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Summary:

Martin Geddes thinks the telecom industry has reached its peak. As he explains, telecom is like the railroad business at the height of the railroad barons. It has acquired its maximum share of the economy, and the only way now is down.

Geddes_TelecomFuture_image

The telecom industry has reached its peak. This is it. Look around you. Whatever you are doing in telecom, however you are making money in the field, it isn’t going to get better than this. This industry has acquired its maximum share of the economy. We are the digital railroad business at the height of the railroad barons. The only way now is down. We’ll see maybe one or two more mini-booms, a few more troughs, but the long-term trend has just gone into reverse.

What’s going on? Let’s gather the evidence

The telco voice and messaging business is on the verge of going into meltdown. Since this is where the margins come from, the problem is hard to exaggerate. The drip-drip of articles about declining voice and messaging volume and revenue is becoming a small stream. Even mobile telephony is losing ground in competition to asynchronous messaging. Twitter and Facebook message volumes are exploding, and SMS is beginning to sink. Termination and roaming are endangered species, hunted by packs of voracious regulators. There is no way back. When I started writing Telepocalypse back in 2003, the only thing I got wrong was the timing.

The traditional vendors are dying, and this is disrupting the telco supply chain. Their multi-year cycle times are hopelessly mismatched to the environment. The federated, standards-based, interoperable services game is coming to a close. Huawei is mopping up the bloody remains from the battlefield. Time to pack up. A raft of “internet-time” startups are taking their place, filling in the missing features that decades of neglect of the voice and messaging business have left behind. (You mean I still can’t record and search my calls in 2012? Wow!)

If you can’t join them, beat it

Meanwhile, telcos are launching over-the-top services to gain and retain customers. For example, check out Bobsled from T-Mobile, Jajah from Telefonica, and 050 Plus from NTT. There’s about to be an all-out war to become one of the surviving voice and messaging platforms. (Hint: Telefonica is ahead. Everyone else is playing catch-up.) The Global System for Mobile Associations’ Rich Communication Suite initiative is in intensive care, and relatives are inquiring about local funeral directors. Senior execs say it privately. Nobody wants to alarm the investors by letting them know that those future cash flows aren’t so secure after all. VoLTE and 4G voice is a mess that preserves the worst of GSM telephony, without giving the user any upside, and leaves an open goal for over-the-top alternatives like Skype.

I strongly believe the business model for voice and messaging is about to go into reverse. The value is going to drain out of minutes and messages charged to users. Instead, enterprises will pay for features that make customer contact efficient, effective and secure. Where Facebook has fumbled, others will fill that gap and become fit-for-purpose B2C channels. Voice and messaging won’t just drop to a price of zero. It will go negative. Users will be courted to lodge their identity and presence with new communications and commerce intermediaries, who make money “upstream.” Once the process starts, it will become unstoppable.

Telcos won’t get a chance to deploy the next-generation free phone product unless they act fast.

Video and data: volume without profit

Video is booming, but there’s no money in it for telcos, except for a lucky few who grabbed the sports rights. The cable business model is now being unbolted from its foundations too. The talents of acquisition, bundling and distribution will serve the cable companies for a few more years, but they know the score.

Whether it’s voice, messaging or video, the money chain from application to transmission to infrastructure is breaking down.

Data volumes are soaring, but again telcos have failed to master the brilliant packaging of voice and SMS with internet services. Apps stores aren’t services stores. Costs are out of whack with revenues, because pricing and network policy is managing “bandwidth.” But that is not the real issue. The real issue is how customer experience is linked to contention, and no telco knows how to manage that adequately today. Given high fixed costs and low marginal costs, some player will always want to offer unlimited plans at unprofitable prices. It’s a not-for-profit business keeping iPhones and iPads connected.

So where’s all the money gone?

For sure, Apple is surging. Apple may only have 20 percent of the smartphone volume, but they have a huge share of the profit. This is a fundamental shift in the balance of power in telecoms. All the APIs that really matter are going to be decided in Cupertino. Don’t be deceived by Android’s volumes. There’s no money there — it’s a dollar-destroyer.

Although Apple is the star around which much will orbit in future, Google is growing too, as long as the PC platform holds. And Amazon is showing how it’s hard to fake infrastructure, and nobody is going to challenge them anytime soon.

Telcos aren’t going to be able to divide-and-conquer these platforms. The locus of power has shifted fundamentally. The value creation is outside the network.

It gets worse.

These players may start to aggregate assets and wholesale access to build AppleNet, GoogleGlobe and AmazonRiver to connect merchants to eyeballs and wallets, without any other gatekeepers, such as a telco retail bundle, in the way.

It gets worse.

Telcos as profitable networked cloud services providers? You’ve got to be kidding me.

It gets worse.

Ericsson has positioned itself as what my colleague Dean Bubley refers to as a dominant “under the floor” player. It is potentially a king-maker for telcos, controlling the delivery platform from which their operations have to be run. Networks are just large, distributed supercomputers — and Ericsson is the new IBM. Nobody got fired for choosing them. Their power is ominous for operators.

It gets worse.

Home networks don’t need service providers. You just buy a box and plug it in. Street-level networks don’t either — you can build a simple resilient mesh. Nor do town networks that join the kids with their school. We fundamentally don’t need communications service providers to manage data transmission. As long as we have a means to fund infrastructure, just as we manage with roads, we can do it for ourselves.

This is the beginning of the end of the Information Superrailroad, where all the bits are scarce and billable. Broadband ISP service is a branch line to nowhere.

Unlicensed wireless is the automobile, and local open fibers are the roads. It doesn’t carry very much very far right now, but it will. And with it, the fate of the telecom industry as constituted today is sealed. Like with the railroads, telcos will carry ever more traffic, and will protect themselves with political power. But their heyday is over, and a new disruptive model has emerged.

Welcome to the real Information Superhighway. I hope you like your iCar.

Martin Geddes is founder of Martin Geddes Consulting Ltd. He runs public workshops on voice innovation and strategy. This article was originally published on Geddes’ site, Future of Communications.

Image courtesy of Flickr user Dave_S.

  1. Richard Bennett Saturday, February 25, 2012

    “Home networks don’t need service providers. You just buy a box and plug it in. Street-level networks don’t either — you can build a simple resilient mesh.”

    Martin, do you have any idea how ridiculous that sentence is?

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  2. Richard Bennett Saturday, February 25, 2012

    Pardon me, it’s a paragraph.

    What happens to home network data when it reaches the box? If it’s Internet data, it does to a service provider for a fee. Why would I want to build a neighborhood mesh that enables others to use the service I pay for for free?

    You can’t do the things that the cellular network does with Wi-Fi. On the cellular scale you need to do things that Wi-Fi doesn’t know how to do.

    Don’t let your visions about services dictate naive solutions to the very real transport issues.

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    1. one thing that has surprised me over the last few years and i little related to what are saying.

      i would have expected that by now nearly all apartment buildings would have subscribed to fast fiber connections and provided free fast wifi for all tenants. i also expected that gated communities would all have community wide fast wifi.

      it has not happened like that, but i still believe that it will. and than gradually no one will have there own internet connections they pay for individually instead it will be included with their homes.

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  3. It’s not the edge of the networks that gives the telcos power, it’s the WAN core. Laying fiber across the ocean. Leasing rights along railroad right-of-ways, thousands of miles of backhoeing across deserts, mountains and other sparsely-populated areas. Shooting satellites into space. Maintaining all of the above. I have written about having tech workers move out of the traditional big tech centers like Silicon Valley and into (far less expensive) smaller cities and towns along railroad tracks–in particular there are a lot of former company towns along railroad tracks that are now economically depressed. If we had that going we would be a lot closer to being able to build and maintain a publicly-operated backbone, but the long-haul links are still a problem. (I was a WAN backbone engineer for Worldcom/UUNET back when their network was larger than their their six primary competitors combined.)

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    1. I think the mistake people make is to assume that a disruptive technology like ad-hoc open networking needs to immediately and directly compete with and replace established systems like the Internet. They don’t; and new applications like M2M (particularly for mobile devices) may even expose the limits of Internet Protocol itself (for it has many problems, but it is heresy to point them out).

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  4. Unfortunately, space didn’t allow me to expand on all these ideas, so I’ll use the comments to clarify.

    The original article was called “Peak Telecoms”; I’m looking at a process of growth as a share of the economy that has continued for 170 years, and I believe will now stop and reverse. This is not going to be overnight.

    Regarding wireless meshes, I am definitely *not* proposing that WiFi meshes can somehow replace cellular overnight (or even in the short term). However, the inevitable future I see is that people locally will reject the feudal telco divide-and-conquer approach to selling connectivity. Indeed, we see this in places like Romania and Pakistan where rather than wireless meshes, people string fibre around to share local access!

    The next step will be very small-scale: the equivalent of the “wireless LAN party” using WiFi Direct; people bonding and sharing access on a small scale. Thus connectedness flips from being a service to a product. In the long term (pace Keynes) we end up with a very different technical and economic architecture to the one we have today.

    We see the early stages of this with business models like the one from netBlazr.

    If I was going to write this again, I’ll grant you one change – I’d take out the word “simple”!

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    1. And the backhaul for these wireless mesh networks? Do you really propose to have multiple internets considering without telcos who is going to lay submarine cables. You say the “we can do it.” I’m not sure who “we” are but if you propose a government run Internet backbone is the solution, you frighten me.

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  5. I can hear the day when people say, “You mean you still have cable?”

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  6. Martin, you may not be advocating replacement of cell with WiFi, but that is IN FACT what AT&T wants its users to do.

    They’ve been preaching ‘scarcity’ while sitting on bandwidth. And judging by how angry their users are on twitter, I’m thinking that a number of users WILL replace AT&T with their “own infrastructure” ..that is, Mom & Pop ISPs who run over the telco’s leased lines, offering better service.

    As you say, it’s not simple, nor will it happen ‘overnight.’

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  7. 5minutesIcantgetBack Saturday, February 25, 2012

    2003-wrong
    2012-wrong
    Keep up the message Martin, eventually you’ll be right. Just hope you live to see it.

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  8. Reblogged this on quickgamer88.

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  9. I’d love you to be right about mesh networks but the reality is that they are much harder and more complicated than we all initially thought. In the long term though, I agree, that’s the way to go.

    I seriously question though, Cupertino’s rule once the Telcos are dethroned, and you actually need to pay $700 for your shiny new iPhone 6 when you’ve just done that a year earlier with your iPhone 5s. Even Apple’s brilliant marketing is going to have a challenge when people need to spend the money on the hardware rather than have it buried in your monthly fee to AT&T.

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    1. The smartphone is going to be the key platform. Apple’s supply chain expertise will allow them to drop prices whilst maintaining margins – up to a point. The iPad confounded expectations on its price point, and the iPod range shows that tiering can be made to work.

      A key question is whether they can decouple from expensive data plans in the US. A partnership with a friendly carrier like Sprint might allow the apps store to be rejigged so that data is “free” (but usage is charged at wholesale back to the application maker, to incentivise network-friendly behaviour). This kind of packaging reflects the success of SMS.

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  10. Really…”Home networks don’t need service providers. You just buy a box and plug it in. Street-level networks don’t either — you can build a simple resilient mesh. Nor do town networks that join the kids with their school. We fundamentally don’t need communications service providers to manage data transmission. As long as we have a means to fund infrastructure, just as we manage with roads, we can do it for ourselves.”. Absolutely absurd. Shoot, why don’t we simpy make our own electricity, plumb our own water, etc.

    While I can agree there a some disruptive players and the game is changing…just like nearly every industry, btw. This premise that telcos are dead is absolutely false. Players will change as will business models but businesses need to run the the networks that carry all the voice, Internet, apps, etc. traffic. Doing so is expensive and complex.

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    1. It seems that distributed energy system and making our own electricity are the next wave… and the rural telco and electric companies would surely like to share some of their history with you.

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  11. I don’t really understand. The telcos own the network upon which everything rides, how is this not good business to be in. A oligarchy on the infer structure seems like a good position to be in to me.

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  12. An interesting article. But I think the Ma Bell days were the old railroad and de-tariffing caused their end. The telcos will not go away as they are providing the digital roads that we currently navigate.
    The idea that we will create some sort of ‘neighborhood’ of wifi networks is impossible. That is, unless my neighbor has all the content that I want to see and I never want to leave my house. I believe we are firmly in the Age of Content (not just information). Our insatiable appetite for content will continue to transform not only the telecom industry but also the cable content providers and networks.
    From Twitter and facebook updates, to mindless apps, to television shows and movies to NFL and other sports shows, its all about the content and we the consumer want to access that content from anywhere seemlessly.
    For sure the industry is changing and it must as all business do, but to go away completely would be impossible.

    @Leo .. where do you think the Mom and Pop ISPs get their connections? Its the ILECs that hold the roads. Any mom and pop ISP still has to peer with the major providers. At some point, those major peering points in the US can be controlled by a few telcos.

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  13. Martin,
    Who pays for the traffic then? Someone still needs to place expensive switches and string lines across the country and between continents.
    While I do understand the peak part here, and the fact that telcos are going to lose control and part of their income, but someone will still need to provide the transport means.
    Al the talks about WiFi and mesh is nice, but at the end of the day, they need to connect to the backbone.

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  14. You cannot be serious!

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  15. Who pays? That’s a very complex topic. We’ll see a fragmentation – see this article I wrote at Telco 2.0: http://www.telco2.net/blog/2007/03/the_telco_20_business_model_ma_1.html.

    The end game is that fixed infrastructure is either user-owned or local (this is not the same as “muni nets”!). Data transmission is paid for at a number of scales, and the services are completely separate.

    I can comment the work of Bob Frankston. I don’t agree with every word Bob says, however his thinking has greatly influenced mine. (Bob co-invented spreadsheets and home networking.) A good starting point is: http://www.frankston.com/public/?name=ThinkingOutsideThePipe

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    1. Totally ridiculous. Mesh? Communities cooperating? Here in the US. How many examples of this are there in the US? They are the exception and not the rule. Installing fiber is beset by real logistical challenges. Could state and local governments get involved? Sure. Telco are ENTRENCHED! If anything Telco’s are purchasing content to cement their strangle hold. Creating a nationwide fiber optic network would mean state and local government cooperation. NOT happening. Google, Amazon, Facebook, and Apple rely heavily on the existence of the telco operators. Imagine if Apple had to do truck rolls to repair fiber. This article was extremely entertaining, but does not describe a possible future reality. It simply states the obvious…Apple, Google, etc are more profitable than telcos.

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  16. There is a certain truth in this article. Voice over internet has been a reality for sometime. There is a reason why VOIP is banned for local calls in India. The impact will be quite devastating for the telecom providers. But once the entire country is connected via broadband, it is just a matter of time. The Telcos will need to adapt.

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    1. This is off topic, but I am compelled to correct you Sailesh. VoIP is not banned for local calls, but it is licensed. This misinformation has been making rounds for a long time now.

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  17. This is probably the most poorly written article I have ever read. Since you choose not to include any actual facts in your article, it is obvious you are either just trying to get a headline or you really don’t understand telecommunications and considering the statements you make here, I would bet it is the latter.

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  18. Let’s face it: volumes are growing and telcos do control the networks. They will price their services accordingly. Half of what you’re saying makes no sense..

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  19. I’ve been in the wholesale voice business for over 10+ years. Two years ago, I made a major decision to change the business model completely.

    When we started the business we had .05 cents + margin, millions of minutes per day.

    Today, that same destination your lucky to wholesale it and make .002 tenths of a cent, and thats on the hopes your customer pays the bill timely.

    No thanks. I say let the big boys do what they do, bring me all the bandwidth as cheap as possible. Unless your AT&T, focus on very targeted offerings as close to the retail user as possible, where this is still nice margin and a sustainable business model.

    Our product changed completely. We created a GSM based offering sold in retail shops, works in over 200 countries, and the VOIP wholesale routes behind it just help improve margin. If the quality sucks, we can change to a Tier 1 with the click of a mouse. Oh, and our product doesn’t care what GSM provider, it picks up the strongest signal, then circumvents them :-)

    No more wholesale penny pinching for us. The future is clear in my opinion, voice, SMS, and data are all getting cheaper and many Apps offer free service.

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  20. What some here may not be aware of is that home networks were not pre-determined to look like they do today. It could easily have been the case, but for the work of Bob Frankston when at Microsoft, that you would have been paying a telco for the privilege of attaching each device in the home to “their” network. This principle of user-owned networks is one that has plenty of precedent. (Incidentally, I worked for a US telco for 3 years, but am based in Europe.)

    You can see the beginnings of new models with companies like netBlazr. It is very early days yet.

    I am not proposing that Apple and Google get into the infrastructure business. They could, however, become wholesale buyers of access, and powerful intermediaries between content/application providers and users. This will become more of an issue as we see a transition from apps stores to services stores.

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  21. If you enjoyed this article (or even if you didn’t but are a masochist), you might like the follow-up titled “Requiem for GSM” at http://bit.ly/zPcthi

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  22. 4G got recently released in our area. Mobile networks are truly taking over I believe. Sure fibre optic speeds are nice, but if 4G is already this ridiculous fast, I can imagine 5G or further versions taking over the speeds of fibre optic.

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  23. Love this: “Home networks don’t need service providers. You just buy a box and plug it in. Street-level networks don’t either — you can build a simple resilient mesh. Nor do town networks that join the kids with their school. We fundamentally don’t need communications service providers to manage data transmission. As long as we have a means to fund infrastructure, just as we manage with roads, we can do it for ourselves.”

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  24. I tend to agree with the thrust of this post; that becuase of the nature of the internet and the nature of the telecommunications infrastructure business, macroeconomic forces should push the infrastructure down and out, to the level of a public infrastructure like roads or electricity.

    I would like to note, however, that this is not a necessity- its largely going to be a matter of policy decisions on exactly how much control the telcos are allowed in content distribution(Comcast/NBC) and how much they are allowed to step on internet-enabled businesses. This is one corollary of the net neutrality debate, and this will NOT be decided by economic forces- it will be decided by federal policy, at least in the near term (5+ years).

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  25. Some of the ideas later in this article were originally developed by Bob Frankston, who both co-invented spreadsheets (with Visicalc), and home networking (when at Microsoft). These are both taken for granted as obvious ways of working today, but were novel and non-obvious at the time.

    If you would like to see Bob speaking on this topic, there is a free event in Arlington, VA on 1 March. Sign up here: http://www.eventbrite.com/event/2970182897

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  26. “I told you the world would end in 2003. OK, I admit I was wrong, but this time I really feel confident…” Yeah, right. I think I’ve heard some other tin foil hats saying using the same way of reasoning. Sounding very confident is not the same as actually being right.

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  27. you are right when you say “When I started writing Telepocalypse back in 2003, the only thing I got wrong was the timing” If it is not in 2003 it will be i n 2013 or maybe in 2023 or perhaps in 2033 or… I am quite sure in 2123 things will be different, you are a real guru man

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  28. s

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  29. After all these comments, no one argued with Martin’s main point that voice and messaging profitability is going away completely. The only argument is over the ownership or governance of local and municipal networks. There will certainly be more local network models rather than fewer over the next decades. Regardless, the peak telecom headline still makes a lot of sense.

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  30. “As long as we have a means to fund infrastructure, just as we manage with roads, we can do it for ourselves.”

    Road building and maintenance is the world over a government sponsored activity, provided by local or national authorities, bare a few toll roads (which are more often than not privately operated but government owned).
    Road is typically a much needed infrastructure that nobody wants to pay for, being almost impossible to rate and bill on a usage basis without getting into big brother territory. And nobody likes paying for the neighbors usage (They always spend much as you do, a fact of life well known by psychologists)

    For the same reasons you’ll always need telco’s to pay and maintain the core of the network infrastructure. To have a fair usage based billing, you would need to know exaclty where and what has everyone been doing on the internet at all time. All bits are not equivalent, depending on where the servers are located the distance travelled can go from a few miles and 1 carrier to thousands miles and 10+ different carriers. Back into big brother territory.
    So the core infrastructure need to be in some form collectively funded.
    That’s what the telco’s do, their strongest asset is the Network!
    But still most telco’s have bloated Marketing departments, spend millions in IT every year, more often than not own thousands of shops and other sales channels.
    If you get rid of all of this, concentrating on wholesaling your infrastructure to Apple, Google and the likes, you might have a very valuable business model.

    For some reasons, Telecom executives have always been afraid of becoming a dumb pipe (A lot of them being former Marketing or Sales executives might have something to do with it). But I really don’t see the point, Michelin is number 1 in tyres (Not really sexy), should they start building cars just because their main business has an image problem? I don’t think so.
    The same applies to Telco’s.

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  31. The trouble with Telcos is globally, governments have been protecting them for decades. This is because for many governments, Telcos are their second largest source of revenue is from the licenses they sell.

    The trouble is this protectionist behaviour has made it hard for Telcos to evolve. In Singapore, the national Telco is SingTel, and you only need to look at its P+L to understand that it is a complex business, with revenue not originating from one clear source.

    Skype disrupted Telcos globally by taking 33% of all international calls. The Telco’s last source of income – roaming – is set to be disrupted. Qualcomm are working on transmitters that sit onboard passenger aeroplanes. These transmitters behave like communication towers. If successful Qualcomm believe there are enough airborne planes at any one moment to create a worldwide network. By bye telco.

    In my estimation we are 5 years from a global roaming providers, flat fees for unlimited data.

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