Or so writes Eric Klinker, in the Harvard Business Review blog, in a solid post about how we’re going to manage the growth of the internet. While Klinker sounds like many a telco-funded astroturfer in his worries about ISP profits, he’s actually the CEO of file sharing site, BitTorrent. And his arguments are worth listening to on both sides of the internet divide — the ISPs and the content companies looking to ride those pipes.

In the post, which is similar in spirit to one he wrote for GigaOM in 2011, he agues that the problem on the Internet is congestion, and that there are far more ways to address congestion than just adding more lanes. And of course as the CEO of BitTorrent, which has a proprietary file transfer system that is composed of masses of distributed computers, his main idea is distributed computing. From the article:

Distributed computing systems work with unprecedented efficiency. You don’t need to build server farms, or new networks, to bring an application to life. Each computer acts as its own server; leveraging existing network connections distributed across the entirety of the internet. BitTorrent is a primary example of distributed computing systems at work. Each month, via BitTorrent, millions of machines work together to deliver petabytes of data across the web, to millions of users, at zero cost. And BitTorrent isn’t the only example of distributed technology at work today. Skype uses distributed computing systems to deliver calls. Spotify uses distributed computing systems to deliver music.

The challenges associated with this are obvious. Customers have to download clients in order to use such networks, and they will still affect the end user’s connection at the last mile or in the airwaves and at cell sites on mobile networks. Thus, they can tax ISP networks (although they can be optimized). But with video a huge driver of congestion on the consumer side, it’s a solution that could work, since people will download software in order to watch TV. Even ISPs have tested distributed computing when they tried out the P4P network protocol way back in 2008.

Distributed computing would force many popular web services to reconsider how they build their applications and stream their files, which could have a large effect on big web sites such as Facebook or Google as well as content companies and content delivery networks. Another option, and one that we’re inching toward, is smart routers and prioritization schemes where the user can set their own network parameters to best use the bandwidth they have available. Software-defined networks will also make such prioritization easier and cheaper to manage inside the core telco network as well.

There’s also a more controversial idea of ISPs charging more for broadband during peaks times, as opposed to current data caps that limit people no matter if they download information at 2AM or during prime time. True congestion pricing would also force users to bear to cost of overburdening the ISP network, although ISPs would then have to be open about how often their networks are congested and would risk consumers losing their appetite for broadband. My hunch is that neither the ISPs or the content companies want that to happen, although it’s still far from clear that upgrades are the death knell for the cable and telco companies, as opposed to a painful shift in their margin profiles.

Regardless, we’re only asking for more broadband and more internet services, so Klinker’s article is a welcome reminder that none of that will come for free.

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Skype’s increase of nearly 51 billion minutes in 2012 is more than twice that achieved by all international carriers in the world, combined. This is not a new story. As far back as 2009 Skype became the largest carrier of international voice traffic worldwide.

Now clearly telcos still have plenty of international voice minutes, but with Skype and others chipping away at the growth the future is clear. Phone companies need traffic to grow to offset the falling prices of long-distance minutes, and this isn’t happening. From the report:

International migration, the rapid uptake of mobile phones in developing countries, and steady reductions in international call prices—especially in the form of flat-rate (and even free) calling plans—have contributed to traffic increases. Nevertheless, recent growth rates are well below the 13% average that carriers could count on to offset price declines over much of the past 20 years.

The regulatory regimes that make telco voice calls so high must be adjusted and carriers must seek other avenues for revenue. Both of these things are happening. The disparity in pricing between telcos and Skype’s calling is brought in part by the different ways governments regulate the telco voice network and how it regulates IP. Skype can avoid many of the fees associated with calling overseas because it only has to pay to reach a number at the end point if it’s not a Skype to-Skype call.

It may seem academic, but those regulatory regimes are a big topic of discussion both in the controversial ITU telecoms regulation attempts internationally as well as AT&T’s attempts to dump its TDM network here in the U.S. As the world switches to IP, regulators and telcos are leery of leaving IP unregulated, although many a proponent argues that’s what they should do to encourage the continuations of lower-cost calling options like Skype.

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That successor will be current CFO Timotheus Höttges, who has been with DT for the last 12 years in various posts. Obermann has been there for 16 years. Tellingly for someone who has recently been complaining about the constraints of working in a big telco, he said in the statement that he wishes to take on “more entrepreneurial activities”:

“I want to go back to having more time for customers, for product development and for technology… As far as I am concerned, [Höttges] is the best choice to succeed me. I cannot think of anyone better suited to continue the developments of the last few years.”

Höttges has experience across the German giant. He started out as CFO of the mobile division, then became sales chief of the same unit. In 2006 he took over DT’s fixed-line business, before becoming group CFO. It was in this role that he headed up initiatives such as the merger of DT’s British operation, T-Mobile UK, with France Telecom’s Orange UK – the result was Everything Everywhere, or EE.

Another telling part of the statement came from DT supervisory board chairman Ulrich Lehner, who said Höttges was a “recognized entrepreneur and has the Supervisory Board’s complete trust”. This points to a continuation and perhaps escalation of the company’s startup investments and digital investments.

Everyone involved is promising a “smooth transition”, which is presumably why the succession has been announced a year in advance.

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Not just ‘games distributor’, mind you – DT has already been doing that for a while with its GamesLoad portal – but ‘games publisher‘. The first title will be based on one of the two great Belgian comics, Astérix (I’ve always been more of a Tintin man myself), and it’s being developed by the Austrian studio Sproing, which specializes in browser-based games.

Here’s what DT games VP Marko Hein had to say in a statement:

“This game is definitely the flagship of a range of products which will get Deutsche Telekom started in the growing area of game publishing.”

The statement also indicated that the Astérix game was being published “with the creative expertise of global publisher SEE Games”.

According to DT spokeswoman Sylvia Braunle, that means “SEE helped [DT] with the Astérix license and franchise” – which makes sense, as SEE’s main experience appears to be in touring attractions, including the Astérix Tour.

“We are the developers and publishers of this game,” Braunle told me.

Diversifying

To put this in context, it’s worth briefly reminding ourselves of the state of the telco industry. Voice and SMS, the original drivers, are becoming less lucrative as people switch to IP-based forms of communication that are, crucially, mostly outside the carrier’s control.

Cheta Sharma recently explained the dilemma quite neatly: basically, voice and SMS are being replaced by data, but that, too, will naturally see a revenue decline in time. A fourth business is needed, and that is…

… Something. It’s not clear what yet. And so we see operators such as DT and Telefónica creating incubators in an attempt to both sponsor and ride the coat-tails of young startups. We also see some genuine innovation that is, from a business perspective, borderline suicidal – here I’m thinking of Telefónica’s Tu Me app, which provides a free, IP-based alternative to traditional, non-free voice and SMS.

And we see moves that vaguely gel with the operators’ TV-plus-broadband packages. Here we have, for example, Deutsche Telekom’s funding of IMDB rival Moviepilot: a service that provides the movie recommendations for DT’s IPTV packages, but that is pretty much available for all to use.

I’d lump the Astérix game into the same category. The logic goes like this: browser-based games use broadband. And DT provides broadband. Except anyone can play the game – it doesn’t serve up any real extra value to DT’s subscribers.

“The innovation portion is the fact that Deutsche Telekom ventures out into different arenas,” Braunle put it to me. “Our core business is telco – we’re trying to expand our horizons by becoming more active in other fields that are adjacent to our core business.”

Maybe it’s just me, but I don’t get it. These services are great, I’m sure, and I’m super-glad that DT’s sponsoring them and putting them out there. But the benefits for the telco are not particularly apparent. It’s hard not to get a sense of a corporate behemoth that’s watching its big moneyspinners dry up, and trying just about everything to find the next big thing.

This kind of piecemeal approach works best if your customers treat you as a content portal and, unless you’re Apple, that era is gone. If DT does succeed at this kind of game, it may end up being more sprawling conglomerate than lean post-telco victor.

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“Large companies tend to be very complacent and arrogant,” Obermann told an audience at German incubator HackFWD‘s Build 10 event in Berlin on Friday. “I preach a lot in the company about bringing external innovation in and working with smaller companies.”

Bear in mind that Obermann was talking to a roomful of smaller companies, some of whom he may want to cut deals with in the future. But if there was an element of pandering in his words, there was also a certain wistfulness — and an admirable frankness.

“Sometimes I miss the speed of decision making in my own company – it’s very big,” he said. “Sometimes I miss the ability to be very informal and fast and the fact that we can’t [take] decisions based on pure intuition.”

That’s an interesting point. Indeed, as the suspicious responses to the launch of Telekom’s hub:raum incubator scheme showed, the telco has quite a reputation for being and difficult to work with.

But then again, being a behemoth isn’t all bad.

“What I like about the large corporations is they have a big lever,” Obermann pointed out. And in order to fondle that lever, he recommended, small firms should have patience.

“It’s about having access to large distribution and a large customer base. In order to cooperate successfully with large companies, you need longer timeframes. They also have to make priorities. We have legacy IT systems… sometimes you need a [slightly] longer lead time if you work with a large elephant. But be persistent if the corporation really matters to you. Once the decision is taken, usually it can be very powerful.”

So how does Deutsche Telekom find the right small firms to partner with? Hub:raum is one option, but there is also room for an ‘easy’ partnership program that is “more theory than practice so far,” said Obermann. “But we’re committed to making it happen.”

Beware disruption

Obermann admitted that Deutsche Telekom was “under pressure, primarily because of IP substitution.” And also because of regulators forcing roaming fee cuts, but mainly because of the same disruptive, smaller companies he also lauded.

“If it’s really disruptive, which means it threatens parts of the organization that might cannibalize themselves and lose jobs, you will have to engage at a more senior level,” Obermann advised. “But not all innovation is disruptive – most innovation is helpful.”

That gives the impression that Deutsche Telekom wants to do business with startups that are useful but not too useful.

It’s a stance that’s understandable but risky in its own way. IP substitution isn’t going to go away, and telcos such as Deutsche Telekom are going to have fight like crazy to stop themselves becoming ‘dumb pipes’. Obermann was hustled away by his minders before I could get his thoughts on rival Telefónica’s all-IP Tu Me voice and text app, which is as disruptive as hell and — incredibly — comes from the Spanish company’s own labs.

Tu Me is a gamble too, of course, but the same could be said of seeing disruption as unhelpful, rather than something to be embraced.

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As has been the case since 2006, cable companies have the most subscribers, with 45.3 million broadband subs now, while the top telcos have 34.6 million subscribers. This dynamic isn’t likely to shift anytime soon given the improvements that cable providers have made in terms of delivering faster speeds to customers as they upgrade to DOCSIS 3.0 networks. Meanwhile, telcos are stuck offering DSL or fiber-to-the-node products that top out at speeds that are far below cable’s. The primary exception to this is Verizon’s FiOS fiber-to-the-home product — on Wednesday Verizon  said it would offer a 300 Mbps tier.

The top cable companies added about 980,000 subscribers, representing 75 percent of the net broadband additions for the quarter, versus roughly 320,000 from the top telephone companies. Top broadband provider Comcast added 439,000 broadband subscribers in the first quarter of this year – the most in any three-month period since the first quarter in 2008 and more than all of the telcos combined.

Photo courtesy of (CC BY 2.0) Flickr user The Consumerist.

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So far it’s been clear that the company has been winning users from incumbent mobile networks, with an incredibly low-cost package that starts at just a few Euros each month. But precisely how many people have signed up has been a mystery — until now.

The numbers are in, and they’re higher than most estimates: in the three months since officially launching, Free has brought on 2.6 million new subscribers.

That’s an unprecedented number, at least in the last decade or so of the European mobile market.

To put it into context, France has a market for around 67 million mobile subscriptions. The current leader, France Telecom’s Orange, has around 24 million users, followed by Vivendi-owned SFR, with 20 million, and third place Bouygues Telecom with around 11 million. Free is now firmly in fourth spot, with around 4 percent of the overall market.

And it seems that it has taken its subscribers from those big rivals, not the pre-pay market, since the number of requests to switch numbers from one operator to another is also 2.6 million (which is triple the usual rate).

Still, things aren’t perfect. Many consumers have complained that Free’s network is poor, and it’s not yet clear whether the WiFi offloading service — which was only switched on last month — is operating as intended. At the same time, rival networks say that the rate of defections has slowed dramatically in recent weeks, perhaps as customers wise up.

There’s also the question of finance — how much it cost to get those 2.6 million users on board, and how expensive the system that Free operates (which is reliant on a deal with Orange) actually is. But Free has deep pockets thanks to its parent company, French ISP Iliad. One thing’s for certain: all eyes will be on its next quarterly report in August.

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The FCC tackles its Mission Impossible

Updated: The Federal Communications Commission’s $4.5 billion plan to upgrade for the 21st Century the funding program that provides telephone service to rural areas will soon become law, as universal service fund reform hits the Federal Register. As policy-making goes, this more-than-700-page regulation detailing the reform was much-needed and has taken years, but once the FCC decided to buckle down and address the problem in the last few months, the lobbying was over in a relative flash. This compared with the two-year saga that was getting network neutrality from a proposed rule to final rule with legal teeth.

Savvy politicos see the USF reform’s speed as a case of necessity, because the issue was complicated and created uncertainty for many telcos and communications providers. The FCC did kickstart the issue two years ago, but only over the summer did it start focusing deeply on it. So the industry and the FCC got together to push the process through in record time with attention for the issue coming mostly from political and industry insiders fighting over their slice of the pie.

Most portions of the reform, which swaps the FCC’s rural funding model from old-school copper and voice to backing broadband and IP, will go into effect on Dec. 29 after the Commission voted to approve the order back in October. While this is a necessary step in moving the nation from the analog infrastructure to something equipped to meet the digital age, there are aspects of the rules where political compromise has cost the tech world and rural consumers while still sending payment to the big telcos.

The plan calls for $4.5 billion to be spent on delivering broadband access to rural America over the next six years. Prior to this, money from the program was allocated to telcos in rural areas who were paid for each line they operated. In some cases, those payments were a critical component of revenue for rural operators, and a source of shenanigans relating to overcharging the government. This is why many rural carriers and even larger wireless players were nervous about the reform efforts and pushed hard to make sure their interests were protected, even offering a model that showed exorbitantly high costs associated with providing broadband to certain areas. The telcos declined to disclose the model they used to reach those costs, although in the USF regulation, the FCC says it wants to make any such models public.

As for the broadband itself, which is what the tech world should care most about, the FCC is attempting stop spending billions on voice access, which is a plus, and start moving money to broadband. Still, the program is full of concessions to the telcos, and somewhat dubious attempts to expand broadband access. For example, carriers that elect to compete for part of a $300 million pot to deploy rural broadband via wireless “must provide broadband with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suitable for real-time applications and services such as VoIP, and with monthly usage capacity reasonably comparable to that of residential terrestrial fixed broadband offerings in urban areas.” Presumably, this means Verizon can’t offer wireless service with caps of 5GB a month if otherwise folks could get DSL capped at 150GB per month.

Update: The FCC took issue with my calling its attempts dubious. I was referring to speeds but the FCC pointed out the 4/1 speed for the first phase of the CAF is based on standard current usage and it also requires sufficiently low latency to enable real-time VoIP and other applications. Then, in the second phase of the CAF, the speed requirement goes up to 6/1.5 in some areas served by the larger carriers and starting in 2014, the FCC review these requirements to make sure the standards are keeping pace.

And while the speeds on offer are pretty low when one considers that the FCC expects 100 million homes to have 100 Mbps connections by 2020 (a laughably attainable goal), the money spent to deploy rural broadband still could end up perpetuating a digital divide. Only this time it won’t be dial-up versus broadband, but DSL and LTE versus fiber to the home and cable’s DOCSIS 3.0.

To fund the program, consumers will still see a tax on their wireline and , now, their wireless phone bills, but the goal is to keep those taxes from rising over time. That charge has risen from 5.5 percent to 15.3 percent since USF’s introduction, according to Republican Commissioner Robert McDowell. It’s unclear what the end cost to consumers will be.

The big elements of the whole USF reform effort involve debates and timing over esoteric federal funding formulas. The implications of these will vary with the big telcos continuing to see rewards as they pay into the system. However, it also starts to address issues such as peering disputes like what Comcast and Level 3 are fighting over (it doesn’t exactly make rules but seeks comments for potential rulemaking) and what cable companies and others can collect when connecting VoIP calls. As reform efforts go, this may not thrill consumers or the tech industry, but it is a start to move policy and billions of dollars in subsidies into the present era, and maybe even into the future.

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Frontier’s EVP of Revenue Development, Melinda White, told us in an interview last week that “tum” means “all” and “tiki” means “idol.” Essentially, the site seeks to bring as many stars from movies and TV series together as possible. In terms of its breadth of content, the site accomplishes that, with hundreds of thousands of videos to choose from.

White said that about 90 percent of all videos on the site are free and ad-supported, with others available for purchase. Content includes TV episodes from networks like ABC, Fox, NBC, Bravo, FX, AMC, Comedy Central and TBS. Hulu and Amazon are primary content partners, but unlike other sites that link to their content, their video players are embedded on the site, meaning that TumTiki users never have to leave to watch the content they want.

In addition to network content, TumTiki also has a large selection of local content, targeted at viewers throughout its footprint. The company serves more than 27 states, and it has videos focused on sports, news and other local subjects. TumTiki also has a sizable selection of web original videos through a partnership with providers like Yahoo.

In addition to its content, TumTiki is also hoping to entice viewers with social features, like allowing its users to create and share video playlists with their friends on social networks. This allows their friends to modify and collaborate on playlists. There’s also a gamification aspect to the site, with users able to earn badges and virtual rewards.

Frontier is primarily a telco and broadband ISP, but it has been trying to enter into the video space: It has 3.2 million subscribers, with 556,000 video subscribers. TumTiki is part of its effort to provide more value to broadband customers and to grab more revenues through advertising and video sales.

At the same time, building a video aggregation site — even one with as many videos as TumTiki — seems a little archaic in this day and age. After all, while Frontier is focused on building a free-to-all, ad-based video site, other service providers are busy building authenticated websites in which you must show you’re a subscriber before you get access to certain bits of content.

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Thin film solar trend

Greentech’s got the makings of one of those occasions when the herd veered left and the market went right. The thin film solar startups that were born in the mid-2000′s, and which used the materials copper, indium, gallium and selenium (CIGS) to convert sunlight into electricity, are now facing a tough market. Solyndra, which went bankrupt this month and took down an over $500 million government loan, is only the most high-profile of these companies, and others include HelioVolt, Nanosolar, MiaSole, SoloPower, and Stion.

The creation of companies that use CIGS became a popular pursuit in the mid-2000′s when the price of silicon, which is used as the cornerstone of traditional solar panels, was fetching hundreds of dollars per kilogram. The idea behind CIGS was that as the cost of silicon rose, these companies would make thin film panels without using silicon, and

Workers inspecting panels in Solyndra's factory in April

would be able to make them more cheaply than traditional solar panels. Dozens of top-tier venture firms backed these companies at valuations of billions of dollars.

However, instead of rising, silicon prices have plummeted, reaching the $50 range in June of this year. HelioVolt founder and chief strategy officer BJ Stanbery told us in an interview today that he believes that the industry is going through a “long anticipated consolidation,” and that startups need to find the right partners to survive (HelioVolt announced an equity investment from Korean conglomerate SK Group). Greentech Media reported this weekend that MiaSole is going through a “management adjustment.”

The CIGS startups aren’t just on the wrong end of the silicon price bet, they’re facing a commoditizing solar market that has more supply than demand, the lowest prices in history, a continued weak economy, reduced subsidies in important European solar markets, and fierce Chinese competition. Large companies would struggle in this environment, not to mention a group of startups that mostly haven’t scaled up into large-scale manufacturing yet. Some of these companies will likely get bought, or could find important international partners, but others won’t be as lucky.

When good tech ideas go bad, CLECs

The thin film CIGS solar bet is just the latest tech trend to convince investors and entrepreneurs to enter and then to fall victim to a major flaw and struggle to deliver. Another one that occurred in the late 90′s — for all you telecom vets — was CLECs, or competitive local exchange carriers. GigaOM’s Om Malik wrote about the CLEC tech trend extensively in his book Broadbandits: Inside the $750 billion telecom heist (which you can read for free online courtesy of Google Books, LOL). Essentially the Telecommunications Act of 1996 forced the telecom market to let in upstart companies, coined as CLECS, that wanted to compete with phone companies to offer DSL from the neighborhood level.

But the phone companies that owned the space could charge the CLECs for access, which at the time was called co-location. However at the end of the day, the upfront capital costs eventually made the business model basically unfeasible for most CLEC companies. Dozens of investors like Battery Ventures and Spectrum Equity Partners put investments on the order of $100 million into various CLEC companies like Winstar. These companies burned through cash on these access fees, and in 2001, companies like Winstar started to fall.

In April 2001, Winstar went bankrupt, and articles like this one in the Wall Street Journal touted Winstar: The Debacle for Our Era:

The damage, in fact, was so well distributed among successful, highly sophisticated investors that Winstar is beginning to look a lot like one of those emblematic disasters that comes to define an era on Wall Street much as the battle for RJR Nabisco came to represent the excesses of the corporate takeover frenzy of the 1980s, or the Long Term Capital Management debacle epitomized the risks of high-tech financial instruments in the 1990s.

MVNOs and P2P

Call it the curse of the confusing acronym technology — CLECS, CIGS — and add another one that I covered several years ago: MVNOs, or mobile virtual network operator. MVNOs like ESPN Mobile, Amp’d Mobile, Helio, and others launched in the mid 2000′s with idea to take a brand and turn it into a cell phone company, and rent space on wireless companies’ networks. These companies launched branded cell phones, targeting niche customers that they thought were loyal customers and would pay high monthly bills for branded data, games, and social networks (this was before iPhone and Android and no one yet used wireless data). The startups paid the phone companies network access (like the CLECs did).

Amp’d Mobile raised $360 million from investors like Columbia Capital, Highland Capital Partners, Redpoint Ventures, Intel Capital, MTV Networks, Tudor Investments and Universal Music Group. Helio raised hundreds of millions in funds from SK Telecom and Earthlink.

The upfront capital costs of launching branded cell phone companies and paying the wireless companies access was a huge problem. Add to that missteps by startups like Amp’d Mobile which ended up attracting many customers that didn’t want to pay their bills. Amp’d Mobile, like Winstar and Solyndra, went spectacularly bankrupt. SK Telecom estimated that its losses from Helio were expected to reach between $330 million and $360 million in 2007.

And finally from my colleague and video expert Janko Roettgers: P2P content delivery. Roettgers tells me that the promise of P2P video content deliver was based on the assumption that bandwidth would remain hugely expensive, and also that smaller publishers could compete on an equal playing field for attention and ad dollars if only they had cheap enough bandwidth. Companies like BitTorrent went through funding rounds and a whole bunch of startups launched in this area, too.

However, bandwidth prices went down instead of up, but more importantly Google, Hulu and Netflix sucked up all the attention and content, which suggests bandwidth never really was the biggest problem to begin with. BitTorrent had to pay back its funders to bring down the value and expectations after it turned out that no one wanted to pay for P2P bandwidth and most of the startups in this space have disappeared or are slowly fading away by now. The P2P industry association DCIA even completely switched focus to cloud computing after it realized that there is no money in P2P, says Roettgers.

Anyone have a favorite tech idea that went bust?

Image courtesy of Flashpacking Life, roland.

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