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The June 17, 2003 Issue Provided by System Dynamics Inc.
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The Quest for ARPU: Alcatel's "Lead With Speed"

What do you learn when you bring together 125 executives from 75 telcos based in 40 countries? We had a chance to find out when we spoke at Alcatel's "Lead With Speed" customer conference in Madrid last month. The speakers were drawn from innovative Alcatel customers, major industry participants like Microsoft, Disney, Sony and Philips, a few consultants/analysts and a sprinkling of senior Alcatel executives. The theme of the conference was broadband, its status and prospects.

Tim Johnson of Point Topic framed some of the discussion by sharing recent DSL penetration figures, worldwide and by country. Worldwide, DSL is the dominant form of broadband being used by residential customers. Tim's message was that DSL is the KEY growth market within telcos' fixed line communication business.

Broadband is also the growth engine for Alcatel. Although broadband is virtually synonymous with DSL for the telco community, Mike Quigley, (Alcatel President, North America) said he expects to see the acceleration of fiber to the home (FTTH), as well as increased DSL penetration in North America.

Brad Fisher, Bell Canada --> Click for larger picture In the North American broadband market--distinct from much of the rest of the world--cable serves a significantly higher proportion of broadband customers than DSL. Brad Fisher, GM Product Development of Bell Canada, indicated that 58% of Canadian broadband users have chosen cable and 42% have DSL. He observed that DSL in Canada has been closing that gap. It will be interesting to see if this also happens in the U.S, where the RBOCs seem to be approaching DSL promotion with increased vigor, lower prices and higher speeds.

With DSL such a major telco thrust, they (and broadband providers more generally) are grappling with a problem. They have had to make large investments to deploy broadband, but are unclear where -- other than faster Web surfing -- the incremental revenues will come from to maximize the return on this investment. By example, one European Alcatel customer said they had increased their Internet and broadband investment from 13% in 2000 to 45% in 2002, but broadband revenues were still less than 10% of their total.

The big challenge, and the focus of many of the talks, is how to increase average revenue per user (ARPU). This is made even more urgent due to the increasing traffic (and network demands) coming from peer-to-peer (P2P) applications. One speaker indicated he expected his traffic to increase 25% in terms of Kb per user in 2003.

Security, music and games have been popular choices as value-added applications for a number of broadband providers. Fisher of Bell Canada indicated they are doing "forensic market pilots" to test consumer interest and willingness to pay for applications, prior to doing a mass launch. So far one application that has been a big hit is security as a value-added service. MusicMatch and Gamesmania have also been successful in increasing revenues. They are now adding parental controls and expect it will also be popular. However, Fisher warned that new applications do not take off overnight and companies must incorporate that understanding in their business plans. They understand that video is a passionate consumer choice and so are now looking at ways to increase video options they can offer their customers.

Van Gogh and broadband --> Click for larger pictureOur talk at the conference -- see -- focused largely on new networked consumer electronics devices--PVRs, digital cameras and camcorders and networked audio players--and how they are creating compelling media applications for consumers. We showed a new "home video" of how we use such devices in our everyday life. In our view, the increasing digitization and number of home devices is driving growth in the "home bandwidth budget".

Many applications need more information flowing out of the home (like sending your relatives a video of baby's first steps). This means that unlike Web surfing--which is highly asymmetric (much more information flows to the home than from it)--future applications will need technologies that support more symmetry. One of the challenges we noted for the audience was how they will address customer applications requiring greater bandwidth and symmetry, starting from today's ADSL solutions. Places like North America, where cable is a major competitive force and the triple play--voice, data and video--is increasingly viewed as mandatory, seem to require new solutions like VDSL and fiber.

Hye Seon Yu, Hanaro --> Click for larger pictureHy Seon Yu of Hanaro Telecom provided a unique view into the Korean market. While most media coverage focuses on Korea's world-leading broadband penetration and the advantages it has brought to that country, Hy Seon reminded us that the story is not without some downsides. From the perspective of service providers, the very rapid introduction, expansion and upgrades to faster speeds have resulted in significant profitability issues. She also observed that there have been digital and generational-divide social issues which are less widely discussed.

We resonated with the talk by Julia Langley, VP at Philips, since what she called "a portfolio of connected devices" sounded much like the applications we showed in our video. From her talk we gathered that Philips has a serious business push into consumer electronics devices that will connect to the broadband pipe and home network. Julia talked about the evolution of these CE devices in terms of adding storage in the consumer device, increasing the portability of both the devices and the content and increasing the ease of use. The business proposition to the end user will be bundled broadband services and connected devices, with entertainment going directly to the CE, not just to the PC.

Nainan Shah, VP Business Development at Sony Computer Entertainment Europe had a message about the role of game consoles in the broadband market. In his view, linking the Playstation and broadband result in a perfect marriage, not just for games but also as a vehicle for music, information and entertainment. In Japan over 300,000 people have their PS2s connected to broadband. Game consoles will be a great driver for broadband services and increasing ARPU, especially in countries where game consoles are more popular than PCs.

In the quest for ARPU, most speakers came to the conclusion that it's futile to search for the "killer app". Instead, they believe that a "cocktail" or "palette" of services will be discovered and adopted, and will over time be integrated into consumers' lives and taken for granted. We're making progress but are still in the discovery stage for what the recipe will be.

Clowning with Charles --> Click for larger pictureHmmm, maybe that's why we and the other guests were sampling all those cocktails during the evenings!

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