There is no one solution

Last week I wrote the post “Isn’t the answer mobile?” which created a great deal of interest, commentary & thought provoking questions (most on the diversity.net.nz blog). Thanks to those who commented, some of what you wrote provides the basis for this post, as well as comments on Rod Drury’s blog post about fibre-co.

I guess the best starting point is to say last weeks post should have been titled “Isn’t PART of the answer mobile”.  It’s clear from both these posts that mobile technology alone won’t suffice, but equally importantly neither will fibre. The FibreCo idea is audacious, and the vision both compelling and energising (which i suspect is the major goal behind it), however it does have a few weaknesses. I’m not here to throw stones at it, because i love that at least someone has provided some constructive solution to our fast internet conundrum, what follows is my own attempt at it.

 

In my opinion FTTP (key being P not H) is only needed by a small (but hopefully growing) group of businesses. Not everyone needs a raging torrent of internet access, just like not everyone needs Mac trucks, PDA’s, high definition printers or computers at all. Hand in hand wit this, I must also admit that I’m not sold on the 1:1 causality that goes with the belief that ubiquitous fast, cheap internet access will drive economic benefits. I don’t see massive queue’s of ‘weightless businesses” just waiting for fibre, I also don’t see all the other fundamentals (like wages, taxes and support) being addressed to drive the weightless economy. Maybe its chicken & egg, but I’m not convinced.  Simon Arnold also asks if you need ubiquity in his comment on Rod’s blog

But if you go back and look at the source of the benefits being claimed by NZI that make up the $2.7-4.4 billion per year (see http://www.nzinstitute.org/Images/uploads/Broadband%20aspiration%20Sept%202007.pdf) most are able to be captured with much lower than the 75% penertration they are justifying the need for public investment off. I do think a bit of hard nosed analysis of marginal cost of provision versus marginal benefit is warranted.

 

Secondly, if you do need that kind of data through put, you should take Bwooce’s advice …

If you want fast internet access for your business, site your business appropriately. ….. Just as you may choose to live next to an airport, you may choose to live in an area with crap internet coverage

If I may extrapolate this out a little, you may want to even have the position that if fast, large bandwidth internet access is important to you, you should pay for fibre to be connected. The great news is that Telecoms cabinetisation program will make this more affordable. The way I read it (& again-not an engineer!) Telecom will be laying a lot of ducts & the distance to the Cabinet is going to be a lot shorter… so it should the cost of getting Fibre installed will decrease. This position should hold true if you are a business or consumer who wants IP TV.

 

Having said Fibre is just one of the solutions its fair to say that i believe ADSL broadband has a role in our future. For some its more than adequate. Again, as Bwooce says 24 mbps is plenty for email, internet, video conferencing etc. By that, it addresses the NZI’s ‘Telepresence’ and ‘Remote working’ economic benefits. (as a sidepoint even Cisco’s full monty Telepresence system only requires 15 mbps & , that’s way more demanding than a web-cam type approach!)  For digital media and other data intensive sectors is ADSL going to be enough? No, see point 1, buy fibre…

 

Mobile….I caught up with some folks about my previous mobile theory. According to them (the royal them) there area bunch of things you can do on a cell site like sectors, carriers & polarisation which all work to decrease contention, optimise spectrum use and generally make the experience better for the consumer & more economic for the carrier.

Despite popular opinion, ISP economics is important, if they can deliver services cheaper (and make an operating margin), then generally the price to customers will be cheaper, but its not all about price. Again, according to ‘them’, doing all these things could allow you to deliver speeds of up to 1 Mbps (maybe more). This speed would definitely improve if high demand users went to fibre. I know 1 Mbps ain’t fantastic against global benchmarks, but again for some it would be a great leap forward and more than suffice. I’m thinking of people on dial (and there are still nearly 700 000 of those) or old plans (256kbps for instance, again plenty of those) Tom Chignall of Vodafone commented on Rod’s blog 

We don’t need a fibre vision – we need a broadband vision which connects the people of this country to each other and to the outside world.…. Our view is that wireless has a major role to play…., The technology is in place today to deliver as good an experience as I get over my Telecom service (resold thro ugh Vodafone!)in Auckland’s central suburbs. Wireless speeds are doubling very soon and we have Telecom and NZ Comms entering the fray with similar technologies.

 

I agree with Tom’s major points , we need a vision that connects NZ to the world in the most appropriate way for them. I think this vision means when you buy a fast internet plan, you are going to have to make some choices based on your particular needs. If you are one of those companies or people feeling massively restrained by ADSL (financially, gaming wise, IP TV wise) then you are in one camp. If you get on the internet to ‘get the email’ like my mum, dial or mobile technology might be fine for you. The reality is though, what ever you choose, you should be aware that you are going to pay for it ….. there are no free rides. To me this is the crux of the issue for NZ . Just look at the links above, price isn’t the impediment (we’re cheaper than the OECD average), fast speeds are available, so why so many dial and low speed plans? No need for them?

 

 

For all those who did comment and weren’t referenced, your input did help, again many thanks

What do Rod Drury & Eric Schmidt have in common?

The answer it seems is securing digital trade routes. The difference it seems is the depth of hte pocket.  Rod has discussed this come up with a bunch of options about this.

Google on the other hand just bought the damn thing… scale benefits anyone?

This quote from Google clearly parallels the thoughts of Rod. 

As more and more people conduct online searches and interact with applications like Gmail, Google Earth and YouTube, we’ve had to think outside the box to create a more scalable, affordable and easy to manage network that meets our users’ needs worldwide. One of the biggest challenges we face is staying ahead of our broadband capacity needs, especially across Asia

 

How Do SaaS companies make money?

I’ve been spending quite a lot of time trying to work out the right model for my currently employer to make money out of SaaS. This hasn’t been an easy task, and i don’t think the answers going to be good, but what it has exposed me too is some really interesting analysis work done on the SaaS market in general.  Things like the announcement of the NetSuite IPO , and this post by Rod Drury on Software RnD really got me thinking.  How do SaaS companies make any profit?

 
This post points to some of the more alarming things about SaaS companies. This one is relates to Netsuite

 

the provider of on-demand enterprise-resource planning software reports solid revenue growth: from $17.7 million in 2004, to $36.4 million in 2005, and then $67.2 million last year. But up until last year, sales and marketing costs always exceeded revenue: $27 million in 2004, and $39.2 million in 2005. Last year, sales and marketing costs were $43.9 million, or 53% of revenue.”

 

The Sales and marketing costs exceeded revenue.  What about the RnD, infrastructure, support maintenance, datacentre etc etc…

 
According to this by McKinsey this is a little out of wack but you can see why i think there's an issue.

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Clearly traditional software companies with incumbency are the cash cows. They’ve cut their code (the RnD mountain) and are leveraging their digital asset for all its worth.  From now on in its BAU enhancements, marginal based pricing (every unit sold only increases the cost of sales by the price of a CD) and stay abreast of what is going on in the market.

BUT the other thing i found interesting here is the parallels between the smaller software companies and SaaS companies (none of which are greater than $1.2b in revenue to the best of my knowledge). 

EBITDA  is quite frankly alarming. From this small percentage shareholders get a return. Hardly appealing. It’s worth noting that because of the licensing model (consumption) you can’t force the client to upgrade and pay more fees either. This EBITDA number is critical because also the money that companies use to reinvest in their product, infrastructure and delivery to help themselves grow.

The Marketing and sales spend is staggering. It makes sense that these companies are massively customer acquisition driven but the return is what?  Surely some clever guerrilla marketing or channel model could help out here? Given that each seat only pays a small about pa or per month you don’t see the massive revenue hikes year on year going head to head with traditional software companies isn’t ideal.

But users are very sticky (at present, but history would indicate that this will change. Imagine if you could export your CRM data (just like you do your feed reader file) and import it into the competition). But if you are a pure play vendor like Salesforce.com, your ability to cross and upsell to increase the ARPU is limited? Netsuite might be slightly different due to the breadth of their portfolio.

 The RnD line did surprise me. To me SaaS software is in constant beta, always being enhanced, optimised and revised in real time. Perhaps like all companies, RnD happens at the genesis of the company. The one cracking good idea and everything else is just evolution?

 The COGS line says to me scale problem. In comparison to large companies they haven’t achieved it.  It poses and interesting problem, one that Rod Drury has again mentioned. How do Kiwi organisations go global (or with my interpretation get Scale)?  It’s my view that the NZ market is too small in its own right to provide true scale benefits to a service provider, including SaaS. 

Xero seems to be targeting right from the get go at being a global enterprise. I think that’s important. But will that be enough? Can the loop of small EBITDA, incremental revenue (per user pricing) and borrowing (VC or IPO) continue on?

I’d be really interested to hear about others thoughts on this as it seems to me that if SaaS companies cannot solve this then the market as a whole is in question.

The netco debate

I spotted this on Rod Drury’s blog. A really good synopsis of the politicking going on about the network seperation (netco) proposal by Telecom.  Rod’s statement  here would be the crux of the matter.

 

           I'm a bit puzzled by David C’s approach here.”

 

My read on this is that the threat of operational separation has been used by the government to ensure Telecom plays the governments game and they therefore win the political points.  Telecom has called the governments bluff here and Labour are stalling for time to think up an appropriate response.

Another thing i’ve noticed is that this government in particular are really reluctant to make decisions. Decisions polarise the population (that is some of them won’t like you and hence vote for you), decisions have consequences, decisions have a long term impact. All things that this government don’t like (given they way the love pointing fingers rather than doing anything about it, just look at Cunliffes bit in the Rod post). This leads to investment.

I also think that by putting investment fairly and squarely in the public arena (which seems to be the actual problem with our future network) the labour government feels slightly exposed.

Mr Cullen is about announce a massive surplus, which indicates that the government isn’t investing our tax back into our creaking infrastructures.  The problem the government has (despite its best efforts to point the finger for the out of control interest rate at home owners) the reality is that central government spending has played a large part in fuelling interest rates.

The other factor I think that is critical here is that up until this moment the government has had an ‘out’ on the much debated OECD broadband penetration and productivity reports. That out has of course been Telecom. This of course ignores tax reform, exporter incentives, a decent savings scheme, education reform and creating an environment where its easy to run your company or live for that matter.  By putting the network back into public hands the government becomes accountable. Hmmm, more tough decisions to make, ops can’t do that. Can’t actually do anything.

In fact that statement is truer than I originally meant it to be. By its complete mismanagement of the wider inter related issues with the economy, the government has painted itself into a corner because now, when we need spending the most,  they can’t as it is tip the manufacturing sector over and the rest of the economy with it.

The telco week that was

Its been a pretty interesting week for Telecommunications in NZ and the world in general actually. Remarkably there has been some fairly reasonable commentary about Telecom’s proposed separation plan.  Personally i think this is a good move by Telecom, it

a) removes a point of leverage that the government was putting on them

b) it will provide a more realistic and manageable timeframe for actual separation

c) it will remove the burden of investment off them alone (to who i wonder again)

d) it will mean that they MUST absolutely deliver on their ICT strategy and remove the foot in both camps that they suffer from and

e) make it easier on their staff (i think that makes 4 severe re-orgs in 2.5 years!!! Spare a thought for them)

I particularly like the line in Fran’s piece where she says

  "Trouble is the Government may be too wedded to its own offensive strategy to see reason in return.”

I’d actually extend that bit to “the government and Telecom’s competitors” are too wedded to their strategies and in my opinion are going to miss an outstanding opportunity.  

I think that the government will miss the opportunity (despite the efforts of people like Rod Drury), i think they are far more interested in rhetoric and political posturing than actually making things better for that average NZer. The other issue is, if they controlled the network, then they’d be on the hook for our current OECD standings, which will in turn make it abundantly clear that having a decent broadband network is only a small part of a picture. Personal and company tax rates, compliance, electricity and other core infrastructures as well as a student debt scheme that drives grads away in their droves once we’ve educated them all need to be addressed.

I also think that most of Telecom’s competitors will miss the boat as well. Firstly that are so attached to being a victim that they don’t have the DNA to actually be proactive.  They will also have to put up some cash to actually differentiate themselves or even get ready to sell the network assets of the new netco. Finally, with the exception of a few of the ISP community, most of them are focused on the consumer market, (which is actually pretty much already on a trajectory) and miss the greater opportunity of offering services to business.

I think the big mover this year will be the Vodafone Ihug story. Already they are making some moves. But this is a network, access and calling game. To be honest this is Vodafone’s DNA coming through. At the end of the day they are what Telecom was 7 years ago, a network and calling company, full stop, end of story. Their track history in building and deploying value added services isn’t flash. Added to this is their ambition (which i have heard from a source) to have one of their divisions being the number 1 telco (and that can only be NZ) and i think they’ve got it wrong.  Another factor that they should be considering is market saturation in the core business and things aren’t going to be that rosey.

Be and interesting couple of years

State Owned Networks

Sorry to keep banging on about Rod Drury, but his last two posts have been in my humble opinion bang on.  

 As i’ve stated before it is naive to expect a publicly listed company to fund a nations core infrastructure. Isn’t that what governments are for? (As an aside, how many of the detractors of Telecom’s broadband services are shareholders? Interesting dichotomy there).

Rod’s argument that robust connectivity to the rest of the world is essential to our survival as a nation is fundamentally correct. Despite the work of people like Rod, Pete Jackson and a lot of others, our economy is still fundamentally primary sector based. That is, the same as just about every other 3rd world country in the world. (if you don’t believe me check out Statistics NZ. Of the top 9 export categories, ALL of them are primary products… nice. ( I mean what other country in the world has adverts in prime time TV to become a dairy farmer!!! Hello!)

 So how to transit further up the food chain, well you start moving into service industries. Ops, well because we are physically isolated from the rest of the world, that means creating things instead of provide traditional services. Creating things that add value to primary products or are unique, like gee i dunno, software?

 Which gets us nicely back to topic, how can we when we are so physically isolated compete? Well we do have a bunch of smart people, entrepreneurship seems to be in the water and luckily enough for us there's this trend call SaaS coming which means we could actually deliver services all around the world from home. Nice, sounds great. All of this is being done, but Rods point is that if we want to explode this, ie exponentially grow our services the links we have and the economic metrixs used by a publicly listed company to decide on whether or not to invest in more fibre aren’t going to cut it. They would actually inhibit this expansion (some would argue they already are).

 Fast links to the rest of the world alone won’t do it in my opinion but it will help. Culturally we need to think global (don’t start a business thinking it’s a NZ entity), we need to think tertiary sector, we might need more than the pittance of innovation funding we currently get. A decent savings culture that would free up funds for VC would also help. But it is a good start.

 I also agree with Rod (and know this better than most) that it would actually do the incumbent providers good to loose the network. It might be the catalyst they need to change as a company. Either that or they will be superseded by someone who could adapt (see the innovators dilemma to see how this works) , either way progress will be made.

Rod’s the man,

This article on stuff,  pointing out Rod Drury’s success with Aftermail and planned success with Xero is fantastic. Kiwi’s are traditionally appalling at recognising our talent and successful people. Well done to the team at Stuff for actually going out there and celebrating this guys success.

 
I’m a big fan of the SaaS delivery model and concept as a whole, and while i’ve not trialled Xero, the concept is incredibly sound, the vision grand. I’ll be watching it closely. After (or perhaps with) CRM, finance applications and payroll are going to be the big winners in SaaS.

 
You can tell by the list of people becoming involved in the project that it’s got legs. I’d personally love be one of them.

 
From us at Unreasonablemen, Congrats