Wall Street Crash: Upcoming Telco Chaos

With the sudden and forced mergers of some of the worlds largest financial institutions, Telco and ISP major accounts teams will be preparing themselves for several months of travel, client meetings and late nights as they try to make sense of their position in the combined entities.

As overnight bags are stuffed and expense forms dusted off; here are some highlights of the fun to come.

Lloyds TSB has strong links to both C&W and BT.However, the major accounts team at C&W will be less than pleased to find that BT's position has been enhanced by virtue of BT being IP Services provider of choice at HBOS.
On the voice & legacy data side, things are likely to be more complicated, as with 3yrs still to run on Lloyds $1Bn outsource agreement with IBM, you can be sure that the IBM account team will be lobbying hard to get access to HBOS' branch network; currently supplied by "...strategic partner, BT"

Tiscali brands innocent customer criminal

Two articles caught my eye this week on the proposed EU Telecoms's package, a law that if passed, will effectively mean that ISPs will become unwilling Enforcers for the Digital Rights lobby.

The first is the surprise involvement of the European Data Protection Agency, whose Supervisor has come out against the act, stating that parts of it relating to the tracing of IP addresses, breaks existing EU data protection legislation, enabling the mass surveillance of Internet users. If true the ISPs will be spending a lot of money on legal fees.

The second proves that there will be trouble ahead for ISPs. It appear that Tiscali wrote to a chap accusing him of illegally downloading a TV show. OK, but this chap isn't a customer of theirs; he had left them a year before and his old IP address had been dropped back into the pool. The cause "Computer error" Nothing to worry about then, that hardly ever happens.

Imagine the damage to Tiscali's Brand, had it gone all the way to the guy being permanently expelled from the Internetit would have made national/international news; it's the modern equivalent of having your eyes put out...

New Heatmap feature shows installed services

Following customer feedback we have added a new Heatmap feature to the BackChannel Account Manager. This makes it possible to see not just where your customers offices are located, but where they have services installed.


This screen shot from within the application shows where HBOS have their primary IP services installed.

Google polishes up Chrome to support GoogleApps

Whilst it has been slow to take off in Europe and the rest of the World, GoogleApps for Business have been as huge success in the US. In Mid 2007 we electronically surveyed 550k US companies to see who was using GoogleApps mail services and it hardly hit the Radar.


Re-running the Survey in Mid 2008 the results couldn't have been more different. GoogleApps had arrived, and the demographic is right in the heart of the US business, companies with between 20-250 employees.

You're probably all Google Chrome'd out by now but a significant part of the Chrome announcement is that it has an application development kit called Gears that allows Web App Developers; like ourselves, Salesforce, etal, to build Off-line features into our products, making them portable.

For Google, this means that users of GoogleApps for Business will soon be able to compose a Gmail that includes a GoogleApps Spreadsheet sitting on a plane, and have it sync up and send as soon as they are connected to the Internet again.

Protect the European Internet industry from Copyright Hawks

BackChannel strongly supports Telcom TVs "Throttle the Package" campaign, we ask that you do too and that you sign the petition to get it stopped.

Check it out; because if EU legislation proposed for passage into law in September goes through; your kids could get you and your family 'permanently' removed from the Internet.

With three aged between 6 and 15, the chance that they will stupidly download a song or watch a copyrighted clip on Youtube which could result in me permanently losing access to the Internet, and changing my life, is a real issue.

Having bamboozeled the French government, and the lunch time o'boozers in Brussels, the US copyright hawks are finally winning the war to end the principle of network as a conduit; a principle that has previously protected the personal privacy and human rights of the individual, and ensured that ISPs are not forced to act as on-line content police for the media industry.

If you're an ISP think what it would do to your business if you're forced to monitor the traffic on your networks and maybe hand over your customers details in order that they can be permanently remove from the online world.

Sub-sea Cabling Map

I spent an hour sorting out various service providers network maps this afternoon, and found this one that is rather good.

Global Submarine Cable Map 2007

In a world that is becoming more IT dependent it highlights the lack of redundancy in the global network of sub-sea cabling.

That C&W takeover of THUS Telecom people are talking about

As the 30th June deadline looms and THUS Management remain coy about their plans, we take a look at how a combined CW/THUS entity would address the IP services market in the UK.
In this graph we see the customers of each player by turnover. The first thing that strikes you is that where CW is weaker than the market average (0 on the 'Y' axis), THUS is stronger and vice-versa. A combined entity would have a significant increase in market strength across the whole business IP services market.

CWs undeniable success in controlling costs, reducing unplanned churn, and bringing its customer base back to those it finds most profitable to serve; has led to a fall in its 'overall' market strength. It's position in the profitable £2m-£20m Turnover bracket is particularly effected, see below.
For CW being able to leverage THUS' position amongst this group could quickly address the concerns that some analysts recently expressed that CW has pulled back too far, too fast.

Given that unlike India, Big Vision in UK Telco sadly took a pasting in the 2001 crash, What is the Pluthero vision that is big enough to accommodate the acquisition of THUS?

THUS is a strong company, has a lot of potentially profitable customers, a UK wide NextGen powered network, and growing reputation for delivering value to customers & shareholders. CW, is a global brand, has a focus on increasing profit per customer, and access to a global network which makes them increasingly attractive to multinationals transitioning from legacy to all IP NextGen services.

My opinion is that both companies are growing in strength and left to it would thrive independently; together the potential is extraordinary.

"Vodafone is a national operator in mobile and we'll take that philosophy to the fixed line world as well"

In recent years New Zealand has become the place where technology companies go to test products, and hone business models prior to releasing them on a world stage.

After my comments on the likelyhood of Vodafone buying up more fixed line capability, one of my colleagues passed me this news report on Vodafone's LLU 'Red' Network in New Zealand.

Vodafone Red has unbundled half the exchanges in NZ's major cities and is busy working it's new triple-play across the country. Russell Stanners CEO of Vodafone NZ said " Vodafone is a national operator in mobile and we'll take that philosophy to the fixed line world as well,"

NZ's a small country so costs are manageable, but if Vodafone were planning such a move in the UK, they should look at THUS Plc. THUS already has the country wide LLU network in place and their Demon Internet subsidiary has many years of experience in providing consumer broadband and telephony.

Tiscali to sell off Broadband Business to Vodafone

Tiscali's 2million UK subscribers are to be sold on again as yet another consumer broadband company does a Python; exit stage right shouting "run away, run away".

The tiny premium proposed on the share value underlines what we industry watchers have long been saying; that there is no value in the consumer broadband as a standalone business. It only makes sense if you either own the networks, or can supply it as part of a total communications package; even that model is unsustainable.

I strongly suspect that long term Vodafone will look buy more NGN/LLU providers. They've shown capable with the piecemeal acquisition of Arcor Germany's No2 telecoms provider last week.

Rely on Emerging Markets Players...

... to make Telco world interesting again.

So Vanco is to be acquired by Reliance Globalcom the highly successful telecommunications and services company based out of Mumbai, India.

Reliance is a conglomeration of three companies: Flag Telecom, Yipes Communications, and the original Reliance Communications.

The VANCO acquisition establishes credible base of customers for Reliance in Europe. Flag provides a global network of undersea optical cabling; Yipes, managed carrier Ethernet services (including VPLS) and Reliance's experience of building its India-wide network of wireless and wired services, including large scale MPLS deployments, sets it in good sted for an assault on the European markets.

Reliance joins TATA Communications amongst the Indian Companies who are taking the experience of building infrastructure and supporting western service providers, and who are now determined to play on the world stage.

Accenture bid to run a ViNO in a brewery

Thanks to one of our readers for pointing me at this. The VANCO story continued to gather pace with speculation rife that bids could be expected and on Sunday this appears to have been confirmed, with IBM and Accenture named as separately interested in a bid for the failing Virtual Network Operator.

Hmm, Accenture & Telco - as Accentures primary customers include some of the worlds largest "real" Telco's they may find that a successful bid would put them in direct conflict with some there largest customers.

Where is the next VANCO

In May 2008 respected stock watchers The Motley Fool rated Savvis as the worst stock in the world like Vanco they offer VNO services and boy have they had a rough year.

I thought it was a little harsh; at least they have some of their own network real estate. But we're already pulling reports off our systems on Savvis' customers, alongside those of VANCO, so watch this space.

Overall, we think 2008 will be a difficult time for VNOs large and small, they are effectively margin traders, and the big network providers seem pretty hostile to them just as their customers are putting the elbow on them to keep their prices down.

Many of the larger players have started offering VNO style services themselves and I am picking up quite a lot of undisguised glee from the bigger ISPs.

Vanco demise: Real beats virtual...

Great news for traditional telco as customers discover that sometimes, real beats virtual...

Vanco looks like going the way of the many margin traders - just like the city boys they too have been caught out by in the credit crunch.

Vanco is fundamentally a buy low, sell and live on margins, business. They're now finding that as the market turns against you, you had better hope and pray that your backers will cover the gaps in your cash-flow.

Having seen the April earnings announcements I was a bit surprised to read the news, especially to discover that analysts, whose praises just weeks ago drove the stock to an all time high, saying "we don't expect to see any value in the companies equity."

Could they have seen it coming? with hindsight probably: 3 things coming together have almost certainly caused a crunch in the companies cash flow, and collapse in the confidence of its backers and investors.
1) Tightening of economic climate causing slow payments from debtors
2) Channel stretching the elastic in the supply chain to breaking
3) Creditors unwilling to increase their risk and extend fresh terms

BackChannel work with enough Telco and ITC companies to know that the big customers are using their buying power to push out average payments, and with a growing and aggressive channel this will have been compounded by the number of links in the cashflow system.

This is always going to be an uncomfortable time in any board room especially bearing in mind and a few months ago Vanco CEO, Allen Timpany, hinted that their backers were not a very amenable bunch, "they want us to build a £200m business when we should be building a £2bn business". After they issued a profits warning in Aug 2007 we can only speculate how the relationship between founders and backers went, but it might have been opportune for someone should have reminded them of the Golden Rule: The man with the Gold makes the rules!

SofNet 2008 - The great BT love-in

Barring a fire on the last day, the Sofnet 2008 conference and exhibition has been a great success, just about every industry Journalist and Analyst I know, or know of, has beaten a path here to London's Olympia Conference centre.

So for an event that emphasizes the convergence of the global ' telecom networks with software, why the 10meter stands filled up with hardware vendors? Juniper, Alcatel-Lucent, Hauwei, Nokia all showing a presence (no Cisco). I guess the answer is the identity of the host sponsor, BT, and in the list of speakers and panel members, which is rather heavy on BT senior staffers.

People tend to be a bit dismissive of BT on a world stage, but here is why the great and the good turn out to fate BT: - A report from the department of innovation, universities and skills shows BT as the UKs largest investor in R&D and in fixed line infrastructure. So for the vendors it's great opportunity to share a platform and network with the golden geese that will see them through the credit crunch.

Security Industry Blog: Infosecurity Show, London

Due to our backgrounds being in information security inc' ISS, CESG and CheckPoint; we've have been invited (with promises of beer) to guest blog for Security consultancy 360is, so here is the first one - looking at the run up to Infosec London and reports on the RSA Conference in San Francisco.

New Corporate ISP League Table for 2008

Our New Corporate ISP League Table for 2008, can be picked up free from our here.

This is our January 2008 baseline. It shows you exactly where the UKs largest companies sourced their Internet Services on the 20th of January, 2008.

Your chance to catch up with BT's ongoing battle with Verizon for the top slot. The new league table has been widened to include the Internet services of the companies that make up the "FTSE All Shares Index", including BAe, Tesco and Tomkins.

The big news is, that as the Internet services market suffer it's heaviest downturn since the Tech' Crash, UK based service providers are once again struggling to compete with their US counterparts.

Register when you pick up the league tables and we will send you the figures as soon as we have them.

Julius Baer backs down over Wikileaks

A good day for free speech as Bank Julius Baer (BJB) decides not to pursue further action against the whistle blower site Wikileaks. If you recall they won an injunction in February to close the site down, that caused a mixture of concern about restrictions to freedom of speech and high entertainment over the inept methods of both Bank Julius Baer and the California courts to get the information off of the web.

But we shouldn't be too pleased, the law found in BJB's favour. BJB, has decided not to proceed because of the negative publicity the exclusive Swiss financial management company has received from the story. It has been posted on thousands of blogs and news feeds around the world, reaching in turn 100's of thousands of people who had never heard of either party - a sort disastrous viral anti-marketing!

CW: PanAm or VirginAtlantic

This weeks analyst call was a toughie for CWs pilgrim and his team of Energisers. I just watched webcast; skip the bit about the Caribbean, it's all phone minutes.

Times Online reported one analyst saying: “Their plans are far too long term for this market. They need a quicker fix than this.” Mate! Go find something else to analyse! If you haven't worked out that there is no quick fix for telco, you're' in the wrong job.

It's not a CW specific problem; it is the same for all the Telco's: After 100yrs of selling voice minutes somebody invented the Internet, and that's having the same effect that airliners had on oceanliners. Massive increase in traffic, loads of competition, and a huge drop in revenues per head as customer choice expands.

In todays financial markets this is a recipe for volatility, and volatility = risk. SO, vicious circle; everyone's risk averse, so everyone's looking for the quick fix, and there isn;t one. The answer for the service providers is to sell core services, to valuable customers over their own networks, and, once they have those customers keep them. Not so simple as it sounds.

After years of volatility, crashing stock prices and stranded passengers; the airline industry introduced Revenue Management in the '80's. They filled their planes with the customers who provided the best economic return. First class, business, early bookers, flexi-tickets, block bookers, loyalty card holders, late bookers all became categories that were given quota's, and managed using sophisticated booking models. They didn't invent anything, or come up with fabulous new killer services! They just provided a core service and managed their customers more effectively.

Telco's must do what the airlines did, introduce Revenue Management and fill their networks with valuable customers. It was realising this fact about 4 years ago that caused us to give up the day job and start BackChannel.

So, CW, PanAm or Virgin Atlantic? Personally, left to it's own devices I think CW has the potential to become a truly global telecoms provider; they have the network, the services, the contacts and the mindset to do the job. Question is; Do they have the time?

BackChannel has new products and a new website

Just a quick note to say thanks very much to those of you who were able to provide feedback on the new BackChannel website it was valuable, valid and consistent.

So, we learnt a lot and made some changes. Thanks to one particular mega value reviewer for his excellent critical analysis - " you really know how to mangle a metaphor !?" Regular readers will also have spotted I can't spell ether.

The release of the new product is driving this change, beta trials at number of carriers have been completed and initial feed back is that it both saves a great deal of the sales peoples time in gathering customer intelligence and reveals a lot of otherwise un-knowable detail on the use of IP Services by large organisations and within Fiber served buildings.

We will of course be continuing with our regular free reporting and market intelligence services: when you're monitoring nearly a million companies you learn some interesting stuff.

Google take stake in Unity TransPacific Fibre

Google has taken a stake in the Unity TransPacific super fibre linking the US Westcoast to Japan.

This is the Google that purchased a 270,000sq ft interconnect facility in New York in 2005. The Google that has a division engaged in acquiring dark national, international and metro-fiber. Is investing heavily in consumer WiMax, a mobile phone platform, mobile applications, oh and spectrum

Still think Google is a search engine and advertising company? Read on...

In 2006 Google was recognised by the American Registry of Internet Numbers (ARIN) as an ISP, when it was granted a large allocation of IPv6 addresses.

At the time of the allocation ARIN's director of external relations , Richard Jimmerson, said. "Any organization that has received (IPv6 addresses) has met that criteria -- and that would include Google,"

Note: IP v6 will enable the Internet address space to several trillion, trilion addresses, more than enough to absorb the current 4 billion IPv4 Internet addresses several times over. They must be planning an awfully big grid network, or is there more to it than meets the eye?

Nervous now? Get in line behind Microsoft; a queue is forming.

UK ISPs to face legal sanction's over downloads

The British government has given ISPs till April '09 to "get on board or face legal sanctions".

The moves follow similar legislation in France due to come into force this summer.

The Media folks will identify the file down-loader by joining BitTorrent storms, then pass lists of offenders to the ISPs and then require them to identify repeat offenders and cut them off from the Internet, probably by invoking breach of contract.

As Tiscali found - If it goes wrong, (surely not) you're on your own.

Judge in WikiLeaks driven Dyna"dotty" as archives go P2P

The Wikileaks train now seems unstoppable. As due to massive pressure on their remaining servers the Whistle Blower has posted it's archives on a number of P2P sites including the notorious Piratebay.

Some good comment over on El Reg regards the Julius Baer/Dynadot/Wikileaks debacle, which shows that the judiciary have no clear understanding of how the Internet works, or even that its geography extends beyond the bounds of their jurisdiction.

Being a working guy, and unlikely ever to need their services, I had hardly heard of Julius Baer and their spat with Wikileaks. If you want to know more about the "due process" take a look at Cryptome it has chapter and verse including all the legal two'ing and fro'ing


This is the kind of viral marketing JB could do without.

ISP Executives in firing line as Governments move on online privacy

Senior Executives within ISPs will be calling in the lawyers this week.

Why? well it's been an interesting week for on-line privacy, freedom of speech and data protection; with the ISPs being moved firmly centre stage again.

In the UK, the Labour government has presented a Green Paper that will coerce ISPs to monitor their customers Internet traffic for illicit content. Recidivists will have their connection cut off, and to stop them doing it again, their names could be entered into a central database of law breakers, to be circulated to other ISPs, government agencies and potentially even to the owners of the content.

In the USA, the Protect America Act has been passed allowing the NSA to filter the day to day emails and web content of both Foreign and US Citizens, in the ongoing search for Al Queda.

Finally, Tiny Californian ISP Dynadot which hosts whistle blower site Wikileaks was forced to hand over the site, contents, supporting literature and all log data to the courts.

So what is the potential fall out for the service providers?

The US government has stated that ISPs who voluntarily co-operate will be protected from litigation by their customers. But we know from experience that won't stop the lawyers having a bash at a few multi-billion$ class actions.

The UK Government has also promised protection for the ISPs. But refusal by the media industry to indemnify the likes of Tiscali against costs involved in fighting prosecution, has already caused that company's attempt to implement the "three strikes" proposal to collapse in disarray. As the process is equivalent to asking the postal service to open and vet every package and letter in the system, there is surely plenty of scope for litigation.

Even after the legislation I foresee many IT Illiterate parents carted away as their kids continued to download music without their knowledge, as well as the media industry choosing to pursue teenagers for individual criminal actions.

It's just a matter of time before ISPs find themselves under siege from the lawyers of those prevented from accessing the Public Internet, email and possibly even phone services, or for abetting the media companies in malicious prosecutions.

Dynaspot shows that ISPs will increasingly being held accountable for the content and themes of web sites that they host, and the authorities will support action against them.

So why should the Senior Executives worry; well there is currently little protection in law that will protect them from irate customer. Reviewing the 2002 Electronic Communications Act (figleaf) passed to protect ISPs who remove content from customers websites.

The Dynaspot case is the final proof that if ISPs don't co-operate they will face court action, heavy fines and even jail.

Oh you're outside the US / UK! "Don't get comfortable folks" - the gaming industry thought they were safe until their CEOs started finding themselves held in US jails for wire fraud and racketeering.

Those ISPs in hosting havens like Finland and Norway should bare in mind that a US arrest warrant cost Swedish Skype founder Niklas Zennstrom $100m, he can afford it, but can you!

Managed Hosted Service in USA: Comparitive strength of vendor

As part of a wider survey of the use of Internet services by over 500,000 organisations in the USA we surveyed the Messagelabs/Postini/MS Frontbridge market for Managed AntiSPAM - AntiVirus services.

Courtesy of our friends at ManyEyes (IBMs visualisation business) Here is something for you play with; just click on the charts title.



The Control is the normal distribution of organisations by state.

Pipex Business to lose prime asset - It's name!

Tiscali's acquisition of the Pipex Broadband last year, has had an interesting knock on. It appears that as part of the deal Tiscali acquired the PIPEX brand; so the business end of the operation has got to change it's name. The new name for PIPEX Business is apparently Vialtus .

It's been a long journey for the PIPEX name, since the Monday morning in 1991 when the original founder, Peter Dawe, bounced into my office and said "hey Steve; Public IP Exchange - PIPEX, what do you reckon?!" I doubt it mattered what I thought, but he was clearly excited. For weeks he had been struggling to find a really "meaningful and pointy" name for the UKs first commercial Internet services provider.

Despite many changes of hands, PIPEX has remained a benchmark of the UK internet scene; justifiably known for it's quality products, support and services ethos. Pipex continued to grow business customers even as it became better known for its consumer offerings.

Losing such an established brand identity is a big issue for any business. But for an established ISP, ouch!! Ofcom reference over 500 ISPs in the UK; even when you take out those who are just reselling other peoples services, it's still over 170 competitors servicing UK business.

The market is overcrowded, economic situation is tightening and competition for corporate customers is now from international players like AT&T, Colt, Verizon and Rackspace. Even with a big bag of money from the sale of the consumer business; it's a brave time to launch a new brand.

So what next, well with the PIPEX name gone we think another power brand is likely to step in and pick up the business; as well as a lot of customers it has some very desirable physical assets.

Cable & Wireless, THUS, and Oakley Capital have all been named as possible suitors. Given their stated strategy of shedding customers, it would be mixed signals to the city from C&W, Oakley would probably want it for "parts", increasingly successful UK operator THUS would seem to make much more sense.

Who knows, BT might even re-enter the fray; our latest research data, published next week, shows it could sorely use a couple of percent more market share in it's ongoing battle for corporate IP customers with US giant Verizon.

Managed Hosted Service in USA

More Visualisation trials: This shows the distribution of sales of a Managed Hosted Service by six service providers. In the drop down you will see companies 1-6 and a Control. Control is the distribution of businesses in the Continental USA.


The sample data are 552,000 US Organisations, excluding Micro-Business. Use the zoom facility it is very cool, hopefully we will get it down to City level on this sort of public interface; In our client systems we are there already and can map down to street/building level.

Visualisations role in data presentation

We are more and more experimenting with visualisation tool kits to find ways of representing the huge data sets we are working with.

Here is a small data set of 203, presented with Many Eyes; part of the IBM visualisation project. It represents a raw count of the IP services consumed in 5 major London office blocks including Tower 42 in Old Broad Street and CityPoint 1 Ropemaker Place.






This was part of a project we undertook earlier in the Year for a company on that list who wanted to take some business off of their competitors.

CWs Pilgrim continues to progress

We have promised to keep you abreast of what John Pluthero and his team of re-Energisers are doing at the revitalised Cable & Wireless.

On arriving at C&W The Pilgrim's shocking mantra was "Only sell to profitable customers!", with instructions to the whole business to start shedding those customers who didn’t add solid value to C&W's bottom line.

What he saw clearly in C&W was the need to manage the revenue of each and every customer, and if the customer isn't profitable, they have to come off the books.

More importantly the new management team accepted something fundamental; It's not about the number of broadband subscribers you can boast or the cool new Linux hosting service; running a successful Telco' is about increased profit and improved execution.

And, there is no doubt this is paying off. Cable & Wireless announced half year figures this week and showed a jump in earnings of 29% EBITDA (Earnings Before Interest, Tax, Deductions and Amortisation), alongside a reduction in turnover of some 10%.

This turnaround has earnt Pilgrim a kick upstairs with the notice that John Pluthero is taking the reigns of global operations with immediate effect, announced at the same time. Former chief of International, Harris Jones, heads back to the pavilion with a reported £4.6m stuffed in his back pocket.

NB: BackChannels ongoing analysis of ISP market share amongst major corporate accounts shows C&W continues to have very low, in fact negligible customer churn in amongst their major accounts, we’ll let you know if this rolls over into international for them.

NextGen Network roll out threatens ISP Major Accounts

BackChannels latest research shows that 77% of Telco' major accounts buy their Internet access from other providers and this rockets to nearly 90% for hosted Internet services such as web hosting, collocation, managed email and DNS services.

It appears that a 'network as a utility' mentality has developed in the purchase of Internet services, and that represents a significant threat to Big Telco's core revenue streams.

Customers see technology migration as an opportunity to tender out, and due to the flexible nature of IP this 'utility' mentality in the acquisition of Internet services is slowly starting to effect customer attitudes to Private IP infrastructure.

As the telecommunications industry progresses towards all IP Next Generation Networks (NGNs) new threats to their position are arising all the time; VoIP, Streaming media, Web 2.0, Software as a Service, Google… All are becoming more & more stable and running over super cheap bandwidth that business now buy like electricity.

So, as providers of private data networks race to transition to IP based infrastructure, they need to have strategy and tactics in place to manage the process.

Over the next few months BackChannel will launch a series of new sales management and business support systems that will help the successful migration process.

Tiscali buys out PIPEX Consumer Business

This weeks announcement that PIPEX is to sell off it's consumer business to Tiscali for £210m ($420m) will be no surprise to those who are following the increasing desperate consolidation of consumer Internet access.

A surprise to some, and relief to it's many business customers is that PIPEX plans to continue as a provider of Business DSL. Assuming that the deal is along the lines of the Bulldog customer account transfer this looks like being a result for PIPEX, having paid £109($218) each for Bulldogs customers they have sold them on for in excess of £400($800) each.

As media and the mobile operators are driving the price of consumer Internet down to "not free, but just about" . PIPEXs move back to higher value business services comes at just the right time.

Only question is what will happen to the Hoff, will he stop dyeing his hair maybe buy a Lexus and a nice suit?

Google and Postini Senior Execs Talk about the Acquisition

It's worth a trip printing off the charts below and heading over to ZDNets Blog to listen to Dave Girourd, vice president and general manager, Google Enterprise, and CEO, Postini Scott Petry, founder, CTO and exec VP of product development, talk about the thinking behind the acquisition and the integration of Postini.





It gets a bit nerdy in places but is worth listening to get a view of how the combined company plans to interoperate with other alternative application vendors such as the Mozilla Foundation, and to make the experience for the serious business user, well 'more serious'.

Google to acquire Postini leading US Mail security vendor

Breaking news in the informartion security area is that Google is to acquire the US leading email security vendor Postini .

In April this year Postini and Google announced a strategic tie up for the consumer oriented Gmail.

Now (July 9th) it is announced Google will acquire Postini for $625 million in cash, subject to working capital and other adjustments, and Postini will become a wholly-owned subsidiary of Google.

Dave Girouard, Vice President and General Manager of Google Enterprise. said "The response to Google Apps has been tremendous, with more than 1,000 small businesses signing up for the service every day. At the same time, large businesses have been reluctant to move to hosted applications due to issues of security and corporate compliance. By adding Postini products to Google's technology, businesses no longer have to choose -- employees get the intuitive products they want, and the company achieves the security and assurance it needs,"

CEO Eric Schmidt commenting on the addition of Postini to the Google Apps portfolio said "With this transaction, we're reinforcing our commitment to delivering compelling hosted applications to businesses of all sizes. With the addition of Postini, our apps are not just simple and appealing to users -- they can also streamline the complex information security mandates within these organizations,"

The news comes as this sector hits hypergrowth. As second quarter of 2007 saw a hockey stick in the adoption of managed hosted mail security, it also saw Googles arch rival Microsoft growing deployments of the Exchange Hosted Services Portfolio based around their strong Frontbridge solution.

This strategic move by Google looks to have slipped them ahead of the game;

Here is the market share data for use of these services amongst some of the worlds largest corporates. The FTSE350 and the Fortune 1000.





As you will see, we left the old names on but here for completeness...

Postini = Google, Frontbridge = Microsoft, BlackSpider = Websense and Messagelabs well there still Messagelabs.

Notes on the potential auction of Virgin Media

On the 2nd July it came out that Carlyle Group had made an offer of about $11bn for Virgin Media $11bn for Virgin Media

On the 4th of July it was reported that Virgin Medias bankers inc' Goldman Sachs were preparing detailed financial presentations for other prospective suitors amongst the Private Equity community.

We've often commented on the similarities between the ISP businesses of Virgin Media and BSkyB, NTLTelewest and EasyNet respectively.

Both these companies are in the UK 'top ten' business Internet market shares Each has about 3% share of the UK businesses with a turnover up to £125m ($250m).

The chart below profiles each companies Internet Access customers (amongst a representative sample of 80,000 in January 2007) as I mentioned before each company has near enough 3% share overall.



NTL Telewest, which claims to offer service coverage to 85% of UK business, is an established and interesting ISP, one that has managed to retain a leadng position in the UK ISP marketdespite suffering from the failing strength of the NTL consumer brand.

As the second largest provider fixed line telephone services and having already sunk an estimated £13bn into its NGN/All IP infrastructure. Perhaps a move into the hands of a private equity firm might see a resurgence in it's fortunes.

Protecting legacy customer revenues

BackChannel is offering a major account profiling service, which allows service providers to gain a complete overview of the Public Internet services brought by their largest strategic accounts on a country buy country, or worldwide basis.

The worlds’ largest Telco operators have thousands of major accounts that generate billions of $ in revenue from a mixture of fixed & mobile telephony and legacy private data services.

These legacy accounts are the corporate crown jewels of the business providing some with up to 70% of their turnover.

Big Telco’ around the world have become experts at weaving themselves into the fabric of these customers strategic private telecommunications infrastructure; not so their public facing IP infrastructure.

BackChannels latest research shows that 77% of major accounts buy their Internet access from other providers and this rockets to nearly 90% for other Internet services such as web hosting, collocation, managed email and DNS services.

A ‘network as a utility’ mentality has developed in the purchase of public Internet services, and that represents a significant threat to these core revenue streams.

Customers see technology migration as an opportunity to tender out, and due to the flexible nature of IP this ‘utility’ mentality in the acquisition of Internet services is slowly starting to effect customer attitudes to Private IP infrastructure.

As the telecommunications industry progresses towards all IP Next Generation Networks (NGNs) new threats to their position are arising all the time; VoIP, Streaming media, Web 2.0, Software as a Service, Google… All are becoming more & more stable and running over super cheap bandwidth that business now buy like electricity.

Messagelabs: Jolly Hockeysticks

Hosted Email Security Services hit an inflection point at the beginning of June 2007 with a sudden uptick in installations across the board in the UK.

For those of you not completely familiar with this service it is an "In the network service" where inbound email is redirected to a 3rd party data centre where the email is scanned for SPAM, Viruses and then returned all clean and shiney.

Whilst it is not to be confused with email hosting by a service provider, many of the large email hosting providers like Cobweb offer the service as an option.

The largest gainer was Messagelabs, whose extensive partnerships with the likes of Verizon, Star, HP and IBM has added greatly to their global market reach; as shown by their strong gains in the USA over the last 12 months.

Amongst FTSE 350 companies the increase is most noticeable, use of hosted mail security services jumped 80% from 135 companies to 244 in 12 months.



Microsoft made the fastest market entry amongst these major UK corporates; having launched in Europe in early 2006, Microsoft gained 5% share from a standing start. Seeing the future Microsoft acquired Frontbridge in 2005 and have been marketing it under their Managed Hosted Exchange brand..

BackChannel released our first Hosted Email Security market in June 2006. We now measuring the actual use of these services by FTSE, DAX, CAC and Fortune 1000 companies around the world, amongst 68,000 businesses in the UK, and plan to extend this to other regions in the near future.

Note: In this blog we're talking explicitly about hosted email security but for those of you interested in the whole subject of email hygene here is a link to the Gartner Magic Quadrant report for 2006.

Cable & Wireless: Breaking up is not so hard to do

Over the weekend the Observer broke another story about the potential break up of the UKs No.1 Alternative Telco.

CW has been operating separate Consumer, National and International business strategies for some years and the break up would not be unthinkable.

Focus on high value customers core operations and improving utilisation of assets worked well for the International business, the UKs more generalist operation was seen as holding them back.

Now the UK operation is taking a more business like approach; i.e. selling the right products to the right customers and making a profit on each one.

So, maybe it is time to give the UK their head and let them run things.

Who won the battle for Bulldog: C&W of course!

Having sold off the Bulldog customer base to PIPEX earlier in the year, Cable & Wireless are likely to be having there cake and eating it too. As they appear to be on the verge of striking a deal to supply broadband Internet and telephony services to Virgin media over that same Bulldog LLU network.

Coming late to the BT, AT&T way of working CW are now clearly benefiting from the miracle of bandwidth wholesale.

Virgin Media and BSkyB: 'Two houses both alike in..." more than Broadband

Here is a thought on how an acqusition of Pipex might help BT to broaden its position in the consumer quad play

I have just been watching an interview with Steve Beynon the MD of NTL Telewest Business on www.telecomtv.com where he was discussing the strengths of the NTL network and how the wide national coverage and its performance capability comes from the fact that the network was built to facilitate the predicted high demand for streaming HD TV, and the decision by Virgin Media to allow them to continue on building and managing the networks and serving the business community.

Then it struck me that a few days ago I had been reading similar comments from David Rowe the founder of EasyNet, acquired by BSkyB to allow them to extend their media reach onto the net.

Whilst these two feuding media giants appear a million miles apart in style it is curious how similar their ISP businesses are in structure.

Both owned by global media brands, both working towards triple/quad play, both being extremely savvy about how they position their product offerings for consumer and business.

They have both chosen to run their home-user broadband business' with consumer friendly 'media' brands, Virgin and BSkyB, and the have also chosen to manage the both have highly successful

For business and for the construction of a national network infrastructure they have NTL Telewest and EasyNet, both long established business Internet service providers

NTL Telewest Brand to continue - is this a trend?

There is a lot more to PIPEX than "The Hoff"

PIPEX the 'Consumer DSL company" are in fact the UK's 8th largest provider of IP Services to Business.

BackChannels analysis of PIPEXs customer base shows that they perform well in the midmarket and have quite a number of major corporate' on their books as well. Where will those high value business customers go when Carphone warehouse buys them?

Bet they're all looking forward to calling Carphone Warehouses 0870 hotline for tech support .

Will it even be Carphone warehouse? You have to wonder, with the others appearing to have pulled out it just leaves Carphone but don't be surprised if BSkyB comes back for another go, when Carphone have forced the price down a bit of course.

BSkyB has a natural home for all the business services as well - EasyNet. They have proven to every ones surprise that you can be both 'fish and fowl'. Using the highly efficient Sky billing systems to handle the consumer end of the business whilst allowing EasyNet to continue running as a highly successful Business ISP.

BSkyB and BT are the only ones who would get the full benefit of the money they might spend.

Niche and Easy does it

The profile we produced of Cable & Wireless' customer base last month caused a bit of a stir.

As promised here is the THUS Profile.


The data were part of a wider project we undertook into how ISPs and Telcos market themselves, the impact that has on their customer base and how it defines the way they need to organise themselves operationally to support their customers most profitably.

Dry I know, but it has long been understood that most succesful companies fit into a niche. You don't want to waste money promoting super resilient VPNs to the finance industry, if your main business is selling masses of DSL to SMBs, or outsource third line support to Elbonia if your customers are 24x7 city dealing rooms.

Our research underlined some simple truths: Incumbent BT are present and perform well across the board; PIPEX are the boys to beat in mass market business DSL; THUS have a good cross section of customers but excel in the lower mid market, C&W are very strong in high value UK based upper mid market and notable major accounts; Verizon are historically embedded in high value major accounts where there is a strong international element, and whilst AT&T have a relatively small number of UK accounts - boy are they the cream.

The growth strategy for these companies is to play to their strengths, to structure the core operations of their business around retaining a core portfolio of profitable clients, serve them effiecently, whilst shedding / avoiding those who could be drain on resources. We call it Yield Management, it's what C&W are trying to do, it saved the airline industry can it save telco?

So what about everybody else: we identified 175 notable ISPs in the UK survey. Big, or small these companies need to know who their customers really are, and focus their whole business behind that position. Those who can't or won't might as well get their coats now.

A Pilgrims Progress: Cable & Wireless

As promised we have been keeping a close eye on Cable & Wireless UK operation.

Since the reverse merger with Energis, things seem to have gone pretty well. Certainly the CW people we meet are increasingly chirpy.

As well as showing a notable turnaround in the companies stock market position, they have continued to fare well in the IP Services market and despite some apparent weakness in the web hosting area, they retained their top 3 position amongst the FTSE350 companies and most impressively have experienced no significant churn amongst their largest Internet Access customers.



The chart above is a unique profile of C&W customers segmented by turnover, based around a normalised or "neutral" axis. As you can see C&Ws profile shows a heavy bias towards major accounts and the upper mid-market. Whilst at the smaller end typically served by business DSL their presence is well below the line.

This striking new data supports the decision by CWs management to sell off their struggling Business DSL business to PIPEX. PIPEXs profile by the way is an absolutely perfect match for that low-end of the market.

Having cast off the burden that was Bulldog, cleared out the first layer of unprofitable customers, CW seem to have made it through the Wicket Gate, but still some way to the Celestial City and BackChannel will be there to keep an eye on "their" Progress.

NB: If anyone would like a free copy of the PIPEX, THUS or Verizon profiles please email steveb"AT"backchannel.co.uk, "AT"=@.
NBB: John Bunyans The Pilgrims Progress is available as a free audio book from Librivox , a really different commuting experience awaits you.
NBBB: We promise no more Pilgrims Progress references

Telstra market share slides as former PTT cancels NGN investment.

Rather like its stock price Telstra' share of the business IP services market continued to slide in the first half of 2006.

As the markets tee up for the Australian governments sell-off of 1/3rd of its remaining holdings in former PTT Telstra, BackChannels latest research shows that the G9 Consortium, led by Optus(Singtel) and Powertel continues to pile on the pressure at the high end.

With its market share amongst ASX200 companies slipping to just 30%, Telstra CEO Sol Trujilo must view data for the highly deregulated UK market with trepidation. Here former PTT British Telecom' share of the large business accounts is just 18.2%.

Remarkably for the market leading telco, the company has announced that it has cancelled investment in its Next Generation, or Fibre To The Node (NGN/FTTN) Network. Saying that it prefers instead to wait for the G9 consortium to roll out their own NGN and they will happily buy wholesale bandwidth from them. This could well be a political gambit aimed at reducing the pressure from the Australian regulator , which Telstra has increasingly blamed for its poor results claiming that meddling by the ACCC is impacting its ability to compete fairly.

For a developed country like Australia it is untenable to not have a NGN network spanning the country, and in reality it is unlikely that a consortium like the G9 would ever really be able to come together and roll out a national shared infrastructure, which leaves either the government (hmm, what do you think), or Telstra.

For the momnet it looks like a Mexican stand-off, but Telstra knows what all former PTTs know, ownership of the physical infrastructure. is key to long term survival in the Telco market and that owning the cables will always you give the upper hand.

Service Disruption

Our apologies to those of you trying to reach the BackChannel website this week. This is due to our service provider 186k pulling the plug on our service, and seeming to be unable to get us back on line.

Having raised a couple of trouble tickets recently we also noticed that the incremented numbers on the trouble tickets indicate that they are receiving an staggering number of new trouble tickets a day.

For those who are interested our TT numbers are 180462 and 187683 raised 5 working days apart, therefore 186k are getting 1,444.2 new TTs every day.

186k is a B2B ISP owned by Yorkshire Internet entrepreneur Dominic Marrocco who also acquired Mailbox Internet, Elite, and a stake in Middlesborough based Onyx Internet in 2005.

Verizon Business drops to No.2 Access Provider to the City for the first time in 10 years.

Verizon Business drops to No.2 Access Provider to the City of London for the first time in 10 years.   

Verizon' slide continues their 2005 trend with competition from UK based IP service providers and high levels of customer churn taking their toll on Verizon' position.  Making BT the number one provider of Primary Internet Access to the largest FTSE companies.

Loss of client accounts to a competitor, or "Churn" is one of the most significant factors effecting telco profitability.  Verizon' churn of corporate accounts is around 12% p.a for this sample group.  BT are subject to a churn rate of 6% p.a.  in the same period.  These rates should be compared with THUS who have had 0% churn and a customer "acquisition" rate of 20% p.a.

We have mixed feelings about the change as both BackChannel founders and most of the team here have at some point worked for the company that has over time been Unipalm/PIPEX/UUNet/Worldcom/MCI and now Verizon, Steve having been with PIPEX on the day the doors opened.

THUS continue to power up the charts, while BT and Verizon tough it out for the top slot

The Summer season has seen some changes in market position amongst all players

THUS Plc continue their 2006 upward trend, moving up on Cable and Wireless and putting further distance between themselves and Telstra UK.

BT has also moved up and are now level peggings with Verizon Business for Top Slot in this league table.  

Verizons position is consistent with BackChannels wider UK market survey, which shows that whilst having a relatively small overall footprint in the UK, Verizon has a proportionately larger number of major accounts than average, reflecting the businesses historical focus on high end customers.

BackChannel Guest Blog at Telco2.0

The Telco2.0 initiative is a collection of like-minded telecom practitioners and stakeholders: investors, managers, analysts, consultants, suppliers and customers, looking for a sustainable economic model for connectivity providers. Among other aims, the initiative aspires to cure traditional network operators from the fear of dumb pipes. As those of us in the UK already know, utility businesses can be very profitable given the right cost base, and funding/pricing approach.

The golden rule (the guy with the gold makes the rules)

Surfcontrol,(SRF.LN) an Internet content hygiene company based in the UK, has just put down £20m for BlackSpider, one of a number of companies offering Email scanning services such as protection from Spam and Viruses. The spiders are also based in the UK, privately held and venture funded. Their business received £5.7m (£4.6m from VC) of investment in 2004.

Valuation of companies has always been more art than science, and has given rise to a myriad of methods for answering the question, "What's this thing actually worth?". Somewhere between DCF, revenue multiple, and book value, a deal is done and the speculation ends.

It is because valuations are so subjective that analysts are so very interested in recent transactions, benchmarking potential deals against what sold recently. Here is how the UK market shares break-down for BlackSpider and their competitors.


Given the hype levels surrounding managed services of this kind, it is interesting to note the level of penetration of the UK market. BlackSpider and their peers are only 10% into this market.

Secondly, when we look at those who make-up that 10%, not all is as one might expect.

(*) UK business market is comprised of the 80000 largest companies or organisations in the UK.

Messagelabs have capitalised on being the first into their home market, as you would expect they occupy the top spot with an overwhelming majority. However it will come as a surprise to many that BT's very own in-house service takes second place, with BlackSpider a distant 3rd. BT's customers are smaller in size than the others on this chart, but still their sheer number is impressive. Seeing this reminds me of report that crossed my desk from Goldman Sachs Investment Research (Rick G. Sherlund & friends) in January. Their report credited ISPs with the power to impact pricing of pure-play security service providers, by bundling similar services with Dedicated Access or making them easy "+1" sales at point of order. If you can find it, read it. Looking further down the list, the sleeping giant at the moment must be Frontbridge, now owned by Microsoft. The company has been pretty quiet in the UK, how much longer will that last?

Given BlackSpider's valuation of £20m and declared revenues of £1.8m, what can we say about the relative value of the UK business of the other players in this market? Or the whole UK market in total?



Using the BlackSpider transaction as a guide, Messagelabs UK business is worth £112m today (6x the UK customers of BlackSpider, 6x the acquisition price) and Frontbridge UK £8m. This valuation is based purely upon customer numbers.

BlackSpiders revenues were £1.8m, and it was acquired for 11x that. Our table has Messagelabs UK at about £10m in revenues, their annual report doesn't clearly break out UK numbers for just the message scanning business, but a figure of £40m revenue worldwide looks possible, meaning the home market is still responsible for 25% of revenues. A figure of £40m worldwide revenues would suggest a valuation of £440m (11x revenues) for the whole operation ignoring non message-scanning business units. Given the relative ease with which customers can churn from one service to another, does anyone really believe this multiple? Perhaps there was still a lot of cash on hand or assets of value in the £20m BlackSpider price. Figuring £5m of assets leaves us with an 8x ratio of price to revenues.

With any valuation model must come assumptions, and here we've a boatload of them. We assume that a BlackSpider customer has roughly the same value as any other customer in this market, we already know this is not the case for BT with its large number of tiny accounts. We assume that the overseas operations of BlackSpider did not significantly contribute to its valuation. As it happens, the company has no customers among the S&P500 or the ASX200 so this may not be such as bad assumption after all. As stated above we also ignore whatever portion of the £20m acquisition price was for assets and cash.

At the end of the day, something is worth what someone will pay for it.

THUS Plc "hot on the heels" of Cable & Wireless, again.

These updated figures come from BackChannels 2006 half year figures for ISP performance amongst the FTSE350, the UK largest commercial users of telecoms services.

THUS Plc power up the charts increasing their share from 4.6% to to 6.8% of this most valuable group of customers, adding amongst others United Utilities, Bodycote and Temple Bar Investment Trust to their list of major corporate customers

The first 6 months have shown mixed fortunes for the challengers THUS, C&W and Telstra. Whilst C&W continued to hold firm on high value Access services. Contender THUS are also putting some serious Surf between themselves and Aussie owned Telstra, who dropped to 4.3% this year.

Proposed deregulation in Europe ignores convergence

At BackChannel we normally maintain a neutral view on de-regulation, with all it's ups and downs without it there would be no public internet, no near universal Broadband etc. etc. But sometimes you have to hop off the fence.

The vision behind the proposed creation of a European Uber-regulator seems more suited to the mid 80's than the late Naughties.

Viviane Reding, the commissioner responsible for Information Society and Media has been speaking about possible moves by the European Union to increase deregulation in Europe by forcing the Former PTTs to 'structurally separate' their various telecoms business as was done by the UK regulators Ofcom in the early 80's.

The proposed deregulation would only effect former PTTs and would undermine the ability of these largely successful European Operators to compete in their own markets. Whilst at the same time handing a significant competitive advantage to US, Far Eastern and even Australian based companies, who would be able to leverage infrastructure and cross subsidise to their hearts content

The move would force them to break up their existing business, seperating telephony fixed from mobile, internet business from consumer each from the other and don;t even talk about content delivery. All this just as the technology starts to converge, just as companies gear up for triple and quad play, and just as interest in converged telecoms is starting to rise.

In future, virtually all telecoms services will have an element of Internet in their fundamental make up. So it will become technically impossible for Telcos to "Structurally Separate" Telephony, from Datacomms, from IPTV.

The impact of the cellular networks, the Internet and in particular the underlying IP (Internet Protocol) technology is largely missed in Ms Redings statement.

Pilgrims Progress

Cable and Wireless have set out on a seldom trod path, turning down unprofitable business and losing un-economic customers as a route to higher profit. As widely reported in the papers, the boss has gone so far as to offer the biggest "non-city broker" bonus scheme ever seen to the new management team. £220m ($390m) is a big bonus, and as you can imagine they have some serious numbers to hit.

CW is the number 3 UK Business ISP, and currently the top hosting provider to the London FTSE. Their published plans are to become the Armani of Telecoms, serving the top 3,000 companies with profitable and high value services.

As well as being able to see who is connected to the IP service providers, one of the things BackChannel is good at is tracking change, so over next year we will post up what we can on CWs performance, analyse the customers leaving & staying, and see if the team are on track for a monster payout.

Good luck chasing that bonus guys, this should be interesting.

Verizon market share slipping as BT and C&W close gap

After more than 10 years as the UK's No.1 provider of Internet services to big business, Verizon is close to slipping behind BT for the first time.

In 1997 Verizon predecessor UUNet/PIPEX share of the UK business market was at 45%. As WorldCom then MCI, Verizon has seen a sequential drop in market share, a trend that continued over the last 12 months. BackChannels current analysis predict BT will move into the No.1 slot within the next few weeks.

But it is not all gloom for Verizon - BackChannels figures reveal the fact that Verizon acquires customers faster than BT. If Verizon can reduce their higher than average churn, their ability to acquire customers will quickly arrest this slide. It will be interesting to see if the new Verizon team are ready to fight back.

Download free UK market data

Globalisation - Australian pipe power

Former PPTs and the power of pipes, has been a bit of a theme for the BackChannel team lately with clients showing interest in the coverage of smaller regional network operators.

This need to own fibre or copper to ensure that your company has a future, was recently highlighted by the re-merge of AT&T and BellSouth.

Unlike Europe and the USA, where government sell-offs, breakups and deregulation, have to some extent curbed the power of the former PTTs. Australia' is running about 20 years behind with the Howard government just now planning to sell it's controlling share in Telstra.

Australia, where the government has been accussed of letting Telstra ride rough-shod over the regulator, where Telstra has managed to defend it's corner.

BackChannel shows Telstra retaining a dominant position with 32% of business Dedicated Internet Access, where they pretty much own all the pipes, fiber and copper.

But despite what the alt nets would have you believe, Telstra don;t have it all their own way. Where competition is free of the constraints of access, that position is strongly challenged with business hosting market share at just 10% for Telstra noticeably behind OPTUS and WebCentral.

It is clear that the majority of ASX200 companies prefer to host with providers who offer a specialist, or more personal service.

This data was collected on the 30th January 2006 using BackChannels proprietary search engine and covers the primary web hosting of the Australias most significant companies.

The AT&T and Bell South - Failure of de-regulation heralds end of the public Internet

Watching AT&T and Bell South come back together is a little like watching Terminator 2, the once exploded body of the early ‘80s monolith slipping back together stronger and faster and more intimidating than ever. What does it mean, and how could it impact the progress of deregulation around the globe.

The US led the way in deregulation by breaking up AT&T and for a while it looked like BT would go the same way, luckily (sic) for BT OfTel was created (some suggested at the time this was in a bid to build some competition into the market, without damaging the BT floatation.)

Now the US is leading the reverse cycle and Europe is not far behind with a bumper few years for M&A already under way, EasyNet/BSkyB, CW/Energis, BT/PIPEX etc. etc.

Deregulation brought innovation, and hundreds of new companies into the national telecoms market; it is safe to say that without deregulation the Public Internet would never have taken off. There would have been no financial imperative, consumers would know no better and besides for business there was always x.25.

Now the experiment is over, IP has won and Big Telco is moving to leverage its control of the pipes and with them the Internet.

From reading Power of the Pipe, you’ll know we believe it is inevitable that the companies who own the fibre and copper will be the winners in the long game. For the national players in Telco and Media, like AT&T, BT, NewsCorp and Time Warner, their long-term growth relies on being able to close the network and own the triple play, delivering their own high value content to the consumer.

The merger of AT&T and Bell South is the auger of a consolidation that will progress country by country. Those companies that have invested in national copper and fibre over many years will snap up those who have invested in regional copper and fibre, closing the networks and charging for access to external sites like eBay, Amazon and even your email in the same way fixed line phone companies charge for calls to mobiles.

In USA for example AT&T CEO Ed Whitacre has been a vociferous opponent of of network neutrality, arguing that AT&T should be allowed to set up tiered services for bandwidth-eating companies. There, legislators are hoping to pass provisions that would prevent or limit carriers from treating different services differently, elsewhere in the world it isn’t even on the government agenda.

Will it happen? Yes, unless the regulators get the national governments to stop it. Can they stop it? No, not unless they are able to beat the interest groups who are already spending hundreds of millions to lobby congress.

Cable and Wireless - Reprise?

The markets have been very hard on CW over the last few months, but over the last few days the mood has started to turn, telling the world the business is "a crappy player in a crappier market" (their words), announcing staff cuts and an intent to lose 8000 customers from the books should have seen the stock fall through the floor.

However the presentation today by Richard Lapthorne and John Pluthero seems to have hit a number of cords. Fewer but more profitable customers, focus on reducing churn and building margins, reducing Capex by exiting unprofitable sectors.

For CW this re-positioning makes a great deal of sense, they have a significant presence in the FTSE350 and other potentially high value accounts, whilst the business overall hasn't exactly led the field in acquiring new customers in the last year or two, they have performed well in notably in Finance sector winning and retaining high value customers like Egg, HSBC and Prudential.

All the volitility in Telco is no doubt tremendous for the hedge funds but maybe, just maybe those analysts still following telcos will give CW a bit of space to prove that sound business fundamentals, like financial prudence and economic profit, have to return to the industry before the telecoms sector can stabilise.

Anyway, it will be a few days before we know if the city plans to punish CW for their audacity in coming clean.

NOTE - For those of you interested in ISP/Telco performance in the FTSE, BackChannel will shortly be publishing our 2005/6 report. This will be ther first time we have published data that drills down into customer churn, hosted services and market sector performance data for all the major business ISPs. This is the stuff that has previously only been available to our clients.

The Power of Cables

Something we noted recently when comparing the UK and Australian markets, is the similarity. Interesting as one has been deregulated for a number of years and the other moving quickly to further deregulation.

For instance:

The players: BT, Verizon(MCI) and C&W in the UK, and Telstra, Optus(SingTel) and PowerTel in Australia. One local former PTT incumbant, one large international and another local player struggling in 3rd place, then whole raft of others going into a consolidation phase.

In both countries the profile of service providers looks the same. A service provider is either excellent at Internet Access, or Data Centre Solutions e.g. Web Hosting, but never both.

What predicates success, well curiously those companies with cables in the ground are winning hands down on the Access services, those without are romping ahead in the provision of DataCentre solutions. Our research shows that this trend is accelerating with companies taking their access services from those who own the cables and hosting from companies that offer specialist services, or more personal approach.

When you have the data in front of you it makes a lot of sense, but the concern for the Cable guys is that with the growing dependency of business on Online services and the coming boom in consumer focussed content the value in the chain is moving more toward the Data Centre. All the fabled 'sticky services" are in the data centre and the cables are becoming a utility.

BT mulls £350m bid for PIPEX

Telco watchers have noted with interest recent speculation surrounding the future of PIPEX, one of the UK's best known suppliers of Broadband and Dial-up Internet access to small businesses and professional home users. The latest rumors are of a £350m (presumably cash) bid from BT. The job lot consisting of:

• PIPEX brand, less of a draw than it once was, still has cachet.
  
• Fast growing ADSL ISP, under margin pressure at the low end.
  
• Domain business, slick provisioning and low running costs.
  
• Hosting and Collocation, majoring on low-end shared servers.
  
• Wimax license, proof of concept trial, lacks capital for build-out.
  
• LLU proof of concept trial, but lacking capital for build-out.
  
• Seasoned management from the XO, GX, and PIPEX family.
  
• £12m cash.
  

Lots of obvious potential, strong broadband market share and growing, technical (but not financial) capability for entry into the LLU market, and an option on the future market for Wimax delivered services. With seemingly so much going for the business, some may be surprised at the premium of only £50m of this offer over PIPEX recent market cap.

Maybe BT knows something we dont'?
I'll leave you to chew on that while we move onto matters regulatory. One of Ofcom's largest projects has been the creation of a market for local loop unbundling. Simply put, granting the ability for other operators to place equipment in BT local exchanges and connect over the last mile directly to customers. The first mention I can find of Ofcom's (then Oftel's) support for unbundling was way back in the autumn of 1998. Formal announcement of a policy would have to wait till March 2000. Only now are we seeing in-scale deployments and smoother processes after many initial problems. Its been a long wait, and as former regulator David Edmonds described it a... "painful and often miserable process". Finally we have the beginnings of a competitive market in the last mile.

How can Ofcom wave through the removal of one of only a handful of potential market-makers in LLU at such an early stage? Providers have not yet finished LLU roll-out, let alone seen a penny of economic profit from what promised to be a disruptive technology. Perhaps if a deal does go through, conditions would be imposed similar to the failed BT/MCI merger of 1997, where certain business units would be spun out or sold to further buyers, if such buyers exist. One thing is for sure, after 12-18 months of deliberation and planning, what lead any such business unit may have had will have been lost to customer confusion and staff fatigue. At the end of such a process, you are lucky if either of the parties can maintain momentum. Which parts would BT retain? Wimax and the high volume, highly automated hosting and domain businesses.

Even if Ofcom is content to see a potential force in the LLU market de-fanged, why would PIPEX shareholders feel the same? After all, we have yet to see LLU deliver economic profit to shareholders, come to think of it.. we have yet to see broadband deliver sustainable economic profit. If shareholders bought into the growth story and the brave new world of broadband and LLU why would you cash-out this early?

Maybe the shareholders know something we dont?
What does this early surrender of a potential LLU player mean for other alternative network operators? With talk of C&W backing off from direct sales of its Bulldog products and going wholesale, when can the customer expect delivery of a rash of new and innovative products?

What if...
What if BT completes the build of 21CN just as the remaining LLU operators are delivering economic profit on their investments? We know that LLU is a 'bolt-on' and 21CN is a from-scratch new network, designed for lowest possible cost of delivery. BT then has the option of dramatically lowering prices, thereby stranding LLU investments of the competition just when their shareholders are due a return (or the bond holders are due a payment). Fire-sales, bankruptcy, and restructuring ensues (again) among the alternative providers while BT welcomes back old friends.

Maybe BT knows something we dont, maybe PIPEX shareholders know something we dont, either way both would do well to remember these rules:

• Something is worth what someone will pay for it.
  
• It takes at least 2 to make a market.
  
• Never forget the golden rule (The guy with the gold makes the rules).
  

Energis, what did £800m buy C&W?

On Friday the 12th August 2005 and after many recent rumours, Cable & Wireless publicly confirmed that it was making a £780m bid to buy Energis. Energis was founded in 1993 by the UK National Grid Group and by 1997 was listed on both the London Stock Exchange and US NASDAQ. At its peak, the target had a 20,000 km pan-European IP network and operations in Germany, Poland, the Netherlands and Switzerland. However, by February 2002 debts levels had reached 2 billion Euros, forcing a sell off its European operations and retreat to its core UK market. In July 2002, a group of the company’s bankers re-structured, firstly by placing the existing business in administration and then creating a new company. 'New Energis' was given £150m and the old debt was converted into equity. Energis was de-listed from both UK & US exchanges.

Using our proprietary "Zero Sum" evidence-based market reporting software, Backchannel puts Energis under the microscope and examines their presence among FTSE350 accounts, charts their position versus the competitors, and has followed a group of 640 of their Dedicated Internet Access customers over the past 6 months searching for indicators of future performance.

Market Share FTSE 350
Dedicated Internet Access March 30th 2005

Energis has little market share in the FTSE350 for Dedicated Internet Access, and has failed to improve upon this low base in the last 12 months. At the beginning of April this Year, Energis had only 11 customers in the FTSE350 market, trailing smaller organisations such as Telstra UK (PSI Europe's UK business, acquired for £50m in August 2004). Although Energis has been able to hang on to most of their large accounts, there have been some high profile defections over the last few months. Simple arithmetic tells us that an Energis/C&W deal would not change the overall market share rankings for Dedicated Internet Access in the UK, given BT and MCI's huge lead on the competition.

Market Share FTSE350
Hosting & Collocation March 30th 2005

Energis has a slightly better share in the Hosting/Colocation market, largely due to the historical strength of an acquired business in this area (Leeds based ISP Planet).

As previous reports have shown, this market is incredibly fragmented, with full service boutiques consistently punching above their weight in the presence of Carriers like BT, MCI, and C&W. In previous reports we have also highlighted the fact that the prevailing churn is from larger carriers to smaller boutiques, who are then able to consistently retain these customers. Should an Energis/C&W deal succeed, the combined entity will instantly become the largest provider of Hosting and Colocation facilities to FTSE350 customers.

Window On Future Performance?

Energis customer churn for Dedicated Internet Access was 25% (gross) between January and July 2005.

640 customers of Energis Dedicated Internet Access product were tracked for the first 7 months of this year, in order to get a feel for the underlying churn rate for the business and to ascertain which UK carriers were having most success at winning accounts away from them. The results revealed a rate of churn significantly higher than their peer average. Although most major accounts did not churn to an alternative provider during these 7 months, there were some significant defections including Prudential, Transco, and the Post Office. As anticipated, BT picked up the most customers.

Energis is 7th placed in the Dedicated Internet Access market, and a 5th placed player in Hosting and Colocation for FTSE350 companies. It has not managed to crack 5% share in either category. Recent churn figures, coupled with the loss of some big name accounts give cause for concern. If the 640 tracked customers are indicative of the rest of the IP business, then timely intervention is required to stem losses and manage cash flow with a backdrop of fixed network costs supporting a shrinking customer-base. Assuming this level of customer churn continues unabated, it raises the question of how long a potential acquirer can count on the predicted value of future cash flows. The annualised rate of churn for the profiled product is near 40%, customer bandwidth prices are still falling thanks to business broadband and LLU, the price of Carrier Pre-Select voice minutes decline towards zero. If it makes sense for the 5th and 7th placed player to roll up, how long do Easynet, Star, Mistral and PIPEX have as independents?