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.