As South Africa prepares to host the 2010 FIFA World Cup soccer tournament, news emerged last week that Indian IT services provider Satyam has been awarded the contract for the tournament. The contract actually covers two full "event cycles," meaning the series of tournaments leading up to and including the championship series to be played in South Africa in 2010, as well as the following cycle ending in Brazil in 2014. Satyam has already promoted its win to the utmost, having festooned its Web site with pictures of soccer action and highlighting internal Web links with a spinning soccer ball.

In the United States, a country where "football" means trying to get your hands on the ball, this level of excitement may seem puzzling. However, the World Cup is a major communications and broadcasting event, outdistancing even the Olympic Games when viewed in total: Organizing agency FIFA estimates that the finals are viewed live by dozens of billions of people (each time you tune in, you become a separate viewer). This is the first time the games will be hosted by a country with an emerging communications network, and the effort to ramp up will be enormous and have very powerful effects on the local players and their relationships. There will be bumps on the road, but on the whole, Gartner expects this effort to succeed (see "Dataquest Insight: World Cup Will Advance South Africa's Telecom Network" for more details).

Satyam will be tasked with providing IT support of the games, as well as to the 12 playing venues, to the broadcasting hub IBC. The live broadcasts will be HDTV-capable and naturally must have the highest priority in routing traffic to the 200-plus broadcasters who will be accessing the tournament games. Security cameras, the local virtual private network (VPN), ticketing and a multilingual call center will all require coordination and support. In the 2006 games, the IBC required a private network approaching 35,000 lines and transmitted some 21 terabytes of data across its network in just about a month. Local players such as Telkom and second national operator Neotel will have to provide the connectivity, particularly in the strained and expensive international sector, to support this level of attention. Satyam will likely find the interstices between its commitments and the local players to be most interesting.

This represents a logical extension of Satyam's presence in and connection to South Africa, where it claims its business has doubled in the past year. One Satyam official classifies sports as a "growing subvertical" in Satyam's media and entertainment sector, and estimates that the opportunity in sports worldwide approaches $1 trillion. Although still emerging in comparison to communications networks such as Europe and North America, South Africa is far and away the wealthiest in Africa. It serves an enterprise sector that is very sophisticated and literally crying out for more-advanced service capabilities. We will continue to monitor the effects of this effort on a leading, emerging telecom market during the next two years.

Recent research: "Dataquest Insight: World Cup Will Advance South Africa's Telecom Network"

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Verizon Wireless has introduced the capability for any device or any application to run on its network. In early 2008, Verizon Wireless will introduce technical standards for the development community that will be used to design products for the Verizon Wireless network. Any device that meets the technical standard will be activated on the network. The company expects to have open devices on its network by late 2008. Verizon Wireless will also continue with its full-service offering.

The plan to offer open access by Verizon was a surprise, and it benefits the company in a number of ways: It helps the company move in the direction the market is taking (after the iPhone introduction and the Android OS [Google] announcement); it prepares Verizon for a world where there will be wireless access on a number of devices such as cameras, music players, gaming devices, and electronic books; and it helps the company set a framework for which to bid on 700 MHz open-access spectrum, which is the most valuable in the spectrum auction, due to the amount of spectrum.

There are a number of uncertainties for Verizon, including capacity on the network and quality of service if the open-access service is popular, possible competition from a service provider offering VoIP on the Verizon network, and the ability to effectively move customer service calls to the new service providers.

A number of these uncertainties will be addressed by how Verizon Wireless prices the service, including network capacity, quality of service and usage of VoIP. Verizon has stated that pricing will be usage-based, which flies in the face of what consumers want - a flat rate. The pricing on usage of the network will have to be sorted out before consumers will readily adopt this method of wireless access.

For further reading, please see "Dataquest Insight: Overview of Consumer Mobile Applications, 2007".

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It's the two-year anniversary of the announcement of the U.S. cable industry's joint venture with Sprint Nextel, the third largest U.S. mobile voice service provider, and things look to have hit an impasse.

During the third-quarter earnings conference call this week, Sprint Nextel Acting CEO Paul Saleh said the company would stop the rollout of additional markets and stores selling Pivot, an integrated wireless and wireline service being jointly developed and marketed by top U.S. cable operators Comcast, Cox Communications, Time Warner Cable and Bright House Networks. Pivot is now operating in 33 markets and 20% of Sprint's stores, but 40 markets were slated to launch by YE07.

The first part of the venture was the co-marketing of mobile voice services with the eventual integration with cable's video and broadband services and applications that would run over both mobile and fixed voice networks. General pricing for the service was similar among all MSOs, ranging from $30 to $33/month for 200 minutes to $199/month for an unlimited usage calling package, and all had the added value of unlimited calls between a mobile phone and a cable customer's digital phone service. Multimedia features with access to live TV channels cost an additional $15 to $25 per month. There were no Pivot plans that cost less than Sprint's own monthly calling plans.

But the service has been slow to catch on with consumers and was dependent on marketing by Sprint in some 20 stores, as well as by MSOs. In addition, there was the big job of provisioning the service, which required that a complex set of back-office OSS/BSS solutions be implemented first. All in all, this was a prescription for delay. It's no surprise, then, that Sprint has voiced its disappointment over the sluggish pace of the service rollout, and cable executives have themselves been puzzled over the value of adding mobile service to the platform.

Cableco response has been muted: Cox's representative said the decision does not affect operations currently in place in Arizona, San Diego/Orange County, New England, Northern Virginia and Oklahoma. Time Warner Cable (TWC) has Pivot service in seven markets and will continue to operate there, but its spokeswoman noted that TWC is "currently reviewing other options for expanding wireless services." Comcast said it's business as usual and that it'll continue with the Pivot service in the two markets already launched in New England and Oregon.

There is no doubt that "simplifying the business," particularly the customer experience, has to be the No. 1 priority. According to Acting CEO Saleh, key issues for Pivot include difficulty in delivering it in a timely manner and a simple process at the point of sales. It's clear that the partners had get to the plumbing right first before launching to a wide audience, which, if not done correctly, will lead to unhappy customers and endanger future prospects for the service for both providers.

Gartner has been highly skeptical of the Sprint-cableco JV success prospects, as cable has had a troubled track record with past joint ventures, and given Sprint's need now to right its ship, we wonder if this is just a pause or the presage to a more dire future fate. Cable is still unsure of the value of adding a wireless component to its service bundles, as top CEOs at cable companies have said repeatedly in many public venues. This public posture can't be very reassuring if cablecos can't figure out the value of why they are doing this mobile venture in the first place - even while voice, video and data are becoming increasingly mobile.

A number of factors have muddied the waters of this partnership, not the least of which include:

• Sprint's own market and technology problems: It is among the weakest mobile providers in the U.S. and has been losing customers to its rivals, especially Verizon Wireless and AT&T.
• The complexity of provisioning the Pivot service: There are various network infrastructures, different vendors for back-office support systems among the various MSO JV partners and Sprint.
• There has not been an ultrahigh level of marketing or promotion associated with the service offering in the various markets to give high visibility to the products/services.
• The need to integrate among and between all the various fixed and mobile voice, video and broadband platforms for existing services and new application development: Certainly, this is no easy task within a cable operator's own organization, let alone adding an outsider's organizational structure to the mix.

Another potentially bigger issue may be whether consumers are actually willing to pay for the benefits and added value of "cross-platform" integration, or whether they are just expecting these features as part of their bundled service offering. More research needs to be done on that issue.

But the biggest "elephant in the room" is that cable has yet to define what its mobile/wireless strategy is and where it's going to place its bets. The companies can't ignore it because mobility is a key weak spot in the multiservice bundle, and as Verizon and AT&T get more creative with their own bundles - which include, for example, FiOS TV, FiOS Internet and Verizon wireless voice as its main triple-play - cable doesn't really have an answer to that package of services.

Will the Pivot Sprint-cableco JV go by the wayside? There is certainly a strong possibility that it could, given past history. But at minimum, Gartner believes cable needs to find a better solution - and an MVNO solution could be a better one than the current cumbersome JV. Ultimately, for cable to be a competitor on par with its telco rivals here in the U.S., cable may need to become a facilities-based mobile provider. Rogers Communications in Canada, which also owns a mobile infrastructure, has this advantage over its peers and neighbors to the south. The best choice may still be Sprint for U.S. cablecos, but not in its current state.

The key thing for cable companies is as follows:

• When will not having a viable wireless solution really start to impact their businesses?
• When will bundles with wireless components become a fundamental advantage for its telco competitors?
• When does that all happen - two years or three years, or sooner.

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Time was, a country would maintain a USF to bring phones to poor, rural folks who didn't have that many and couldn't afford them. Here in the U.S., it's been a long time since the fund served any purpose so simple and straightforward, and it could be headed for even further change. The USF in the U.S. also gives funding to those areas judged "hard to serve," as opposed to merely rural - one example would be certain suburbs of Denver, which is set in the Rocky Mountains. It costs more to construct phone lines there, but the territory is hardly rural. And the people who live there aren't by any stretch of the imagination poor.

Now, with nearly three phones (including mobiles) for every two people, questions are arising about what to do with the billions of dollars that go into the fund each year. Connect more schools to the Internet? Continue to subsidize service to areas that were once judged hard to serve, but now have two or three competitors? Change the focus of the USF from simple voice connectivity to broadband data access? Here are three things you can count on as the debate continues:

• It will take an eternity. The U.S. Federal-State Joint Board has six months to make a recommendation, and the Federal Communications Commission (FCC) has another year to implement that decision (barring resistance, court challenges, clarification demands and so on). Look for nothing to happen until after the next general election.

• It will cause an outcry. All major carriers contribute to the USF (which means virtually all consumers support the fund through taxes passed along), and a fairly high number get substantial funds back. We're speaking of billions of dollars annually, by default, going to the largest fixed incumbents who still serve the most customers. As their margins on voice and data access services continue to decline, don't expect them to greet suggestions that they take further losses (from decreased USF support) happily.

• The fund will remain just as big, but will change in character. U.S. carriers and regulators can spin like tops, but the fact is our basic connectivity issues are essentially solved. America's fixed-line penetration, even though falling, is still above 65%, mainly due to mobile substitution as younger folks simply forgo a fixed line (very different from being unable to get one). In all likelihood, the interested parties will determine that broadband access is now the essential requirement to be supported, and they will work out a formula that still allows participation by all the present cast of recipients, in more or less the same amounts.

Meanwhile, much of the rest of the world struggles with the essential voice connectivity that developed markets seem to have left behind. Gartner estimates that, throughout the Middle East and Africa, as just one example, fixed teledensity is 7%, and even combined with mobile, it is less than a third that of the U.S. In many cases across the region, fixed teledensity is also shrinking or barely growing at best, and in some nations, mobile carriers are not required to contribute to a USF (in others, no fund exists). Rural fixed teledensity in the Middle East and Africa is well under 5%, and mobile is not much better. Soon, the term "universal service fund" will be used to describe very different things indeed.

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BT's recent reorganization has a number of positive features. Combining network infrastructure and IT functions in integrated "Design" and "Operate" groups makes BT the first major telecom operator to end what has become an increasingly artificial division, as next-generation networks become more software-driven. In addition, integrating both the domestic U.K. and the global design and operations into one organization should reduce overlap and improve BT's ability to deliver the same set of services worldwide. All these steps could be summarized as making the services factory more efficient.

The risk side of this new structure, however, is that by centralizing these functions BT is creating a longer path between its customers and the groups ultimately responsible for delivering what they want. For example, until the reorganization, BT Global Services had one organization responsible for customer service and network operations; now, operations will sit in the new division, while customer service remains in Global Services. Similarly, on the product side, there is a risk that customer requests for new service will not be as clearly heard though the longer organizational path that now exists. In Global Services, this risks leading to an increased reliance on customized solutions, using the professional services team that remains within Global Services. In existing reports, such as the "Magic Quadrant for Pan-European Network Service Providers, 2006," we have criticized BT Global Services for its already heavy dependence on custom solutions. However, while we urge enterprises to monitor these points closely, BT also recognizes this risk. In an effort to ensure this does not occur, BT is retaining strong product management teams in the customer-facing units, with matrix reporting to the central unit, in a similar approach to the way it managed its shared IT organization before this reorganization.

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Rumors that Cable & Wireless is considering selling its U.K. and international PTT operations to different bidders show how the different business areas the company has been pursuing might have more of a future apart than together. The international PTT business - in many cases, as the incumbent operator in former U.K. colonies - has not been run as an integral part of the main operation, so hiving this off should not impact many of its U.K. enterprise customers to any great extent. Now for the confusing part: These "international PTT" networks are essentially for in-country operations - the international backbone network is part of the U.K. operations.

With large former incumbents such as BT, France Telecom/Orange Business Services, Verizon and AT&T all building out their international networks, the global market is becoming tougher. Within the U.K., Cable & Wireless' strong customer base, extensive backbone network and considerable investment in local-loop unbundling make it an attractive proposition for any number of large foreign operators, particularly those with extensive international presence, who can provide additional benefits to Cable & Wireless enterprise customers in terms of direct in-country reach around the globe.

The unbundled local-loop access - currently sold only as an enterprise and white-label/wholesale offering - could become a retail consumer product again, driving further consolidation in the U.K. market if the successful bidder already had a presence in the broadband space. The U.K. has been relatively slow to adopt multiplay DSL offers, including voice and data, with much of the current bundling involving switched voice and DSL, rather than VoIP over DSL. This is likely to accelerate rapidly, as more providers roll out ADSL2+ capable DSLAMs in their unbundled exchanges. Cable & Wireless has long been pursuing this strategy, and so would represent a quick route to widespread deployment of a multiplay-capable network for any acquirer.

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In a closely guarded plan, a small but strategic team in India's state operator has been actively working for the last two years on two very interesting pilot projects.

The first one is a WiMAX project in six major cities and four rural districts. Aperto, the vendor involved in the project, has been deploying its WiMAX-Forum-certified base stations and CPEs and is expected to commission the networks shortly. Apparently, the pilot project has gone well, and BSNL is back to the drawing board to get a much bigger rural project under way, the contours of which are emerging. India is a key market for wireless technologies, including WiMAX. All major WiMAX providers, including Intel and Motorola, have been courting the prospective operators and governments. Besides BSNL, others such as Tata, Reliance Communications, Airtel and MTNL are known to have tested pre-WiMAX equipment in their networks.

But what is really interesting in BSNL's case is that it has been putting in the works yet another related project, a hybrid VoIP service for rural areas. The tender document for this project outlines the project's scope and objectives, with a modest budget of about $0.5 million to deploy a combination of VoIP gateways and analog telephone adapters to provide subsidized telephony to rural subscribers. That the project involves WiMAX as the last-mile technology, tied to its other plan of establishing rural WiMAX base stations, makes it clear that this is not a one-off project. This makes good sense, provided that voice will be the key driver for any telecommunications network in rural areas in India, where teledensity is less than 3% and PC density is next to nothing.

One thing to note here, however, is BSNL's own megaplans to expand its mobile cellular services, including 3G services, to rural areas. Cellular services have grown at a scorching pace in the past few years in India, pushing the country's teledensity from a single digit to over 15% currently, but most of the growth comes from the urban areas, leaving the urban areas with high penetration of mobile services and the rural areas with very little penetration of telecom. The Indian government, as well as operators, views increasing telecom penetration in rural areas (almost 70% of India's one-billion-plus population lives in rural areas) as key to sustaining India's telecom growth. In line with Indian operators' rural plans, multinational cellular infrastructure providers like Ericsson and Nokia have come out with special form factors of base stations to suit rural expansions, and different handset providers are planning ultracheap mobile phones.

What this means is that India is rapidly developing as the arena for a grand showdown between two key intensely competing wireless technologies.

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The edge hosting market - content and application delivery networks (CDNs and ADNs) - has been a hot space for acquisitions lately. In October, Internap bought VitalStream for approximately $217 million. In November, ,a href="http://www.akamai.com">Akamai bought Nine Systems for approximately $160 million. In December, Level 3 Communications bought the CDN portion of the Savvis business for approximately $135 million. Today, Akamai announced it would buy Netli in a deal worth approximately $178 million. Unlike the other acquirees, valued for their core CDN and streaming media capabilities, Netli is a specialist in Internet application acceleration, speeding the delivery of Web-based applications for enterprises.

Both of Akamai's acquisitions are shrewd and show for the first time that the company is open to incorporating significant new technologies into its service that were not developed in-house. While the acquisitions are great news for Akamai, and good for both of the acquirees, who needed to become part of a larger company in order to compete more effectively, the acquisitions also reduce choice in the market. Competition spurs innovation in this rapidly evolving market. Once the acquisition closes, enterprises seeking an ADN service will have only a single company to choose from - Akamai.

Carriers, for the most part, are really missing out on this market. It's not a bandwidth business, although the pricing schemes for CDN services can sometimes make it seem like that, and enterprises use the cost of bandwidth as a factor in calculating the cost-effectiveness of a CDN service. Edge hosters are really the first wave of utility computing infrastructures; some of them, such as Akamai, operate that infrastructure on a massively distributed scale, whereas others, such as Limelight Networks (www.limelightnetworks.com), operate that infrastructure out of just a few dozen data centers. These companies deliver content and applications from the edge, or use their network of servers as a way of delivering value-added services such as encryption and acceleration. These companies are pointing the way toward the computing infrastructure of the future, and they should be carefully watched.

See "Application Delivery Networks Go Beyond Traditional Content Distribution Networks" for further information.

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Vodafone Egypt signed an E£3.34 billion ($586 million) deal with the Egyptian government for a 15-year 3G mobile phone license. At first sight, it might appear that Egypt's regulator learned the lessons of Western Europe, where runaway bidding created such outrageous costs as to contribute strongly to operators' early problems in rolling out successful services. But when the prices of those Vodafone bids in various European territories - such as $9.4 billion (U.K.), $7.6 billion (Germany) and $2.0 billion (Italy) - are compared on the basis of GDP per capita, one's ease might wane. Egypt has GDP per capita of roughly $7,000 today, less than a quarter of the basket average in the three European countries mentioned for emphasis ($28,000 to $30,000). So, on a real cost basis, Vodafone needs to get value from a bid that might as well have been directly comparable to its Italian bid, at over $2 billion.

On the other hand, Egypt is not a mature telecom market and has a rather low fixed-line penetration, estimated to be less than 14% at the end of 2006. Therefore, it could be more economical to deploy mobile broadband data access, which would explain why the deal was attractive to Vodafone even with an expensive license. To that, it has to be noted that 3G is also a voice technology and that Vodafone may well want to use the 3G network to carry the expanding voice traffic, instead of upgrading its 2G network. Interestingly enough, mobile WiMAX, which is promoted as a networking solution for broadband data and voice/multimedia services, especially in emerging markets, was not selected here (see"Key Criteria for Wireless Carriers to Evaluate Mobile WiMAX"). One major reason that we could assess is that certification for the products will not commence before 3Q07, and that most likely the first end-to-end certified product solutions won't be commercially available before mid-2008. Many vendors quote WiMAX cost efficiencies to be much better than 3G or even 4G - something that is hard to quantify as the technology has not been deployed in scale. The business opportunity for Vodafone Egypt is here and now, and it needed to make a decision to pitch for footprint, hence selecting 3G. Finally, Etisalat will launch its mobile services in Egypt in 2007, which will increase competition in a market shared between Vodafone and Mobinil until now, so offering 3G access could be perceived as a competitive advantage, when Vodafone is ready to launch it.

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During the Next Generation Networks conference hosted by Sintesio (www.sintesio.org - an interoperability test lab), the conference participants discussed the main question of whether NGN deployments and IMS are based on a technology push by the vendors, or if there are critical business drivers justifying the network investments. While it is clear that, with the competitive threat to offer differentiated service at low cost and high ARPU via an efficient broadband architecture, the implementation of standardized technology is key, the technical capabilities and interoperability of those next-generation topologies are just not fully finalized and aligned yet.

Because Sintesio is an ETSI-endorsed NGN testing environment that is focusing on facilitating and conducting interoperability between multiple softswitches and the PSTN, a lot of attention was drawn during the conference on how and when IMS will become an open standards topology. To nobody's surprise, it was concluded that there are major issues in terms of interoperability between the two current releases (TISPAN R1, 3GPP R7), and fixes won't be available in new vendor product portfolios before end of 2007.

That assessment concurs with Gartner's opinion that IMS will be important to consolidate and streamline core control layers but will not play an immediate major role in the generation of new multimedia services before 2010 (see "IP Multimedia Subsystem Will Become the Medium for Delivering VoIP in EMEA"). Many services don't need IMS to be introduced, because the service delivery architecture can do that as well in an efficient manner. So what operators need are not technology pitches on the promises of IMS but the discussion of milestones of network transformation to capitalize on strategic investment.

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After much anticipation, the One Laptop per Child initiative under John Negroponte appears ready to begin distribution of PCs at a price point not too far above his announced target of $US100. Several emerging-market governments have expressed interest in purchase and distribution.

This initiative has received much attention from those studying technology's impact on emerging markets. The Gartner telecommunications team has published analysis of the prospects for the leading equipment vendors in emerging telecom markets (see "Emerging Markets: Telecom Challenges for the 21st Century") and obviously had to factor in the presence of PCs as one input to our profiles.

There's just no way the $100 PC can be a bad thing for the end users it's aimed at. I am in no way in line with the detractors quoted in the news or others I've heard of on this project. From a telecom perspective, however, I do have some concerns.

I think it's telecom connectivity that truly lifts up an emerging economy - the relationship between teledensity and increased GDP is well-established, and my colleagues have extended the thesis to assert an even greater effect with broadband connections. PCs are primarily useful as Internet access devices in this context, and just supplying more does nothing to alleviate that bottleneck. We have done some work on the future of emerging telecom markets specifically: It would be dangerous, of course, to make a blanket statement about nearly half the world's population and expect it to fit perfectly. Broadly speaking, emerging markets are those in Latin America, Eastern Europe, the Middle East/Africa and all but a half-dozen nations in Asia/Pacific. But within that region are several - such as the Czech Republic, Israel, Chile and others - that are on the cusp of developed status already. In many other nations, the bulk of the country is in an emerging status, but the major cities have increased attention and development, forming a kind of "pocket" of developed telecom status.

In emerging telecom markets overall, however, I am seeing indications that it will become increasingly divergent from developed regions in the next few years:

• Emerging markets are increasingly mobile (yes, developed markets have more mobile connections than fixed, but not three times as many, headed for five times as many!).
• Emerging markets are just as stuck in narrowband mode, if not more so than today. Our statistics indicate that the incremental broadband connections of emerging markets are already slowing substantially.
• One key assumption forwarded by my colleagues is that, in emerging markets, 80% of mobile operators will remain independent entities in five years, as they are today (this is the obverse of the situation in developed markets). So the overwhelming growth of mobile means a lowering of the ceiling for fixed operators, in markets where I believe the vast majority of end users will have but a single connection.

So the presence of PCs, while very helpful, will fall short of revolutionizing the economy in emerging markets, unless they have better telecom connectivity. I don't believe more computers will do much, in and of themselves, to draw more connectivity.

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The U.S. Federal Communications Commission (FCC) postponed its consideration of the AT&T-BellSouth merger until a 3 November Open Meeting. This all transpired after a letter signed by Democratic Commissioners Michael J. Copps and Jonathan S. Adelstein was handed out to media on hand at the FCC offices to cover the originally scheduled 12 October Open Meeting (see Letter Concerning the AT&T/BellSouth Merger). This was quite a move to get the chairman's attention, which it did (see Letter From Chairman Martin Concerning Next Steps for Review of AT&T/Bell South Transfer of Control Application). In response, Chairman Martin, agreed to cancel the meeting, and scheduled a 3 November session where the FCC will again take up the issue, and he instructed his staff to accept public comments on the proposals until 24 October (see Public Notice Erratum: Acrobat).

Unfortunately, there is a lot of politics surrounding this merger review, both inside and outside the FCC, and even at Congress. At the same time, these commissioner letters were being passed around, two major CLECs filed a motion with the FCC, urging disclosure of AT&T's last-minute filing offering merger concessions to expedite commission approval (a copy of which is included in the FCC's Public Notice). What a mess! However, it was expected — given the harsh reaction that Commissioners Copps and Adelstein and several Democratic legislators had to the U.S. Department of Justice's (DOJ's) decision to approve the acquisition without conditions on 11 October; given that there is a Tunney Act review of the two previous Bell mergers being conducted at the DC Circuit Court and the DOJ's actions would prevent any such review to be conducted on this merger if no conditions are imposed; and that there is a 2-to-2 vote standoff at the FCC since the newest commissioner - Robert M. McDowell - will in the end be recused from the decision because he previously served as senior vice president and assistant general counsel at CompTel.

The chairman is in China this week, so internal discussions at the commissioner level are on hold. I'd love to be a fly on the wall when the discussions begin again. I think they are still quite far apart on several high-profile items, especially on network neutrality rules. Ultimately, the merger will be approved and concessions will be imposed as a condition for approval similar to those imposed on the Verizon-MCI and AT&T-SBC deals (price freezes on special access circuits, performance benchmarks, interconnection requirements for VoIP providers, and possible divestitures involving BellSouth's spectrum assets in the 2.5GHz band - that sort of thing). We also expect that the FCC may require that the newly merged company operate its Cingular operations at an arm's length for some period of time (see this report for Gartner's view of the market impacts of the AT&T-BellSouth merger). Stay tuned; it's bound to get fun.

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The darling of the French telecom sector, Iliad, owner of broadband ISP Free.fr, has experienced stock price turbulence since it announced last week that it has plans to deploy a fiber-to-the-home (FTTH) network across the city of Paris (some 4 million households). Having grown at a dramatic pace during the past few years on the back of local-loop unbundling, where it rents copper pairs from French incumbent France Telecom, to deliver triple-play services over ADSL2+ at "up to 28 Mbps" (ATM speed without error correction), it now feels a minimum of 50 Mbps per customer is needed. But the cost of doing so is what is alarming investors, particularly at a time when France Telecom's own plans to deploy fiber across Paris (and, eventually, other parts of the country) are under review.

This could be part of a smokescreen to speed up the process by which the incumbent lays its next-generation network across the rest of the country, as well as to obtain regulatory intervention to ensure equal access by alternative operators to this network. If it is, then Free is paying the (share) price. It is also opening up the debate as to whether the incumbent should have to provide equal access, if its competitors can afford to build their own networks. Free's move will not be well received by alternative operators on the other side of the Rhine, where Deutsche Telekom has been in a fierce battle to retain the exclusive rights to use its own next-generation network, rather than make it available to other providers.

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Telmex has just named Hector Slim Seade as its new Chief Executive replacing Jaime Chico Pardo. Snr. Pardo was named Chairman. Snr. Slim Seade is a nephew of Carlos Slim Helu who family owns Telmex. Snr. Slim Seade has been in operational roles at Telmex since 1998. Telmex is the biggest operator in Mexico and is a key carrier in the South American marketplace.

Will this mean a change in Telmex’s direction? Telmex has been acquisitive in South America to overcome sagging revenues in Mexico. This has been a good move as demand for network services finally appears to be growing in such places as Brazil and Argentina. Will Telmex continue to expand its operations in the region? Will it focus on operational improvements? Or will it focus on defending the Mexican market. Of the three options, it appears that it will focus on operations. We think the new CEO will be positive at this time for Telmex as it should help it consolidate its position in South America and improve its operational efficiency.

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On 22 September, the German telecommunications industry organization Verband der Anbieter von Telekommunikations- und Mehrwertdiensten (VATM), an association of competing telephone companies, criticized the current draft of the update of the telecommunications act (TKG), arguing that, in part, the TKG is contrary to the deregulation efforts of the European Union, which has been controversially discussed in the parliaments in Germany and Brussels.

The thrust of VATM's argument is that the provisions of paragraph 9a of the new resolution would allow T-Com to deploy its VDSL network without opening it up to competitors. It would therefore enable T-Com to operate in a noncompetitive manner, since it is the dominant broadband access provider.

Don't expect this provision to go into effect, even though T-Com has lobbied hard to win this position. The European Commission will object and require VDSL unbundling. However, the unbundling requirements do not have to be draconian. In fact, if the EC were to impose overarching unbundling requirements, the likely outcomes would be contrary to the agency's pro-competitive goals. All they have to do is to look to the U.S. for the approach not to take. The FCC imposed all the rates, terms and conditions of network unbundling on the incumbent carriers. By doing so, it nearly collapsed the industry, and investment (from both the incumbents and competitors) nearly stopped (see "Unbundled Network Element Policies Threaten U.S. Telecom Services Growth"). Then, when the FCC followed our advice and allowed the parties to negotiate these terms, things turned around. Subsequently, the FCC relaxed its unbundling requirements on greenfield FTTP facilities, and last-mile broadband investments have soared (see, "FCC's Unbundling Relief for FTTC Provides Vendor Opportunities").

Imposing stringent unbundling requirements would trigger a similar situation in Germany. Actually, it would give T-Com, under heavy pressure to cut cost until 2010, the perfect excuse to delay the VDSL deployment until the revenue potential of the value-added services - mainly IPTV - that would be delivered over this network were clearer and more reachable. It remains to be seen whether frustrated shareholders will support new technology plays that are not mature enough to substantiate profitable ROI flows.

Moreover, T-Com may want to re-evaluate its value-added service strategy. Earlier this month, T-Com had announced the first IPTV offering it would like to see over its new broadband network. This offering consists of the broadcast rights to tier-one soccer games (Bundesliga). This is an inefficient offering that comes with a heavy price tag, as there are satellite and cable TV offerings with similar programs and content at very low or no cost to the subscriber already available in Germany. T-Com here would be replicating the classic mistake of other IPTV service providers that seek in IPTV the "Holy Grail" to differentiate their services, but merely provide sports and me-too broadcast TV.

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The Dutch government has just announced plans to sell off its remaining 8% stake in Dutch carrier KPN. Last year, it gave up its right of veto over changes of ownership, by selling its "golden share" back to the company. Having watched the disastrous consequences of last year's attempts by Swisscom to buy Eircom, the inference is that the Dutch government at least has recognized the need to step away from the telecom market, and give KPN free rein in deciding where its future should lie. Dutch regulator Opta has also been relaxing things for KPN in areas where it is not deemed to have significant market power, and the company has been busy this year acquiring small broadband ISPs in the Netherlands, as well as restarting its international ambitions in the enterprise space around KPN EuroRings.

All of this smacks of a company bulking up to be sold. Who would be interested? Well, debt levels aside, any of the major PTTs around Europe could be tempted - the Dutch market is competitive, but KPN retains a strong position in it. But just as likely is a private equity bid, akin to the ones that saw Eircom and TDC sold during the past 12 months. Consolidation is absolutely necessary in Europe - it remains to be seen if KPN will be the next to go.

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The issue of pretexting and customer privacy continues to increase in importance, especially because increased Internet use brings questions to customers' minds regarding how their personal information is being obtained and used. And it's the customers' perception as to just what customer privacy is and whether or not their privacy rights are being violated.

With all the negative press around HP's alleged scrutiny of personal phone records in its board leak investigation, a group of bipartisan lawmakers wrote a letter to Senate Majority Leader Bill Frist pressing him to schedule a vote on pretexting legislation, S 2178. A similar House bill (HR 4709, the Telephone Records and Privacy Protection Act) passed the chamber by a 408-0 vote April 25 and has received support of the S 2178 co-sponsors. HR 4709 would make it a crime, punishable by a fine and up to 10 years' imprisonment, to fraudulently obtain customer account information from a telephone provider, to sell or transfer customer account information without the customer's authorization, or to purchase or knowingly receive customer account information that has been fraudulently obtained. It also provides enhanced penalties of up to five additional years for aggravated cases, including violations that are part of a pattern of illegal activity involving multiple customers, violations that are used in furtherance of a stalking or domestic violence crime, or violations that are used in furtherance of causing harm to a law enforcement officer. Holding up the bill, however, is an effort to merge the House bill with S 2389, which is considered more favorable to carriers. It outlaws the acquiring, selling, or soliciting of phone records and increases penalties for violations but not as much as the House bill. It also preempts state laws on carriers' handling of customer proprietary network information.

Pretexting is not just an issue in the U.S. It is also alleged that Telecom Italia's security office and a Florence-based private detective agency were acting as a sort of freelance spy ring, improperly using phone records and bank-account data belonging to Telecom Italia customers and employees.

Telecom carriers and vendors need to beware of privacy issues emerging within the Internet era, and understand that these alleged violations only fuel the fires of privacy concerns. Take advantage of this negative press and launch a campaign to share with your clients the steps and processes that you have taken to guard their personal information and protect their privacy. New anti-pretexting laws in the U.S. are imminent. Positive steps taken now may preempt customer legal action, build customer loyalty and potentially lead to less-egregious compliance requirements (see, for example, "Communications Service Providers Must Address Data Privacy and National Security Issues" and "Internet Privacy Issues: How Should They Be Resolved?").

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Talk of Verizon's dissatisfaction with Microsoft's progress may be overblown. While Verizon has deployed its FiOS TV service in an increasing number of markets and it works, it's been the telco's vision all along to move beyond "just TV" to more advanced applications and services. This effort involves a tremendous amount of specialization for Verizon's particular hybrid RF-IP TV platform, which Microsoft most likely either doesn't want to get involved in or can't take Verizon there fast enough.

Verizon's fiber-to-the-home (FTTH) platform is unique in the marketplace: It is similar to a cable network's platform for delivery of digital broadcast content, but it uses IP-based technology to deliver all video on demand (VOD) and interactive applications and services. The move to start developing more advancements is probably due to Verizon wanting to take control of its own destiny and move as quickly as it can against cable and satellite competitors - as well as Microsoft's reluctance to support advancements to the basic cookie-cutter software requirements of Foundation Edition at a time when it needs all the resources it can muster to support the dozens of pure IPTV deployments it has won around the world. Verizon is likely to maintain this hybrid RF-IP system for some time, or at least until it has completed the rollout of its GPON infrastructure.

Gartner believes Verizon will have more than enough bandwidth to support the normal digital channel expansion as well as the explosion of high-definition (HD) programming expected over the next few years. It will also be able to support VOD content and HD-VOD. HD, VOD, and HD-VOD in particular all have the potential to constrain the bandwidth capacity of AT&T's U-verse network, especially in multiple HD TV set households, as well as some cable operator hybrid fiber-coaxial cable networks.

Cablecos are already starting to implement selective infrastructure upgrades to both conserve and expand bandwidth capacity within their networks. These include analog recapture, digital simulcast, switched digital video, advanced compression technologies (MPEG-4/VC-1), extension of the plant to 1GHz operations, or a combination of these technologies. While Gartner believes Verizon has the superior network infrastructure to withstand the bandwidth onslaught over the next five years, cable will definitely have to start implementing modest network upgrades soon, to stay even with the aggressive innovations Verizon is planning to offer consumers.

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Time Warner announced it will sell off its investment in Time Warner Telecom (TWT). This divestiture is consistent with Time Warner's transformation into a "media and entertainment" organization. The recent sale of Time Warner AOL's European Internet access businesses and the announced resignation of AOL executive Ted Leonsis highlight this transition. In addition, look for the upcoming IPO for the Time Warner Cable business unit once bankruptcy issues associated with the Adelphia Communications purchase are cleared up.

TWT serves the business market and largely operates a separate network from the consumer-focused Time Warner Cable network. TWT has a national fiber backbone network complemented with fiber rings in selected metro areas. Operationally, there should be few complexities with the separation. The parent company is also requesting that TWT be renamed to achieve Time Warner corporate's branding objective. Thus, the "Time Warner" reference to TWT will soon be history. The move will also help to remove any future confusion as a result Time Warner Cable's increasing activity in serving the small/midsize business and enterprise markets.

Present plans call for the current TWT to be spun off as a separate company. However, TWT has a high debt burden, which will concern potential investors. Gartner believes that TWT may be purchased by an existing carrier, such as Level 3 Communications, with a retail telecom consolidation business model.

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Telecom Italia's announcement to spin off both the mobile branch and the fixed network to create two separate companies, substantially abandoning fixed-mobile convergence, has no market or strategic justification.

Convergence is still a priority in the mobile industry, with key technology vendors and service providers working in that direction. As an example, see the announcement from Vodafone Italy, which has signed a deal with Fastweb to offer broadband Internet connection in the home to its mobile phone customers; BT made a similar announcement last week in the U.K. In addition, other mobile operators such as O2 and Orange offer this already.

On the other side, IPTV cannot justify the move. Yes, it may have some potential in Italy, but it hasn't been proved yet. Internet TV has just begun, Telecom Italia does not have significant experience and competence in the media business, and future competition in this area may be tough, with the presence of other players such as Mediaset, Sky and Rai. The deal with Murdoch for content supply may help - and certainly Murdoch is keen to expand from the exclusive but limited satellite TV business to the potentially massive IPTV business - but it is not enough to explain the decision to get rid of the extremely profitable mobile business.

In fact, this reorganization seems to be driven mostly by financial pressures. Telecom Italia's debt has reached the huge figure of 41.3 euros with a negative impact on the share value. Shareholders are not happy, particularly Olimpia - a holding company owned by Pirelli (70%), Benetton (20%) and two Italian banks (Banca Intesa and Unicredito) - which controls Telecom Italia with a 17% share. But, most importantly, on 4 October, Banca Intesa and Unicredito will leave Olimpia, giving back their shares, and Pirelli will have to buy them and absorb Telecom Italia's debt. This will be extremely negative and explains why the company must get rid of its debt.

In addition, there are regulatory pressures on Telecom Italia, coming from Italian and European regulation bodies and aiming to open up the Internet broadband markets to fair competition by a complete, real unbundling. This explains the second part of the reorganization concerning the fixed network spin-off (and might in fact help Italy get healthy competition for its Internet broadband services).

While we agree on the need to do something to resolve the debt issue, it is difficult to understand why this problem was not considered 18 months ago, when Telecom Italia decided to undertake the convergence strategy. The debt was already high two years ago, and no one could have reasonably expected to see benefits from a converged strategy (and a consequent debt reduction) in less than three to four years. Similarly, regulation compliance issues were ignored for years. So, either Telecom Italia's board was planning all along to use convergence as a means to simplify the process of operations and personnel streamlining in both Telecom Italia companies, in view of future sales; or Telecom Italia didn't fully understand all the challenges and implications of a convergence/integration plan.

Whatever the case, these organizations went through 18 months of intensive transformational efforts in order to implement the one-company strategy -probably for nothing, because the mobile branch is likely to be sold in the end. This is a shame because money and resources have been wasted on this initiative, reducing Telecom Italia's ability to generate value and Italy's ability to modernize communication services.

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