AT&T and Napster In Groundbreaking Music Service Deal

When the rumor mill becomes silent, you know something big is coming. AT&T revealed today its new music service pact with Napster, a well-known but struggling online music service provider. This deal arrives just a couple of weeks later after AT&T announced its intention to end the content promotion partnership with Yahoo!, and we can’t help but musing on the connection of the two events.

This new deal is groundbreaking for digital music industry in three ways:
1. Scope and feature: this is not the first time that an online music service provider partners with a walled-garden service operator. But the scope of collaboration is much broader than past precedents. Napster allows AT&T customers to access to not only its full music catalog, but also all its service tiers including PC-streaming and Napster-on-the-go, as well as mobile phone synchronization features. In contrast, Real Networks’ Rhapsody only gives Comcast subscribers (unhappy I am) free access to its premium online radio stations.
2. Pricing: AT&T subscribers can access Napster’s service for free for twelve months, a promotion that is also unprecedented. Napster’s premium “To-go” service costs $180 per year, and is perceived as much more valuable than the online music/radio streaming service. This arrangement might be the steepest discount Napster has ever given to a partner, and I am just wondering what kind of revenue sharing scheme the two parties have hammered down.
3. Exemplary effect on other service providers: No doubt this partnership will send ripples to the peers of the two companies in their respective industry. This bold move of bringing valuable content from the open Internet into its “garden” in order to drive subscriber growth clearly fits AT&T’s “three-screen” strategy (TV-PC-Mobile Convergence), and will be closely watched by other service providers. If successful, the partnership might lead to AT&T’s acquisition of Napster. After all, Napster’s share has been battered for too long and service providers need compelling content badly to fuel subscriber and ARPU growth. So it sounds like a logical deal to me, and all they want is a piece of evidence that digital music subscription market has room to grow.

For the struggling Napster, it apparently did not have the upper hand in negotiating the deal, but this is a much needed strategic move to help it survive as a standalone music service provider. Previous attempts, like free MP3 player or ad-supported music download, have largely failed to energize its subscriber growth. The new pact, though might be at the expense of Napster’s margin, is expected to give its subscriber base a lift, tame Wall Street’s frustration, and give the management more time to find the right course for the company.

For AT&T, the deal highlights its clear resolve to turn itself into an experience enabler for consumers. With service infrastructure for three entertainment screens, it is eager to introduce richer content so that consumers will stay on its network longer, spend more and think less about switching. The ability to transfer tracks to a mobile phone will be complementary to its future over-the-air mobile music service.

Finally, for the digital music industry, especially the nascent but besieged music subscription service, service providers’ deep involvement is clearly a positive sign. We at Parks have long argued that service provider’s participation can be one of the drivers to revive subscription growth, and AT&T has made the first step. Music has always been a loss leader for big retailers, and music subscription service can do the same for service providers.

A New Trend in Digital Home Customer Care: Enhanced “User Diagnostics”

If you’ve followed our recent blogs, white papers (Business Models for the Digital Home, for example), and recent studies (Managing the Digital Home: Installation and Support Services), we’ve definitely tried to stay on-top of the area of customer care in the digital home space. In our research, we’ve been fortunate to have gotten to know so many companies with innovative solutions to help reduce some of the complexity and costs – both to consumers and to companies in the market – who approached us with a simple question: “When are you guys going to start writing about the challenges associated with the digital home and begin analyzing the opportunity for this space?” It’s definitely been a steep learning curve, but through years of often patient conversations with us (because we often feel like we have to ask the same question again and again to clarify the answer in our heads!), we’ve been excited at the pace of development.

Just in the last few weeks, we’ve had some really interesting briefings with a good number of companies who are implementing embedded solutions to help create more proactive diagnostics and quality measurement, as a way to address some common concerns in the broadband and triple-place space, in particular. We were recently briefed by an AT&T representative, who gave us some insight into the telco giant’s decision-making process when it came to selecting the HomePNA 3 solution as its twisted-pair and coax home networking solution of choice for its U-verse services. Critical to the final decision was the fact that Coppergate – the chipset provider – had already embedded tools onto the silicon that provide for remote real-time diagnostics and management. This turns out to be highly complementary to the TR-069-based remote management system (RMS) solution that AT&T is deploying using its residential gateway partner 2Wire. And, because the other home networking options didn’t offer this type of solution, we’re told that this made a significant difference in the final decision to AT&T.

Clearly, the broadband and television service providers have much riding on their deployments of added services and value-added features (bundled digital and IP voice, triple-play services, digital television, streaming Web content, etc.), but they are also on the hook for the customer support calls that are sure to flood into their call centers. Increasingly, many of these calls, we’re told, will be related to quality-of-service as much as those pertaining to more tangible problems, such as a service failure. For operators banking on delivering even more advanced services at the same level of reliability they were able to deploy with Plain Old Telephone Service (POTS), their need for even more granular data capture and quality measurement will be even more critical.

Texas Instruments, which has played a key role in the development of broadband solutions (cable and DSL) on a worldwide basis, is looking to its PIQUA solution (unveiled in January 2006) as a way to solve some of the thorniest quality-of-service issues. PIQUA is a DSP-based and embedded software solution designed to monitor and improve the quality of IP-based services, including voice, data, and video. The management tools provide real-time diagnostics, allowing customer service personnel to see such data as dropped-packets, line delays, and video image problems, even down to individual television sets in the home. In many cases, TI indicates that PIQUA can help the quality-of-service teams fix problems before the customer has to pick up the phone to make the complaint. And, in a world in which a 10% reduction of phone calls is considered a good success, this can be a critical tool. And, if the customer eventually does need to call customer support, PIQUA can offer a help desk agent a much more complete view of the performance of the carrier’s entire network – including the access and in-home portions.

Although cost savings as a result of reduced phone calls is one clear measure of success, increasing customer satisfaction will be an important measure for service providers going forward, as they seek of offer expanded services in an ever-competitive environment. For example, last year’s study – Managing the Digital Home: Installation and Support Services – finds that 64% of consumers who accepted a home networking solution from their broadband service provider said that the availability of customer support was a primary reason they chose the offering. The requirements for managing the customer support experience, therefore, are going to grow hand-in-hand with the advanced services being deployed by the operator.

While the requirements for enhancing service diagnostics and troubleshooting for operator-deployed digital lifestyle offerings may seem evident, are there other opportunities for extending the reach of customer care to some less-obvious areas, including the consumer electronics area? Like their counterparts in broadband and home networking, CE companies (and often their retail partners) are under great pressure to reduce customer support calls. And, while silicon-based and embedded diagnostics tools are well-positioned on the “IT” side of the industry to alleviate costs and improve service, the CE manufacturers face different variables and may require additional customer help tools.

For a broadband provider and home networking equipment manufacturer, a silicon-based approach makes sense, since these solutions do well at diagnosing hardware problems as well as low-level operating system and driver problems. Better yet, if these solutions can be designed to continue working even in the event of a software “hang” or parts of the hardware system conk out, even better. As long as there is some data flowing back to a customer support agent and some level of remote access, there’s at least a chance that the problem can be addressed.

On the other hand, silicon-based diagnostics and management tools are likely not going to be the only solution implemented for improving the customer service experience for consumer electronics products (both retail as well as service provider deployed). We’re told, for example, that, many of the customer support calls related to CE devices (DVRs, set-top boxes, televisions etc.)are actually related to device complexity and functionality, more than just mis-configured settings in the software stack or QoS issues related to an access network. Just this week, one vendor told us that they’re getting reports that 50% of customer support calls to Tier 1 OEMs and service providers are more related to “How do I use this feature,” than software, IP configuration, or driver issues. Furthermore, when products are being returned to retailers and/or the manufacturer because of “defects,” only 15% are being marked as a hardware failure.

We would therefore assert that solutions are needed that help increase customer understanding in configuration and allowing customer support agents to see how the device is being used. This would allow the agent to figure out what’s confusing the customer and then how to help them. A good solution, therefore, would be one able to integrate into the application and device code and augment silicon-based (“Hardware”) diagnostics and serve as a User Diagnostics tool.

A key realization for solutions providers in this space is that carriers and equipment vendors as well as other third-party players (remote IT support organizations, for example) need to understand the basic parameters of the digital home. At present, these entities are largely flying blind when it comes to knowing which devices are connected on a home network and how they are being used. With remote diagnostics capabilities and two-way reporting to a “knowledge database,” carriers can benefit from more timely information about the configuration and use of digital home products and provide more proactive service if their customers have problems with equipment or services.

Furthermore, the value of the knowledge database can be extended as consumers seek to add more devices to their digital home configurations. In addition to recommending fixes, the database can be used to generate recommendations for compatible software, hardware, or equipment. For example, the carrier may build internal case studies that would indicate that Wireless Bridge X works particularly well with Game Console Y, and could serve to recommend such a product when the customer is ready to link his or her game console to the broadband connection for online gaming.

Enhancing customer care is going to require major improvements to end-user hardware, software, networks, and the customer support systems by many different players – service providers, retailers, equipment vendors, and CE manufacturers. We’re certainly seeing a key trend that dictates much more automation in the way that problems are diagnosed and fixed. These are definitely going to be beneficial to the managers of customer support offices, who are charged with reducing call volumes and enhancing the level of customer care. At the same time that automated systems are being used on equipment and networks, however, we would argue that a level of detail needs to be given to enhancing the customer’s comfort with using digital home equipment. In this case, we anticipate that a little bit of education and extra TLC in helping reduce customer confusion can go a long way to building a really innovative (and dare we say – revenue-generating?) customer support solution.

Court Ruling on Cablevision's RS-DVR

A federal judge today ruled against Cablevision's Remote Storage Digital Video Recorder (RS-DVR), which was the cable company's experiment to move time-shifting capabilities from a home DVR to the company's own servers. In his ruling, the judge said that Cablevision would be involved in unauthorized duplications of the plaintiffs' (in this case, television programmers and movie studios) content. The tenor of the ruling seems to revolve around the fact that since the recording functionality itself wasnot located in a customer's private residence, but as a "service" in which Cablevision is "doing the copying," the judge couldn't approve of it under the well-established precedent of fair use.

If one holds to the theory that recording on a consumer's personal property is still protected under fair use notions, I wonder how the courts will react to the National Music Publishers' Association's (NMPA) lawsuit against XM Radio. If the recording is taking place at the device level (and not through XM's own network), wouldn't the courts have to reject the lawsuit based on the fair use precedent?

Questions About BPL Technology

Since the release of the Parks Associates report FTTx and BPL: Analysis and Outlook, we have received some interesting questions about the technological feasibility of BPL. While many of these concerns are valid, it is important to note that many of the technological issues that have plagued BPL deployment in the past are being addressed and with some success. Some the most interesting statements we received were...

BPL will not be a rural broadband solution because of its high signal attenuation. Physics and regulated maximum signal levels by the FCC will limit BPL's signal reach.

This is a valid issue for many BPL providers. It is true that the BPL signal can degrade after a couple of miles. However, this issue is based on the use of analog repeaters. Some BPL vendors are addressing this problem through the utilization of digital filters. Companies like IBEC have developed solutions that use digital regenerators. This equipment filters the signal digitally and recreates the entire signal. An exact replica of the original signal is then sent out. This allows the signal to be regenerated every half-mile down the power as far as it is needed. In some areas, IBEC has been able to send the signal up to 13 miles.

Because the power grid is not static, some BPL customers may not be reached after the power is re-routed or experience a diminished quality of service.

In most cases, when utilities re-route power through the grid, consumers still receive service. As long as a back-feed or alternate path is provided to the consumer, BPL vendors believe the development of signaling schemes using IP packets will ensure that the signal reaches the consumer. If the power is directly cut off to the consumer, yes, they will not receive a broadband signal. However, if you do not have power, are you really worried you can't get on YouTube?

BPL systems are limited in the amount of bandwidth it can provide. (1-2 Mb/s) BPL will never be able to provide the enhanced data, voice and video services that cable and FTTH can today.

The best broadband service in terms of speed and bandwidth is FTTH. In a perfect world, everyone would have access to this type of technology. However, it will be decades before telcos and cable providers expand these high-speed services to rural areas. Today, most BPL suppliers and vendors support 200 Mb/s data rates on the backbone and 80 Mb/s of customer throughput. While this technology will still need to improve, most BPL providers believe they will have the ability to supply triple-play services to rural customers. However, the demand for basic broadband services (i.e. Internet access) in rural areas should not be dismissed. Parks Associates research has found that a significant percentage of rural residents demand broadband services. While enhanced data, voice and video may be a few years away, it is likely many BPL providers will still be able to capture customers by providing faster data rates than the current dial-up/narrowband service available.

BPL will never be a mainstream broadband option like DSL, Cable or FTTx. However, it has gained enough attention that companies like Google and Earthlink have invested millions of dollars in the potential of this alternative broadband access method. Additionally, the impact of BPL on how utilities manage the power grid can not be discounted. The ability for utilities to perform functions such as automated meter reading, remote connect and disconnect of service and overall grid management will be the main drivers of BPL growth over the next few years.

Cisco acquisitions continue unabated

Cisco's acquisition of WebEx - in a $3.2 cash deal - is going to continue the networking giant's goal of promoting as many feature-rich (and bandwidth-intensive) Web applications as it can. It'll be interesting to see how effectively they mesh the online meeting tool with its existing Telepresence offering to enable a whole new level of virtual meeting capabilities.

Meanwhile, I'm kicking myself. A buddy of mine got me involved in CNBC's portfolio challenge, and my holdings are struggling. Since the purchase price was a 23% premium on WebEx's closing share price yesterday, that may have lifted me out of the basement. Meanwhile, my brother sits in the top 15% of players thanks to a holding in a defense contractor. No imagination, that guy...

I guess it goes without saying that Parks Associates does not recommend stock picks, which is probably a good thing, given my track record in this contest so far.

The Chinese Government Wrecks the World Economy

Thought that would grab your attention. No I'm not talking about the recent global stock market meltdown caused by the selloff on Chinese stock market. I'm talking about the recent announcement from the Chinese government about their intention to regulate virtual economy. Many Chinese media outlets have reported the announcement and Financial Times also published an article on March 7th. According to the FT article:

A formal notice quietly issued to officials last month by the Communist party and government departments, including the central bank, has ordered “strict differentiation between virtual exchanges and online commerce in material products”.

The notice says: “The People's Bank of China will strengthen management of the virtual currencies used in online games and will stay on the lookout for any assault by such virtual currencies on the real economic and financial order.”

Virtual money can only be used to buy virtual products and services the companies provide themselves, issuance will be limited, and users are “strictly forbidden” from trading it into legal tender for a profit, says the notice.

The curb on virtual money reflects concerns that it has been used to circumvent China's strict laws against gambling.

The intervention of the Chinese government in the virtual world will impact not only gaming companies such as Tencent which generates a lot of revenue through its QQ coins but also a large number of Chinese "Gold Farmers" who spend time leveling up in Massively Multiplayer Online worlds to exchange their powerful characters and rare items for money. Many of these Gold Farmers are students and they sell a lot of the items to U.S. gamers. Of course, it's not all bad news-at least the annual U.S. deficit with China, which stood at $266 billion in 2006, will get some room to breathe...

Consumer Storage Hot in 2007?

We caught the quick blurb in Dealerscope on March 6 about retailers' optimism for home entertainment PCs and media server sales this year. Combined with the client inquiries we've received about consumer storage and the briefing requests from several companies just in the last week, we're inclined to think that consumer backup, content safekeeping, and improved sharing solutions are going to be a significant focus for many companies this year. We actually provide a media server update in a free white paper (Consumer and Personal Storage: Trends and Outlook) available for download from our Website.

It's probably been a frustrating task by developers of external and NAS-based storage devices to figure out a way to wake up consumers to the fact that their digital content is at risk! When we sit down with consumers in focus groups and discuss how they're interacting with digital content (photos, music, home videos, etc.), the fear of losing truly valuable content due to a hard drive failure or some other malady always tends to come up unaided. It indicates that consumers are thinking about the problem, but may not necessarily be acting upon it just yet.

So, we're interested in how development of consumer storage progresses this year in terms of not only continuing to develop more reliable and robust storage (RAID, mirrored drives, disk scrubbing, etc.), but also adding some new twists. For example, expect that we'll start to see a marriage between local storage (the external or NAS box) with online storage services that can serve as 1) a back-up to the back-up; and 2) allow consumers to more easily share certain content with a trusted circle of friends and family. This emphasis on sharing may turn out to be an interesting way to make consumers more aware of backup overall. We expect that we'll see a greater emphasis placed not only on how consumers store their content but also on how they share it. Expect to see developments in portals, content tagging, and other methods to identify key content to be stored and shared.

Remember WAPI?

According an article on Sina.com, the WAPI Indutrial Union is indicating that there will be volume shipments of WAPI products this year. There will be more than 30 WAPI certified products on the market and Lenovo has a line of WAPI laptops. In fact, the MII has a document that requires government purchase programs to first consider WPAI products. The WAPI Industrial Union forecasts hundreds of millions of dollars in sales of WAPI products just for 2007.

It's been a while since I last read about WAPI (Wireless Authentication and Privacy Infrastructure). Wiki has a good definition here. WAPI is the Chinese technology standard for WLAN networking. Although the focus appears to be on security and national interest, the Chinese government is effectively shutting out foreign vendors from the Chinese wireless home networking market. The WAPI specs are only disclosed to 11 Chinese vendors and any foreign vendor who wants to make WAPI products would have to work with one of these 11 vendors. Although the Chinese government wants to set up its own technology standard, such tactics maybe considered technology trade barriers and harm the long-term development of Chinese technology companies. The South Korean government is taking a different route. It wanted to push its own mobile broadband standard WiBro but later folded it into Mobile WiMAX, so that Korean power houses such as Samsung and LG can leverage their early to market advantage and become strong mobile WiMAX competitors on a worldwide basis.