In Defense of Walled Gardens
By CSMG
Telephony Magazine, June 26, 2006

For end user demand and competitive supply reasons, we believe more walled gardens - not fewer - are required to help drive digital services growth.

Both end users and companies dislike walled gardens for both their perceived restraints and "unfair practices." Set within the context of a single industry segment - the internet for example - this is accurate. But the recent attacks on Apple by over-zealous European regulators miss the point entirely. End users are not being forced to buy iPods by the millions. Convergence is happening. Indeed, given new Telecom and Media industry trends, end users fundamentally require more walled gardens that offer end-to-end plug-and-play like Apple's iPod service. Otherwise, users must endure the difficulties inherent to moving digital content between devices within the home.

The "walled" part of the garden is required because a closed system ensures the seamless movement of digital content and services across networks and hardware. It optimizes ease of use and encourages digital service and content purchase and usage. At this stage of the digital services market lifecycle, mass market users fundamentally require closed system benefits.

Multiple studies conducted by CSMG on behalf of clients have clearly identified the critical need and demand for easy-to-use and simple services that free their imprisoned content and allow them to buy new digital services with confidence. It currently takes an engineering PhD to figure out how to use today's mix of services and hardware. Most end users simply do not know how to use the complex technology on the market today and if left unchecked, the ever-growing interconnectivity requirements among the internet, telecom and in-home networks, and the plethora of new gadgets clogging up US homes is likely to stall digital services market growth. Had it not been for Apple and their plug-and-play walled garden, there would be no digital music market, period.

There is also a competitive rationale for such a strategy. Important market trends are driving competitive convergence: new all IP wireless and fiber networks; the digitization of services including voice; the availability of broadband; enhanced equipment capabilities; and, the advent of new sideloaded wireless handsets. Under these pressures, competitive boundaries are eroding and Apple becomes as much a competitor of, say, Verizon, as traditional players such as Sprint. In short, multiple formerly separate large companies are now fighting for the same digital service revenue, and the table stakes for success are quite clear. The standard has been set by Apple and its powerful end-to-end plug-and-play service, hardware and software package, and robust DRM backbone.

There are, therefore, both an end user need and a competitive need for major players-the likes of AT&T/Cingular or Comcast/Sprint-to develop robust in-home walled garden, plug-and-play services that ensure the seamless connectivity between their iTunes-like portal, set-top box and wireless handsets. This is neither a simple nor an easy proposition, but to avoid a dumb pipe scenario for carriers, it is essential. This will both satisfy existing customers and ensure competitiveness with new West Coast and big box retail competitors.

The walled garden strategy, however, is not stand-alone. CSMG is also advising its major telecom clients to develop in parallel a set of network capabilities that will allow other companies to offer their own walled garden services. This "Smart Pipe" strategy is optimal both for high capex network owners and end users, as it takes the realities of the market into account. With user tastes diverging in a digital world, certain brands appeal to certain segments and no one brand can offer all things to all people. In the converged world, carriers need to focus on depth of revenue per subscriber for a narrower group of customers versus the traditional shallow voice-centric breadth of revenue from all customers. For core customers, an easy-to-use walled garden offering is optimal, while for other customers, letting third parties satisfy end user needs is a smart business decision.

In short, this dual walled garden and open, smart pipe strategy is essential for both competitiveness and for the successful development of the digital services market. Until plug-and-play standards and hardware interoperability become an in-home reality, expect to see more-and not fewer-walled gardens in the future.