ISPs need to lock down the digital vault market before Google et al. do

Posted by Mohammed Hamza Monday, December 22nd, 2008

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Our research suggests that digital vault services that allow consumers to store their photos, documents and other data online is already generating serious amounts of cash for many telecoms operators. As with all online services, there’s the threat that Google, Yahoo, etc. will do it better, but there could be an even greater cost to operators than lost revenues if their Internet rivals succeed.

Operators typically charge about US$5 to US$10 per month for their digital vault services. Online-backup-platform vendors IASO and Steek agree that “teaser” offers attract between 10% and 20% of an operator’s subscribers, 20-25% of whom convert to premium services in the first year. IASO provides online storage services to KPN and BBned in the Netherlands, while Steek serves France’s Neuf Cegetel and a number of unnamed French ISPs.

A major threat to an operator’s success with online storage is popular photo-sharing sites such as Flickr, Photobucket, Snapfish and Picasa. Yahoo-owned Flickr has more than 10 million users, a substantial proportion of whom pay for the US$25 a year Pro service.

But there is more at stake for operators than any extra revenue online storage services might bring. Say, for instance, a large number of KPN’s customers in the Netherlands began backing up their multi-gigabyte photo and video libraries on a service based in the US, the operator could end up incurring significant peering charges for the traffic leaving its network. Richard Nijhoff, managing director of software online for KPN, told me:

“It would affect the balance sheets quite significantly if Picasa was to offer a photo-backup service which saw 50% of the customers back up their photos in their complete size… A lot of data that is in our network would go out of the network to someone else’s.”

Still, operators claim to have a distinct advantage over the Internet firms in terms of the associations consumers make with their brands. They say that consumers see them as more reliable and trustworthy than large Internet firms and “fly-by-night” startups.

Some operators are looking to harness the popularity of the Internet firms’ sites, rather than create services that compete directly with them. Partnering is important because operators aren’t well equipped to make copies of Picasa, says Nijhoff:

“We and other telcos are looking at copying the Flickrs of this world, but I prefer the model where the telco is preserving the data for the customers and making smart connections with the functionality of Facebook and other such sites.”

One approach would be to allow users of an operator’s storage services to share their photos and other content with, say, Facebook via the social network’s open APIs. IASO is working on open APIs for its platform.

But I think operators should proceed with caution, and not just because of the obvious risk of betting on an untested approach. While adding web 2.0 bells and whistles may impress the technologists, it would appear that much of the appeal of operators’ digital vaults is down to the simplicity and privacy they offer more conservative consumers.