A call for a new business model
Ken Zita President, Network Dynamics Associates
When Zarathustra descended from Silvaplana, crazy ideas in his head, he had some big news. When the world’s telecoms’ elite descend on Geneva this month, seeking inspiration not in the mountains but at Palexpo, they may face a similar epiphany. The news? O man, take care! What does the deep midnight declare? Telecom is dead!
With annual turnover of a trillion dollars plus, telecom is hardly in the grave. But the traditional telecom industry is in its twilight, an economic idol being put to rest by the Internet.
And so the Furies cry: Telecom is not dead! It is infrastructure, a lasting public service! We own the customers! The Internet is just an application! It would be nowhere without us!
A seismic change in telecom
Alas, the global information industries have transformed dramatically since the last ITU Telecom World four years ago. The inevitability of an “all-IP” world is now all but certain. The signs are everywhere. Skype, the free voice upstart, has eclipsed 100-year old telephone monopolies to become the largest provider of international phone traffic. Twitter, texting and social
networking are replacing casual phone calls as local fixed line networks contract. The speed a mobile device can browse the Web or forward a digital photo has become the measure of the market.
Telecom is not dead any more than God was dead for Nietzsche. But there has been a seismic change in telecom these past four years – a passage into uncharted territory. The Internet is dismantling the orthodoxy of one of the most powerful industries on the planet. The infrastructure that has served the world so well for the past century is being swapped out with “next generation networks” based on the Internet Protocol. The details of how this works, though fascinating, are topics for networking gnomes and technologists.
In the past, the value of communications was directly related to scarcity. Calls were billed by the minute and there was never enough bandwidth for data. Today we have ubiquitous broadband in rich countries with the promise of “ultra-broadband” services around the corner. In Hong Kong it is already possible to enjoy 1 GB/s Internet connections in the home — about 150 times faster than the quickest service providers in Switzerland today.
Time for a new business model
Really high speeds mean that each individual communication – a phone call or file transfer – takes up an imperceptible amount of bandwidth relative to what is possible on the network. This throws off the traditional “economics of bandwidth.” Abundance overcomes parsimony. In the emerging marketplace for digital services value is created by the applications on the network rather than the network itself. Put another way, profit margins are increasingly associated with content and connectivity and decreasingly with the amount of bandwidth consumed. When bandwidth is too cheap to meter, it is time for a new business model. That’s what’s happening now.
Connecting people and machines will always be a sturdy business, like electrical transmission. But establishing physical networks is also like plumbing – prosaic and low margin. The opportunities for incremental gains come from convergence, the collision of telecom, broadcasting, media services and software made possible by IP and the Web.
It used to be that the switches in the telecom networks determined what services could be offered. Increasingly, the last mile connections will handle voice, data and video transmissions with equal ease. Software defines the service. Anyone with a data centre and cloud of computers can provide the services people want and are willing to pay for. Innovation can come from anywhere.
Competition comes from all quarters and the traditional boundaries between telecom, content and media, software and the Web are eroding. More likely than not, the cool new stuff originates from somewhere else besides the staid-but-trying desperately-to-be-hip telecom provider. The Apple Store has defined a new era of online commerce while taking a huge bite out of the high-end handset market. Google offers cheap voice services and free office software. Big websites and portals like YouTube and Facebook become engines for communities and the communities in turn create secondary markets for monetizing network traffic. Telecom providers see only a fraction of the new revenues associated with connecting people to these services.
Dead or Alive?
While broadband access will continue to make money “forever”, it has become a commodity and tends to be regulated. Growth lies in offering on-demand content to fickle consumers whose tastes constantly change. To meet the challenge telecom companies need to reinvent their businesses and evolve from a utility mindset to a lifestyle innovator. To their advantage, incumbents have tremendous inertia, huge balance sheets and formidable lobbying machines with which to shape sector policy. But a lot of them just do not understand what customers want. In the past they never had to. Telecom, like the-rock-star formerly-known-as-Prince, is not really “telecom” anymore. It has become a “digital services” free-for-all with competition coming from all quarters.
“While telecoms are trying to compete with broadcasters and cable companies they still have a lot to learn … with ubiquitous Internet connectivity, convergence and competition for content services and applications will only increase”
Where it’s all leading
Two big trends provide additional nails to traditional telecom’s coffin. Video on the net is soaring. In the US, already more than 150 million people watch up to 100 videos or 5 hours of online video per month. While the future is anybody’s guess, by 2011, US citizens may watch 250 billion video downloads online. More than two thirds of viewers are older than 35. The message: Everybody is doing it, not just the kids. Content providers, meanwhile, are keen to aggregate and syndicate programming in efforts to regain control over fragmented audiences and Balkanized
advertising revenues. While telecoms are trying to compete with broadcasters and cable companies they still have a lot to learn. What happens when you can search YouTube from your HDTV?
The other monumental trend is the imminent arrival of very, very fast wireless networks. Even the fastest mobile networks today are lazy compared to what lies just around the corner. LTE, or “long-term evolution”, will allow downloads to the handset as fast as 300 Mbps and uplinks of 50 Mbps – fast enough for Dick Tracy-like high definition video conferencing and whatever else can be dreamed up.
First services begin in the US later this year although Europe will nurse its installed base of GSM and so-called HSPDA services for a few years to come. Within five years or so, 4G networks will bump speeds to 1 GBs, breathtaking by any measure.
That mobile networks will be so fast is amazing but, strategically, there is more to it. They will make the Internet
“Growth lies in offering on¬demand content to fickle consumers whose tastes constantly change. To meet the challenge telecom companies need to reinvent their businesses and evolve from a utility mindset to a lifestyle innovator.”
truly mobile whereas today’s devices are still essentially smart phones tethered to carriers. With ubiquitous Internet connectivity, convergence and competition for content services and applications will only increase.
The old telecom world may be dead – but the new world has only just begun! «««
Comments on this entry are closed.