Posted by Keith Willetts
Great article this week in the Economist asking what the world's bankers (did I spell that right?) could learn from the telecom melt-down of the early 2000's. One very interesting point it made was that shareholders at the time encouraged telecom companies to go 'back-to-basics and concentrate on their core business. But as we know, and the finance industry will find out, that's not such a great idea. Those markets for us (and them) are mature, low growth business in many cases.
According to IDate, 2008 saw the global communications market grow only by +4.2% to $1.37 trillion, but most of that growth was from still expanding markets like India and China. In mature markets any volume growth was more than cancelled out by price declines on mobile and broadband. Poor old fixed line revenues fell by 5%. Prices for everything are declining as we go not only into a recession but maybe a deflationary period as well - I can't imagine a scenario where communications prices will go up, indeed they are likely to follow a form of Moore's law. In Europe, mobile penetration now exceeds 100% and with no more market left to trawl. So how do you continue to grow your business? The stock answer from CEO's is an exciting story of new mobile broadband; mobile TV; IPTV; unlimited music, online books - you name it they will claim it. But that question and similar answers have been asked for a long time now and there is little evidence to show that the service providers can realistically generate new, innovative revenues.
Remember when location based services would make us all rich - well the market took so long defining standards for exposing the location data that the handset guys have just got around it by putting GPS chips in their phones. Same for MMS - too hard, too slow and too user unfriendly to get a mass market going. The only truly new services, like iTunes, have come to market from 'over the top' players, not the communications companies.
So the question has to be asked - can service providers realistically generate sufficient new revenue from the services they sell to their current customers to replace the falls in price on traditional services as markets saturate? And if the answer to that is maybe not, what are they going to do for an encore? Until recently you could point to diversified services like outsourcing of corporate communications networks as a ray of sunshine - that was until one major carrier started posting profits warnings and admitting over-stating profitability of that business.
So I think service providers are quickly coming to a fork in the road when it comes to their core business model - just who are their customers and their competitors; what services should they be selling and how are they going to monetize them? Pioneering services like Amazon, Google, iTunes, and Hulu have shown that entire markets can be shifted to a digital economy model at much less cost but where everyone can still make money. Apart from bricks and mortar stores of course. We are seeing a similar thing in publishing - more and more publications are going online and eschewing expensive printing and shipping. Books and newspapers may well follow music and videos in going online through products like Amazon's Kindle.
In fact the global recession will push almost every business on the planet to look at what cheaper and better online approaches they can exploit. Thanks to advances in communications - fibre, 4G wireless and femtocells, (putting cell sites within the home), the market for digitally enabled services may well explode on a myriad of consumer devices from net-enabled TV's through online gas and electric meters, fridges and cars. This mushrooming of devices and a true digital economy represents a huge array of opportunities for expanded communications services. The key question is - does it also open up a whole new set of revenue streams for the service providers? Do they get commoditized into bit pipe players? Would that matter?
Almost as long ago as deregulation, Michael Porter (Key Competencies, 1985) outlined the concept of companies maximizing their core competencies and minimizing any reliance on what they are not good at. So what is it that communications are good and no so good at? How many wildly successful new services have been introduced in the past 10 years? Apart from DSL (Alexander Graham Bell with knobs on) you really have to scratch your heads to come up with anything - most are basically variations on a theme: voice minutes in all-you-can-eat packages with texting thrown in and different bundles with broadband. For mass market, innovative, successful services - Google, Facebook, iTunes, Kindle, Hulu, and so on none of them have come out of a communications company. All of them could have been invented by a communications player - they certainly have the brains - but their business models get in the way - their DNA is just not geared to taking risk, moving quickly and launching anything that might damage current lines of business.
But on the other hand none of these new services could exist without the innovations of the communications industry. What the service providers are good at is being a great enabler of other people's services - after all, for a 100 years phone companies have enabled us to talk to other people - they didn't do the talking!
Playing Both Sides of the Fence
Being a service enabler presents a new business model or at least, significantly extends an old one. Providing a range of enabling capabilities can be unlock a different charging models, such as taking a percentage of the revenues of the services that are enabled. This gives much more scalable revenues than, say, flat bandwidth charging approaches. It opens up new revenue streams by opening up the software and process infrastructure of a comms company - transport obviously (but maybe various qualities of service) plus capabilities like billing; settlements; authentication; cloud computing; user information and so on: in other words a super- wholesale enabler. But to open your mind up to that, you have to get your head around the fact that you are accepting that someone else is going to be the provider of service to the end user. And its tough to pursue both a provider model and an enabler business model in the same company because they are usually in conflict. You can just imagine the schizophrenia that can result.
At Management World Nice this May, we're hosting a sessions on exactly this subject. Werner Vogels, CTO of Amazon, will talk about how his company has successfully played both sides of the fence: providing services to its own end users but also providing a lot of capability to enable third parties to sell through Amazon.This business model is starting to be more understood and taken more seriously by communications companies, but you'd have to say the jury is still out which fork in the road providers are going to take. Will it be the model of trying to develop innovative new services for individual end users and businesses, or will it be more of the role of a behind-the-scenes enabler.
I think the next two to three years will be crucial to answering this question. A "do nothing" approach probably means service providers getting backed further and further into a commodity bit carrier. Being the 'Intel Inside' of numerous new and exciting services is a much better place to be that a bystander watching the action for the sidelines. Enabling other people's services is something that communications companies can do to leverage their really core competencies.
Let's put a traffic camera by that fork and watch which way the punters go.