A friend of mine works for a Telco and of late we’ve been debating the prognosis for Telcos in the face of threats from internet businesses. He gave me some figures detailing the revenue of some internet businesses versus some large Telcos (obviously the Telco’s revenue was massively bigger than the internet companies), and reminded me that al these web services we love to use rely on a Telco providing the network layer.
His perspective then was that all the SaaS businesses in the world are mere leeches, wholly dependant on Telcos to earn their dollars.
Given the current status quo of course he’s right – but in this age of mass disintermediation, there has to be another alternative.
What’s to stop a massive internet player from disintermediating the network layer – building massively scaled wireless networks that obviate the necessity of using the current Telco’s networks. Forget for a minute the arguments about the efficiency of DSL vs Fibre vs WiMax and think about the concept here.
Currently Telcos make their money from network provision – sure they talk abut being service companies and selling value added products – but essentially it’s about providing pipes. As such you have the following equation for a web service;
Total cost = (Telco pipe price + Margin) + (Web Service Cost + Margin)
So let’s, in the words of Tony Blair, find a third way. Imagine a world where (for want of a better example) Google owned an alternative network. The equation in that instance would look like this;
Total cost = (Network Cost + Web Service Cost) * Margin
In recent days we’ve seen rumours of a plot by global Telcos to create some sort of Skype rival, surely this (if it’s true) proves my contention. The Telcos are trying to disintermediate the disintermediaters, creating a point to point offering that is vertically integrated.
My friend pointed out that, given the wildly higher revenue and market capitalisations of the telcos, compared to the internet players, it’d be more viable for them to do the integrating. While I agree that it would be easier from a capital point of view for the process to work this way, we come to some cultural roadblocks that, in my mind, make it more plausible for the internet players to win.
Telcos have grown accustomed to mega-profits and and large ARPUs, it’s hard to take that model and morph it into a long tail one where you make billions a penny at a time. Yet this is the very model that long tail providers are used to – they’re more likely to be able to stomach a lower ARPU, a lower margin and a more aggregative revenue stream than Telcos. Add to this the fact that Telcos have fixed infrastructures they wish to protect and the result is quite some barrier to Telcos winning the war.
So a couple of points for the third way.
1. Someone has to stump up a bunch of serious cash for the network bit . Conceptually possible but there’s no avoiding that you are talking $B in an NZ context at least
2. The equation of
Total cost = (Network Cost + Web Service Cost) * Margin
should in theory work both ways right? Wouldn’t the telcos see this coming and just play this game? Then they are there first. But obviously THAT hasn’t happened. Why is that? Probably more to do with business culture than anything.
As it is, global trends around the world show that Telcos are being disintermediated, their businesses are being broken up into retail and wholesale arms, retail becomes lower margin therefore web services look attractive. Net result is the additive equation not the multiplicative one.
Oh and I love the way that the link to taking on Skype is seen as a plot as opposed to a business response. Some telcos are actively using Skype already – three being the lead player.
Disclaimer: Yeah – I still work at a Telco
Many telcos would argue that they do not currently make their money providing “pipes”. They may say that they make their money providing “dialtone”. There’s quite a big difference.
Yes, incumbent telcos have grown used to supernormal profits in recent years, mainly due to running essentially the same service they’ve been running for decades (PSTN voice). This service may be running on infrastructure which was paid off years ago, hence the (now) high profit margin.
The last few years have seen strong challenges to this profit due to so-called “over the top” services, such as Skype. These challengers can easily enter the market with very little infrastructure investment, due to the local connectivity part having been built by the telco, and the arrival of a workable Internet infrastructure (transit, peering, etc.). The challenger services can therefore jump in to an existing market, with minimal capital expenditure or ongoing operational overheads, and undercut the existing players. Skype is a great example, using few central servers and a peer-to-peer service architecture in order to scale effectively.
Given the proliferation of broadband, people have spotted a bargain and are willing to accept occasionally lower-quality or “best effort” service, over the traditional standard offered by the incumbent telco. In many ways, the arrival of lower quality mobile voice and poor UI SMS text messaging has done a great deal to reduce the consumer’s expectations of communication services!
When it comes to emerging SaaS, however, these are most often services which the telco does not currently provide, which does put them in the role of “pipe provider”. One view may be that as the telcos begin to better understand how these emerging services fit together in to a coherent set of communication, consumer, and business, tools/services, that the equivalent of a “next-generation dialtone” will emerge. This may be with reliable services, performance guaranteed, but a possibly higher-cost. In video terms, this may be the difference between YouTube and an on-net streaming VoD High-Def IPTV service (to use a current example). Of course, this opens the argument of net neutrality.
Ben, Telecommunication is the transmission of a message from point A to point B (wireless or otherwise). When ISPs & other internet Telco companies try to replicate the very services of the traditional Telco (one with a network infrastructure), ie, relay a message from A to B, then those services become Telco themselves, so the distinction of being a traditional Telco and an internet services doesn’t apply anymore.
@miki yes agree telcos should see it coming and could react accordingly – question as you say is whether they can culturally
@rik agree with your comments re “next generation dial tone” which is really what I was saying in my post – but what is to stop the web properties from aggregating this new dial tone on their own network. sure infrastructure costs money but google doesn’t shy away from spending $ on hardware (and neither does amazon or ms for that matter)
@ff correct – so instead i should have said “traditional telcos” vs “new telco/web companies”
From a brand and marketing perspective there are other hurdles for old-world Telcos when it comes to breaking out into new business models, I think.
Despite their larger resources they also seem to nearly always try to develop new brands which leverage their old ones – despite their old ones having overwhelmingly negative baggage.
It seems like such a small point, but considering how timing can be critical when launching to niches in the long-tail, any time spent unnecessarily wrestling inevitable (and seemingly unexpected) negative brand baggage (from leveraging a brand they thought would help) can get the whole thing off on the wrong footing. In my view that’s a strong opportunity for the smaller player to be making their inroads into the market from a clean slate.
Where the Telcos have pulled-off the switch to (or addition of) services more successfully there seems almost always a fiercely independent brand being built to support it.
I guess this is a thought in response to your comments around the constraints of the ‘old culture’.