Here Comes Trouble: Navigating the Infotech to Telecom Chasm

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A journey begins with a single step — unless it starts at the edge of a chasm. Infotech companies seeking a greater role in communications need to do more than replicate telecom models. For evidence, one need only look at the pile of casualties at the bottom of the chasm between the two.

Infotech and telecom business models operate at opposite ends of the product vs. services spectrum. Microsoft, for example, sells software and related products; the $50 per year XBox Live service supports the sale of the $400 Xbox gaming console and associated games. Telecom companies, on the other hand, sell monthly access to a shared infrastructure. Here an example is AT&T, which sells wireless handsets at a loss to help acquire customers that will pay $600 a year for service.

Conversely, the Internet-driven service model of Google revolves around an audience built on free services. Whereas Verizon’s ability to charge $50 per month for wireline telephone services rests on a process of regional market allocation (a.k.a. implicit agreements not to compete on price), Google can’t charge for services because there always exists a competitor willing to give the service away for free.

Infotech companies do not divide up the global market, but they do segment the value chain. Selling a new product requires making existing products obsolete. Intel avoids competing with Dell because the pace of innovation forces specialization; the same holds true for Microsoft and Texas Instruments. The service offers of the telcos look static by comparison, but telco vertical integration facilitates reliability.

A third of the spectrum licenses utilized by Verizon Wireless were obtained at no cost in the late 70’s. Today, Verizon invests in infrastructure and collects rent from users of the spectrum. The infotech industry, meanwhile, turned the narrow slice of unlicensed spectrum made available by the FCC in 1985 into a Wi-Fi access point product business.

The fact that access points costing $40 in 2008 outperform the access points that cost $400 in 1998 helps sell laptops. Tropos Networks succeeded in promoting Wi-Fi as an infrastructure product, but EarthLink’s efforts to apply a telecom service model failed. Absent the telecom market allocation agreements, Wi-Fi qualifies as nothing more than an amenity, like light or heat.

Infotech companies succeed by selling products that offer an abundance of options. Telcos succeed by selling services where few options exist (and by attacking companies that attempt to introduce them, such as Vonage). Consider the analogy of someone purchasing a BMW vs. hailing a taxi in NYC: the BMW buyer weighs the future options resulting from the purchase, while in the absence of other options, it makes the most sense to hail a cab.

Telcos invest in barriers to entry, not communication per se. The infotech company seeking to become a supplier to a telephone company will not find much interest in enabling cool new services. The telco will buy routers supporting the deep-packet inspection necessary to identify and isolate VoIP traffic.

The communications status quo remains a long way from making face-to-face meetings obsolete. An infocom industry can emerge to expand communication options in the form of products and software or by building an audience with free services. But there’s no future in trying to replicate the service models of the telecom industry.

6 Comments

Thomas

It’s interesting to see the raft of Telcom Technology start-ups that get funded and the others that fail every year. I don’t think that entrepreneurs that cut their teeth in the enterprise IT markets understand that it’s very very hard trying to sell to one of a few very large market players. And there ain’t much more beyond that. There are so many blog posts telling the CSP’s what to do — the righteousness tickles me pink. CSPs are going to do what they want, when they want. They’re not very motivated to act quickly by outside market forces (for better or worse). I think the key to success for start-ups in this area is not the quality of their product, but their relationships with key decision makers inside the large Telcos.

Aman Sehgal

Dimitrios Matsoulis in a comment wrote “Who is going to compete in search with Google, or operating systems with Microsoft?”. Its true that no organization can compete Google for the services it offers but Linux has indeed offered a lot of competition to Microsoft. As in todays scenario, almost every Telecom industry (Original Equipment manufacturer)is using Linux as its Prime Operating System in Products.

It is not necessary that every Telecom company does business by sharing its infrastructure. Most of the Telecom companies are Original Equipment manufacturers who sell their products and then offer maintenance & support to the buyer and most of the time they try to outsource their maintenance & support business to a reputed Services Company so as to concentrate on new innovative solutions or products or services that can try to resolve the daily basis communication related problems faced by general public and can choose to compliment that pyramid to make its business.

Sampath

“Telcos invest in barriers to entry, not communication per se.” — Every public company should do this…barriers to entry is a competitive advantage and I see no reason why it is not good…

Infotech cos do the same thing by their installed base and standards –

Dimitrios Matsoulis

Hi Daniel,

Things change quickly and the current situation might mutate without return. I agree that telco companies have created barriers but I disagree that these do not exist for infotech. Who is going to compete in search with Google, or operating systems with Microsoft? Infotech is not a newcomer any more and a certain “balance” -if that could ever be said in a dynamic market- has been reached. Even in blogging there are established names and sites that most people know, but of course like you said entry is easy.

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