“[O]ur business is about scope and scale and having superior incremental margins. If you are looking to tax content and bundle device, application and network, it isn’t going to work. You had better be good at moving information if you want to be a network service provider.” – Jim Crowe, CEO of Level 3 Communications, at Citigroup 2008 Global Entertainment, Media and Telecommunications Conference.
We’ve just completed a major 6-month study into the future of broadband, including an online survey responded to by over 800 industry insiders, interviews with leading figures and actors in the industry, and desk research into comparable networked industries like container shipping and power distribution. Below are some of the key findings, which very much echo Jim Crowe’s comments above.
1. Telecom is a logistics business for valuable data. It’s about providing personalized delivery of that data, and removing the “customs barriers” (such as network provisioning, authentication) to that delivery. This is much more complex (and profitable) than being a “dumb pipe,” but doesn’t mean being an applications or media business (something telcos are notoriously bad at doing).
2. Broadband is just one of many distribution systems for data. Others include broadcast, physical media, circuit voice, SMS, content delivery networks, and edge caches (which capture and retransmit broadcast content, e.g. networked DVRs). The successful broadband services provider of the future will be able to mix and match multiple delivery systems, just as logistics companies blend road, sea, rail and air.
3. A key enabler for this will be home hubs, media servers and set-top boxes — whoever gets to deploy and manage these boxes will emerge as the winner in the space. As these boxes are the “ports” at which all the different delivery systems must dock, they will be critical to being a “logistics solutions” provider. The best examples today come from Iliad and Sky in Europe, which have the best blend of multiple-delivery systems, features and content. Mobile devices and networks will also need to evolve new provisioning, authentication, policy and retail models.
4. Telcos will make increasing amounts of money from wholesale, not retail. Media companies, employers, merchants and government will pay BSPs to deliver content and applications on their behalf. So you’ll watch YouTube without worrying about fair use limits (on “unlimited” ISP plans), or going over your usage cap. Google wants you to watch and watch without having to worry if there’s a meter running. Wholesale markets tend to be concentrated, since the whole point is that buyers (like Google) don’t want to have to personally interact with dozens of sellers (like telcos). That means only a few large telcos or aggregators will prosper.
5. The ISP product suffers from severe economic problems. A few users are diverging in their usage from the rest, driving capital and operational cost. These users are different from day to day, so you can’t shed them. Attempts at traffic shaping to manage cost only work with a policy of “radical honesty,” such as that from PlusNet in the UK. Retail prices are falling to the point where additional usage is being priced below the cost of transit for that traffic.
6. Nonetheless, the ISP product will continue to grow, but the emphasis will move elsewhere. Users will increasingly buy (or use ad-funded versions of) applications with all “postage and packing” charges included, for all the networks and places they wish to use that application or content. Amazon’s Kindle
is just the start of a major shift in how we retail broadband services.
7. Voice will be the catalyst. There will be a rapid rise of non-traditional voice services as voice is embedded into the general online experience. You’ll be able to call your date from your mobile dating application, without knowing your date’s mobile number, and the whole cost of the call will be borne through your dating application subscription.
8. Telcos will move towards “two-sided” business models, which involve not just wholesaling bulk capacity, but increased personalization of delivery to their own retail ISP end users on behalf of their “upstream” partners. This will include using location and presence to enable everyday business processes (e.g. parcel delivery, health-care services), ad insertion, or ecommerce services like credit checks.
9. This is part of a larger “platform” business model that involves opening up the telco to exploit underused assets. This is a much bigger activity than just enabling a few APIs, and requires considerable restructuring to achieve. For example, you need a sales force to find these new wholesale customers!
10. Network neutrality is a completely mis-framed debate. It assumes that the user has access to a single telco product: pre-paid (by the user) ISP access. The real market will be vastly more complex, with users having access to many “virtual” networks — some overlaid on the Internet, some private. All the bogeymen making noise about blocking and throttling are just the shadows of welcome improvements in the wholesale markets. This exactly mirrors what has happened in the financial markets over the last 20 years, where vertical integration ended and lots of wholesale markets grew up to repackage and resell debt and other financial instruments.