The IP Development Network Blog

It is strange to see an industry worth $1.3 trillion a year feeling powerless. Perhaps Canadians can understand it - they have a GDP of $1.3 trillion too - but the powerlessness in telecoms doesn't come from having a behemoth on the doorstep. It appears to me that telecoms operators are more like heroin addicts, powerless to prevent their dealer being sent down by the authorities who have finally caught up with them.

The drug is recurring subscription and minutes revenue. I would say that the industry has grown fat on it over the last few decades, but that would be suggesting that the income had been reinvested to bulk up the body of assets that they own. While some may be able to live off their reserves during the approaching famine, many will not - in particular new entrants - who have seen their share of the income passed upstream to wholesale providers and downstream to customers in the form of lower prices.

Taking from Both Sides
The need to create a two sided business model was one of the key messages from Telco 2.0 last week. Each side - consumers and business partners - must pay some because neither party is going to contribute the whole. Sounds good, but the practicality of the theory depends greatly on where you start.

Fixed and Mobile are different. They are very, very, very different. This was another of my takeaways from last week. For all the talk of convergence, actually what we may now be seeing are two rapidly diverging markets.

Fixed Operators - Out of Control
Fixed operators have very little control over what runs over their networks and that gives them very little leverage with business partners as they seek to develop that side of their business model. They are providing the bit-pipe commodity, which is fine for the internet evangelists, but terrible for the shareholders.

Consumers cannot differentiate one branded bit-pipe reseller from another, so the commodities are locked in a price war leading to MAD. The only winner may be the structurally separated monopoly wholesaler for whom the infrastructure guarantees a 10% or so ROI.

Where there is infrastructure competition, there is oversupply, and that is now being exploited. David Goldie of the CPW talked proudly of having built his NGN for just £200m, comparing it to BTs 21CN investment in the billions. Indeed, the CPW and Free in France have clearly made the investments of others work to their advantage, buying unused dark fibre or core network routes and leasing backhaul circuits to exchanges.

It is worth considering how little actual value this adds though - this is not infrastructure competition. It is buying distressed assets that has been built by over optimistic competitors. These like the CPW who buy are the winners of infrastructure competition, not the ones like BT or Virgin Media who are taking the risk.

But, for all CPW success, they are vulnerable to the next wave of oversupply. Having led the market lower and strategically decided to avoid adding value (it is an option...), they might find it tricky should someone else steal their clothes and take the lead on price. Orange indeed may have to, because their Freeserve market leading legacy has worn away through confusing rebrandings and over-complicated service wraps. What would CPW do if you got free broadband and voice with your mobile contract...? Just a thought.

I had to laugh when Dave Burnstein talked of how to make the open network model work. It begins with using distressed assets and ends with government money as far as I could tell. While it is good to hear controversial opinions like this aired, I had more sympathy with Openreach's Steve Robertson who argued that the case for fibre in the US is made by allowing telcos to monopolise the whole value chain - somewhere we don't want to go in Europe.

Mobile Operators - Quite the Opposite...
On the other hand, mobile operators have it all. They have an oligopoly, sympathy from the regulators (guilty at the 3G taxes), pricing power, huge cashflows and a valuable product (in the consumer's eyes). In one word, they have control.

Furthermore, their customers expect walled gardens. Mobile network neutrality? Is that perhaps the first time anyone uttered those words? But think for a minute, why is that a strange concept whereas fixed network neutrality is a religion for some?

The upshot is that mobos can evolve a two sided business model because on the consumer side, there is a lot of control and little in the way of choice, while on the application side there is control and... yes, that's right... little in the way of choice. Something that cannot be said of fixed networks.

There were regular pleas last week for mobile to go the way of fixed operators. The reason the mobile internet is so crap is because the networks are closed to innovative applications going over the top.

Those in the mobile industry delighted in this - why do Facebook, Bebo et al do deals with mobile operators? Because they have to to deliver a decent service. Why don't they do deals with ISPs? Because they don't have to. Who makes money and who doesn't? You don't need to know a lot about telecoms to answer that one...

Value in a market is usually defined by its desirability combined with its scarcity. There is scarcity on the mobile side, there is abundance on the fixed alternative. The scarcity comes back to that one word - control. Why don't they open up their networks? Go figure.

Two Very Different Ways Forward
There are so many differences emerging between fixed and mobile that they might have to start splitting conferences like Telco 2.0 up into one where the addicts can wallow in their own pit of despair and another where they can scheme and plan how to combine to squeeze control back from upstarts like Google. Divergence for me really was that clear.

The two sided business model has a lot of promise for the mobile guys because the hydra is under control - tamed by it's master's control over its environment. For fixed operators, it might just be back to chasing the dragon.

Labels: Telco 2.0

# posted by Jeremy Penston @ 10/22/2007 02:40:00 PM

Monday, 22 October 2007

The Two Headed Beast