What I'm about to say seems obvious, but only in retrospect. You'll already know it all, just won't have said it out loud.
The voice calling industry has been shifting from landline to cellular for a number of years. Cellular minutes of use have exploded while landline talk has stagnated. No news there. [This is bleedin' obvious already. Ed.]
Landline networks let you place calls from one fixed point in space to any other point on the network. One to many. Mobile calls can be made from any point in space (within coverage) to any other point on the network. Many to many. [You're fired. Ed.]
This difference is the driver that creates fundamentally different economic structures for fixed and mobile telephony. It isn't the wirelessness, but the mobility that matters. Why?
Well, when you have a fixed network you can use any technology you like to do the "local loop". Cable, MMDS, laser, copper twisted pair, glass fiber, etc. You just have the appropriate adapter box in your home or office to let you plug into that physical layer technology.
From your perspective, you don't care at all what the technology is or who supplies it. From your network operator's perspective, they want a vendor with low prices likely to stay in business for a while. A choice of interchangeable vendors is a bonus. But a niche technology is OK too.
This implies a highly fragmented market for fixed access technologies and network operators. The exception is for those serving multinational companies who want seamless global private networks. Then size matters.
Mobile or portable networks (including WiFi) don't work this way. When you move around, you need to interface with whatever the "loop" technology is in your physical vicinity. You need compatibility. That makes for a co-ordination problem. That may be solved by a single company building an ocean-to-ocean network. Or by a suite of companies where billing, access provisioning and network operation may be separate functions (as with WiFi). Either way, they are going to charge some form of economic rent for the privilege or performing that "works anywhere" co-ordination function.
Dampening this down, however, is that to make the co-ordination function work at all you need technical standards, which in turn encourage new entrants and open markets. So the mobile wireless network industry is likely to be consolidated with a few large moderately profitable network operators.
This is why companies like Qualcomm that can corner a mobility technology make buckets of money, when network operators don't. It's why Nokia is profitable: they own their own little compatibility ecosystem. And it's why I'd invest in a company that has a unique 802.20-compatible technology (built for mobility from day 1) over an 802.16 WiMax technology (kludged for mobility from day 100).
The consequence of the above is that the future for network operators is at one of two extremes. Firstly, very very large. This could possibly be integrated across wireless, national and intercontinental backhaul and local fixed delivery. The scale for fixed networks can be leveraged through advantageous peering deals, probably driven by owning key backbone fiber.
Very large mobile network operators will dominate, because smaller competitors will be driven out by steep roaming and termination charges. But they won't be particularly profitable because the compatibility will be owned by technology companies, handset manufacturers, operating systems vendors and provisioning aggregators. (Interestingly, this is a bit like the global airline industry consolidating into alliances. But unlike telecom, there's no roaming or termination charge issue with stepping off an EasyJet plane onto a British Airways one. Thus smaller plays stay in the game. "I'm sorry Sir, you appear to have travelled here on a discount operator's flight. We're going to have to surcharge your ticket.")
The other extreme is very small, possibly even built by the users themselves (think: WiFi, packet radio ham networks). The less mobile the requirement, the smaller the size of the market sub-division. So if you're in the fixed wireless broadband business, you want to follow a strategic path of customer intimacy and product differentiation to fit a niche, not scale or low price.
And everything in the middle will be eaten of will fade away. Sort of like Goldilocks, but with only hot and cold porridge on offer. No fairy-tale ending for telecom!
So, to wrap up, the structure of the communications industry isn't an accident -- it's the inevitable consequence of mixing economics and physics. The invisible hand meets the unseen wave.
Posted by Martin Geddes at 10:56 PMTrackBack URL for this entry:
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