There's a corollary to the paradox of the best network.
The network becomes dumber and dumber, reducing opportunity to differentiate by embedded service. The customer's cost of Internet membership becomes lower and lower -- affordable to all -- and reduces the opportunity to engage in creative pricing of the services on that network. For wireless connectivity, the coverage reaches the "good enough" stage for the great majority of users.
This means that people are likely to have a choice of networks that meet their needs, with clear market signals as to where the best deal is, and products that are readily compared. Users are therefore likely to revise their choice on a frequent basis (until the municipal fiber reaches their front door, which is game over for everyone else). This makes the "first mile" connectivity market look a lot like the (horribly low-margin) long-distance voice market today. It's not unusual in long distance to have over 100% churn (i.e. if you had 1,000,000 customers on 1st January, you'll cumulatively lose over 1,000,000 customers during the year; you have to make that back up with new customers, some of whom will defect and need to be be replaced by yet more new customers if you want to stand still.)
The consequence? Telecom (meaning "bit haulage business") becomes less and less about networks. The network division of a telco has traditionally been the exalted realm of high priests of technology, beyond challenge or even control. The IT folks were seen as second-class citizens in the technology stakes. And the operational management, well -- they just don't know anything about anything, do they?
Instead of this, success in future is increasingly defined by non-network attributes. Your ability to cheaply acquire and rapidly provision customers; to accurately manage the credit you extend; pro-actively seek out and destroy the root causes of customer care costs; excel at billing and collections; juggle your finances better than anyone else; perfectly tailor handset, spectrum and network supply chain management and inventory to demand; ramrod a few bundled third party communication services onto the bill; and so on. Anything to snatch and hold on to uppity churnaphilic customers.
That's quite a change in the internal political landscape in telcoland.
The recent Harvard Business Review article on operational innovation offers a clue to how to survive as a telco in the dumb pipe world. Get really good at operations. At the right time, sell your network off and become a service company.
We're already seeing horizontal layering like this today with networks assembled from multiple affiliates (informed readers will know who I'm thinking of...). The affiliates do the local network build-out, the central telco supplies the brand and enabling services. Another example is Wayport, a lonely survivor from the WiFi bubble, which aggregates the provisioning and billing across multiple networks. (The demise of Cometa just adds more fuel to the argument that network operation is a dunce's business.)
Perhaps we're heading towards a future where instead of a dozen large vertically-organized telcos in the US, you'll have thousands of niche marketing-based companies. These are the front-end to the customer, and may be embedded in other businesses that have an existing customer relationship to manage. (How long until Wal-Mart enters telephony on its own terms as a service provider rather than reselling phone cards?) You'll then have a few dozen platform companies that provide the enabling services. These will either excel at process innovation or have control a few key platform technologies. Think of Amdocs and Convergys; Microsoft and Sun; systems integrators and their outsourcing arms; and spun-out chunks of telco that excel at specific process steps. Finally there's a handful of long-haul network operators gently revolving through the bankruptcy cleansing cycle.
(Incidentally, the moves of IBM into the operational part of the outsourcing business -- they don't just built your IT infrastructure, they'll also operate your business for you -- suggests that they want to own the process innovation. They can see a way to suck the lifeblood out of their own outsourcing customers!)
Of course, you might try to sail against the tide, and focus on things you can control. Stiffly try to preserve the vertical structure. Deploy locked-down set-top boxes and handsets that only can operate on your network on your terms. Set up thin pipes with connectivity rationed through quality of disservice measures. Distribute copyright-controlled media content and DRM, rather than slippery user-generated (and user-controlled) messages. As a tactic to generate cash, that's fine and dandy. As a strategy to survive, it's suicide.
UPDATE: More on structural separation of telcos here. A distinction not really drawn is the difference between application service and customer service. Should the application platform (those SS7 switches, HTTP proxies, SMS gateways, etc.) be divested together with the connectivity or separately?
Posted by Martin Geddes at 11:04 PMTrackBack URL for this entry:
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