Reimagining the telco; impact of the internet economy on the telco industry part 3/4

The previous post discussed a changed business model towards data rather than voice. This must affect the entire telco industry.  This post assumes the change and looks at some factors that may have an impact on the next gen telco’s business model by comparing aspects of the traditional telco model to the ISP model.

Input costs.  A traditional telecommunications networks cost more than an ip network (ISPs are built on ip, a data technology).  Data technology is much cheaper than voice technology to deploy.  An estimate is “that the cost of packet voice is some 20 to 50 percent of the cost of a traditional circuit-based voice network” according to Cisco.  This is why a lot of our phone calls today are transported over ip networks.  Input costs affect output costs.  And once the infrastructure is there, transporting a voice call over the internet has almost no cost (voice by volume is a small fraction of the total internet traffic).  This means it is plausible that in the near future, voice charges drop significantly.  So too for the already high roaming charges as the internet model reduce the rational of roaming (this would be analysed in a future blog as a commentary).  But in business, this may not happen until much later.

Convergence.  Delivery infrastructures today are separate for voice (telephone), video (tv, movies), music (radio) and text (newspapers, magazines).  Broadcast tv for one uses transmission towers. The change as we know has begun.  Radio and video continue to converge onto the internet.  The broadcast tv battle looming over Aereo in the US (capturing then transmitting free-to-air broadcast over the internet) is worth watching but portends the long term transition towards the internet being the single infrastructure for all media forms, not just broadcast tv, realising the dreams of pundits of the information superhighway at last.  The economics of these sectors must and is being transformed.  In turn so must the business model of the ‘telco’ industry.  This convergence is gaining traction now though it is really a long way to go for it to reach 70%, to me the inflection point for business impact.  At this stage it is about awareness.

Distance-based costing.  When you want to access a website, do you first ask yourself if you really need to if it is located in another country like what you would do with phone calls?  Would you access a website less like you would send less sms to a friend who is vacationing overseas because there’s a higher cost?  If you were looking to rent data centre space for a server, would you not consider one in a foreign locale (cheaper perhaps) even when your users are from your country of origin?  Would you even think of that if it is for a voicemail (say dating site) service?

The telco model is a local model (mostly), the internet model is by nature global.  There is no cost difference in using internet services locally or globally but it does with the telco model.  Translated, the telco business model is distanced-based while the concept of distance is a misnomer to the internet model.  Eventually this must influence the pricing model. Some celcos include roaming charges for internet access.  To an internet model!  But of course in businesses, you milk a cow until it runs out of milk!

Another example is when a company buys connectivity.  When you pay say for a leased line, distance is a factor besides bandwidth and you hope your office is near a telco exchange.  When you buy broadband, is distance a factor? [No]

So unlike paying voice calls in terms of local, national or international rates, you do not pay a different rate to send an email or make a Skype call internationally with the internet model.  Well, you don’t even pay (unless you have to connect via the traditional phone networks) but that’s another twist of the differing business model but I hope the point between ‘local and global’ pricing model is made.  Imagine if it was the telcos who invented the internet applying their traditional pricing models?  It would probably be still-birthed.  In fact in the pre-internet days you can send rudimentary email-like service, charged on a per-email basis (and size and location)!  We stuck with using postal mail and phone calls!

Inbound outbound costing.  Unlike some revenue models of telcos/celcos that charges for receiving a call or making a call or both, with the internet, you do not pay for the process of uploading content or downloading content.  As voice becomes merely an internet content, what happens?

Volume.  Usage volumes are many, many orders of times higher in a data-based (content-based) internet economy compared to voice in traditional telephone networks.  In commerce, volume impacts prices.  It also affects input prices and thus the current issue of net neutrality.

Internet business models and methods.  In the US, Google has started to operate fibre-based broadband in some metro areas.  Whether it’s a long term strategy to improve service or they intend to compete with the incumbents or merely to send them a message, their method merits a mention.  The way they go about it is quite different from the approach used by the traditional telcos.  Telcos tend to take a longer investment horizon with a build-it-and-they-will-come approach after some feasibility study.  Google uses the crowd to select locations for their ISP operations.  The community has to provide enough subscribers by signing up.   This gives it more certainty, reducing the risk.  This also reduces the costs since they can carry out the installations at one go.  To incentivise the community, they provide free access for some sites such as schools and libraries.  The paid service is also usually cheaper compared to the offerings from the traditional telco ISP.  Their decision making is transparent and open compared to a telco who keeps plans closer to the chest.  Being open, involving the community, using crowdsourcing and with some ‘free’ are very much methods commonly used by the early adopters, today mostly the iconic internet companies.  It is probable that these methods will be used by conventional businesses once the early adopter phase moves to mainstream in the cycle of the internet economy ie. soon.  I call this adoption phase, web 3, something to soliloquy about in a future post.

Do refer to the earlier posts in particular “internet business model Part 1.2 (on the open culture posted 24 May 2013)”, “internet business model Part 3.0 (defines value in an internet economy, posted 28 May 2013)”, “internet business model Part 3.2 (applying crowdsourcing to traditional businesses, posted 30 May 2013)” and “Internet business model (the value-of-free, posted 5 june 2013)” for more on these topics.

Data-risation.  The last example used here is what I call datarisation.  This has the greatest impact on the traditional telco.  When any service be it voice, video, music or text is transported over the internet, that service (content) is data-rised into packets.  Once turned into packets, the network does not differentiate much between the types (voice, video or text).  To the internet, they are all data.  Once datarised, the value drops.  Aereo seems to use this principle. Napster dropped the price of music.  Voice, a valuable commodity in the telco industry now becomes essentially free (in transition, the value is not zero but decreases).  The economics of the industry is transformed.  There is a rational for this and briefly it is to do with the economics of scale, technology and the way the internet economy functions for example, of removing layers of intermediaries.  The latter changes business models, most of which evolved from the industrial age.  In many cases, direct monetisation becomes a challenge.  This is the cause of the mayhem and upheavals in the telecommunication sector today; reducing voice revenue and change.  Luckily for the telcos, the broadband business increases the monthly subscription revenue relative to that of a telephone.  But this is data business, not voice.

All these are fomenting confusion and uncertainty in the industry today – voice as a commodity loses its value, voice monetising model collapsing and thus the industry around it, convergence, the impact of datarisation, changing business models, changing revenue models, etc.  Perhaps the industry in the throes of transformation is misunderstood, misinterpreted.   If it isn’t, the voice equipment industry would not collapse so suddenly.  Many in the telecommunications industry and most lay persons think the internet is simply a natural progression from the telephone.  It is not.  The business models are at opposite ends.  The internet is a natural progression of the computer industry, with ‘data’ as the common factor.  A telco strategy applied to an ISP business is a mistake.  Sure, it’ll work but I liken it to a 10kg steel ball chained to a sprinter in the Olympics.   A conservative in a telco would probably suffer a seizure at this thought but if the Board understood the internet model, they will know that the revenue returns in a different form, possibly more.

Massive changes like these are not merely about better technology but more likely seeded by the era moving from the industrial one to the current age based on information.  The impact is that the fundamentals of the telco industry have changed, from a voiced-based one to one based on data.

In the next post, this blog would look at plausible changes to the next gen telco’s environment; of competition, culture, strategy, organisation and regulations.  The regulatory regime would likely transform significantly as the telco industry converges with the internet/IT industry and as its content-delivery infrastructure inches towards being a single unifying information highway for tv, radio, video, voice and text.

The future’s bright for a telco.

LinkedIn – dr tommi chen (goggle + profile not completed)

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