“The future telco is the ISP”
In the previous
post, I postulated that a major shift is underway by observing trends, that
would be transformational to the telco industry. This post looks at the whys then endeavours
to reimagine this sector, one that is destined to grow significantly larger in
an expanding internet economy.
What changed?
era
In this post,
we’ll explore the rise of the data industry, deregulations and the internet as plausible
reasons.
The telephone
was invented in the 1870’s in the midst of the industrial age. How ironic then that the first call made on 10
March 1876 in Alexander Bell’s successful experiment with the telephone was his
speaking to his assistant, Thomas Watson, in the next room. That first phone call used analog
technology. Another Thomas Watson,
Thomas Watson Senior (IBM) it was that in the early 1920’s had a huge role in
the commercialisation of computers, the data machines that uses digital
technology. Historians I think already
attribute the invention of computers to the start of the information age.
Telcos started
as necessary monopolies as the massive investment necessitated governments to
grant them monopoly status. In time,
this monopoly and the huge profits generated made them haughty, ruling with a
command-and-control culture within the industry and without. I know, I faced a wall when I was setting up
my first ISP in 1990! Such a culture
impedes their potential in an internet economy.
As the industry
started to de-regulate, competitors got in.
Competition allowed a second tier of voice resellers into the market,
buying wholesale from the first tier telcos to resell. Re-sale brought the price of voice down and
further reduced it when they used the internet to lower their costs. In time history may timeline this as another
transition towards internet voice. It
had a hand in the packaging of voice into data (packets) on a large scale
commercially. This deregulation also
allowed the early ISPs to be set up.
Then ISPs were non-telco ISPs and it was only later that the telcos started
getting into the act.
But it was computing
that lead to the invention of local area networks or LANs (the early networks
based on data) and the internet (first commercialised through the ISPs) that
really changed things for the telco industry.
I
sense that most people think that the internet is a natural evolution of the
telcos, it is not. It is critically
important for telco planners to understand this.
Because
computers are data devices, the network designed to allow them to ‘talk’ to one
another should be based on data technology but there were only the
telecommunication voice networks then.
Thus data networks were invented in the mid-1970’s. The early data networks were local area
networks such as Ethernet or Cambridge Ring and they are called ‘local’ because
they operate within short distances, say within a building. In the early days of long distance connectivity
when there were only the telecom networks, modems (remember acoustic couplers?)
were developed to translate between content based on digital data to analogue
form to be transported by the analogue telephone networks and then converted
back to data, the language of computers at the receiving end. Having to translate was not efficient. Remember the days of dialup internet access
using modems? Modems allowed data to
flow over a voice network (data-over-voice)
As data networking technology improved and internet usage exploded from
the mid-1990’s, economics dictated that the telecommunications networks
(designed primarily for voice calls) be replaced with data networks since
internet traffic was 100% data. Using a
data network to transport data is obviously cheaper and faster than piggy-backing
it over a voice-based network. Today
broadband and Ethernet private lines, both based on data tech are replacing
traditional leased lines and telephone lines.
With the ISPs,
the infrastructure for the internet economy (which is only clearer now) was being
built, replacing the legacy telecom infrastructure. With wireless, the shift of the celco
industry towards LTE also means the mobile infrastructure becomes a data
infrastructure.
The first telecom networks were built with analogue technology. With the advent of digital technology, they
were re-built by digitising voice into digital packets over a mostly digital
infrastructure. But because the PSTN,
the telecoms’ network, was designed for carrying only voice, it was designed
very specifically and efficiently to carry voice packets. It was fine then but....this fixed 64 bit
packet (the most efficient size for voice application) network became a ‘lame
duck’ when we started using it for internet access because web pages or video
consumes vastly bigger sizes. It was
totally inefficient. It is like a train
where every seat is in its own carriage!
This is why accessing the internet in the early days (even now as it
takes time to replace the entire PSTN with data networks) was slow. Ill conceived attempts by the telecom
industry to force the use of their own brands of data networking technology
such as the ATM and ISDN (shockingly now because they were based on the 64-bit
format even when it was known then that this format is terribly inefficient for
internet traffic!) failed miserably wasting billions of dollars, some of which
came from the tax payers.
Voice is now mostly
transported over data networks ie. voice-over-data flipping over from the days
of data-over-voice. Another milestone is
reached when sms, the telecommunications industry’s own ‘data’ service was
overtaken by WhatsApp in traffic volume in 2012. Unlike sms, WhatsApp is free and contrary to
the conventional telco business model, free has value in the new economy (see a previous
post - free
now has value).
And when say 80%
of the world’s telephone-based networks are replaced with data networks, a
sea-change shift will occur.
(1) Mainstream voice calls will become free like email. Voice cannot then be monetised directly just
like most web content can’t because the economics of the internet changes its
value. Some are made valueless in a
conventional sense. Others will have
their value dropped precipitously.
Alternative ways to monetise is necessary. New revenue models have
evolved and will continue to evolve. Email
for example is monetised indirectly and so is WhatsApp’s messaging service.
By then since the build up of data networks are essentially carried
out by ISPs, the ISP becomes the de facto telco. (Here I separate the ISP from the
traditional ‘voice’ telco although today the biggest ISPs are a part of
telcos. There are also many independent non-telco
ISPs in this sector)
(2) Thus the future telco is the ISP.
And the telecommunications industry is transformed.
(3) Since the term telecommunications company or telco commonly refers
to the voice business and as that business disappear to be replaced by the data
business, the term telco becomes a misnomer. Communications may be a more appropriate term.
A changed
business model of data rather than voice must affect the telco industry, its
revenue stream in particular.
But of course we are now in transition and
the industry must balance a voice strategy to one based on data. There is still a lot of money to be made from
voice (though for many telcos, the data business has become the prime
business). However in any transition
comes opportunity for the fleet footed.
Will a non-telco broadband provider with focus and without baggage move
ahead? Should major strategies be based
on the voice business or data business, even now?
So it was the
rise of the data industry aided by deregulation that changed the voice industry
forever. Historians may say it is really
the world moving from the industrial to the information age.
We’ll take a
look at other factors that may have an impact on its revenue model by comparing
the telco model to the ISP model in the next post.
I’ll end this
post with an event worthy of note. The
original telco, AT&T, founded by Alexander Graham Bell which went on to
create an entire industry is no more.
Southern Bell in 2005 took over AT&T (but kept the namesake renaming
the combined company AT&T).
But the telco
industry prospect’s bright.
LinkedIn – dr tommi
chen (goggle + profile not completed)
©Chen Thet Ngian, InternetBusinessModelAsia.blogspot.com
(2012, 2013). Unauthorized use and/or
duplication of this material without express and written permission from this
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