The residential telecom (and cable) industries appear to be careening down a path of evolution from a provider of consumer network services to a revolutionary platform for all businesses
to redesign their products and services. This path is defined, above all else, by the Broadband Incentive Problem. The transition to a platform for the redesign of everything, spurred by this problem, is a story best told in three acts: Telco 1.0, Telco 1.0 SP1, and Telco 2.0.
Telco 1.0: Broadband access is currently provided all-you-can-eat in industrialized countries. The result of this business model has been remarkable broadband penetration, but this penetration leads to a plateau in access revenue while network costs continue to escalate (primarily from video over the Internet). Korea, which has the highest broadband penetration in the world, is the canary in the coalmine, as the chart to the right shows. The resulting Broadband Incentive Problem, as explained by the MIT Communications Futures Program (which included participants from Comcast, BT, DT and FT) is the following: "The broadband value chain is headed for a train wreck....Today's prevailing business models give wired and wireless broadband operators the perverse incentive to throttle innovative, high-bandwidth uses of the Internet." The network cost increases that prompt this throttling are both capital and operational costs, as the MIT report explains in detail.
"The broadband value chain is headed for a train wreck....Today's prevailing business models give wired and wireless broadband operators the perverse incentive to throttle innovative, high-bandwidth uses of the Internet."
Telco 1.0 SP1: Several innovative approaches are already being taken to address the Broadband Incentive Problem. Some ISPs are charging premiums for subscribers that exceed monthly usage
limits. While this affects few subscribers now, as more high-bandwidth Internet apps are innovated this will evolve into a pricing scheme tiered by traffic volume in order to cover network costs. Unfortunately, as the MIT participants explain, "The aggregate monthly traffic volumes used to set price tiers today are only gross approximations for the actual costs that any user's traffic imposes on a network."
A more interesting approach than traffic volume pricing to the Broadband Incentive Problem is the attempt to recover network costs from non-access-based revenues, or, vertical integration. According to a Forrester report, "successful operators will acknowledge MRC as a shrinking business" (see chart on left). What will take it's place? "In the past, operators
built services internally; but to meet consumers’ shifting needs, operators must work with third parties to source content and applications as well as build platforms to support the consumption of these services over any device." In other words, service providers will vertically integrate with and resell/subsidize (a) network devices (beyond phones, modems and DVRs) and (b) content (beyond TV video and ringtones), resulting in a plethora of new product bundles. Verizon's CTO said last month that "Broadband capabilities will be found in virtually every electronics product out there", while Verizon and many others (including content providers like Paramount) are working to develop standards for improved content delivery via TM Forum's Content Encounter. As their ability to manage content-specific bandwidth improves, the ability to sell higher bandwidth for specific online content and applications opens new revenue streams.
While resale of network devices and content enabled by vertical integration will bring some new revenue sources to the telecom industry, it will not be enough to cover the increasing network costs of the industry, as the MIT paper explains. First, legal and regulatory interventions will constrain the range of vertical integration available to the service providers. Content providers and application service providers (e.g. VoIP) will cry foul on net neutrality grounds, as Vonage successfully did when Madison River degraded their traffic and others are currently in response to Google's edge-caching in ISP networks. Second, many bandwidth-intensive sites and applications have no revenue generation, but are critical to innovation. Service providers obviously can't vertically integrate to replicate such services when competitors provide them for free. Should these sites therefore be throttled because they have no revenue to share? Third, reliance on revenue-sharing with sites that do generate revenue (like YouTube) presumes a static Internet, because all new sites would need to then be throttled by default. All of this, of course, leads us back to the fundamental Broadband Incentive Problem. (A fourth obstacle is that telcos' ability to roll out new content services in rapid product development cycles is likely to remind well behind the likes of Google, Disney, GE, CBS & Apple thanks to slow telco industry adoption of SOA standards needed to streamline the dozens of product data silos.)
Telco 2.0: So why is the previous stage labeled Telco 1.0 SP1? Because the
vertically integrated devices, content and applications of this stage are still
squarely within what STL Partners calls the one-sided market structure of Telco 1.0. A one-sided market structure is one "where the telco buys equipment and content from suppliers ('upstream'),
integrates them, and bills the end user for services
('downstream').
The upstream side is cost, and the downstream side is revenue" according to STL's Telco 2.0 Manifesto.
In contrast, Telco 2.0 will witness the telecom industry leveraging its assets as a platform for businesses in all industries to redesign their products and services. Telecom vendors like Avaya, Nortel and Cisco call this Communications Enabled Business Process (CEBP), an approach that makes new products and services possible by removing the "human latency" from communications. A basic insight here is that the telco web portal is not the place to sell most of the products and services that incorporate communications elements. The two-sided market structure addresses the Broadband Incentive Problem by enabling merchants and customers to interact directly using the network as a platform so that the costs of the network are allocated to all parties.
- Imagine a washing machine that sends you a free text message when a load is finished, and includes an Order Detergent Refill button that initiates a shipment to your home by your telco that shows up on your next telco bill.
- Imagine an ad on a bus that asks you to send a free text message to a number to receive a free sample delivered to your home, with the telco selling the free texts and fulfillment services (the telco knows your address) to the provider.
- Imagine an airline that sells prepaid calling cards with unlimited minutes within your destination city during the term of a round-trip flight, as well as 100 minutes to your origination city.
The only limitation of Telco 2.0 will be the creativity of product designers in other industries. New CEBP enable radically new services (and the evolution of products into multiple services). Furthermore, the services enabled by CEBP are more sustainable from a revenue perspective because they directly address individual consumer needs and more sustainable from a cost/environmental perspective because they squeeze our wasteful "human latency" from business processes.
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