OTT and Telco: Threat? Opportunity? Head in the Sand?

It's ok, you can come out now!

There’s a strange dilemma in telco.  Worldwide demand for its core product is skyrocketing, and all that the industry can do is complain about it.  When you step back from it, it’s quite bizarre.  It’s like a spoiled child, given everything they could ever want, with no restrictions, and over-protective parents decrying any attempt at discipline.  Then, when the child has to fend for itself in the big bad world, she is totally unequipped to even consider the threats and opportunities that presents.

Sure, the cost of providing ever higher capacity is increasing, and competitive threats are similarly increasing, and consumption patterns are being redesigned as more and more people and machines connect in more and more interesting ways.  But this is just an evolution of the industry, the same as mobile and the internet were evolutions of the industry, like deregulation before that.  The question now becomes ‘how will telco deal with it?’

Informa just released a research paper claiming that telco’s “share of mobile content and commerce revenue [will] drop from 44 per cent in 2011 to 31 per cent in 2016″ (extract available here).  the report continues: “applications (including app store downloads and preinstalled/sideloaded apps) makeup the largest chunk of global mobile data traffic. From 43% in 2011 to 60% in 2016″ while the share of revenue climbs to a paltry 11% by 2016.  So 60% of the traffic driving 11% of the revenue.  Not good, right?  Hey – it gets worse!  Video will take up 33.4% of data traffic, and return – wait for it – 0.7% of revenue!  Perhaps most interestingly of all, however, is their projection that by 2016, 30% of users in growth markets will use smartphones.

It seems to me, all in all, a pretty reasonable forecast.  It presumes current course and speed, and no change to the status quo.  New devices will become functionally richer and economically cheaper, services will continue to grow from OTT players, and service providers will make a little bit more from carrier billing, though not enough to make up for the increased cost of service delivery.  Juxtaposed with declining voice revenues, disappearing fixed line voice revenues, and the bit pipe nightmare coming close to being real, something’s gotta give.  Keeping the industry head in the sand will mean that margin gives, and telco resigns itself to being a commodity broker with customer billing attached to connectivity, in much the same way that the electricity company provides electricity today.  There are some pieces to be jettisoned first – the consumer electronics business (selling phones) for example; and the bandwidth variability problem, where some networks have better coverage in some locations than in others.  Network sharing should fix that.

So what could change it?  There will be outliers, those who generate more than their fair share of data revenues.  Who might they be?  What might they look like?  I have a theory.  If someone is bold enough, brazen enough, and clever enough to open their network as a development platform, a genuine development platform, in a reasonably large market, and develop business models that embrace other industries who wish to develop their own services on that platform, the telco paradigm could significantly shift.  It would be entrepreneurialism on a grand scale, a magnificent experiment, and it could result in failure.  But if it’s done right, it could redefine telco.  Think about it.

First, the relationship with the cutomer is dramatically changed.  No longer are customers seen as endpoints on the network nor even “emotional consumers” as some of the marketing gurus would have us believe.  They become so much more than that – they become part of the product (like my friend Paul Brody likes to talk about).  Product design integrates the customer.  Analytics and business intelligence become shared APIs.  Product development is something that is shared.  Business development is about getting more and more businesses developing on the platform.  Google is a partner.  So is force.com, Amazon, Facebook, and Twitter.  So is Ma’s corner shop, Pop’s Garden Hotel, and Jimmy’s Wacky Tees.  Revenue sharing becomes the dominant model.  Free stuff becomes an essential component.  Those services with a marginal cost attached get given away for free (that’s what telco missed, big time).

Government becomes a partner.  Content makers become partners.  Partners, of course, are the new customers.  The telco industry becomes a driver, enabling other businesses, not a business in itself (in the conventional sense, at least).  It is localised, specialised, diversified.  Billing is integrated.  Context models are exposed.  Customer Care too is socialised.  Devices are less relevant.  Services are everything.  And everything – everything – is an app.  Everything is bundleable, if that’s a word.  Voice minutes and data bandwidth can get bundled with ad supported games, billed on the “phone bill” and accumulated revenue split with service development partners.   Core enabling services become building blocks for services innovation.  Marketing is distributed.  The telco market is deliberately exploded into a thousand fragments, pushed beyond the bounds of the regulator, beyond the jurisdiction of the country, and into the diasporas, the communities, and the ad hoc networks that customers choose to live in.

The alternative, of course, is to cut costs, minimise customer service (or charge for it), cling on to the bit pipe business (which is admittedly not a bad business, relatively speaking), demand government protection, and then hope.  Which is what most telcos – and Informa – think is the most likely scenario.  Sadly, I do too.

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