Opinion: Consolidation, then reinvention

With the UFB contracts awarded, IDC analyst Rosalie Nelson asks what lies ahead

On May 24 the Government announced its final partners and the framework for this country’s Ultra-Fast Broadband Initiative, which will deliver fibre-to-the-premises to 75 percent of New Zealanders over 10 years. The industry’s collective breath had been held for so long in anticipation of the decision, that the announcement attracted no arguments or shouting. There was just a quiet exhalation of relief there is now certainty.

But now comes the hard graft of implementation, and a growing recognition of the profound, destabilising, impact of structurally separating telecommunications networks from services.

Open-access fibre has the potential to drive an explosion of new services, applications and connected devices, and encourage a new class of asset-light service providers. That is positive for New Zealand Inc. But, without fundamental change, the fibre providers face an increasingly unstable business model of falling revenues, rising costs, and stagnating investment. That is not theoretical: it is a global trend that the UFB will exacerbate locally.

IDC believes shake-out and consolidation are inevitable. This country will most likely consolidate to two or three national providers, with a limited number of regional, dedicated business and niche service providers each occupying different ‘layers’ of the service stack. But the deeper question is this: will the industry that emerges from this be streamlined and profitable, delivering intelligent network-centred services? Or a totally commoditised utility?

In the ‘ultimate commoditisation’ scenario, the consumer market becomes increasingly difficult to serve. The availability of ultra-fast broadband access coupled with consumer’s voracious appetite for high-bandwidth video causes an unprecedented explosion in traffic, without any compensatory revenue growth. Telco’s lose their relevance and relationship with customers, who instead flock to the device, application and content innovators.

In the business market, the telcos become relegated to commoditised sub-contractors rather than networking partners; as IT service providers, integrators, device and internet companies focus on building compelling application and service ecosystems.

The loss of voice revenues is not replaced, while fibre broadband providers become the carrier of other’s business cases, at the expense of their own. Take this to its logical conclusion, and you get stalled investment, clogged up networks that fail to perform to user’s expectations and demand for another round of government intervention.

Yet, there is the potential for another scenario, one in which the telcos reinvent themselves - intelligently.

They review their core capability and relevance in the much wider ICT market, and shift their emphasis from owning to enabling. Under the UFB, fixed-network ownership is no longer a point of differentiation. Mobile networks will, in time, be treated as just another means of network access.

Telcos are not native innovators. Yet they have an unparalleled capability to integrate, manage and support connectivity and communications in an increasingly complex world of devices, networks, systems and platforms. It leads to a new role in the complex ecosystem.

Telcos capitalise on their customer scale, billing systems, and subscriber usage information.

These capabilities are not unique, but become compelling when both customer and network insights are integrated. Telcos begin to deliver premium connectivity, and application/context aware networking. The potential to guarantee the quality of user experience, and deliver the right service, to the right person on the right device and in the right context will be increasingly compelling.

Out of this, a new business model emerges that supports a shift from user pays to third-party revenues. This is a hybrid business-to-business and business-to-consumer model, based on a more collaborative approach. It opens up potential for new sources of advertising, online commerce, premium connectivity revenues. Customers will choose who they will for their relationships: the telcos focus is on being the connectivity partner of choice.

A new focus on profitability and margins will lead to a far more sophisticated customer segmentation model. Households will be identified by their converging professional, personal and family needs. Business verticals will cease to be defined by size, nature of business and propensity to pay. Instead, they will be segmented by their characteristics, such as whether they view IT and telecommunications as strategically empowering their business, or simply keeping the power on. There will be a gradual shift from ‘one size fits all’ to ‘an audience of one’ where personalised services become available through self-select and loyalty offerings.

So which scenario will prevail? The answer is both: we believe there will be basic commoditised players alongside smart network-centric service providers. And it will get messy before it takes shape.

As Einstein once said: “We cannot solve our problems with the same thinking we used when we created them.”

Those who succeed in this environment will need to not only have the courage, vision and a willingness to transform - they will require a new way of thinking.

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