Opinion: The future of the telco - marginalisation or reinvention?

IDC analyst Rosalie Nelson ponders how today's market leaders will sustain their business models

"How did we get left behind — while the rest of the world evolved?" The uncomfortable truth, penned by Nokia’s CEO in his now famous ‘burning deck’ missive, defines the challenge facing the entire ICT sector — in this era of massive technology disruption and changing user preferences, how do the market leaders of today sustain their business tomorrow? It was one of the key issues flirted with, but not fully confronted at this year’s TelCon 2011 event earlier this month.

The disruptive technologies — the explosion of mobile devices and applications, social networking, cloud computing, always-on video, converged networks — are coalescing into the new mainstream IT platform of the future.

It is being driven by the voracious appetite of a new generation of users — the communications agnostics who supplant email with social networking, calls with videoconferencing, text with instant messaging and multimedia collaboration. These are users who increasingly demand seamless access to what they want, no matter the device, network or location.

It is being enabled by the capability of the next generation of fibre rich fixed and mobile networks. These trends are totally dependent upon high-bandwidth, resilient, high-capacity, always-on and converged networks — yet those who are expected to invest in these networks are increasingly marginalised as ‘smart but commoditised distribution pipes’, while the value goes to the over-the-top innovators and content providers.

This is the reality of the new world: every assumption of who will be the leaders of the future, or indeed the factors that define leadership is being overthrown. These transformational pressures span the telecommunications, IT services, hardware, software and content industries, with each looking to identify sustainable future business models, at times at one another’s expense.

New Zealand is not at the bleeding edge of this change — not least due to our aging rather than youthful population and relatively low GDP.

Nonetheless, it is here and it is happening. Look at it this way: today’s 10 to 30-year-old communications agnostics are maturing. The relationships they hold will be defined by the device, the applications, the dynamism and personalisation of the service. The fixed and mobile voice market — which still comprises 58 percent of today’s industry revenues and a much higher percentage of profitability — will inevitably erode to zero, becoming just another service embedded into applications. Broadband access itself will be commoditised or potentially offered as a ‘value-add’ by a new generation of providers funded by search, advertising, application and micro-billing revenues.

In this scenario, the telco of the future — the service providers of voice and broadband access — may equally be Google, Sky, Trade Me, Skype or new, as yet unheard of brands. The government’s UFB initiative will not be the architect of this process — but it will facilitate the initiative by becoming an open-access platform that any service provider can, in theory, access if it has the service and capability.

So what is the role of the telco in this new world? The good news is that networks are the connecting lifeblood of all new communications and services — integrating and managing these is critical, complex and specialist. But the business model for network investment is increasingly unstable — an issue highlighted by Dr Kou Miyake at the recent TelCon 11 conference. He told delegates that while NTT Group now has 14 million subscribers and Japan is the most fibred country globally, NTT’s forecast is for fibre costs to exceed revenues, despite all R&D efforts to reduce network costs. The investment pressure is no longer the access network, but the exponential growth in traffic and its impact on bandwidth.

It is a message this country can’t ignore: if we get a fibre-fuelled explosion in data traffic — and we will — then we need to ask what this means for our market.

This won’t be addressed by the government’s ultra-fast broadband initiative: backhaul and international bandwidth will be down to the private sector to manage.

Network competition and reducing equipment costs may help — but it doesn’t resolve the retail service challenge of how to monetise bandwidth growth. Charging users more for bandwidth will be unpalatable — there is already huge pressure on current data caps and charges.

Charging the content and video owners sounds good in theory — but their business case is fragmenting and, as one TelCon 11 broadcast delegate did point out, advertising revenues can only go so far. Telco service providers may seek to deliver new types high value services — but telcos track records on rapid services innovation (and collaboration) doesn’t give great grounds for confidence.

There is no easy resolution to these issues. It points industry consolidation and reinvention; a clash of business models and industries that only time (and pressure) may resolve.

It suggests an outlook where the economies of scale required for core network investment are explicitly recognised (which we believe would lead to consolidation) and telcos reposition themselves as enablers and platforms in a more complex wholesale/retail ecosystem, with a role for niche regional and specialist providers. It requires more than a strategy of adaptation: it requires fundamental reinvention.

The status quo is not sustainable.

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