The notion of traditional service provider “core competence” where it comes to running networks has come into question as much as “natural monopoly.” And if traditional service providers do not have “core competence” in access network operations, commodity pressures are bound to grow.
That will mean lower profit margins. But it could get worse. Gross revenue might also fall, as a growing number of app providers–and perhaps some device suppliers–go the “do it yourself” route and supply their own access services.
That broad trend already can be seen in the data center, voice, messaging and other app areas. More activity is happening in the core telecom infrastructure area as well.
So if access network operations are a function, not necessarily a core competence for any of the providers, and if DIY implies lower costs to supply the function, then it also follows that the access business will be less lucrative in the future.
“Core competence” implies not only that an entity is good at doing some things, but that an entity has a unique ability to so those things, in ways that others cannot emulate.
Viewed that way, no single mobile operator has a “core competence” where it comes to building or operating mobile networks, by definition. Others can, and do, routinely do so as well.
That has become increasingly true in the fixed network business as well, as cable TV operators, Google Fiber and third-party Internet service providers provide identical services, and operate their own networks.
In other words, perhaps “running networks” is not really a core competence. If so, Verizon and other traditional access providers are going to face huge headwinds.
Managing access networks arguably is a “key role or function” provided by an ISP, whether that is a core competence or not.
There is a reason the seven-layer Open Systems Interconnect model has access at one layer and apps at the other end of the stack.
The functions are distinct, even if any single provider might not have an actual “core competence” that is unique, within its role.
In other words, “things we do” within the ecosystem is a valid concept, even if “core competence” is less clear.
“The one thing that I try to think about is core competency,” said Verizon CEO Lowell McAdam. “And I’d put our team up against anybody in the world on the network side.” Few would disagree with that statement, as far as it goes.
“The connectivity layer is where we feel we need to be dominant,” said McAdam.
But here’s a key follow-up statement: “ As you go up into platforms and things like content, it’s not exactly our strong suit.”
In other words, Verizon’s strategy is to be “dominant” as an access provider, and then be “a player” in at least some of the applications that require access.
In principle, that is a very-sound strategy. It is the strategy embraced by cable TV providers, who likewise might argue they need to be dominant access providers, but also own at least some of the apps they deliver.
Still, over time, a number of trends suggest that the access function might be less a matter of scarcity than has been true in the past.
There are going to be more providers (cable TV already has the largest market share in the U.S. Internet access business).
There are going to be more ways to source access (Wi-Fi, new high-throughput satellite constellations, fixed wireless, balloons, unmanned aerial vehicles).
There is going to to be much more capacity (more providers of gigabit fixed access and much more wireless spectrum).
And the cost of being an access provider is going to drop. As that hurdle gets lower, a wider range of potential business models becomes possible.
All of that erodes whatever advantages an access specialist might believe it possesses. So, in one sense, Verizon’s strategy is strategically flawed. It does not actually have a “unique and hard to replicate core competence” in access.
Others have done so, and more will do so in the future.
Still, Verizon is correct, in another sense. Like cable TV operators, the revenue portfolio will be a mix of selling access, and owning at least part of the content delivered over that network.
“Core competence” is not necessarily the issue. Key function is the issue. Verizon will build on its access function, adding app roles. Like many other big participants in the ecosystem, Verizon will participate at multiple layers or segments within the ecosystem.
But Verizon might not have a unique capability in any of those roles.
That raises a key question. We know that, in any part of the Internet ecosystem, participants often move into adjacent areas. So ask yourself: at a high level, what is harder, moving up the protocol (and therefore business function) stack, or moving down it?
Is it easier for an app provider to become a transport provider, or an access or transport provider to become an app provider. We all know the answer, instinctively: it is harder to move up the stack than down it.
There is a simple reason for that state of affairs. When any participant moves down the stack, it is itself the “customer” for the services of the lower layer. The higher-level buyer knows precisely what it wants from the lower-layer sellers.
When trying to move up the stack, the seller has to guess at what the buyer wants, while competing against many others who already lead in that niche. That is harder, and riskier.
Also, when moving down the stack (technology and business), it increasingly is possible to “do it yourself” rather than buying commercial systems and products that one might argue cost much more if only because pension costs, marketing and other overhead costs must be recovered.
For an app provider moving down the stack, relatively few of those costs are present, at any magnitude. Instead, the buyer often can piece together solutions from open source and proprietary building blocks.
That is how Facebook and Google have been able to change the cost requirements for operating big data centers, and what Google has done in creating the customer premises gear supporting its Google Fiber services.
And that is the same objective the Telecom Infra Project initiated by Facebook is seeking in the network access, backhaul and management areas.
There are two primary reasons. First, application layer providers increasingly have the direct customer relationships, access is just a function.
Second, app providers increasingly will be suppliers of their own access.
Customer relationship wins over “function,” as a value generator, long term. Electricity is the foundation for our use of all manner of electronic devices and apps within a home, office, factory or outdoors venues. But what matters is the value of the appliances, apps and functions.
So, ultimately, the value of the access provider role is the issue, not its essential function. In other words, access is akin to electricity.
Electricity is a commodity. It has to be there. It has to work. But it does not drive most of the value within the ecosystem of things that require alternating or direct current (at least for recharging) to operate.
That separation of functions within the ecosystem is by design. Though many would argue that communications access is not a natural monopoly, the notion generally is that electrical supply is a natural monopoly, at least at the level of infrastructure.
