In Business Model, Internet Access, Mobile, Spectrum

It has been a tough couple of decades for much of what we used to know as the “telecommunications” industry, but it is likely to get much tougher, for some major reasons.

Consider just a few of the key trends which have developed over the last couple of decades. With the death of monopoly regulation, profit margin is being wrung out of the business. There are more competitors, using more and different networks, plus over-the-top applications that compete directly with traditional services. In other cases, OTT productds are “imperfect,” but “good enough” substitutes for a wide range of existing altenratives. The net result is that legacy telco, cable, satellite, fixed wireless and mobile services are becoing less profitable. 

The Internet has become the biggest part of the “next generation network.” That does not mean the Interent has become the “total” next generation network. Mobile networks continue to be quite important “next generation” platforms (4G and 5G, for example).

But the Internet does supply many, perhaps most, of the apps, services and features we might associate with next generation networks.  In a strict sense, the Internet is not the next generation network. “Public” or managed networks still are important and relevant. But such networks are not the “whole” network. 

Wi-Fi now is becoming the biggest part of the “access network,” at least in terms of consumed Internet data. That is a big change. Again, that does not necessarily mean Wi-Fi is “more important” than the public or managed networks, only that “unmanaged” Wi-Fi now is a foundational part of the access fabric.

Also, value is migrating up the stack to the “application layer.” That is the source of access provider anxiety about becoming a “dumb pipe.” Get used to it. That’s the future, or most of it.

Finally, app layer providers will relatively easily move “down the stack” to vertically integrate experience, while access providers will find it challenging to move “up the stack.”

None of those trends are helpful to traditional “telecom” providers. That, in turn, is why some believe “telecom” industry incumbents should not be more-heavily regulated. The basic thesis: it does not make sense to place more burdens on a declining industry, and that is what legacy “telecommunications” happens to be.

“Wi-Fi has long since passed cellular as the dominant connection platform,” says Craig Moffett, partner at MoffettNathanson. “We’re going to move to a model where cellular is going to be what you roll onto when you have to.”

Says Moffett: “We’re going to think about Wi-Fi as the first network and cellular as the second network, rather than the other way around.”

If you think about Uber, it is a way of unleashing latent resources using a new business model. The analogy to Wi-Fi is fairly clear, as well. As Wi-Fi has become a major method of offloading mobile network traffic, so Wi-Fi is emerging as a new platform for supporting untethered communications that have a mobile component.

The other angle is that value always has resided in the applications people want to use, not the access method. Under monopoly regulation, people purchased the ability to make calls. Access was necessary to enable that value.

That remains the case. People want to use apps, and therefore need Internet access. In one sense, it is not as though value is migrating to the “application layer.” Value always resides in the application layer.

All the other layers enable the app layer. With the rise of IP networks, with access separated from apps, the sources of value simply become transparent, where they once were hidden.

In other words,  access is becoming commoditized in a new way because the apps and access are separate products for the first time.

We sometimes speak of “value shifting up to the application layer” in the new ecosystem. In truth, value always resided in the app layer.

It is simply that, under monopoly regulation, the access providers also had a monopoly on the valued app (voice).

“If you understand that Apple and Google want to control your experience of the cloud, you can understand why they would like to ‘uberize’ the entire wireless space so their brand dominates your cloud experience,” says Francis McInernery, partner at North River Ventures.

That is why “low cost” now matters so much in the access business. Though a reasonable strategy for a tier-one provider is to own some of the valued apps supplied over the access networks, access itself is becoming a commodity.

And that means the business model has to evolve towards “much lower costs.”

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