“Once industries become digital, they also become digitally contestable, meaning companies from outside the traditional industry confines can enter and compete more easily,” consultants at Accenture said five years ago, urging firms not to delay the adoption of industrial internet of things capabilities.
That same Accenture statement also neatly encapsulates the core change in connectivity provider business reality. Once telcos and all other service providers decided to embrace internet protocol as the universal next-generation network; having also decided to virtualize applications and their delivery, the whole telecom business lost much of its moat.
Some 20 years ago, the global telecom industry, evaluating either asynchronous transfer mode or internet protocol for digital applications, chose IP, the computer industry favorite for networking, instead of ATM, the telecom proposed standard for next generation networks. It was a fateful decision, and the right choice, even if there have been huge unintended consequences.
To the extent closed telecom networks allowed firms to tightly control all apps on the network, open IP networks essentially destroyed much of the traditional moat.
The moat, in business as in medieval warfare, was the protective ring of water around a castle that hindered attackers from reaching a castle’s walls. In business, moats are any ways a business is able to maintain competitive advantages over its competitors, allowing the firm to protect its long-term profits and market share from competing firms.
Choosing IP also meant abandoning much of the business moat that had allowed telcos to control virtually all apps they chose to create and sell to their customers. Over time, sales of data networking services to enterprises had grown, and telcos never expected to program those pipes. The applications were created and chosen by the customers, while the telco simply supplied the networking.
Today, the pattern has changed. Every application runs “over the top” of an access pipe. The network, in essence, is open. Apps can be created, owned and offered to customers by virtually any company or entity, using the open access pipe. So telcos still create and own their own messaging, voice, linear video or virtual private network products.
But the big change is the draining of the moat. Today, any app provider can reach a telco’s customers, using nothing more than the open internet access pipe. That is a fundamental change in the business environment.
These days, almost every product is “contestable.” The shift to digital delivery is one driver. But competition also has changed the business dynamic. Where a monopoly provider might well assume at least 95 percent capture of the addressable market, in competitive markets, a reasonable expectation of share is between 20 percent to 40 percent of the market. On top of that, legacy markets tend to shrink over time, as new replacement products emerge, and demand for legacy products shrinks.