According to an FT article, EU telcos are mulling over the idea of sharing infrastructure rather than deploying multiple, interconnected, often competitively-overbuilt, national networks. The move is partially a response to regulatory issues in Europe, where operators believe they are being asked to improve services and lower costs while their own costs are rising. Some see this move as a potential win-win, for operators who’d likely see lower cost and for consumers who might see the same, or at least see competition focusing on things that really matter.
Then there’s Asia-Pac. Australia, a country where regulations have long favored consumers over operators, launched a new broadband network company that took over wireline infrastructure and offered its transport/connection services to all. Whether that’s really doing anyone in Oz any good is something you’d have to ask them; those who talk to me aren’t at all sure.
Does this sound like an industry under pressure? Maybe a lot of pressures at once? Sure does to me. The question is whether any of this consolidating-to-manage-cost would work.
The underlying concept is logical. If five carriers cover the same geography, each of them has to build out network technology at a high cost. For wireless they compete for spectrum, too. But the five operators would be at each other’s throats in competition, driving costs down and features up. Maybe, anyway. The problem with the theory is that all those parallel networks are more expensive, which limits how much cost can be wrung out by competition. You don’t fight each other to sell at a bigger loss, after all.
Regulators like those in the EU and Australia want to make consumers happy (they vote) and also make carriers happy because they contribute to political campaigns (and junkets). The key is to walk a fine line to please consumers but recognize that a dead carrier can’t offer service. Those I survey in Europe and Australia believe that it’s national policy to keep the operators on the ragged edge of dissolution, picking consumerism over potential political contributions from operators. I’m not sure that would work in the US, but in any event the knee-jerk reaction in Europe and here is to say that “competition” is good. In Australia, as I’ve noted, they’ve decided that competition wasn’t working. Maybe the dominant operator was too dominant, maybe the cost of supporting a largely unpopulated country is too high…it’s hard to say now because we can’t run a controlled experiment. But the point is that we have two very different perspectives in a regulatory sense, and now we have operators suggesting maybe a third option. Competition “higher” in services and cooperation below.
The FCC here believes that the solution to the problem is to drive down roaming costs, allowing operators to decide whether it’s too expensive to build out in a given area and sharing via roaming where it is. The problem with that is that it doesn’t stop over-building, and lower roaming fees might create a “SVNO”, or “semi-virtual network operator” who built out enough to be able to share in roaming agreements but only just enough. This kind of operator would then drive down prices and undermine ROI for the others.
There’s another dimension to this, though. Operators don’t suggest this sort of thing unless they feel their back is to the wall, financially. Bond raters don’t like telcos in Europe any more, or at least not as much. We have clear signals of pressure, and that means trouble for the equipment vendors. Why anyone thought otherwise is a mystery to me; even Cisco’s drive to connect every watch and toilet to the Internet to drive up traffic could work only if unit bandwidth cost fell even further. Operators won’t pay more to connect more things unless customers pay them, and we all know how far getting people to pay for online watches and toilets will get!
This operator push, combined with network functions virtualization, demonstrates that the operators are going to drive cost out of the network some way or another. If you’re a network vendor you need to be thinking about what that means. For Cisco, the notion that the company will be forced to become an IT player is smart because they can’t hope to gain market share from where they are. For all the rest, there’s a chance that grabbing share by supporting a new vision of networking would offset the lower prices. That tells me that these other-vendor guys need to be looking very carefully at how the network of the future, driven by cost now as much as by value, might be different. And how they could capitalize on it.
But let’s not forget an important point. Every single network vendor out there has themselves to blame for the cost pressure today. For FIVE YEARS operators tried to get vendors to cooperate in a service-layer transformation of their business model that would have made the operators less vulnerable to unit-bandwidth-cost trends. For five years, vendors blew them off. You reap what you sow.