Does AT&T’s Digital Life Prove There’s No Life in Digital?

The Street report that ATT is considering the sale of its Digital Life division should have a lot of telco transformation people on edge.  This is the division that handles consumer offerings like home security, long seen as the basis for any shift of a network operator into non-connection services.  Is it not working?  Worse, AT&T is a poster-child for SDN/NFV transformation at the infrastructure level.  Is that transformation then not producing what’s needed to support a shift to services beyond connection?  If so, then this could be very bad news.  The question is just what the “news” really is.

AT&T has been spending a lot on M&A, most notably and recently the still-pending-approval deal with Time Warner, but earlier the DirecTV deal.  The media deals make AT&T the largest pay-TV provider.  In contrast, the Digital Life stuff is about six-tenths of a percent of AT&T revenues, and AT&T decided to sell off DirecTV’s home security business when it did the acquisition.  On the surface, it looks like the home security and even home services space doesn’t merit operator attention.  Verizon dropped its own offering several years ago, remember.

It’s always difficult to get an official reason why a given service idea seems to be heading for the trash.  In the case of home security, some of my operator friends have been willing to comment off the record.  They say that there are three reasons for the problems with home security as a service.  First, incumbent competition.  Second, low ARPU.  Finally, unfavorable cross-contamination of other services.  Let’s take them one at a time.

Most of the people who read this blog probably have a home security system.  Most upscale developments include them at least as an option, and many communities have 100% penetration.  The homes are wired when built, or by the first security firm that comes in.  The homeowner will then go back to that company for changes in the system, including the inevitable repairs for the sensor pieces.  Increasingly, the aftermarket for systems is supported by wireless models that involve self-installation by the homeowner.  Data suggests that this is a down market segment, with less revenue potential overall.

The problem here is that unless you want to try to be a pure wireless-self-install player, you need to have installation services.  Operators generally contract these out, which means there is effectively no profit for them in the installation.  Since the operators’ names aren’t household words in security services, they have to advertise heavily to even get a play, and that means that, given the zero-profit installation, the initial sale probably won’t even pay back marketing costs for several years.

The revenue side is a big issue in other ways.  Most of the money in security systems comes from the monitoring process.  Operators obviously have call centers, so they in theory should be able to monitor the home sensors and act, but their costs for this have typically run well above the costs of independent security firms.  Some of my contacts told me that if they matched monitoring prices with incumbent firms, their profits on monitoring would be about half what they’d like, and well below the profits of those incumbents for the same services.

Perhaps the biggest issue is the downward price pressure coming into the market.  The operator contacts I’ve listened to on this tell me that their customers are not the high-end users in most cases, but perhaps a bit below mid-market.  This space is already under price pressure from increased competition, and if strike prices for services continue to fall, operators are in another market where profit declines seem baked in.  Your customer gets worse every day.

In more ways than one, perhaps.  People are way more likely to get rabid over a problem with a security system provider than even one with their Internet or TV.  There are inevitably callbacks with home security, often decades after the sale.  Many of them don’t result in incremental revenue, and if the operator has contracted for installation they’d likely have to contract for some of this stuff.  The rest would end up going to that call center where operators already have higher base costs.  In short, it’s going to be hard to provide quality support.

What happens if they don’t?  Sure they could drop the security service, but how many customers do you suppose won’t threaten their provider with loss of the whole relationship?  So, for a service you might make a minimal profit on, you could be risking the whole bundle.  Let me see…little ARPU upside, big customer loss downside…why did I think this was a good idea?

Probably because you thought that “moving up the food chain” from connections to OTT services would be easier.  Perhaps it looked like a technical problem, or (if you read the tech news) a political one within your own organization.  Apparently, it’s not that easy.  The truth is that what makes Google or Facebook or Amazon winners isn’t just that they offered something over the top.  It was because they offered something unique in the market.  You don’t find those niches by going out to look for services others now sell that you could also sell.

The reason this stuff is relevant is that the concept of NFV is almost totally dependent on virtual CPE, which in turn can’t be a broad-based service if you can only sell it to businesses.  You could argue in favor of consumer vCPE providing you could provide some service kickers for it.  The services of security (firewall), and DNS/DHCP are already present in under-fifty-buck home gateways.  At best, operators would have to give them away, and that assumes they could even justify cloud-hosting features that can be purchased that cheaply.  What services would be credible to consumers beyond those gateway services?  Obviously, home monitoring and security would be on top of the list, which is why the hint that those services can’t be profitable enough is critical.

However, it’s not NFV that’s the problem here, only vCPE, and that’s a problem for the same reason home security as an OTT service is a problem.  It aims at stuff already being done, and all of that stuff is very likely to pose the very same challenges as home security does.  NFV is only threatened to the extent that it relies on “basic” vCPE, which unfortunately it probably does way too much.  If NFV wants to ride the vCPE train, they’d need something that is unique.

SD-WAN, in a form that links the edge elements (usually boxes today, but often cloud components, and easily translated into virtual network functions for NFV) to internal service features for added capability and differentiation, is an easy answer.  If operators linked SD-WAN with vCPE they could create an offering that had real sticking power.  They’d also reduce the risk that they’ll lose customers to Internet VPNs, a likely outcome of their current (non-) strategy.  Versa follows this general model in their relationships with CenturyLink, Comcast, and Verizon, but I think it could be tied better with infrastructure-level services.  And, in any event, SD-WAN is still a connection service with a very limited (business) appeal.  The Internet took us out of the age where business services dominated.  SD-WAN can ease operators out of traditional connection services, but they have to know what they’re easing into.

You could take a similar view of home security and monitoring.  Why would operators elect to jump in and go head-to-head with incumbent providers in a market that’s facing declining prices already?  Don’t offer customers the same thing they already have or can get elsewhere at a bargain price.  Offer something unique.  Tie in external sensors and analytics to predict security risks as they develop.  Correlate multiple sensor inputs to help define what’s likely happening.  Correlate alerts in nearby homes, and IoT sensor information.  Think about what advanced technology, applied by operators at massive scale, could do for home monitoring.  It beats scrabbling in the market dust for a few tenths of a point of profit margin.

Agility is what this means, pure and simple.  You have to be able to frame new services to meet market opportunities, not to try to catch up with the competition.  The whole value proposition for things like SDN and NFV and even service automation is tied to agile response to market opportunity, because even cost control is just a short-term way of getting a payback for an agility and automation investment.  That means that firms need to be looking at a reasonable platform for delivery of OTT services, one that can be reused and exploited.  SDN and NFV can be part of that platform, but they’re not the whole story.

What we’ve learned in the last two decades is that what users want from broadband isn’t connectivity, it’s information and experiences.  “Climbing the OSI stack” to add connection functionality isn’t a long-term answer.  In fact, these kinds of services are really best as means of translating current services to exploit carrier cloud.  If you don’t have carrier cloud to exploit, then you don’t have the best growth medium for things like SDN and NFV.

Google built its network to deliver services.  They’re totally open about its structure.  Maybe the network operators should take a look at it.