We’ve heard nothing but doom and gloom for telcos in the race to relevance, and two Light Reading stories frame the latest round. The first story says that the digital transformation race is leaving telcos behind, and the second story that the big tech elephant is squashing telecom. The combination presents a view that the telcos are becoming the dumb-pipe players that many had predicted, some had feared.
Back in 2004, I participated in a mock presidential debate on election day, with the topic being “smart networks or dumb networks”. I had the smart-network side, and I won the debate, which I think proves that there was a compelling story to be told on the topic even then. The fact that we’re still declaring dumb networks the winner in reality in 2021 is proof that the telcos didn’t tell it, or perhaps even want to tell it. Or perhaps couldn’t tell it for reasons out of their control.
Digital transformation isn’t leaving telcos behind as much as it’s taking place above them. Birds don’t replace moles (yes, an unglamorous comparison, but one I think is fair) because they’re not in the same ecosystemic slot. We need moles, glamour deficit relative to birds notwithstanding. Not everyone can be over-the-top, that position requires somebody be at the bottom. Connectivity is the foundation of today’s advanced services, as it was the foundation for other network services in the past. Should telcos flee that to be digitally transformed? Who steps in?
There are a lot of reasons why telcos aren’t innovative at the service level, and things like a truly fossilized culture are surely among them, but there are also hard economic realities in play, and some regulatory positions that many hold dear.
Imagine two competitors in some unnamed higher-level network service. One competitor offers only that service, and uses the network connectivity the other provides. The other is the provider of that connectivity, and adds the higher-level service to their repertoire. Connectivity services have been suffering a profit-per-bit slump for at least one and likely two decades, which means that ROI on those services has declined to the point where it’s below what’s required for most vertical markets to sustain share price. Our second competitor likely has to invest most of its capital at this low return, where our first competitor simply pays commodity prices. Who wins this war? Unless you’re into fantasy, you know the answer to that one.
There’s a strong argument that the reason for the declining profit per bit picture is the Internet that created those higher-level services in the first place. One reason the Internet was so successful was that the entire Internet was based on three principles—unlimited usage pricing, all-provider peering, and bill-and-keep. No matter how much traffic a user generates or absorbs, their price doesn’t change. All ISPs are interconnected, so being on any one will give you access to everyone on the Internet, and each provider bills their own customers and keeps all the money. This made Internet startups easier to finance, but it also eroded the business model of that telco bottom layer. We call all these principles a part of “net neutrality”.
I’ve opposed bill and keep for decades, but I’m not going to reprise that point here. My point is that the situation the telcos are in make it difficult for them to rise above the connection layer, and make it difficult to make the connection layer profitable. Thus, any higher-layer service would have to subsidize the ROI losses the telcos incur in connectivity, and competitors without those connectivity services would have no such need.
This doesn’t mean that telcos couldn’t win in higher-level services, only that they couldn’t win in those services that depended only on widespread, open, zero-usage, connectivity. The mistake that the telcos have made is not realizing that there were other services that perhaps weren’t “higher-level” but “parallel-level”.
Let’s go back to a point I made earlier. “This made Internet startups easier to finance….” Venture funding launched what we know as the Internet just as much or more as the web standards presented by Tim Berners-Lee. In a sense, VCs were parasites on the telco host, and asking telcos to jump into “the Internet” at the higher level was asking them to self-parasite. But are all possible new services VC ticks on a telco body? No. The term “over-the-top” means “on the Internet, above the connection layer”. Could there be services parallel to the connection layer?
I contend that there is, and that IoT is an example. If we were to look back to the first vision of the “Internet of Things”, it’s clear that it depended on a connection layer, but also a huge community of “things”. These early visions didn’t assume that IoT was nothing more than home thermostats with WiFi access, they assumed that a sensor population, open and available for exploitation just as the connection layer was exploited would create another OTT-like revolution. It might, too, but VCs would never fund that.
Nobody VC would have funded the Bell System either, which is why telecommunications started as a regulated monopoly. But we have quasi-utilities today with a lot of free cash flow and a very low internal rate of return, meaning they could accept projects that required a lot of capital (“first cost”) and had a low ROI. We call them “telcos”.
Telcos could have turned IoT from a collection of sensors, systems, and connections, into a global service of awareness, just as they converted twisted pairs and plug panels and switches into a service of communications. They could have then either offered their own IoT services, wholesaled their service of awareness to others, or both. Instead, they did everything in their power to turn a service-of-awareness opportunity into another doomed-to-commoditization connection service. 5G, says the telcos, supports IoT because it lets us sell 5G services to sensors and not just humans.
This was, and is, the Great Telco Blunder. They could have launched a whole new industry, and they not only let is pass them by, they actively ran from it. Not from the classic OTT opportunity; they never had such an opportunity. From the service of awareness opportunity, which nobody had and which they were uniquely positioned to exploit. And now, not surprisingly, we’re on the edge of “too-late” for that opportunity.
Amazon Sidewalk isn’t exactly a revolution. It’s a way of creating a kind of household federation of WiFi access to allow home-related telemetry to use adjacent WiFi networks where the home network doesn’t reach. What it might revolutionize is the service of awareness. If all of the individually deployed IoT sensors could be collected in a vast, organized, secured federation, we could end up with the mass sensor-network deployment the telcos could have initiated, and didn’t.
The telcos aren’t falling behind in the digital transformation race, they’re not even running. They’re not getting squashed by big tech, either. In one sense, they’re performing a role nobody wants (maybe not even them) and in another they’re throwing themselves under every bus that big tech presents. But the big story, the big truth, is that the problem isn’t over-the-top, it’s by-the-side, and they’re about to lose the biggest, and perhaps last, opportunity they have to be a winner.