What are the network operators, the service providers or ISPs, going to do? As the Things Past and Things to Come podcast said today, there’s a lot of bad signs coming in a space that’s had little else for over a decade. Operators have faced a consistent drop in revenue per bit, and it’s proved increasingly difficult for them to offset this with reductions on the cost side. The financial press has been increasingly negative on the space, and EU operators have been pushing the Union to force OTT players to contribute to improvements in infrastructure. Is there a seismic shift about to happen, or is this the same sort of noise we’ve heard for the last ten years?
Let me start by saying that that last question is the hardest to answer. Yes, profit per bit has been falling, and yes, we’ve been hearing that the net profit per bit was going to hit the point where further investment in infrastructure would mean operators would reduce their financial stability and cut their stock prices. But we’ve heard that all along. Is anything different really on deck here?
Since 2012, operators have been saying that they’d reach a point where they couldn’t profitably build out better networks within two to four years. Obviously that’s not been true. What’s happened instead is that operators have been relentlessly working to reduce opex, and dabbling on the capex side. The result has been a stretching out of that inevitable point where cost and revenue cross the ROI demarcation, where investment in infrastructure won’t meet company requirements for return on investment.
It’s very difficult to estimate where the real crossover could come. My model currently says that operators have between two and seven more years where cost management can stem the tide of profit-per-bit reduction. Where in that range a given operator lies depends on the opportunity density (“demand density” in my terms), which determines the rate of return a mile of infrastructure can earn on the users it passes. However, the same demand density measures the potential revenue an operator could obtain from new services, and it should be clear that while cost management vanishes to a point, revenue upside is limited only by the perceived value of new services.
So far, operators have tended to bog down on the idea that a “new service” is a new service customer for an existing service, or some tweaking of the service pricing model. That idea, IMHO, is clearly not working. A new service has to either be a new experience for the end customer, or a new set of facilitating features designed to promote OTT use. There are two paths operators might take toward this kind of new service, targeting a specific opportunity or investing in infrastructure from which multiple service paths could then evolve.
One of the deficiencies operators themselves agree they have is an inability to conceptualize new retail services beyond connectivity. Another is a lack of understanding on how to market something that’s not a simple evolution of what they’ve sold all along. Both these deficiencies make it difficult for operators to take the first of my two paths. It shouldn’t be like that, but it is, and there’s little point at this time in claiming we could solve that problem. Let’s assume it’s a given, so that leaves our second path.
AT&T, whose financial position is shakier than many others because of its low demand density, has already said that it believes that a path to new future revenues would be to build features that would be wholesale components of services/experiences offered by others, meaning of course the OTTs and perhaps the cloud providers. The question is how those facilitating features/components could be made available.
It seems fairly clear that the foundation of meaningful new services depends on two elements, contextualizing and personalizing, and that the two are linked. The theory behind these services is that operators today are focused on mobile services delivered to smartphones for the majority of their profit. However, mobile services are really little more today than mobile versions of wireline services. We have calling and broadband Internet as the primary features operators provide, and those features are already commodities. I believe that to create our meaningful new services, we have to exploit some new aspect of mobility, and that aspect is it’s-with-us-ness. Unlike wireline services that are delivered to a facility, mobile services are delivered to a device that’s in our hands as we live our lives. That means that if our services “understand” what we’re doing (contextualization) and “understand” our specific desires for facilitation (personalization) they’d be valuable to us.
We’re already seeing some OTT services that nibble on these concepts. An example is a security system that uses the phone to manage a “geofence” that sets a boundary for our being home or away. This is personalized to our notion of what “home” means, and it’s contextual because the behavior of the security system will depend on whether we are “at home”.
Our geofence also opens an important element of the concept of contextualization, which is that one of the pillars that support it is our location. If we could establish the location of a service user, and could exploit knowledge of the location without creating a privacy/security risk, we could offer contextual support for other activities.
Which raises the second pillar of support—goal behavior. We are in Location X trying to do Thing Y. Having information on what both X and Y are would allow a service to offer us support in reaching our goal. Are we driving or walking, looking for a place to find something specific, looking for a specific place, or maybe a specific person? The answer to this goal-related question, combined with our location, gives a service provider an opportunity to do helpful things, ranging from direct goal support to perhaps warning us about potential risks we might encounter.
This, I submit, is the next level of service. However, getting to it is going to require a significant investment in technology to locate us precisely, keep a record of goals and personal policies, and match these factors up in a way that can’t be exploited by a malefactor to track our movements or put us at risk otherwise. Operators are accustomed to making investments with a limited ROI, and they’re already regulated and could be made to protect our privacy and security better than players who are not. If operators could create a set of APIs based on personalization and contextualization, they could offer these to OTTs who would then frame retail offerings, and they’d get the wholesale revenues from the success of those offerings.
This is what I think operators need to be doing, but having a service goal like this isn’t going to answer the technology and business questions that still need to be addressed. I’ll do that in follow-on blogs.