There are surely people out there who continue to believe that network operators, meaning telcos in particular, can catapult to profit growth on the back of traditional voice and connection services. There are also people who believe the earth is flat and that politics is a civilized tension between intelligent debaters. In assessment of profit opportunity, as in politics, it’s all about numbers, and the numbers aren’t on the side of the “people” in my example here. Omdia, who’s done some nice research, put out a report that’s cited (among other places) in TelecomTV. I don’t subscribe to other companies’ research, but the topic here is important and so I’ll comment on the summary material that’s widely available.
The core proposition in the report is one I agree with and I suspect that nearly every serious strategist in the industry would also agree with. Telcos can’t hunker down on basic connection services and hope that somehow they’ll be profitable again. That’s true. My research has shown that in the consumer space, there is no hope of profits from basic services. On the other hand, it also shows that there’s a significant profit to be gained in other service areas that telcos could reasonably hope to address. In fact, my numbers are a bit more optimistic than Omdia’s. Where they expect a bit over a $500 billion opportunity by 2027, my numbers suggest that there is actually almost $700 billion in consumer services and another almost $300 billion in business services to be had.
A second foundation principle of Omdia’s position appears to be that the real opportunities lie so far above the network, above those basic services, that it’s the cloud providers who naturally own them. Telcos should expect to partner with the cloud providers, and accept what another commentary on the report might be only “a small fraction” of the revenue potential, because it would be “better than nothing.”
The specific target areas the report suggests include digital music and streaming video, gaming, and smart-home services. It’s the latter that’s suggested to offer the greatest growth potential, and thus present the best opportunity for these telco/cloud-provider partnerships.
OK, I can buy a lot of this, at least to the extent that I agree there is an opportunity and there is a potential to exploit it via a public cloud relationship. However…I think that both the specifics of the opportunity and the specifics of the partnership would have to be considered, and above all that the mechanics, the technology, used to address the opportunity would be paramount in determining whether there was a useful telco opportunity to be had here.
Let’s look at two hypothetical partnerships, which we’ll call PA and PB. Let’s also say that both attempt to address the same opportunity. In PA, let’s assume we have one partner who has nearly all the assets needed to address the opportunity, and thus could really exploit the opportunity themselves. In the other PB partnership, let’s assume that there is at least a set of critical assets that still have to be developed, so neither party can really exploit the opportunity with what they have. Which partnership do you think affords a real balance of opportunity among the partners. Let’s then look at the specific target areas the report cites, and see whether they’re PA or PB opportunities.
OK, digital music. How many digital music services do we already have? Answer, too many to allow any to be highly profitable. What’s the key asset needed for the services? Answer, the music. Imagine a telco getting into this. They might try to market the digital music offering of current incumbents, but there is nothing other than sales/marketing they can contribute. Not only that, other types of business would actually have a better shot at sales/marketing in the space. I listen to one digital music source that’s bundled with another service, and I get another one subsidized by my credit card company. This is darn sure a PA partnership in my view; telcos would gain almost nothing from it.
Digital/streaming video is the same, or perhaps even worse. The essential element is the content. There are already many streaming services and they’re raising prices to try to compete, or they’re dependent on ad sales when competitors all have to scramble for the same (or often fewer) ad dollars. Telcos have already tried to market streaming video services with their broadband, and none of these ventures have taken off. Another PA. If there’s a PB lurking here, it lies in somehow personalizing and customizing both services, which could be an AI application.
Gaming? OK, here we have some PA and some PB flavor to our opportunity. On the one hand, gaming is a kind of content just like music and video, and has the same issue set. On the other hand, gaming in its massive multi-player form (MMPG) is dependent on network QoS to ensure a realistic experience. There is something here, a new dimension that not only is open to a telco to address, but that might be easier for the telco to address. Our first PB element! And is gaming a kind of metaverse? PB for sure if it is.
The same can be said for smart-home services. These services depend on devices, which is a kind of “content” and has a definite PA dimension. There is already a set of hosted services available, as OTT elements, to provide access to the devices from a website, app, or both. Another PA. However, there are service QoS dependencies to consider; if you’re away and your home or local Internet is down, you can’t access your devices. There’s also a question of whether a “smart home” is really a special case of IoT, which might mean it’s a “digital-twin metaverse” and a certain PB.
OK, without getting into the details of metaverse and AI technology, how would a telco play in this? There is a general answer to the question of making a partnership with a cloud provider work, and it was provided by a telco. It’s facilitating services. Forget marketing partnerships; telcos are notoriously bad marketers, and they don’t even operate near the top of the food chain in any of these service opportunities. You can’t sell something if you’re layers away from the buyer. Instead, what telcos have to do is facilitate, meaning build some lower-layer element that makes the retail experience better, cheaper, and easier to get into the marketplace.
Facilitation was proposed by AT&T, so it has operator credibility. However, facilitation requires two things operators aren’t exactly naturals at providing. The first thing is a sense of the retail experience being facilitated. You may not have the experience to sell a widget service, but you’d better understand widget-ness well if you expect to facilitate one. The second thing is a realistic model of the layered relationship you’re creating. Something is “facilitating” if it adds value, but it’s a valuable facilitation only if the cost of the facilitating service is reasonable given the retail price at the top, the distribution of contributed value through all the layers, and the cost to another party of replacing your facilitation with their own.
Omdia is right about the need for telcos to partner with OTTs, but I think it’s critical for telcos to frame the partnership so it doesn’t become parasitism instead. Connection services and telcos are increasingly disintermediated from demand sources overall, created because what connections are used for today is the delivery of experiences. It would be very easy, and very destructive to telco interests, for a partnership with public cloud providers to become a conduit for even more declines in telco revenue per bit, and if that continues then the foundation of modern telecom could be threatened, and some form of subsidization would be inevitable.