We are at a defining moment in the evolution of telecom. Forces are building across a fault line between service providers and Internet giants. Both sides appear to have reached a wall. It’s a matter of time before an earthquake reshapes the scene. For service providers, the challenge lies in hard-to-scale rigid networks and a culture steeped in conservatism that slows evolution. For the Internet player and OTTs, the challenge lies in a business model that is close to run out of steam with slower growth looming in the horizon. Each side views the other with trepidation. The service providers claim that the Internet players are getting the bigger slice of value, while the Internet players see service providers as the bottleneck that’s gating their revenue growth. The triumvirate of mobile network operators, fixed access service providers and Internet giants are locked in a standoff that will shape the future of telecom.
Stalling Revenue Growth of OTTs Forcing Them Into Access
To put this into perspective, consider the data from Facebook for 3Q2016:
- Daily active users averaged 1.18 billion in September 2016 (up 17% year-on-year).
- 92% of daily users (1.09 billion) were mobile users (+22% over the same period).
- Mobile advertising revenue represented 84% ($5.7 billion) of advertising revenue for 3Q2016.
While the numbers are stellar, the growth potential remains coupled to the number of users, specifically the less privileged users who can’t access the Internet. It is no surprise that Facebook is leading the Telecom Infra Project (TIP) to reduce the cost of access while Google joins CORD to transform central offices into modern data centers. Other Internet giants have similar objectives but pursue different solutions: Apple leveraging MVNO model through Soft SIM technology. The influential Internet players are all active in figuring out how to make the Internet more accessible. They have achieved unmatched cost efficiency by building their own, global, web-scale data centers and technologies which they are now taking to other industries and applications.
Having been involved in the business of telecom access for years, I can attest that reducing the cost of access is a complex, multi-faceted endeavor. The industry has focused on the cost of equipment, but there are many other factors just as critical, if not more. Take for example regulatory and taxation: in one Brazilian province, telecommunications services are taxed at 40%! Thus, aspects such as business models, logistics, operational processes, and regulatory, to name a few, are key.
Access Game Changers Leading To New Entrants
In light of this, new approaches to access become imperative. One such approach, among others, is the use of shared spectrum such as the CBRS band (3.5 GHz) in the US and LSA (2.3 GHz) in Europe. The regulatory structure eliminates most of the cost of spectrum and leads to new business models based on user-deployed, instead of carrier-deployed, access nodes. This leads to new dynamics between mobile network operators who own spectrum and wide area coverage, fixed access operators who own the transport network and Internet giants with content and web-scale efficiency in core networks in a three-way standoff that will shape the future of telecom.
Intensifying Standoff Among Mobile and Fixed Service Providers and OTTs
This battle pits global, Internet-scale businesses against local, access-oriented businesses. Scalability for the Internet players is easier to achieve: the more internet users, the cheaper the cost and the more additional users are expected to onboard. This leads one to expect drastic cost reduction that service providers cannot readily match. Service provides, on the other hand, own critical assets that are hard if not impossible to replicate: spectrum, towers and wires in the ground.
The dynamics between the Internet giants and service providers points in the direction that players have to move in evolving their competitive strategies. Agile networks enabled by SDN/NFV and a flexible regulatory environment for access are key elements to these strategies. Business models that best leverage these tenets are critical to a compelling value proposition. With these elements, a new world order for Internet access will emerge!