Why Business As Usual Will Kill The Wireless Industry
With telecom operators generating most of their revenue from voice, text and data, the need to differentiate service was of minimal concern. As long as this profit came in and they had the largest customer base, this model “worked” and was rewarded by the market.
Unfortunately for the telcos, this business model has been outdated by two developments : the rise of really terrific devices and the ubiquity of the Internet enabled by high speed data networks. This in turn has exposed the traditional model to be too one-dimensional. The old model no longer pays off – as voice and text pricing continues to fall, growth for operators is only happening in new innovative data services. Recent reports from Juniper Research and Ovum paint a dire picture, with telcos hemorrhaging profits. Higher costs for consumers’ data use have been installed to supplant declining voice and messaging losses.
With the legacy business model running out of runway, the operators have to rethink their revenue channels and modify their approach to business innovation.
One option is to flip the previous model entirely, and focus first on differentiating services, followed by increasing profitability and then neutralizing competitors. By reversing priorities, carriers can begin to build a business model that is two-sided and transactional. Think how Visa and Mastercard operate their business: the end-customer and the merchants both pay. The operators are now deploying such models with data and Internet services to similar ambition.
At Mobile World Congress 2012, one session addressed this concept of a two-sided business model, with representatives from AT&T, Facebook and Expedia on the panel. With voices from both operators and over-the-top application and content providers, this discussion was a perspective on the current telecom environment and focused on how collaboration between the two can lead to opportunities for both. The consensus: partnerships can create sustainable profitability and enhance how both serve their customers.
While buy-in from both sides makes the shift to this new, two-sided business model seem like a no-brainer, a recent survey from STL Partners identifies that while carriers and OTT providers are in agreement of what should happen, there are barriers that are obstructing any possibility for change.
The STL Partners survey includes perspectives from 25 major OTT providers – including Google, Fox Networks and Salesforce.com – and 15 operators, including AT&T and Verizon. One conclusion from the survey is that the carriers’ risk-adverse culture is the largest roadblock to business model innovation. The survey found that technical issues, the cost of IT integration and even lack of interest among carriers were of minimal concern.
Although operators are under pressure to change, timing is still critical. If an operator invests too early, there are risks of wasting resources and destroying what value is currently available. Conversely, investing too late could lead to a potentially fatal game of catch-up.
Operators face a prisoners’ dilemma when it comes to entertaining the idea of collaboration. They are aware of the benefits and consequences if they choose to do nothing, but cite cultural limitations as an excuse to do nothing.
Three technology considerations that could kick start change:
- Focus on productivity: Today’s operators are paying up to boost network speeds, but it won’t matter unless networks are flexible. Rebalance network investments into platforms that enable third-parties.
- The Internet is not the enemy: Web-based OTT providers offer operators a chance to improve revenue and customer service. Leveraging cooperation with these agile players can create mutual benefits.
- Invite collaboration: There’s no merit in keeping the network closed to over-the-top services. Build a platform that includes success for both the third party solution and the operator.
It won’t be easy to re-engineer existing business mode. But if operators choose to do nothing, the risk of fragmentation and losing their revenue base is very real. Partnerships between carriers and OTT providers would allow carriers to focus their innovation efforts on creating new revenue channels, counteracting disintermediation and increase profitability.