I’m spending the next few days in Orlando at STL Partner’s first Telco 2.0 show here in the U.S. The conference has quickly grown in influence as one of the industry’s go-to events for new thinking about telco service and business (and, frankly, survival) models.
The day’s early focus was on survival, and the message delivered by the kick-off speaker, Richard Kramer, managing partner of investment research firm Arete Research was rather dire. His pragmatic, investment-centric view of the global telecom industry was dubbed by a later speaker as “the valley of death.” Telco. Network equipment. Handset. The West (versus emerging Asian markets). All seem to be “not a great place to be,” quipped Telco 2.0 chief analyst Chris Barraclough of Kramer’s view.
Caption: Kramer (left) and Barraclough (right) at Telco 2.0 event
Before getting to Telco 2.0’s prescription for countering today’s market challenges, it’s instructive to fully explore Kramer’s view of the upcoming “smash-up” of the global tech market, characterized by massive innovation and subscriber growth but offering great challenges for company’s aiming to ride that tsunami to real bottom line growth.
In quick sketch form, here is Kramer’s high-level assessment of the tech/telco market:
- A “demolition derby” is coming in handset/smartphone market — much better growth but massive decline in margins due to price competition. “Smart phone devices are going to take over smart phones whether you like it or not — coming down to ‘dumbphone’ prices.’”
- The future value in mobile is from services — a very tough nut for device makers to crack (see Nokia’s Ovi) and a window opened for mobile operators (but also software players like Google and Apple).
- Smartphones are all moving toward a new international standard in terms of size — “the trouser pocket” — which will help define their capabilities as well.
- Hypercompetition is coming to the device industry. Individually, device makers like Nokia, Apple, RIM, LGE and Samsung have “rational” strategies to compete — however, “collectively they are all insane” due to the challenges of trying to compete and take share in a rapidly changing marketplace.
- Users don’t care about phone OSs; still, today’s 6-plus mobile phone platforms will boil down to two or three winners by 2012. Today’s app stores will morph into or be replaced by content stores — “the next wave of business in the mobile industry is who’s going to come up with the content store for integrated devices.”
- Mobile services will move to a channel model, but “only a few vendors can make money packaging content” in mobile.
- Investors look at telcos as stable, generating dividends, but chronically disappointing as growth vehicles; at the same time, telco “perceived ability” to cut costs and pass those savings on to shareholders has not been successful either.
- Today, subscribers are all using more mobile data traffic, but that’s not generating incremental revenues due to the cost of delivering that service and lack of creative models to monetize mobile data.
- There’s an argument to be made that the telco sector could (should) support a natural monopoly spurring investment in 4G and fiber. There won’t be multiple providers making LTE investments — costs are too high.
- Ultimately, value in five years will flow to companies with the highest quality networks, content linked seamlessly to devices and massively scalable software and bandwidth enabling cloud services.
Despite concerns about how this all will play out, Kramer called “this the most exciting time in tech I’ve ever seen,” adding however that “the whole value chain as we know it is going to get chopped up.”
Telco 2.0’s Barraclough followed up to take a look at how service providers can thrive in this new environment. Using Amazon.com’s evolution from retailer to platform provider as an example, Barraclough described his firm’s “two-sided” business model — positioning providers as sitting between their traditional downstream customer base (of millions of customers, thousands of segments and hundreds of devices) and new upstream partners to which it can provide services to help reach those customers including: identity/authentication, advertising/business intelligence, e-commerce, order fulfillment (both online and off), billing/payments and customer support.
This “telco 2.0 business model restores elements of value and control to the telco industry,” he said.
Most importantly when looking at the larger tech landscape, telcos must compete “where others don’t” — he pointed specifically to more intelligent networks and third party app/service enablement as the best bets — rather than “compete in the bloody red waters of trying to compete for the customer user interface.”
One of the greatest challenges for service providers is market fragmentation — there is today no “super-carrier” that can universally reach all consumers. The challenge then, is can service providers “collaboratively produce a platform” that not only can reach subscribers but serve upstream partners, Barraclough said.
The give-and-take between Kramer, Barraclough and STL Partner founder and CEO Simon Torrance, who facilitated the day’s discussion, set up many of the key themes of the day.
We’ll add new insights and comments from the show throughout the first day’s events:
“TV in the short term will be what we already know.” — the channel is dead, TV will become more social. Big picture — media isn’t a product or service, it’s an experience. Tech needs to understand that if they want to monetize the delivery of media.
– David Touve, Asst. Professor of Strategy, Williams School of Commerce, University of Washington & Lee
- Media business models are under as much pressure as telco models. “[Media] is struggling to find business models that work for all constituents involved, and consumers as well. [There will continue] to be good money to be made on straight-up advertising. It’s a good business. But is it enough to support all the hungry mouths? No.”
– Eric Klinker, CEO of BitTorrent, who also added adding jokingly (or not so jokingly), that BitTorrent is a rare company to “be reviled by two industries”, telco and media.
- More than half of mobile apps are downloaded “for no specific reason” — to pass time, because I have my phone with me, according to a poll of GetJar customers.When do users download apps? The largest percentage: right before sleeping. More poll takeways: 79% recommended an app to a friend; 74% would download app sponsored by a “cool” brand; 67% would pay for a good app; 73% said they use the mobile Internet more than the Internet
— Ilja Laurs, CEO, Getjar (second largest mobile app store — focusing on Java apps — after the iPhone app store)
- “What is the real value play for each of the service providers and device manufacturers, and what is the value play for the consumer?” — For device/software makers like Apple, the equation is: sell apps = stickiness = loyalty = more device sales. Beyond that, the end game = life long customer loyalty. For Google, its decisions are being driven by it’s core business: advertising. So for example, Android is a new advertising engine, not a mobile OS. Finally, the service provider: they are generally device and UI agnostic. Much focus on core asset, the network. Must focus on cloud services as core business and open up APIs and enablers to network, plus create an easy-pay mechanisms. Do they care about content or applications, not really — but they do care about personalization and how they can enable it.
– Scott Adler, vice president, Amdocs Interactive