« Interview: Malcolm Matson of OpenPlanet on OPLANs | Main | Telco 2.0 event: Business Model Map Q&A »

Guest blog: Sowing the Seeds of the Portalpocalypse

One of our speakers at the “Telco 2.0 event”, Marty Algire , VP of Platform and Products for RadialPoint shared some entertaining ideas on how operators could turn the tide of commoditization on the Web portals and search companies. We’ve invited Marty to do a guest blog post for Telco 2.0 and share those ideas with a wider audience.

The Telco 2.0 primary claim is about the separation of network connectivity from user facing applications and services, and the Web 2.0 influences on those applications and services. One of the strategies of Telco 2.0 is “partnerships and 3rd parties’ innovations are required to complete the bundle.” This platform/partner strategy was lifted directly from the Telco 2.0 blog, and has been repeated in some form or another by industry analysts and SDP vendors for at least the last 5 years.

However, if you’re a developer, and you’re looking to experiment with your new service idea, would you gravitate towards your local Telco and it’s APIs to their universally unique provisioning system, or to one of Google/Yahoo/MSN where you get access to APIs for search, storage, email, chat, presence, etc…?

The investment required to play the platform/partner strategy has changed within the years characterized by the Web 2.0 moniker, and to be competitive now requires providing access to core end-user applications and their data, and allow developers to build on top of those. So the problem becomes one of building upon an already functional end-user application, not plugging into a platform of OSS/BSS APIs.

Even if Telcos did have a broad and smooth application surface area of APIs and rich data, which are years away with current IMS/SDP approaches, why would any 3rd party partner want to fragment their development resources across 100+ Telcos when they can reach a user base 200-500x larger directly via Google/Yahoo/MSN?

The best form of defence is vigorous attack

Telcos are not going to software develop their way out of this one, and there is no one partner or consortium or set of standards that’s going to save the day: they should scorch the ground Google/Yahoo/MSN stand on now by together funding open source search, email, chat, and voice applications (for examples, see Nutch, Jabber, and Zimbra) and enlisting the existing army of open source developers to their cause. This gives Telcos a common set of core Internet applications and moves them into the ‘build upon’ game.

Now the question for the developer becomes “I can play around with my service idea at Google, Yahoo, or MSN, each of which gives me access to 200MM to 500MM users, or I can build it upon this open source platform used by all the major Telcos which gives me access to a comparable user base and I can take advantage of the existing long standing billing and service relationships Telcos have with their customers.”

Linux has already taught the technology industry how to compete with an entrenched platform, and we started off by saying the Telco 2.0 primary claim is about the separation of network connectivity from user facing applications and services. Therefore, by open sourcing what is separated from the network, Telcos can sow the seeds of commoditization in the platforms of their portal competitors and start to move the value away from software bits back to the network, where the Telco has an inherent performance and cost advantage.

Google needs to steal telco customer relationships to grow earnings

With several large Telco contracts to provide portal and search functionality up for renewal next year and the year after, the word at the recent Telco 2.0 conference was that Google has been competing aggressively for the search business by making big revenue guarantees.

On the surface it may appear that Telcos partnering with Google (Google is used as an example here, the same holds true for Yahoo or MSN) for search is not such a bad idea. After all, users need to get their search results from somewhere, and it’s not like the results page is driving users to google.com web properties and applications. However, by joining the AdSense network big Telcos will end up increasing the value of keywords and ranking and that drives the high margin revenue on Google.com side of the business, which continues to take customer relationships at the expense of Telcos.

Step into my parlour said the spider to the fly

The Google FORM 10-K for the period ending December 31, 2006, shows that Google aims to run their AdSense network (when access providers do a Search deal with Google, they are joining the AdSense Network) as close to break even as possible. Revenues from Google’s AdSense network were $4.2bn and Cost of Revenues were $4.2bn. This is not a revelation, the annual report points out the margin on revenue from the AdSense network is low, and much lower than that from the Google.com web properties (the web pages created by Google where Google displays ads, e.g. search, froogle, gmail, groups etc…) However, what is interesting is how revenue from the AdSense network drives earnings in the Google.com business.

This part requires an understanding of how click volume drives the prices of keywords and their ratings upwards. Let’s say this table represents the cost per ranking for the keyword ‘Portalpocalypse’:


If you consider the cost of the click only, than the 5th rank is half as expensive as the first rank and therefore provides higher value to the advertiser. However, the advertiser gets much fewer clicks at that ranking. Advertisers pay more per click to receive a higher ranking which delivers more clicks. Therefore the larger the number of clicks, or network of publishers generating clicks, the higher a keyword and corresponding ranking is valued.

Therefore, Google the advertiser network runs the AdSense business at close to break even because it maximizes what publishers make which attracts more publishers which drives up the total volume of clicks and therefore the auction prices for keywords and rankings. This way, Google the publisher, earns more revenue at fatter margins when clicks are generated from its own web properties.

Of course, Google could always trade profits from it’s own properties for profits from AdSense, but by maximizing pay to publishers in AdSense they ensure the rapid expansion and overall market share of the Google AdSense network, and there is no benefit to a more balanced approach so long as their own properties remain popular.

Therefore, to drive earnings Google will continue to invest in kick-ass applications that attract users away from Telco services, and yet this investment in applications are funded by Telcos and other large publishers joining the AdSense network.


There is no way today to replace the $30m-$50m a year in revenue each Telco could make from joining the AdSense network. However, Telcos can protect their future revenue by investing in open source search technologies in parallel to their portal deals. This way Telcos can sow the seeds of commoditization into the portals’ business, and over the long term move the value away from software bits back to the network, where the Telco has an inherent performance and cost advantage over the portals.

Open source search technology is indeed immature and such an investment does require a longer term view, however, open source search is inevitable: there is too much power in the search platform for it to be left to a few private companies and it’s a technical problem developers are naturally attracted to. To borrow a phrase from legendary technology investor Roger McNamee - the guy with the longest time horizon wins.

Telco 2.0 editor’s note: It wouldn’t be the first time that “my enemy’s enemy is my friend” became received wisdom: think IBM undermining Microsoft’s OS business with Linux, or Google attacking Microsoft’s browser hegemony by funding the development of Mozilla Firefox. Are free ad-funded portal services more of a threat than realised, demanding a more severe commoditise-the-opposition response? As always, comments are open.

To share this article easily, please click:


Very interesting analysis on how Google controls the value distribution between ad brokering and ad distribution. This reminds of the iTunes-iPod game, where Apple ruins the profitability of other, smaller online music shops by running iTunes at just above break-even, to make its own profits from the most popular digital music players.

The open source search technology idea... how far can the analogy with Linux go?
Aren't most of Google's costs in expensive server farms and downstream Internet connections?

Post a comment

(To prevent spam, all comments need to be approved by the Telco 2.0 team before appearing. Thanks for waiting.)

Telco 2.0 Strategy Report Out Now: Telco Strategy in the Cloud

Subscribe to this blog

To get blog posts delivered to your inbox, enter your email address:

How we respect your privacy

Subscribe via RSS

Telco 2.0™ Email Newsletter

The free Telco 2.0™ newsletter is published every second week. To subscribe, enter your email address:

Telco 2.0™ is produced by: