The Telco 2.0 methodology -- Introduction
The journey from Telco 1.0 to Telco 2.0
We've been doing a lot of consulting work and proposals recently for large network equipment vendors, operators, industry associations as well as start-ups. We've got to the point where we're seeing the "big picture" of what Telco 2.0 really means to them in terms of business problems to address, and a repeatable set of tools and approach to solve them. Indeed, we're feeling pretentious enough to say that we've got a methodology coming together. (It's telco, so it's good to have an 'ology.) The full details will be in the forthcoming second edition of our Telco 2.0 Market Study.
In case of business vertigo, lie down horizontally
On one hand there's the vertically integrated Telco 1.0 (or even the analogue Telco 0.1) where you control everything: service, devices, retail, network, identity, partners, the lot. A world of "take what you're given" for the customers. At the other end extreme is the future disaggregated Telco 2.0 -- where users are the masters of every device, network and service - "take what you want". There aren't hard dividing walls between them: it's a gradual journey with shades of grey.
For example, it was our pleasure on Monday to meet up again with Malcolm Matson and hear about the latest developments in OPLANs out in the Far East. (For more on OPLANs see our earlier blog post.) We think this is a strong "Telco 2.0" model, with separation of ownership of the access infrastructure from all services. So far, such an extremely horizontal model has only been applied to the most advanced of markets, such as Scandinavia. Anyone who tries to jump straight from 1.0 to 2.0 will find the rest of the ecosystem of services, distribution, payment, etc. unable to keep up. (Malcolm would no doubt argue that such purging of incumbent structures is needed, but we're a bit too conservative to agree - it's destructive destruction rather than creative.) Unbundling or municipal networks are part of that same journey separating networks, services and devices.
Core issue: Broadband Incentive Problem
In this process of horizontalisation or modularisation of the industry, one thing comes up over and over: the capex crunch caused by the broadband incentive problem.
We've written extensively about this before, so the quick version is:
- User demand for network capacity is increasing fast, driven by content sharing and video downloads.
- Willingness to pay isn't -- or, more accurately, there's a wider dispersal of willingness to pay and usage making it hard to price network access.
- The "free riders" are driving capex spend, or degrading the experience of other users at peak times.
- Competition is flattening revenues.
- There aren't any simple pricing fixes. Efforts to sort different types of traffic or users tend to cause customer confusion (complex Ts&Cs), privacy issues (deep packet inspection) or anti-trust concerns ("network neutrality").
- There aren't any simple technology fixes.
Picking up on this last one, Ericsson forecasts a ten-fold traffic increase over the next five years. You might think that throwing capacity at the problem is the whole answer. Unfortunately it doesn't work. Clearly more capacity is wanted -- it just has to be done on a rational economic basis. Ericsson's own data shows streaming and downloands equalling voice traffic in this period. You'd be very brave to suggest that this traffic will generate the same revenue as voice. Throwing capacity at the system just increases the spread of traffic volumes and the free-rider problems of users sharing (often pirated) video content with no exposure to the real costs of their activities.
Ericsson isn't alone in this approach of "solve your pricing problems with capex". Comcast, a leading US cableco, has a quite progressive "Telco 2.0"-like streategy. Yet they are busy promoting their next-generation high-speed network. It's great to demo downloading video with faster-than-real-time. Just as a hypothetical shareholder I'd like to know what that does to your cable TV business. If you're going to offer this capacity, the business model needs to change. The fifteen-fold speed increase they boast of in a decade can't match the fifty-fold increase in processor speed and the corresponding ability to source and consume those bits.
Different ways of packaging up the connectivity with the services and devices
This isn't an isolated example. Take the current news stories about soldiers out in Iraq and Afghanistan and their Internet access. On one hand, the US military is saying that the media is the battlefront in 4th generation networked warfare and that they need to get their message out via YouTube. On the other, they're banning soldiers from accessing these same services to upload experiences and download messages from home because the satellite networks are being swamped by short-form videos.
The solution to this is packaging. YouTube and the telco/cablecos need to be able to classify the traffic on the network, have wholesale relationships across many carriers so that there might be a raft of charging and priority models, enable more efficient delivery with content caches at the far side of the satellite link, and so on. The money and the bits have to flow together in different ways and speeds.
A roadmap from Telco 1.0 to Telco 2.0
So the challenge is to put together a framework for operators to understand:
- Where are we now on the 1.0-2.0 scale?
- What does the target state look like?
- How do we go about the transition?
This means putting together two things:
- A process for the above.
- Tools to support the process.
In our next post, we'll cover the process in more detail, and then move onto the tools.