How's your Google Strategy?

At the 21C Global Summit a few week's ago former BT Chief Scientist Peter Cochrane - an industry 'guru' who likes to shake things up - presented a number of thought-provoking ideas about telcos competing with Google, including this rather cryptic slide:

cochrane.gif

This is how we decipher it:

  • What Peter's chart is trying to tell us is that e-commerce revenues will rise, network access costs will fall, and at some point the former will gobble the latter as a business.
  • Some products are natural complements -- bullets and guns, strawberries and cream, milkshakes and straws.
  • Sometimes these have a high 'cross-elasticity of demand', where lowering the price of one significantly increases the consumption of the other. If the cost of delivering that discounted product is low, it may make sense to price it at zero. The local lunch deli throws a free plastic fork into your bag because it makes you more likely to buy an expensive slice of chocolate cake. The key question for us is: which of our telecoms products behave this way, and when?
  • What we're likely to see more of in the converging telecoms-media-tech space are players from one part of the value chain trying to preserve the profits on their high-margin products by bundling and giving away for free complementary products from potential rivals from other sectors.
  • In telcoland it's happening on a small scale at the moment, with fixed voice being "given away" or run at a loss to encourage customer relationships that include higher-margin mobile or non-geographic traffic. The highest-margin products staying chargeable.
  • Traditionally, access has been the high-margin product. And by selling it by the sachet (via telephony) rather than the bucket, profitability has been maximised through fine-grained price discrimination.
  • But margin is a function of revenue and cost. A disturbance to these variables can change the subsidy model.
  • In the e-commerce value chain, companies like Google have spectacular margins. However, this is off a small revenue base, yet one growing explosively. Their own stated goal is to become a $100bn revenue company.
  • Google will ascend the e-commerce value chain to incorporate more functions (sucking value out of merchant payments, for example). See some more analysis of this trend here.
  • Companies like Google and eBay will learn how to re-intermediate existing "voice commerce" (e.g. freefone numbers) over time, as well as maintaining hegemony over e-commerce. See here for more on this.
  • At the same time the costs of building access are falling as technology improves
  • Much of the cost base of telcos is associated with customer acquisition, billing, and resulting care. The "underlying" cost of the telecoms product (ie. access) is significantly less than the overall cost figure.
  • Therefore, at the margin, we should expect some products to have a flip in their economic model. The e-commerce revenue will be used to subsidise the access. Freefone numbers have done this for years, it's just we've not worked out how to do it for IP - hence the Telco 2.0 Survey on Broadband Business Models (PS: 560 people around the world have taken part so far...have you input yet?)
  • This is because 'access' is a complementary product to e-commerce, and e-commerce providers want it to be free to stimulate volume as well as trigger usage data and stickiness to their platform.
  • Over time, an inversion of the telco business model will happen, with an increasing amount of connectivity being free.
  • This may require a radical approach -- something Google has been working on, with many patents and investments (watch this space!)
  • So, if you're a telco, you need a strategy for dealing with Google. Now.

(Ed - Nice warm up for Cisco's presentation at the Telco 2.0 Plenary on 17th October, when they'll be stimulating the participating execs with ideas for how to develop a 'Google Strategy'. The ensuing brainstorm should be interesting...)