Monday, June 21, 2010

Some dumb pipes worth more than others

A longstanding concern of telecommunications carriers is that they will be reduced to the providers of “dumb pipes.” While demand for the Internet — and particularly the mobile Internet — continues to grow, they may find profit margins squeezed to commodity levels if they are merely providing commodity services.

The near-term role of mobile operators was the key subject of discussion at the inaugural CEO Summit of the Mobile Entrepreneurs Forum Monday in London. In part, it was because the first keynote speaker was Vodafone cofounder (and longtime board member) Dr. Mike Walker, OBE. In part, it was because the European carriers were prominently sprinkled among the audience at the 11 discussion tables.

Thus it should not have been surprising that — framed by a sunny operator keynote — that most of the tables took an optimistic view of the first discussion question of our breakout session: “what role will [mobile] operators play in five years’ time.”

Everyone agreed that the future of mobile data usage is the mobile Internet. Even for Vodafone, the era of walled gardens is ending, and users expect access to the best content available, whatever access method they have.

The optimistic view argues that carriers can offer a seamless experience, that they are a crucial nexus of the mobile ecosystem, or that by buying exclusive rights to key content — such as a big soccer tournament — they are becoming media companies. Several tables (including ours) also noted that the operators are sitting on a wealth of individual consumer usage data — which Google can only dream of — that they might figure out how to monetize some day.

The Mobile Internet: How Japan Dialled up and the West DisconnectedA few also suggested that operators could play a role in selling billing services. Apparently among the Europeans present, no one had heard of NTT DoCoMo, which mastered that model with i-mode a decade ago.

However, the operator at our table was a no-show and we had two Americans, so we took a much more pessimistic view about their future. Existing operators face three types of threats: increased commoditization/competition among existing rivals, possible new entrants, and ways of capturing value (iPhone App Store, Android Market) that bypass the operator.

The end of flat rate mobile data is both an opportunity and a threat. Operators will be able to charge the data hogs what they are really costing, but at the same time, it will reduce the attractiveness of 3G networks relative to wired and hotspot alternatives — particularly for American teenagers addicted to watching YouTube.

Consolidation — reducing directly rivalry — might be a hope for operators to moderate some of these pressures. However, based on the past 30 years of telecom regulation, I think few countries will allow the number of operators to drop below three — exactly because healthy competition is needed to keep honest the would-be oligopolists.

Our group concluded that the near-term prospects for US operators were not good, as the bypass threat posed by Apple and Google were already quite strong. We thought that in the near term, European carriers would continue to milk their market power — although one other table noted that two French DSL carriers are stitching together roaming across millions of WiFi hotspots to form, in effect, a new mobile Internet network.

Certainly in China the operators remain a chokepoint, and another table suggested this was true in Latin America. So the geographic variation remains considerable — some pipes are more scarce (and thus more valuable) than others.

However, what was striking in retrospect is that the mobile phone companies are almost in exactly the same boat as the US cable TV companies. The cable TV companies have the advantage of mindshare providing entertainment content, albeit less growth. Both, however, may end up being just “dumb pipes” by which users access the open Internet, to use content provided by those who didn’t have to pay to build the pipes.

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