The internet is evolving and this process is irrevocably changing the nature of the network market. Internet diffusion and the broadening of its usage, as well as its very pervasive nature, is destined to make it increasingly difficult for network operators to maintain their gatekeeper role.
Network operators have lost control over a range of activities that are taking place over their networks – they have to accept that ‘edge’ and virtual network developments have created a supra-network that makes exercising central control more difficult.
Apart from the technical aspects the increased importance of these networks for national social and economic development is also a major factor that undermines the gateway-keeping position of the network operators. This has resulted in governments implementing a range of political, economic and social policies that are dependent on an affordable and high quality digital infrastructure. The problem is that these social and economic benefits don’t show up on the balance sheets of the network operators.
Networks critical for social and economic development
In all, 119 countries around the world have now implemented policies that recognise the importance of broadband infrastructure for the digital development of their societies and their economies.
Increasingly this infrastructure needs to be made available at utilities rates, similar to electricity, gas, water and roads.
These developments are putting pressure on the margins of the operators as they are required to make these networks available on a wholesale/utilities basis, which is exerting pressure on the ROIs that network operators have been accustomed to for many decades.
Moving towards Next Generation Networks, many of the emerging open-network FttH networks now have technical facilities – for example, through their ONT (optical network terminator) – that allow a range of providers to directly offer, in parallel with eachother, independent services to people’s homes (for instance, a customer does not necessarily need an internet subscription to also have access to a smart grid connection, a health monitoring service or certain entrainment services. There is no doubt that open infrastructure models will have to be the way forward.
Higher level values are moving elsewhere
Unfortunately the operators have been unable to move into higher value services, as these markets have now largely been captured by OTT companies and device manufacturers such as Google, Apple, Amazon, Microsoft, Samsung, Sony and many others.
In the 1990s the operators failed to embrace developments that would have allowed them to move into what is now called the OTT sphere, and in the 00s they failed to monetise the mobile data opportunities.
We also see, especially if we look to the future, that fixed and mobile broadband networks are increasingly being used by a whole range of different sectors – media companies, healthcare organisations, educational institutions, energy companies (smart grids) and others. As mentioned, these sectors and industries require low-cost access to the network in order to build their own business models and do not necessarily want to go through traditional network operators performing the gatekeeper role.
Many companies and organisations who want to participate in the digital economy, will be happy to tap into value-added network services that operators have to offer, so there are good opportunities here for the operators. But other ICT companies as well as a range of emerging niche market operators are also moving into this space, with their cloud computing, specialised applications and data centre services; so, no matter how we look at it, competition for network operators will only increase. There are good examples from network operators who are taking a leadership position in this space, but many still cling to a rather inflexible approach based on their old culture as the dominant incumbents.
Managing the transition
The dilemma for the network operators is how and when to make the transition to the inevitable. Moving to the new environment – providing infrastructure services within the digital economy – will mean cannibalisation of some of their old services, even though new revenues from this emerging digital economy are still very uncertain. This is a key challenge for any organisation transitioning into the new digital environment.
Nevertheless, holding back the transition could be very costly, as has been shown when other sectors have delayed or refused to go through this process.
The changing market indicated above also means that to a large extent retail customer contact will move away from the operators – particularly any contact regarding the more value-add activities (applications). However the operators can also utilise this changing situation to collaborate with their wholesale customers on the delivery of these services, using the telcos’ customer bases.
With demand growing exponentially in nearly every aspect of the business, this environment is creating plenty of opportunities in which networks are playing an increasingly important role. The explosion of OTT companies, as well as other companies tapping into these growth areas, is evidence that money can be made. It is up to the network operators to find their role in this business. They can no longer be the all-encompassing gateway-keepers – they will have to develop new open models that will allow them to play in this market.
Once they have made the decision to change they can focus on the unique offerings they can contribute to the digital economy and monetise their position there; and from such a platform it will also be much easier to develop their future strategies.
This is an edited version of a presentation made by Paul Budde at the “State of Telecoms” conference at Columbia University in New York City this week.