Value Chain Choices Have to Be Made

For most service providers, the biggest fear is a future where they are relegated to being providers of low-value, commodity-priced "dumb pipe." Which is why just about every telecom executive is looking at ways to "move up the value chain." Which isn't a misguided thought. The risk is that network companies will forget that the one unassailable value they do bring to the party is precisely their "dumb pipes." Which is not to say they have no experience with applications. POTS is after all, an application. But there's a gnawing, nagging sense that most innovation is going to come in the form of applications that ride on top of pipes, and that today's service providers might not be well placed to capture much of the value from those innovations. Again, not a random thought.

The problem is to find some path forward that maximizes the permanent value of access, transport, directory and other services in a world where some applications will be of the "walled garden" variety "telcos" can create and control, while many more apps will be "over the top" applications they won't be able to control or profit from.

At the end of the day, today's tier one carriers will probably have to recognize that "pipe" is the foundation of everything else they do, and a sustainable business in its own right. Some of that pipe might occasionally be "dumb." Most services, though, are going to require some degree of intelligence to be useful. Real time services, for example, require more intelligence than the best effort Internet to be useful. But there are going to be more private networks where something closer to dumb pipe is what the enterprise customer wants to buy.

Telcos will wind up being distributors of video in the consumer markets in a way analogous to cable operators, which puts them into the "apps" business. But they ultimately will have to concede that most of the apps business simply isn't going to be within their orbit, and that a sustainable business has to be built on being good plumbers, first and foremost.

There's nothing wrong with exploring and creating partnerships that provide a slice of the revenue. But there's great risk in believing carriers can change enough to be really successful app providers. It simply isn't in the organizational DNA. Tier one providers need to focus on the quality of their pipes (networks), first and foremost, and then on only a few applications they historically understand (POTS, mobility, special access, networking) very well. Straying too far from that core competency will prove quite dangerous. In that regard, video entertainment is going to prove to be an adjacency they can master. Other web-based services won't likely prove to be as logical.