Will Telcos Be Pipes or Service Providers?

Almost no question is strategically more important for any cable TV company or telco than the issue of what future is possible, or desirable. Telcos and cable TV companies always have been "service" providers, where applications and access were tightly bundled. 


Broadband access was the first consumer service to break from that mold, and private line services were the first big change in the business customer segment.


So the big issue now is what "should" be the strategy in a business environment where virtually every application can, in principle, be delivered to users "over the top."

Deutsche Telekom CEO Rene Obermann said the cloud was an opportunity for telcos to “make the most of our assets” and transform themselves into "smart pipes."


Still "pipes," mind you, but pipes that have features. 

“Most people expect us to become dumb pipes, but that’s wrong," says Obermann. "The question of whether we will be dumb pipes or smart pipes will be a thing of the past.” 


In areas such as traffic management and quality of service, network access and transport providers will essentially make substantial money providing various traffic management functions sold to third parties that have a business interest in the end user quality of experience. 


That assumes regulators will let access providers provide quality of service measures that end users can buy, or that application and service providers can buy. It also assumes customers are willing to pay. 

Though both over the top and owned apps, services and features are likely to be staples of any long-term future to some degree, the pipe function is going to be more important over time. Nor is it clear that the revenue contributed by the smart features ever will be quite so substantial as the "dumb" access feature. 


One is hard pressed to think of any "value-added" feature in the mobile or fixed network businesses that provides as much gross revenue as the "basic" service. In other words, do the security features offered to consumers as part of their broadband access subscription drive as much revenue as the access? 


Wll QoS mechanisms drive as much revenue as access and transport, for business customers? 


To be sure, one might argue that a content delivery network so blends a transport function with a value add that it is difficult to compare the incremental revenue provided by the "content acceleration," compared to "simple transport." 


The point is that the value adds probably never will be driving as much revenue as the "base" access products. The issue is to find the exceptions to the rule. 


If a mobile service provider sells a stand-alone personal Wi-Fi Hotspot feature for a smart phone subscription, is the incremental cost likely to approach the retail price of the smart phone's data plan? Probably not. 


But could the personal Wi-Fi Hotspot plan drive incremental revenue that is up to 50 percent of the cost of the basic smart phone access? That is possible, and highly significant. 

Keep in mind that a personal Wi-Fi Hotspot service is still a "dumb pipe" product. But one might conceive of it as a value-added feature of the basic smart phone broadband access service. 

The point is that dumb pipe, though derided, should continue to be the foundation for all the smart pipe features, and that these "smart" features will represent incremental revenue that is some percentage of the value of the "dumb pipe" access. 


Nor is the underlying wholesale cost of bandwidth necessarily related in linear fashion to retail value and pricing. The value of personal Wi-Fi Hotspot bits arguably is higher than that of smart phone bits, or no rational consumer would pay extra for the feature. 


The issue is how many of these enhancements to "dumb pipe" are conceivable and possible, even when the pipe remains the foundation for the rest of the business. . 

Cornelius Vanderbilt cut the price of rail freight 90 percent, Andrew Carnegie slashed steel prices 75 percent and John D. Rockefeller cut oil prices 80 percent between 1870 and 1900.

Malcom McLean, Sam Walton and Michael Dell did roughly the same for container shipping, discount retailing and home computing a century later. Such radical changes often are unwelcome by the producing community, though the consuming public benefits.


In some ways, what service providers are trying to do is sell automobiles and ships rather than steel, even as steel remains the underpinning of the business. 


Service providers always built services on top of pipes. They always have sold "voice" as a retail product to end users; the pipe was only a means to create the service.


What is is different now is that the pipe is becoming the foundation product for the future. Users will buy access to the Internet and apps, whether they buy apps and services from the "pipe services" provider, or not. 


That's the new strategic challenge: to build the whole new business around pipe services.