Telecom Business is Fragmenting

The separation of access from applications that is a fundamental feature of Internet Protocol will probably have an apparently contradictory impact on the structure of the global telecom business.

On one hand, slower growth will drive a new wave of consolidation among service providers, both domestic and internationally.

That will mean a smaller number of larger suppliers. Just five percent of global telcos control about 62 percent of industry revenue, according to analysts at Booz and Company. One might argue those figures show a high degree of industry concentration. But Booz say there is significantly more to come.

On the other hand, end user application markets might be fragmenting, essentially creating smaller islands that run counter to the growing trend to scale on the networks side of the business.

Increasingly, the emphasis is on local services, local content and local development
grounded in the community needs of local markets, according to the  International Telecommunications Union.

That trend to “localism” should lead to business models adapted for the specificities of geography, demography, generation, and economic and social environment in each country.

You might call that “personalization.” But personalization also means fragmentation of formerly homogenous markets. And that runs counter to the consolidation trend among access providers.

And that will complicate retail packaging, pricing and offer development across markets. In some cases, that will encourage access providers to focus “mainly on access.” Other suppliers might try to play more on the personalized applications end of the business.

So, as has been the case for a couple of decades, service providers will adopt different business models. And though it might not be a popular observation, access providers might well find they don’t have as many natural assets as they would hope, in the applications area. For any number of reasons, carriers simply cannot develop on the fast-paced,consumer-based model.

Access provider time horizons for investment and product life cycles simply are too slow, compared to the consumer application providers.

In fact, access to the network is now the basic product, rather than voice - which is increasingly fragmented and embedded as a feature or function of an application
such as gaming or messaging, rather than being a stand alone service, the ITU suggests.

The fragmentation of the industry  into closed, proprietary systems operating in silos of
communication could potentially threaten the interconnectivity upon which the global telephony system has been built, the ITU says.

So there is a growing disconnect between the diversity and localism or personalized nature of applications and the scale and need for interoperability of access operations globally.

In some key ways, the way software and applications now get created--independently of access--creates the potential for distinct revenue models. Generally speaking, the service provider “customer” generally is the actual end user of an access service.

The application customer generally is an advertiser or retailer, not the end user of an application. That means service providers generally sell to a different customer than an application provider, even if a “user” is a focus of the operating business.

And that will be a growing issue. Can access providers balance the challenges of selling products to consumer end users and other business partners (advertisers, merchants, enterprises)?

In the applications area, access providers will compete with dozens to scores of other competitors, most of whom capable of innovating faster.

In the access area, they will compete with a handful of other providers, most of whom cannot move significantly faster than each other. Which model makes most sense? Which models will regulators allow?

And which is the easier path? One might reasonably argue that the quickest path to revenue growth is to simply acquire other assets, essentially postponing a bigger strategic choice.

In fact, “the telecom sector remains relatively fragmented,” Booz consultants say. In the healthcare and oil and gas sectors, companies in the top five percent generated 79 percent of total 2009 industry revenue.

International revenue provides another indication that further consolidation is possible. In the telecom business, international revenue accounted for only 25 percent of telecom industry revenue in 2008. That is well below the 38 percent level that all industries averaged, and only half that of some industries, Booz and Company consultants say.

Regulators might make the key decisions easier, especially where they mandate a "separated" industry structure where "access" is a wholesale product, and all retailers compete on a non-facilities-based basis.

That wouldn't directly enable an access provider to consider a bigger move into "applications." But removing most "network operations" overhead from the organizational culture would make easier a shift of resources into applications.