Internet Exacerbates "Competition" Issues, But Competition Still is the Key Market Change

It appears that IP messaging app WhatsApp has passed 250 million users, enough to put WhatsApp in the same league as Twitter (200 million users) and Skype (280 million), in terms of user base.

Others might say the real impact is that IP-based instant messaging services are becoming, for many users,  the primary social graph. That means a potentially important new revenue vehicle is being created.

“For whom?” is the issue, as seems always the case for service providers.

Seemingly endless amounts of speculation and argument will continue to be expended by executives, pundits and analysts about “what service providers should do.” That’s a fair enough question.

What should by now be abundantly clear is the strategic impact on service providers, no matter what they decide to do tactically (participate by buying into the business, create branded versions of such services, fight back by enhancing the value of any existing substitute products, or essentially ignore the attackers).

The analogy and historical precedent is the advent of competition within the facilities-based telecom business, even before the advent of over the top competition. A look at addressable market illustrates the primary change of strategic context.

Back in the monopoly days, a national carrier’s business case was fairly simple. Whatever other assumptions one might have made, the potential addressable market was nearly “100 percent of homes and business locations.”

That had implications for the “cost per subscriber” or “cost per customer” metrics. At very high customer penetration, “cost per customer” and “cost per passing” are fairly closely related metrics.

That is a relatively simple business exercise. Build out network, passing 10,000 new locations, and sign up 70 percent to 90 percent of those locations as customers.

All of that falls apart in a competitive environment. Assume just two strong contestants with networks, equally skilled and with some advantages (telcos with mobile or cable TV with video).

In that case, the math is quite different: build or upgrade a network and sign up perhaps half of those locations as customers. That can nearly double the “cost per customer,” based strictly on payback on network capital.

The other likely effect is an increase in marketing expense.

In other words, the effect of competition is a fundamental change in network economics and profit margin.

Over the top services pose the same sort of challenge. By now, it should be obvious that one clear implication of IP-based competition is that profit gets wrung out of any service or application that formerly was immune from such competition.

So whatever tactical response a service provider chooses to make, it will be within the context of radically-different gross revenue and profit margin assumptions.