Could "Winner Take All" Become "Even Winner Loses"?

With the major caveat that creating an app-based or software-based company has infinitesimal barriers to entry, compared to building an access network, bond market wizard Mohamed el-Arian says research and development spending buys less than it used to, because markets have tended to take on a  “winner take all” character. Others have documented the "winner take all" trend in technology markets.

The key now is whether a firm can execute on commercializing a killer app, and less about how much money it has put into “innovation.” Apple is the firm that probably comes to mind, even if it has produced what some might call a killer gadget.

Whether network effects always are so strong in all markets is one issue, though. Some argue that winner take all trends are common, across many industries. Consider the recent “battle” between Long Term Evolution and WiMAX to create a global fourth generation mobile network standard.

That was settled in much the same way the VHS versus Betamax standard war was resolved, with complete victory by one of the proposals.  

It isn’t so clear the analogy is so apt in the telecom business, though one might note that scale always has been a key asset in the  access or transport services business.

On the other hand, the “winner take all” concept does resemble the shape of most mature telecom markets, even if that was not the case at the beginning, as with the mobile service provider business in some countries. Some predict African mobile markets will feature a winner take all pattern.

On the other hand, one might also speculate about the future benefits of “winning” in the access market. There are two key aspects, first the value of dominating market share in the access business, and then the broader matter of the relative value of access in any Internet-based business ecosystem.

To be sure, most of the value in any Internet-enabled ecosystem flows to the “application layer” participants, not the “access provider.” That, perhaps, is less the issue. Maybe the bigger issue is what value accrues to the market share winner in the Internet access business.

It’s a bit of an abstract notion. Any contestant in a telecom revenue segment would prefer to be the leading and dominant supplier. In that sense, winning is its own reward.

But one might argue there is a potential dystopian angle. If one accepts the thesis that bandwidth prices tend to decrease over time, then the logical counterweight is to sell more units.

ISPs will be doing that.

At the same time, it is reasonable enough to assume that future revenue contributions from important applications such as voice, text messaging and possibly even video entertainment will decline dramatically.  

To be sure, that is why mobile service providers have such high hopes for machine-to-machine or Internet of Things applications. If mobile penetration increases from 100 percent (one phone per person) to 400 percent or 500 percent (multiple devices and sensor applications per user), it is easy to see the impact of potential new revenue streams.

Still, access networks are expensive, and some firms have legacy cost structures that arguably are too high, compared to other key competitors. So the imponderable is what happens to aggregate revenues in a decade or two? Can a major telco or cable company actually go bankrupt?

To be sure, lots of competitive carriers, and at least a few incumbent local exchange carriers, have gone bankrupt, without apparent long term harm to the national access infrastructure. But those firms were, by definition, not the carrier of last resort, with national or ubiquitous coverage.

But there are some potential warnings one might make. AT&T, one might argue, sold itself to SBC because it otherwise would eventually have gone bankrupt.

“Winner take all” economics might occur because of network effects or platform economics. But there is one more hard-to-answer question. Sometimes “winner take all” happens because a market is shrinking.

It is possible, perhaps likely, that major telcos will find a way to create new revenue sources big enough to offset declining revenues from legacy sources. But market failure is conceptually possible.

It hasn’t happened yet. But it could happen.

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