It's Always Dangerous When a Competitor Gives Away the Thing You Sell

One characteristic of newly-competitive markets, including both former monopoly markets that are deregulated, and existing markets that are roiled by transformative and disruptive new technology, is that the boundaries separating one industry from another typically become porous.

Put simply, what happens is that “firms not in your business get into your business.” 

That is the inter-industry analogy to intra-industry segment encroachment, where one contestant in an existing value chain decides to enter a related part of the value chain.

That is why, in recent years, questions have been raised about app providers becoming Internet service providers, app providers becoming device suppliers, telcos becoming banks or mobile payments suppliers, cable companies becoming telcos or telcos becoming video entertainment distributors.

Sooner or later, U.S. cable companies also will become contestants in the U.S. mobile communications as well.

But the most-unsettling moves arguably have come from app provider entry into Internet ecosystem adjacencies, specifically Internet access and devices.

As with the earlier examples of Voice over Internet Protocol (VoIP), the business problem is extreme: legacy providers suddenly face competitors willing to give away the thing the incumbent sells.

Much advice has been offered about “what telcos can do about voice revenue erosion.” For the most part, almost nothing has worked, with the salient exception of the shift of demand from fixed lines to mobile phone access.

The range of offered device ranges from “add more value” to “gain more scale” to “cut costs.”

In practical terms, service providers have tried all of those approaches. The triple play bundle was a successful effort to change the perception of value. High definition voice or Wi-Fi calling are efforts to add more value directly to a product.

Firms have expanded into new markets outside their legacy footprints, and taken many steps to reduce capital, operating, customer service or marketing costs.

Porous boundaries, in other words, both increase competition within existing businesses and transform revenue and cost parameters, distribution and marketing methods.

Will Facebook become an ISP?” is among the new questions.

In some ways, Facebook already has taken a half step, by creating bundles of mobile apps available to users in many markets without the need for a mobile Internet access plan.

Facebook also seems to be preparing for some sort of freemium strategy as well, allowing users to upgrade from “no incremental cost” to “for fee” application access.

Observers might object that the strategy ultimately requires either partnership with mobile service providers, or some way of replicating the access function. Facebook might do both.

While not confirming that Facebook had any interest in becoming a full-fledged Internet service provider, Facebook CEO Mark Zuckerberg has in the past noted that barriers to connectivity are an obstacle to Facebook’s growth.

The reason is that both Google and Facebook have business models that scale directly with use of the Internet in general, and of course their own applications in particular.

It might be clear enough that Google wanted to become an ISP in the U.S. Internet access market in order to force other major ISPs to radically upgrade their facilities and consumer offers.

Google itself might not have been completely clear, at the onset, about whether Google Fiber was simply a way to speed up bandwidth investments throughout the industry, or something more.

“To connect everyone in the world, we also need to invent new technologies that can solve some of the physical barriers to connectivity,” Mark Zuckerberg, Facebook CEO, has said.

In the past, the question of whether Google, Facebook, Amazon or others might likewise become device suppliers also has been answered. Google’s Nexus and Amazon’s Kindle and Fire phone provide part of the answer to that question.

Some think Facebook has decided it has to become an ISP in some developing countries. Among those who believe Facebook will do so is analyst Jeffrey Himelson

Among the moves that suggest this is coming is the string of acquisitions Facebook has made recently.

Pryte, now owned by Facebook, has developed software that makes it easier for consumers without mobile data plans to buy short term or temporary access. That is one way of boosting access to WhatsApp or Facebook, since users would not have to buy mobile data plans.

Facebook also owns Ascenta, a satellite drone company, Facebook's Internet.org initiative provides another clue.

Already, Internet.org has created an app allowing access to a bundle of applications without charge, and without the need to buy mobile Internet access.

Most might agree Facebook’s upside is greatest in developing regions without substantial Internet access at the moment. That might explain Facebook’s interest in drones and satellites.

Advertising now accounts for 90 percent of Facebook's revenue, but a significant portion of that advertising revenue comes from U.S. and Canada users, representing average revenue per user of about $5.16.

In the rest of the world ARPU is $0.68. Facebook might have concluded that, as does Google, connecting everybody to the Internet is fundamental for future revenue growth.

And that just might mean in is in Facebook’s interest to become an ISP, thus illustrating the way radically-important new technology erases boundaries between industries, and roles within existing ecosystems.
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