Sunday, July 5, 2015

Telecom a "Zero Billion Dollar" Market?

Will the “zero billion dollar market” strategy become a relatively widespread reality for telecom providers across much of the rural United States?

The "zero billion dollar business" is an artifact of near zero or actual zero rating of services and products made possible by marginal cost pricing.

Think about Craigslist. Because it could rely on a fraction of the revenue that newspapers needed to operate profitably, it also was able to change the retail cost of placing “classified” advertising.

Media executives have a saying about the revenue potential of their businesses in an Internet age: revenue is a matter of “analog dollars, digital dimes and mobile pennies.”

In other words, the marginal cost of many Internet-based businesses actually destroys markets, making them smaller. That accounts for the fortunes of newspapers, magazines, travel agencies, physical forms of recorded music or video, bank branches, the postal service, long distance calling and most other products where digital substitute products are possible.

The thing about zero billion dollar businesses is that they are highly disruptive. They can vastly reshape wholesale costs and retail prices; features and benefits; and so capture leadership of new markets that are vastly smaller than the markets they displaced.

Hence “analog dollars, digital dimes, mobile pennies.

Consider the growing phenomenon of various governmental or third party and “close to non-profit” Internet access ventures in the United States.

WiredWest is a telecommunications cooperative designed to bring broadband to rural communities in Western Massachusetts.

Some 22 WiredWest communities have passed bond authorizations totaling $34.5 million for their towns’ portions of costs to build a fiber-optic network.

So far the WiredWest Coop has received over 6,700 deposits for service, representing a third of potential subscribers, and 15 towns have more than 40 percent of premises presubscribed.

WiredWest hopes to eventually wire a total of 32 towns in the state.

Granted, such Internet access networks do not neatly represent marginal cost pricing or near zero pricing. Access networks are quite physical, and do not scale as Internet apps can add users.

But there some analogies. It might be argued that third party networks partially funded by governments can sustain themselves at lower revenue levels than private firms can manage.

In part, that would be an instance of “zero billion dollar” mechanics: new firms creating sustainable models for themselves that nevertheless have the effect of shrinking the size of the existing access market.

In other words, should the implications not be clear, new third party contestants, partially funded by government entities, could recreate the Internet access market. Though total service provider revenue would decline, the new contestants might thrive in the remaining market.

And should the Internet access market become smaller, traditional telcos and cable TV companies might find their voice, video and other revenue streams insufficient for them to remain viable providers.

True, access is an “atoms” business, not a “bits” business. But that is why marginal cost pricing is so profoundly important.

In many cases, pricing at marginal cost does not recover the sunk costs of network investment, especially when stranded asset rates are high.

Zero billion dollar markets are transforming many other industries. One has to wonder how much of that effect eventually will affect the access business as well.

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