Thursday, May 26, 2016

Verizon Strategy Right in Terms of Function, Wrong in Terms of "Core Competence"

Sooner or later, the notion of traditional service provider “core competence” where it comes to  running networks--already challenged--is going to be severely tested within the Internet ecosystem.

“Core competence” implies not only that an entity is good at doing some things, but that an entity has a unique ability to so those things, in ways that others cannot emulate.

Viewed that way, no single mobile operator has a “core competence” where it comes to building or operating mobile networks, by definition. Others can, and do, routinely do so as well.

That has become increasingly true in the fixed network business as well, as cable TV operators, Google Fiber and third-party Internet service providers provide identical services, and operate their own networks.

In other words, perhaps “running networks” is not really a core competence. If so, Verizon and other traditional access providers are going to face huge headwinds.

Managing access networks arguably is a “key role or function” provided by an ISP, whether that is a core competence or not.

There is a reason the seven-layer Open Systems Interconnect model has access at one layer and apps at the other end of the stack.

The functions are distinct, even if any single provider might not have an actual “core competence” that is unique, within its role.

In other words, “things we do” within the ecosystem is a valid concept, even if “core competence” is less clear.

“The one thing that I try to think about is core competency,” said Verizon CEO Lowell McAdam. “And I'd put our team up against anybody in the world on the network side.” Few would disagree with that statement, as far as it goes.

“The connectivity layer is where we feel we need to be dominant,” said McAdam.

But here’s a key follow-up statement: “ As you go up into platforms and things like content, it's not exactly our strong suit.”

In other words, Verizon’s strategy is to be “dominant” as an access provider, and then be “a player” in at least some of the applications that require access.

In principle, that is a very-sound strategy. It is the strategy embraced by cable TV providers, who likewise might argue they need to be dominant access providers, but also own at least some of the apps they deliver.

Still, over time, a number of trends suggest that the access function might be less a matter of scarcity than has been true in the past.

There are going to be more providers (cable TV already has the largest market share in the U.S. Internet access business).

There are going to be more ways to source access (Wi-Fi, new high-throughput satellite constellations, fixed wireless, balloons, unmanned aerial vehicles).  

There is going to to be much more capacity (more providers of gigabit fixed access and much more wireless spectrum).

And the cost of being an access provider is going to drop. As that hurdle gets lower, a wider range of potential business models becomes possible.

All of that erodes whatever advantages an access specialist might believe it possesses. So, in one sense, Verizon’s strategy is strategically flawed. It does not actually have a “unique and hard to replicate core competence” in access.

Others have done so, and more will do so in the future.

Still, Verizon is correct, in another sense. Like cable TV operators, the revenue portfolio will be a mix of selling access, and owning at least part of the content delivered over that network.

“Core competence” is not necessarily the issue. Key function is the issue. Verizon will build on its access function, adding app roles. Like many other big participants in the ecosystem, Verizon will participate at multiple layers or segments within the ecosystem.

But Verizon might not have a unique capability in any of those roles.

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