Google et al Really are the Competition for Major Telcos, Not Other Telcos

For some time now, telecom executives have mentioned in surveys that their main competition  is not other service providers, but over the top app firms such as Google, which now lead markets for content, apps and platforms, and are emerging in devices and infrastructure.

Yet other surveys have executives citing device or other platform suppliers as the top threats, not other service providers.

And yet the typical executive or department head, on a day-to-day basis, likely continues to benchmark performance by other service providers. So mobile operators are obsessive about their market share, compared to other mobile operators. Cable operators tend to benchmark against telcos, fixed network telcos against cable.

Rival satellite providers consider other satellite providers to be the key share benchmarks.

All of that makes sense, yet obscures the primary challenge (some would say the existential threat) to the “telecom” industry, namely the shift of value away from access to applications, and the ability of app platforms and providers to subsume access functions and vertically integrate.

It would be correct to say that app provider strategy includes vertical integration, allowing the firms to better control both their supply chains as well as reducing cost.

For example, 60 percent of trans-Atlantic traffic now runs over privately-owned and operated undersea networks, not over public telecom networks. One way of describing this is to say that 60 percent of international traffic on those routes has been removed from the telco addressable market.

Google and Facebook already have moved into public Wi-Fi, fixed network access, mobile services, satellite services, access equipment standards and ways to subsidize internet access.

But that is only part of the story. The leading app and platform providers have emerged as the leading forces in cloud computing as well, with a growing role in devices.

Devices, in fact,  are among the building blocks of Google’s growth strategy, to be built on Google, cloud, hardware and YouTube, Google says.

Hardware revenue, though still included in the “other” revenue category, grew 38 percent in 2016 and seem to have doubled in 2017.

The commercial reason behind Google’s emerging business model appears to be the value that a single company can create if it combines content services with network hardware, many would argue.

One way to create this value is by aligning networks with content.

And that is the reason why Comcast’s acquisition of NBCUniversal was so instructive, and why AT&T wants to buy Time Warner. If your primary competition is app firms with network assets, then telcos likewise need to become app providers with access network assets.

That is seen first in entertainment video, but will deepen in other areas, such as internet of things. In that sense, the U.S. Department of Justice effort to block the AT&T acquisition of Time Warner is misguided. That would block a necessary step AT&T must take to survive the competition with the leading app providers.

In other words, the “relevant market” is no longer “telecom services.” The walls between content, media, access and communications are evaporating. Firms such as AT&T must vertically integrate, as their most-important competitors are doing.