Saturday, April 14, 2018

Creative Destruction in Telecom Industry Requires Creative Construction

In 1996, with the passage of the Telecommunications Act, regulators thought they would unleash a huge new wave of competition and innovation in the telecom business. So they unleashed competition in voice services, about four to five years before the voice business reached an absolute peak, and began a sustained decline.

Innovation did come, as did competition that sliced prices. But the innovation came from suppliers of internet-based services. In fact, the whole global telecom industry stopped trying to create the “next generation network” platform, and instead adopted TCP/IP, the internet model, completely and irrevocably.

"Creative destruction" has been at work, where the new displaces the old. It is not pleasant for "losers," as profitable as it is for "winners."

Looking back a few decades now, it is simply historical fact that as profit was driven out of the old telecom business, so was investment ability and relevance. Where telcos used to create and own customer premises gear, switches, operating systems and so forth, today a shrinking roster of suppliers exists to supply such products and platforms.

Less investment in basic or applied research now is conducted by service providers, as they simply cannot afford to do so. The converse happens at the fastest-growing and largest internet app provider and platform firms. There, internally-owned development is the norm.

There are some other “scary” implications for capital-intensive access providers. App development these days is lead by asset-light firms (software-based firms). So access to capital--vital for access providers building expensive networks--is less a requirement for app development, where, arguably, the greatest value now is being created.

As Professor Jerry Davis notes, Blockbuster, which was delisted in 2010 and liquidated, had 84,000 employees and more than 9,000 stores at its peak. Netflix, which arguably drove Blockbuster out of business, has 3,700 employees and rents server space from Amazon, even as it expands globally.”

“Zillow has 2,200 employees; Yelp has 3,800; and Facebook, with a market capitalization of more than $350 billion, has just 13,000 employees globally,” says Davis.
Any plier of any trade, all companies selling a product, every non-profit organization and every governmental agency can continue to sell products--or avoid bankruptcy--only so long as there is demand for the products.

That is why people sometimes move from one industry to another (some are shrinking, some are growing), why companies must change the products they sell, convince buyers a product is needed  and why non-profits often must find some new problem to solve (the original problem actually is solved).

Almost perversely, curing a disease means any company solving that problem must find new diseases to eliminate. As the old adage goes, there is not much of a market for buggy whips these days. A better current example is demand for dial-up internet access, phones unable to use the internet or landline telephones and services.
There sometimes are instances where “fake problems” are said to exist, so entities can stay in operation (and continue to get donations, volunteers or revenue). Political parties and politicians arguably do that all the time.

In the telecom industry, we have seen many example of this sort of creative destruction. There no longer are switchboard operators. Many people and firms that once made a living selling long distance service are doing something else.

Specialists selling services to small businesses discovered they no longer can compete with the older products when up against cable TV providers of those products. Likewise, many competitive local exchange carriers find there is a non-existent consumer services business model and a slender opportunity in the small business segment, with the greatest opportunities (perhaps targeted opportunities) in the enterprise segment of the market.

The point is that every industry affected by competent new competitors and the internet is going to have the profit margin wrung out of it. Big rearrangements must necessarily be made, and regulators must be wise enough to let them do so.

Creative destruction is destruction, nevertheless. Survivors will have to creatively construct their new roles. Regulators need to allow that to happen.

Freedom is the better framework for all in the internet ecosystem. Keeping industry segments in boxes does not make sense when the walls between industries keep coming down.

There are, to be sure, issues around privacy, trust and so forth that are going to be addressed. That is a different matter from impeding participant search for, and construction of, new roles, to supply new value.

Firms and industries are shifting roles and value propositions. Let it happen.

No comments: