Saturday, June 30, 2018

Amazon Makes Another OTT Move

Amazon just spent $1 billion to buy online pharmacy PillPack, which PillPack, which supplies medications direct to home in 49 U.S. states, excluding Hawaii. The U.S. pharmacy business currently represents about $400 billion in sales value, so it might be obvious why Amazon wants in.

On the day the deal was announced, incumbent pharmacy suppliers and pharmacy benefit managers lost about $20 billion in market value. The same thing has been happening to virtually all other retailers whenever Amazon decides to enter their segment of the business.

Telecom industry professionals should understand the business issue quite well. What Amazon is doing is taking out the middleman, a process called disintermediation.  

Telcos encountered this some time ago. Skype, Google, Facebook and others now supply messaging and voice services themselves, allowing their users to communicate without buying a service other than internet access from any internet service provider.

Netflix and others now offer video entertainment services that compete with and replace linear video subscriptions. In fact, Google competes directly as an internet access service provider (Google Fiber), acting not only as the app provider but also displacing the ISP role as well.

Disintermediation means the “reduction in the use of intermediaries between producers and consumers.” In other words, cutting out the middleman, and going direct to one’s customers, without the use of other distribution channels.

So one big impact of huge content and app firms building and operating their own networks is that the size of the public communications market is reduced. In other words, a growing percentage of international bandwidth no longer moves over public networks, supplied by public carriers (telcos or capacity specialists).

Depending on the route, private bandwidth supply represents as much as 30 percent to 70 percent of total traffic on those routes.

The other impact is falling prices. With some exceptions, bandwidth prices on undersea routes have fallen steadily, but not precipitously, over the last decade or so.

One issue, as noted, is that traffic now is shifting to private networks owned and operated directly by content companies, app companies and other enterprises, who no longer need to buy such long-haul capacity from commercial providers. That means fewer potential customers, and therefore more competition to secure what remains of demand for public network services.

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