Big Changes in Product Strategy Must Come, for Fixed Network Service Providers

Google Fiber will no longer offer a linear TV product to new customers, essentially migrating the business model to a more-typical independent internet service provider model that is based on one product, not a triple play or dual play (video or voice). 

Comcast and Charter Communications, though noting that entertainment video still is a highly-significant revenue source, also say they now focus on core communications--especially internet access, business services and the new mobility segment--as their revenue drivers. 

Some small cable TV operators and small telcos might be moving the same way, essentially letting their video customer base dwindle, as mobile phone and internet access become the ubiquitous services consumers want. 

The big problem for small and rural service providers always has been that the linear TV business model is quite challenged. Few such operators have ever actually claimed they make a profit on entertainment video. 

In rural areas, where there essentially is no business model, subsidies always have made the difference between no service and “some level of service.”

At times, some rural service providers that have taken on too much debt might find themselves unsustainable. 

There are clear business model and strategy implications. In a competitive market, the reasonable assumption must be that two excellent providers will split market share; three excellent providers might expect only 33 percent share. 

There are two really-important implications. Without a lower cost structure, any single firm cannot expect to prosper if it has been built to support two, three or more key products. In the monopoly days, one service could support a full network, whether that service was TV, radio, voice or telegraph. 

In a competitive market featuring skilled competitors, suppliers might have to sustain themselves with customer share of 50 percent, 33 percent or less. That is why the triple play became important. The revenue impact of serving one out of three locations is mitigated if three services are sold to each customer location.

All that changes if we start seeing one key product supplied by most firms in competitive markets. Lower costs are necessary. That is why most independent internet service providers have such low overhead, compared to the larger telcos and cable companies.

But it also is likely that no bigger firm can get by simply by slashing costs. Additional revenue must be generated from other products and roles, to replace the dwindling legacy sources. 

So we might predict two developments. Single-product fixed networks using cables are only feasible if internet access is the product. Voice and video will not generate enough revenue to support a fixed network. 

So far, it has been possible for a wireless network to support itself on the strength of TV, radio or internet access. 

That changed in the competitive era, when single-product strategies based on high adoption (market share of 80 percent or more) began to fail. Multi-product sales based on selling more things to fewer customers (scope), rather than one product to nearly everyone (scale). 

All that seems to be changing as revenue upside from voice and linear video dwindles. Video arguably is the more-difficult challenge, as cost of goods is quite high. 

It certainly will make more sense, in a growing number of settings, for highly-focused, low overhead firms to try and make a go of things based solely on internet access, abandoning the multi-product strategy. 

But other changes must follow. Either overhead, capital and operating costs must be drastically pared, or new revenue sources found, or both. The decades where product bundles compensated for lower market share seem to be ending.

Something equally challenging now emerges: how to make a profit from a one-product network with lowest take rates.