"The End" of Connectivity Services Revenue Model is Coming

“The end of communications services as we know them” is coming, argues the IBM Institute for Business Value. That puts the institute on one pole of an argument that never seems settled: should service providers build strategies around connectivity revenue sources, or look elsewhere for growth?”

In other words, should service providers focus horizontally on connectivity services or vertically integrate?  

In part, the study team--consultants Chad Andrews, Steve Canepa, Bob Fox and Marisa Viveros--base those recommendations on shrinking profit margins and lessened value of core connectivity services. That is what I have called near zero pricing.  

“There is evidence that connectivity may commoditize more suddenly and dramatically than expected,” the team argues. In other words, both lower prices per bit and lower demand for other legacy services will continue as a fundamental trend. 

“Margins for connectivity are likely to fall,” they note, as data consumption keeps increasing. “On the surface, exponential increases in scale would seem like a good thing for CSPs, but only if pricing keeps pace with the rate of expansion,” they say. “History and data suggest it will not.”

Near zero pricing is the term I use to describe the larger framework of connectivity provider pressures towards ever-lower prices. Others might prefer to emphasize marginal cost pricing. The point is that there is a reason the phrase dumb pipe exists. What we need to remember is that dumb pipe now is the foundation of the whole connectivity business. 

A caveat is that what people usually mean by “dumb pipe” is that a product has low value, is sold at low prices and generates low profit margins. That always is positioned as a bad thing. 

But think about it: industry revenue growth now is lead by broadband services (internet access), which is, by definition, a dumb pipe service. It is a way to get access to applications, not an actual application itself. Nor are profit margins always low. Broadband access now routinely has higher profit margins than entertainment subscriptions or most voice services or messaging can generate. 

The other issue is that value and revenue within the information technology and communications spheres keeps shifting away from “data access and transport.”

“In just three to four years,” sustaining growth may require “most CSPs (communication service providers)...to develop new competencies and assert themselves in new roles in value chains,” the IBM Institute for Business Value says. 

To be sure, that is not a novel bit of advice. “Think beyond connectivity” is about as standard a recommendation as one is likely to find any analyst, consultant recommending as a revenue growth strategy.  

“If CSPs are to thrive, most will need to develop new competencies and assert themselves in new roles in value chains,” the institute also says. As always, that advice runs counter to that of virtually all equity analysts, who always seem to want service providers to “stick to their connectivity roots.” 

Where the institute urges pursuit of different and new roles within the internet ecosystem, equity analysts want a focus on connectivity services. “Up the stack” or not remains a key argument. 

“CSPs should seek new ways to make money, beyond metering connectivity and access to data, as these traditional mainstays of CSP business models are likely to commoditize,” the institute says. 

“CSPs should seek new ways to make money, beyond metering connectivity and access to data, as these traditional mainstays of CSP business models are likely to commoditize,” the institute says. 

The institute identifies 5G and edge computing as key platforms, in that regard. Again, rather obvious suggestions. The institute also recommends a hybrid cloud strategy. That is not too surprising, given IBM’s commitment to hybrid cloud as its core strategy.

The institute also argues that telcos must become platforms. Again, not a novel view. The term platform is misunderstood by most, however. It has a different meaning when referring to computing than to business models. It is the former instance, not the latter, that seems generally meant by the phrase “becoming a platform.”

In the sense the institute sees matters, becoming a platform is meant in the sense of computing platforms. 

A platform in that sense is a group of technologies that are used as a base upon which other applications, processes, services, or technologies are developed. Platforms can be hardware (e.g., chips, devices) or software. Types of software platforms include operating systems, development environments (e.g., Java, .NET), and digital platforms. Digital platforms are highly configurable/extensible software tools that sit above traditional development platforms. 

Most observers would agree that core connectivity revenue streams are under pressure and are likely to stay that way. Where opinion really diverges is “what to do” about those circumstances. 

As wise as diversifying into new roles might be, history suggests how difficult that will prove to be for most service providers. That noted, most would also agree that opportunity exists in a number of areas including internet of things, edge computing and advanced networks. How to seize opportunities remains a subject of debate.