Telco Disaggregation is Coming

As it is conceptually possible to separate simple replacement of existing processes with digital versions--keeping the processes intact--and the use of digital technologies to reshape and recreate processes (digital transformation), so it might now be possible to suggest future lines of development for “telcos and retail connectivity providers.”

In principle, as telecom and connectivity networks are virtualized, there are opportunities--or risks--related to reconceptualizing “who does what” and “who and what creates the value?” 

The risk is disintermediation: removing the distributor or middle man from the value chain. The potential upside is the ability to create higher-value services and apps faster, more affordably and more flexibly. 

We might then ask the question: “what is the value of the telco and where is that value located?” 

source: STL Partners 

In part, this is a shift from a vertically-integrated to horizontal model. That can have huge business model implications. The vertical model is closed; the horizontal model is open. The vertical model tends to come with higher costs; the horizontal model with lower costs. 

The vertical model tends to feature lower rates of innovation, while the horizontal model tends to increase rates of innovation. 

The vertical model entails more control of products and business model, while the horizontal model tends to lead to  less control by the telco. Think of the internet as a horizontal model, where functions are disaggregated: access networks are distinct from platforms. Platforms are distinct from applications running on those platforms. 

Another way of looking at the difference is to say that a traditional telco was at the center of its own business. In the internet era, telcos are part of the transport and access function, but not necessarily part of the applications or platform functions. 

In other words, think of telecom as becoming part of the computing business. In that business communications functions are demarcated from applications, hardware and platforms. 

Communications are required, but logically separated from the other higher-order processes. Local area networks require spectrum and access points, but the actual applications, platforms, hardware and functions are logically separated. 

Ethernet cables might be necessary for a local area network, but nobody would mistake connectors and cables for the value of devices, software and functions those cables support.

Disaggregation might lead to opportunities related to creation of vertically-oriented services and apps, but it might also limit the ability to benefit from scale, to the extent that extensive domain knowledge has to be mobilized, and that knowledge will not translate directly to other domains. 

Still, the move to disaggregated processes is subtle. Telcos might gain directly agility, but also face new forms of competition. Telcos might be able to rework cost structures and create revenue growth opportunities, but also face some additional commoditization of contributed value. 

There will be a new balance of “what we do” and “what others do for us.” It is a complicated, multi-dimensional set of changes. 

An analogy is disintermediation and something we might call “re-intermediation.” The internet makes it possible to remove retailers from value chains. That gives us online commerce. But online commerce also allows the creation of a platform and marketplace (Amazon, for example) that recreates a role for the distributor. 

To the extent that telcos are distributors, they face the danger of disintermediation. Look at the move by Google, Facebook and others to own and build their own wide area networks. That removes customers and demand from the retail capacity business.

At the time, there is at least the possibility that exchanges (for bandwidth, cloud computing, edge computing, security, private networks) could be created. Perhaps the form would be a federation of exchanges globally, as it seems unlikely any single entity could emerge on the Amazon model, in terms of scale. But regional exchanges seem possible, as Alibaba is dominant in some markets, Amazon in others, third parties functioning in yet other markets. 

In any event, there are possible positive and negative surprises. Disaggregation does raise, ast least indirectly, a key question: what is the unique core competence of any telco? And how does that get leveraged in a disaggregated network and business model?