How Do You Compete with "Free?"

Why, over the past couple of decades, have connectivity service providers been so concerned about over-the-top application providers? In large part, because the change from a closed telco value stack to an open internet value stack both devalues traditional telco products and enables new competition. 

Put simply, “it is hard to compete with firms that give away what you sell.”  It also is hard to compete with providers who are willing to sell “at cost.” Consider the way “triple-play bundling” has worked in the fixed networks business. 

While it is true that both incumbents and attackers have used the bundling strategy, they have done so for different reasons. In nearly all cases, some services have been the equivalent of retailer  “loss leaders.” 

Telcos have been much more concerned with “merchandizing” video services to protect voice service revenues and profit margins, while cable TV operators have been more willing to merchandise voice services or mobile services to protect legacy video revenues. 

These days, most fixed network service providers hope to merchandize almost anything to protect home broadband market share, revenue and profits. 

Mobile service providers, on the other hand, want to protect broadband data access revenues and merchandize voice, text messaging, phones and video or content. 

In other words, can you compete with "free?" That complaint lies at the heart of issues connectivity service providers have had with over the top edge providers or app providers. 

For communications service providers, the issue has arisen mostly in conjunction with low cost or “free” services such as Skype or WhatsApp that supply voice or messaging services “at no incremental cost,” once a user has suitable devices and Internet access.

That has led many to say the economics of abundance makes new revenue models possible. Some would say “abundance,” a relative term, makes new models essential, in at least some cases. But the implications are startling.

The basic idea is that transistors, storage, computation and bandwidth are so abundant  the cost of their use--and digital products built on them-- is a price very close to zero. 

The corollary is that businesses based on the use of such resources can be viewed differently from businesses where physical  inputs are necessary and relatively expensive.

In other words, businesses based on abundant inputs can "waste" those resources. In a pre-broadband, pre-Internet-Protocol era, unicasting (content on demand) would have been nearly impossible. That is why video entertainment was broadcast or multicast. 

The same sorts of economics apply to digital products whose cost of replication is quite low, in comparison to physical goods. 

Or consider Facebook Messenger, or Skype or WhatsApp. It is the same general business problem: competitors who can afford to give away valuable apps and features, or price them very low, because their business models are built on some other revenue driver. 

Incumbents in the New Zealand home broadband market lost about  three percent account market share over the last year ending in March 2022, says IDC. 

Notable share gainers include Trustpower, Contact Energy, Electric Kiwi and Nova Energy,  energy retailers who now are bundling home broadband with their energy services. 

“The energy retailers have a distinct advantage over the telcos; energy retailers don't need to make a profit on their broadband services,” says Monica Collier, IDC New Zealand researcher. 

How to ”compete with free" is a major question in the Internet era, where many goods--especially of the non-tangible sort-- can be replicated and produced with low marginal cost.