Can ISPs Really Build Ecosystems?

If you have been in the connectivity business long enough, you are used to hearing visions of how connectivity providers can “revolutionize” their businesses by creating  new lines of business, crafting new products and building new revenue models. 

So Telstra CEO Vickie Brady says the role of the operator is to become an “ecosystem builder,” even if that means “not always being in control of the end-to-end solution.” 

There is a clear logic. Many industries based on software and computing resemble ecosystems. Large data centers these days might be likened to ecosystems, where it is not simply servers, but the connections between firms, servers, apps and software and connections to other locations that create value.

The same observation might be made about the Applie iPhone business, which increasingly is an ecosystem of products built around the device. Even an airliner or an electric vehicle might be said to be an ecosystem that creates value only when the extensive wraparound exists.

Planes need many things to become part of an airline operation. Branding, training, reservation systems, airports, maintenance facilities, business alliances, loyalty mechanisms all are necessary. But the airline industry also is part of a larger travel ecosystem including lodging, local transporation, destinations and attractions.

Cars are themselves an ecosystem of parts and systems, but also require fueling stations, maintenance, insurance, road systems, parking, driving instruction or training. Cars are part of a broader transportation infrastructure that includes other transport modes and also shapes where housing and businesses are located.

We can add "ecosystem builder" to the list of stock phrases such as “telcos becoming techcos,” or becoming “platforms,” trying to create app stores, getting into financial services, mainframe computing, system integration, devices or more recently, edge computing. 

Telcos tried to create their own “over the top” voice over IP services to compete with the likes of Skype, their own messaging apps, their own content services (with more success). 

That is not to throw shade at the companies we once knew as “telcos,” but many decades of efforts at reinvention have had modest success. The big problems are changes in customer demand, competition, product substitutes and the chosen architecture of service provider architectures. 

When connectivity service providers chose TCP/IP as their next-generation architecture over asynchronous transfer mode and the whole suite of ISDN-derived standards, they also chose a layered model that not only permits, but encourages, third party app development 

Since functions are logically separated, no business relationship has to exist between a particular app delivered over the IP network and the owner of the access facilities. So “over the top” is an architectural rule, not a term for streaming video. 

The practical effect is to separate app creation from network services. The former no longer requires ownership of the latter, a contract with the latter or the permission of the latter. And while connectivity providers had developed voice and texting, they had no special competence in creating apps for computers or computing devices. 

And these days, that is most of app development. 

At the same time, competition has taken away monopoly-era profits and gross revenue and market share. Customers, meanwhile, prefer mobility services over fixed network voice services, and messaging over short message service. 

All of this challenges the business model. 

To be sure, one might point to growing global services revenue, as more people become mobile subscribers, in particular. But most legacy tier-one service providers have seen flat or declining revenues, challenged profitability, profit margin squeezes and declines in average revenue per account. 

That, one might argue, bolsters Brady’s argument that massive change has to happen. But for the rise of mobility services and the internet, legacy service providers would be in even worse shape than they are. 

So Brady’s call to create new ecosystems with connectivity providers at the center is not untimely. Skeptics will question which entities actually could emerge at the center of new ecosystems of value, or whether additional revenue actually would accrue to connectivity providers in such ecosystems. 

One might, for example, question whether the sale of functions necessarily nets more revenue than the disaggregated elements. Many observers already fear any relegation of access providers to the role of “bit pipes” or “dumb pipes.” Some might say the sale of deconstructed features could help or hurt, in terms of maintaining relevance and value. 

There is gold, there are gold miners and there are many other roles that support gold mining, from hardware to services. What Brady suggests is that connectivity providers could organize or participate in the equivalent of a gold production ecosystem. That is fair enough. 

The issue always is core competence and how additional competencies in additional roles can be created. That has tended to be the problem in the past. 

“We need to change” is not the same as “and this is how we will do it.” After all, investors have punished connectivity providers who unsuccessfully try to diversify, over and over again. Changing or diversifying always is applauded if it succeeds. But fail and executives will be urged to “stick to what they know.” Been there. Done that.