Very few observers would likely characterize the connectivity business as “robust,” “consistently high margin” or “well positioned for growth.” Management challenges therefore reflect the realities of margin pressure, average revenue per unit declines, high degree of competition, key product demand that is dropping and relative loss of ability to control or shape new application development.
Nothing better summarizes the strategic context than the fear that the connectivity industry is becoming a “dumb pipe” commodity business with higher costs over time. That is a recipe for trouble.
The by-now classic illustration is any depiction of revenues earned by connectivity providers and others in the internet ecosystem (devices, apps, e-commerce, advertising, content), compared to the more-nascent ecosystem in 2010.
The illustration is somewhat unfair, in the sense that every industry has, or can have, a different valuation, using any multiple of value compared to revenue, price or earnings.
As a consequence, many obvious challenges center on retail pricing, operating costs and business models. Those issues, in turn, are shaped by the disaggregated, layered model of computing, which then also disaggregates “value.” App creation and ownership are separated from ownership of connectivity assets.
At a high level, that means network ownership is not aligned with application or service ownership. No business relationship must necessarily exist between the owner of an access network, or the supplier of premises connectivity, and the creator and supplier of any application or service that simply requires internet access.
Other challenges grow from the best effort nature of internet access, using either Wi-Fi or access networks. By definition, IP transmission is not deterministic. That makes consistency an issue.
And while much internet value is created by ecosystems, connectivity providers have not yet been able to place themselves at the center of ecosystem organization, in the same way that some device, application or transaction platform suppliers have been able to accomplish.
Lots of effort has gone into activities that connectivity firm owners hope will rectify these deficiencies, sometimes centering on creation of more disaggregated revenue models based on use of application programming interfaces, participation in ecosystems or unbundling and disaggregating portions of the network function itself.
It all remains a work in progress.
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