Why No Telco is Likely to Become a "Platform"

Enron’s failed effort to create a bandwidth trading market similar to energy trading operations provides an insight into why it is so hard to create telco services platforms. For starters, Enron did not actually operate as a neutral third party supporting transactions. Enron actually purchased capacity from various service providers and then made that available for purchase by customers. 

It operated not so much as a bandwidth exchange but as a wholesaler. Of course, the intention was to outgrow the wholesaler function and eventually function as any other commodities market. Service providers hated the idea. 

The last thing in the world they wanted was to certify their core products as “commodities,” in the sense of “low value, low profit margin” products with little in the way of differentiation. The fear was more akin to telecom products being viewed as “lower value” sugar or flour, rather than “high value” gold or rare earth elements. 

Many would argue that the effort also failed for other reasons, apart from telco resistance. The information and network operating systems actually were not robust enough, and liquid enough, to support the hoped-for ease of transactions. Think of the value of a bandwidth exchange as “bandwidth on demand” and you get some sense of the issues. 

“Bandwidth on demand” is not ubiquitous on any single telecom network, for consumer, retail business customers or enterprises. Though a few locations, well supplied with optical fiber and virtualized network operations capabilities, might theoretically support near real time  bandwidth on demand, that is not possible at most locations. 

Something possibly closer might be feasible for the few global wide area core networks and key landing stations, internet points of presence, hyperscale data centers and key colocation centers. But even there the capabilities required to support full bandwidth on demand arguably do not exist. 

Much the same problem exists for connectivity products other than IP bandwidth, including voice, messaging and enterprise private network services. 

The issue is whether communication networks can become actual platforms, in the sense Enron envisioned it. Among the practical problems is that Enron--not the service providers themselves--would own and operate the exchange. 

It all boils down to “who makes the money” and “how” the money is made. Even when understood as a business-to-business marketplace, a bandwidth exchange, for example, a key principle is that buyer and seller transactions volume is how the platform makes money. 

Some might argue that ubiquitous communication networks are two-sided markets, as users connect to user, and telcos make more money, in some cases, based on usage volume.

But that is not the definition of a two-sided market, much less a platform. A platform does not own the resources its users buy and sell. Telcos do own their facilities and do create the products they sell directly to buyers. 

A communications service uses a traditional “pipeline” model, where a product is created by an entity and then sold to customers. So telcos are not platforms simply because the product allows entities to connect. 

The connectivity service provider revenue model consists of creating a capability and then selling that to customers. That makes a telco a user of the “pipeline” model, not the “platform” model. 

Nor is that a two-sided revenue model. All revenue comes from sales of access, subscriptions or rights of use. That is a classic one-sided pipeline model. 

As an automobile must have tires, so a communications service must offer the value a buyer seeks, which is connectivity, using one or more essential protocols and features, to the relevant locations, persons or devices. Still, the revenue model is a traditional pipeline approach: the connectivity provider owns and creates the product sold to customers.

A true platform does not own the actual products purchased using the platform, and makes money by a commission or fee for using the platform to complete a transaction. A ridesharing platform does not own the vehicles used by drivers. A short-term lodging platform does not own the rooms and properties available for rental. An e-commerce site does not own the products bought and sold using the platform. 

As always in real-world commerce, there are some hybrid models, where a platform might also sometimes act as a pipeline, when using the platform. House brands sometimes are created and sold by the operators of a platform. In such cases, the platform owner also acts as a pipeline product supplier on the platform. 

Whether a firm can act as the organizer of an ecosystem, a platform or not creates or limits business model opportunities, especially around “how” a firm earns its money. Keep in mind that most businesses, most of the time, have a “pipeline” or pipes  revenue model. 

It is not an easy analogy. Some might say the issue of who pays matters, in that regard. Some might point to new services as an area where telcos actually do operate in a two-sided market, as do media companies. 

Sales volumes and product relevance matter for any revenue model, for any firm. Additional issues, such as scale and value creation, are important for platforms. For a platform, scale leads to more value creation. For a pipeline model, scale leads to lower unit costs. 

A real platform creates value that is directly supplied by its users, rather than created by a product supplier. Recommendations, for example, add value to platform buyers and are directly created by users, not the platform or the sellers using the platform. 

Consumers and producers can swap roles on a platform. Users can ride with Uber today and drive for it tomorrow; travelers can stay with AirBNB one night and serve as hosts for other customers the next. Customers of pipe businesses--an airline, router or phone suppliers, grocery stores-- cannot do so.

Some day, efforts might again be made to create platforms for the parts of the connectivity business. It will remain a difficult challenge. Any telco hoping to become "the" platform for trading would have to be a carrier-neutral broker, and not be an owner and operator of network services in a direct sense.

By definition, that calls for a neutral third party. So it will remain difficult for any single telco to emerge as a universal platform.

Remember Enron Bandwidth Trading? That was a Proposed Platform

With the emergence of platform business models, the issue is whether telecommunications firms can act as platforms or two-sided markets. Enron tried to create such a platform in 1999.

A platform acts as a marketplace or exchange, and makes its money facilitating transactions between buyers and sellers. A platform typically does now own the actual products being purchased. 

A two-sided market facilitates transactions between buyers and sellers. In some cases, a two-sided market earns revenue from at least two parties to a transaction. A newspaper or magazine can be thought of as using a two-sided market model, earning recurring fees from subscribers and advertising from firms who want to put messages in front of those customers.

Complicating matters, some argue any two-sided market is a platform; or that any platform is a two-sided market. Others would disagree with one or both propositions. 

Some argue a two-sided market is a functional definition of a platform, bringing buyers and sellers together. Others might argue that a platform and a two-sided marketplace are not synonymous. 

Operating systems sometimes are said to be examples of platforms and two-sided markets. The OS might be a platform, but it is not a two-sided market, only a tool used to create a two-sided market. Apple’s IoS supports the AppStore, which brings together developers and users. But the OS is not itself a market. It is better considered a platform. But the point is that two-sided markets and platforms are, in fact, not synonymous. 

source: ExcellentWebWorld 

Videogame consoles, on the other hand, might be viewed both as enablers of a two-sided business model and an ecosystem, the creation of which is one common function of a platform. In an ecosystem, participants might create buyer-seller connections on either side of the platform (buyers with buyers; sellers with sellers), not just buyers and sellers. EBay or any similar marketplace provides an example of an ecosystem.

So do many other app-based platforms including ridesharing, short-term accommodations or other forms of asset sharing or rental. 

Sometimes buyers become sellers; sometimes sellers become buyers. 

True, two-sided businesses bring buyers and sellers together. The credit card market provides an example, where the cardholders and merchants are brought together in payment transactions by the third party acting as the clearinghouse. In that scenario, Visa or MasterCard act as the clearinghouse, while the two sides of the buyer-seller transaction are retailers and customers. 

Health maintenance organizations mediate transactions between patients and doctors. Many ad-supported content or media businesses are two-sided marketplaces, if not platforms. Magazines, newspapers, TV and radio stations and most programming networks or video production studies operate as two-sided markets, if not always as platforms. 

Social networks and search engines are classic two-sided markets, with advertisers and consumers being the two parties brought together by the platform, operating as a two-sided marketplace. To return to the question: can connectivity services suppliers create two-sided markets, or become platforms?

Yes and no. “Yes” as owners of media and content properties earning different types of revenue from different sets of users: earning money from consumers who buy subscriptions to content and also earning money from sellers who want access to the consumer or customer base using advertising. 

“Yes” when a connectivity provider owns a marketplace in e-commerce, ridesharing, lodging or any other product, making its money as a fee or commission on marketplace transactions. 

But “no” when referring to any connectivity service sold to either consumers or business customers. Platform operation is conceptually possible. 

The platform model was unsuccessfully promoted by Enron in 1999 when it proposed bandwidth trading exchanges, for example, Enron proposed creating a trading exchange for bandwidth purchases on the model of trading exchanges for other commodities such as corn, sugar, gold or copper. 

Were such an exchange feasible, it would allow some third party to facilitate bandwidth purchases by buyers and sellers in roughly the same manner as accomplished by any consumer e-commerce site. The platform would makes its money as a fee for facilitating such transactions, without owning any of the actual network assets. 

So far, it has proven impossible to create true platforms for connectivity services, though media operations sometimes can use two-sided market revenue models.

Telecom Revenue Recovery in Asia Pacific: How Soon?

Retail connectivity service provider revenues tend to track gross domestic product growth or contraction, so it would not be surprising to learn that the economic recession caused by Covid-19 public health measures have caused retail service provider revenue to contract, in Asia and the Pacific region. 

Always, telecom service spending tracks household income. So when income falls, telecom services spending tends to dip as well. During the Covid-19 economic lockdowns, when people were working from home, lower travel also meant lower roaming revenues, for example, though counterbalanced to some extent by higher spending on broadband access services.  

Virtually everyone expects a rebound as economic activity accelerates. So how fast will the Asia-Pacific recovery occur? It depends. Global tourism is expected to remain below pre-pandemic levels till 2023 and delay economic recovery in tourism-dependent economies, so that also is an issue. 

 source: World Bank

Among major economies of the Asia region, only China and Vietnam have followed a V-shape recovery path with output surpassing pre-COVID-19 levels in 2020, a World Bank report says.

Most of the other countries have not seen a full-fledged recovery in terms of either output or growth momentum, the World Bank says. 

By the end of 2020, output in the four other major economies had rebounded but remained on average around five percent below pre-pandemic levels, with the smallest gap in Indonesia (2.2 percent) and the largest gap in the Philippines (8.4 percent). 

 source: World Bank

As you might expect, economic contraction has been particularly severe and persistent in some of the small island economies with output in 2020, remaining more than 10 percent below pre-pandemic levels in Fiji, Palau, and Vanuatu. 

Longer term, it is possible that growth over the next decade could be as much as 1.8 percentage points lower than pre-Covid-19 projections for the region excluding China. 

Still, China and Vietnam already are on pre-Covid growth paths. Indonesia and Malaysia will be back to 2019 later levels this year. Thailand and the Philippines will do so by late 2022, the World Bank estimates. 

Connectivity service provider revenues should track those developments quite closely, with the caveat that tourism-heavy economies will take longer to recover than export-oriented economies.

40% of Pilot Industrial IoT Projects Move to Full Deployment

Few industrial internet of things projects--about 40 percent--move from proof of concept into full production, and those that do often struggle to achieve a positive ROI or business outcome while running into significant technology scaling and data integration challenges, a 451 Research report sponsored by Hewlett-Packard finds. 

That should not come as a surprise, given the high failure rates of most other large information technology projects. 

Of the $1.3 trillion that was spent on digital transformation--using digital technologies to create new or modify existing business processes--in 2018, it is estimated that $900 billion went to waste, say Ed Lam, Li & Fung CFO, Kirk Girard is former Director of Planning and Development in Santa Clara County and Vernon Irvin Lumen Technologies president of Government, Education, and Mid & Small Business. 

That should not come as a surprise, as historically, most big information technology projects fail. BCG research suggests that 70 percent of digital transformations fall short of their objectives. 

From 2003 to 2012, only 6.4 percent of federal IT projects with $10 million or more in labor costs were successful, according to a study by Standish, noted by Brookings.

source: BCG 

IT project success rates range between 28 percent and 30 percent, Standish also notes. The World Bank has estimated that large-scale information and communication projects (each worth over U.S. $6 million) fail or partially fail at a rate of 71 percent. 

McKinsey says that big IT projects also often run over budget. Roughly half of all large IT projects—defined as those with initial price tags exceeding $15 million—run over budget. On average, large IT projects run 45 percent over budget and seven percent over time, while delivering 56 percent less value than predicted, McKinsey says. 

Significantly, 17 percent of IT projects go so bad that they can threaten the very existence of the company, according to McKinsey . 

Beyond IT, virtually all efforts at organizational change arguably also fail. The rule of thumb is that 70 percent of organizational change programs fail, in part or completely.

Rational Asset Use Does Not Drive Sharing

Subscriptions are a major business theme. So are various forms of asset sharing sharing. (short-term rentals, ride sharing, bicycle rental) that monetize little-used assets. 

It often is said the car ownership paradigm is challenged by ride sharing or car sharing “since cars sit idle 95 percent of the time.” All that might be true, but also irrelevant to many consumers, whose other “owned” goods also sit idle most of the time. 

Think of showers, toilets, most of your kitchen utensils, seasonal recreational equipment, much of your clothing, most of your content (books, music, videos) or gardening equipment in areas where there is a winter. 

The point is that consumer behavior does not necessarily change because an alternative becomes available. Convenience and overall cost of ownership make ownership a favored choice even if usage statistics suggest it is more efficient to rent capabilities. 

source: Ericsson

Some 10 percent to 20 percent of urban users expect to be using ride sharing for regular commutes to work in 10 years, Ericsson surveys have found. Higher percentages expect “other people” to do so. 

In other words, respondents say they will not be ride sharing, but expect others to do so. Of course, automobiles and other vehicles are deemed useful for purposes other than getting to work. Many consumers would still want to own their vehicles for other life pursuits. 

“Renting rather than owning” as a trend will likely continue to grow. But change will not happen because higher utilization of assets is rational.

How Much 5G Revenue Lift?

A new report issued by the by BCG for the European Telecommunications Network Operators’ Association suggests new use cases enabled by 5G will generate nearly 66 percent of total “telco” revenues by 2025.

source: ETNO 

It is not entirely clear what that claim means. In the context of an argument for government financial support, it seems to suggest that “new 5G use cases” will drive overall telecommunications revenue. 

That seems unrealistic in the extreme. For starters, mobility services in Europe account for about half of total revenues. Were 5G to displace 100 percent of telecom revenues, 5G would account for about half of total revenues, best case.

Even the more-focused argument that 5G might drive 66 percent of “mobile revenues” by 2025 is plausible only if one assumes that 5G replaces most existing mobile revenue and adds substantial new fixed wireless, internet of things revenue, despite the existence of competing networks and use of premises wireless that does not necessarily create substantially higher connectivity revenues. 

Do you really believe IoT drives 35 percent of total mobile revenue by 2025? Were that the case, do you not believe revenue forecasts would incorporate that expectation? Of course, there is a rational explanation. 

Legacy telecom revenues could drop so much that new IoT revenues simply allow the industry to tread water. The larger problem is that the typical firm in the telecom industry has to expect to lose about half its current revenue about every 10 years. 

That means the mobile industry has to expect to replace about $500 billion in recurring revenue, while fixed network operators have to expect to replace $400 billion in recurring revenues, within 10 years, assuming global revenues in the $1.8 trillion range by perhaps 2025. 

Those are daunting numbers. 

source: Statista 

In Asia and much of the Pacific, mobile revenues account for something closer to 70 percent of total revenue. In the Middle East, mobile revenues account for as much as 80 percent of total revenue. In such regions, one might argue that the impact of incremental new IoT revenues could be substantial. 

source: IDATE 

But that remains a tall order. GSMA has estimated service provider IoT connectivity revenue at less than $45 billion globally by 2025. In a global business of $1.6 billion, IoT at that level would represent less than three percent of total industry revenues, but possibly six percent of mobile revenues. 

That the report is issued at all reflects the importance communications regulators have in creating and shaping the business model. It is deemed necessary, from time to time, to “remind” regulators and politicians of the economic contributions an industry makes.

In that regard, the ETNO report argues that 5G and gigabit fixed networks can provide enormous economic benefits. No surprise there. What would be surprising is an argument that no financial help is required and that 5G is such a lucrative thing that service providers cannot wait to deploy it.

How Much Will Remote Work Continue to Shape Enterprise Spending Priorities?

Over half (59 percent) of the respondents to a survey by Aryaka said they expect 25 percent to 50 percent of their workers to remain remote at the end of 2021, and a further 21 percent with more than 50 percent remaining remote, the study found.

That will have repercussions for connectivity service provider revenue, possibly capital investment and architecture planning, if the trend continues longer term. 

Performance issues, for example, will be a bigger issue if a substantial portion of the work force is remote for significant amounts of time. 

source: Aryaka

Global WAN Business has Bifurcated

The global capacity business has bifurcated. Hyperscale data center operators, media and content providers have one set of needs while enterprises have different sets of needs. 

Hyperscalers need to connect with other data centers (including cable landing sites, internet points of presence, owned and third party data centers). The hyperscaler requirements are almost exclusively internet data volumes, and video entertainment represents the bulk of that demand. 

source: Cisco 

Enterprises not in the content business, on the other hand, need to connect headquarters locations with branch offices and workers with cloud or premises-based applications. 

source: Aryaka 

Hyperscalers require optical transmission and IP bandwidth. 

Non-content enterprises need quality of service networking (MPLS) and virtual network support (SD-WAN and VPNs), plus voice services. 

Much of the hyperscaler need is met by owned facilities. Nearly all the non-content enterprise demand is met by retail services. Very little hyperscaler bandwidth demand is access network related (connections to end users), while almost all non-content enterprises require access network connectivity.

Hyperscalers require relatively less collaboration support (in terms of bandwidth volume or spending). Enterprises always need significant amounts of unified communications support.

So MPLS and SD-WAN are important non-content enterprise concerns and purchases. That is virtually never true for hyperscalers and content enterprises (in terms of bandwidth demand and spending).

Singtel and Optus Partner with AWS for Edge Computing

By 2022, more than 50 percent of enterprise data will be created and processed outside the data center or cloud, up from less than 10 percent in 2019, Gartner predicts, which partly accounts for hype around edge computing as well as connectivity provider hopes for a role in edge computing. 

The issue is what roles mobile operators will choose to pursue.

Singtel and Optus, for example, have chosen to embed Amazon Web Services capabilities into their Multi-access Edge Compute (MEC) infrastructures using AWS Outposts. It is not immediately clear why Singtel chose to use the AWS Outposts platform, rather than the AWS Wavelengths platform. 

Outposts was built to reside on a customer’s premises, while Wavelengths was designed to reside in a telco edge computing facility. Outposts equipment is managed directly by AWS, but that should also be true for Wavelengths deployments. 

AWS Outposts provides the full suite of AWS tools and services on the premises in a self-contained rack. AWS Wavelengths puts AWS servers inside a telco facility. Perhaps Singtel simply preferred the footprint, capacity and ease of using Outposts, rather than using Wavelengths. 

Outposts supplies a rack of servers managed by AWS but physically on-premises. In Singtel’s case that is its own facilities. 

Presumably Singtel provides the power and network connection, but everything else is done for them. If there is a fault, such as a server failure, AWS will supply a replacement that is configured automatically. Outposts runs a subset of AWS services, including EC2 (VMs), EBS (block storage), container services, relational databases and analytics. S3 storage is promised for some time in 2020. 

Use of AWS Outposts also requires certain loading dock, connectivity and other physical requirements that Singtel and Optus might have concluded was easier to standardize if provided at telco facilities. 

Perhaps ensuring adequate facilities also is a requirement. But Singtel also says it can deploy the MEC with AWS Outposts to the customer’s location, especially for use cases where confidential data must be kept, or preferably is retained, on the customer premises.

The shift to edge computing is part of a historical oscillation between centralized and decentralized approaches, and the virtualized 5G network core essentially requires use of edge computing capabilities. It is not yet clear how much synergy might be developed between a mobile operator’s core 5G network edge computing requirements and retail customer requirements. 

source: GSMA Intelligence 

But many argue that 5G-based private networks, edge computing, and network slicing represent the best chance for mobile operators to boost revenues. Those use cases “present network infrastructure vendors and telcos with the best chance to capture the next wave of wealth that will be generated by 5G,” said Raj Yavatkar, CTO at Juniper Networks. 

source: Gartner 

Video Calling Used by 82% But Voice Calls Decline, Metrigy Finds

Metrigy’s “Workplace Collaboration 2021-22” study, Metrigy found that 82 percent of survey participants now use video for all or most meetings. Almost 44 percent of respondents say phone utilization declined in 2020 by an average of 34.6 percent. 

Fully 28.6 percent say that calls have shifted to video-enabled meeting apps, while 17 percent say that they shifted to using personal mobile phones for voice. On the other hand, given the Covid-induced shift from field sales to inside sales, neither is it surprising that 25 percent of respondents reported higher phone usage. 

Also, inbound calls to customer support centers arguably increased during the pandemic. 

source: Metrigy

CFOs are Likely to Demand More Inside Sales than Field Sales

Before the Covid-19 pandemic, international business travel was a $1.5 trillion annual expense, growing about seven percent a year. So among the questions to be asked is whether such business travel spending rebounds to former levels, or changes.

According to researchers at Growth Lab, business travel and spending has grown far faster than global gross domestic product. So it might be reasonable to expect executives to consider whether such spending--and how much--is required, post Covid. 

To be sure, much such travel arguably is related to the emergence of global firms that must coordinate across geographies, creating a need for personal relationships best developed face to face, rather than virtually. 

source: Growth Lab 

As a matter of necessity, business-to-business sales and support operations have had to move to virtual modes during the pandemic, when international travel was unlawful. As was the case for much office or knowledge work, productivity arguably has not suffered from enforced virtual work modes. 

Whether that remains true long term is another question. Most businesses can work, short term, off embedded social capital and relationships. How well they can do so long term is the unanswered question. Will new employees be able to socialize and learn each organization’s culture on a mostly-remote basis? Will human bonds be sustainable when they are created and sustained mostly virtually? 

Can business-to-business sales permanently shift to virtual modes on a permanent basis?

source: McKinsey  

There is evidence that although online traffic to company websites has grown substantially, sales close rates have fallen. In a business-to-business context, face-to-face interactions arguably are important. In other words, field sales became impossible and all sales became “inside sales.”

Most organizations selling B2B use a mix of field and inside sales, but inside sales has a bigger role for smaller customers and follow-on sales.

It remains unclear how the field sales roles can change, longer term. But there is some thinking that the distinction between field sales and inside sales almost vanishes when remote sales is ubiquitous. And, to be sure, financial officers will welcome the chance to reduce sales costs by emphasizing virtual and reducing the cost of field sales. 

Most buyers are comfortable with remote purchasing when sales amounts are relatively small. The issue is how big purchases must be handled or how to reshape sales funnels. 

Over the longer term, sales effectiveness will drive the balance of physical or virtual; field or inside sales. As always, larger sales with a longer sales cycle will be more apt to use physical processes. 

And since most organizations set operating budgets based on historical norms, a dip in sales expense in 2020 is likely to be followed by continuity in 2021 and at least a few years beyond. 

Face-to-face sales in B2B settings will get more attention as the pandemic ends. The issue is how much of a return can be expected. “Less” seems more likely than “more.” And “less” seems more likely than “return to 2019 levels.” Any organization that believes it can permanently change its sales cost metrics is going to try and continue doing so.