"Pipes to Platforms" is a Generic Problem, Not Just a Telecom Issue

Telecom is not the only business or industry where debates about business strategy include the issue of “pipes versus platforms.” 

In fact, almost all businesses use a “pipe” model: they source and create products sold to customers. Firms create products, push them out through various distribution systems for sale to customers. Value is produced upstream and consumed downstream. 

Virtually all consumer goods use a pipe model, as does manufacturing, media, most software products and education. 

Platforms are different. Unlike pipes, platforms do not just create products and sell them. Platforms allow users to create and consume value as well. When external developers can extend platform functionality using application platform interfaces, that usually suggests a platform model could exist. 

Another way of stating matters is that, on a platform, users (producers) can create value on the platform for other users (consumers) to consume. Think of YouTube, Wikipedia, Amazon, Uber or Lyft. 

The business implications can be profound. Some attribute Apple’s rise to prominence in the phone industry not on its design, its user interface or operating system features but to its creation of an ecosystem and platform. 

In fact, the ability to generate revenue from acting as an intermediary or marketplace for different sets of market participants is the functional definition of whether some entity is a platform, or not. 

That can be glimpsed in service provider video subscription businesses, where revenue is earned directly from subscribers, but also from advertisers and in some cases from content suppliers. It is the sort of thing eBay must do, daily, in a more direct way. 

source: Platform Business Model 

To be sure, there are some differences between the traditional app provider platform and any possible connectivity provider platform. For starters, by definition, app platforms tend to be asset light. No surprise there. Software-based businesses almost always are less asset intensive than most other physical businesses. 

In general, however any “pipe” business that sells a set of products directly to its customers will tend to require more owned assets than a software business that operates in an ecosystem. 

source: Platform Business Model

At a high level, when executives and professionals in the connectivity business talk about dumb pipes, they almost always refer to commodity product business models selling undifferentiated carriage or delivery of bits. But there are other senses in which the “pipe” model also matters. 

If one believes that prices for telecom products are destined to keep declining, or that more for the same price is the trend, then there are a couple of logical ways to “solve” such problems. 

Connectivity providers can create and sell new or different network-based products or shift into other higher-value and different parts of the product ecosystem. That is one way to escape the trap of marginal cost pricing, which might be the industry’s existential problem. 

But it is not clear whether telcos can create platform business models, and if so, where and how. The traditional connectivity business seems destined to remain a pipe (create products sold direct to consumer) model. There are glimmerings, though.

Some service providers who now are video subscription providers can create an advertising venue or marketplace once the base of subscribers grows large enough. So that provides one example. 

Some data centers work on creating marketplaces or exchanges that enable transactions beyond cross connects, even if the revenue model is indirect (marketing potential, lower churn, higher tenancy, greater volume) 

So far, connectivity providers are mostly thinking about what could emerge with edge computing, beyond the pipe revenue model (selling compute cycles or storage). Some might envision a potential role in one or more internet of things use cases such as automobile IoT or unmanned aerial vehicle networks. 

Still, it never is easy for any company, in any industry to create a platform model, even if many would prefer it over a pipe model. 

But the potential path forward seems logical enough. The historic path to create a platform has often involved sale of some initial direct product, sold to one type of customer, before becoming the foundation for creation of the marketplace or platform that creates new value for different sets of customers. 

That strategy might be called stand-alone use, creating a new market by directly satisfying a customer need, before a different two-sided or multi-sided market can be created, where at least two distinct sets of participants must be brought together, at the same time, for the market to exist. Virtually any online marketplace is such a case. 

Others might call it single-player. OpenTable, which today has a marketplace revenue model, originally only provided a reservation system to restaurants, operating in a single-sided market mode, before it then could create a two-sided model where restaurants pay money for the booked reservations made by consumers. 

The first million people who bought VCRs bought them before there were any movies available to watch on them. That might strike you as curious, akin to buying a TV when there are no programs being broadcast. 

In fact, though commercialized about 1977, it was not firmly legally established that sales of VCRs were lawful until 1984, when the U.S. Supreme Court ruled that Sony could sell VCRs without violating copyright law, as Hollywood studios alleged. 

So what were those people doing with their VCRs? Taping shows to watch later. Time shifting, we now call it. Only later, after Blockbuster Video was founded in 1985, did video rentals become a mass market phenomenon. 

So here is the point: quite often, a new market is started one way, and then, after some scale is obtained, can develop into a different business model and use case. 

Once there were millions of VCR owners, and content owners lost their fear of cannibalizing their main revenue stream (movie theater tickets), it became worthwhile for Hollywood to start selling and renting movies to watch on them. 

Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use. 

So OpenTable, which operates in a two-sided marketplace--connecting restaurants and diners--started out selling reservation systems to restaurants, before creating its new model of  acting as a marketplace for diners and restaurants.

The extent to which that also will be true for some internet of things platforms is unclear, but likely, even for single-sided parts of the ecosystem. 

The value of any IoT deployment will be high when there is a robust supply of sensors, apps, devices and platforms. But without many customers, the supply of those things will be slow to grow, even in the simpler single-player markets. Just as likely, though, is the transformation of at least some of the single-player revenue models to two-sided marketplaces. 

In other words, a chicken-and-egg problem will be solved by launching one way, then transitioning to another, more complicated two-sided model requiring scale and mutual value for at least two different sets of participants. In a broad sense, think of any two-sided market as one that earns revenue by creating value for multiple sets of participants.

Amazon makes money from product sellers and buyers, while at the same time also earning revenue from advertisers and cloud computing customers. 

Telcos have faced this problem before. 

Back in the 1870s and 1880s, when the first telephone networks were created, suppliers faced a severe sales problem. The value of the network depended on how many other people a customer could call, but that number of people was quite small. The communications service has a network effect: it becomes more valuable as the number of users grows. 

These days, that is generally no longer the case. The number of people, accounts and devices connected on the networks is so large that the introduction of a new network platform does not actually face a network issue. The same people, devices and accounts that were connected on the older platform retain connectivity while the new platform is built. 

There are temporary supply issues as the physical facilities are built and activated, but no real chicken and egg problem. 

It remains to be seen whether some connectivity providers also will be able to create multi-sided (platform) markets for  internet of things or other new industries. 

The initial value might simply be edge data center functions. Later, other opportunities could arise around the use of edge computing, the access networks, customer bases and app providers. It would not be easy; it rarely is. But creating new revenue streams for some customers who just want edge computing cycles could create foundation for other revenue streams as well.

One Proven Way to Create a New Revenue Stream Whenever There are Network Effects

The first million people who bought VCRs bought them before there were any movies available to watch on them. That might strike you as curious, akin to buying a TV when there are no programs being broadcast. 

In fact, though commercialized about 1977, it was not firmly legally established that sales of VCRs were lawful until 1984, when the U.S. Supreme Court ruled that Sony could sell VCRs without violating copyright law, as Hollywood studios alleged. 

So what were those people doing with their VCRs? Taping shows to watch later. Time shifting, we now call it. Only later, after Blockbuster Video was founded in 1985, did video rentals become a mass market phenomenon. 

So here is the point: quite often, a new market is started one way, and then, after some scale is obtained, can develop into a different business model and use case. 

Once there were millions of VCR owners, and content owners lost their fear of cannibalizing their main revenue stream (movie theater tickets), it became worthwhile for Hollywood to start selling and renting movies to watch on them. 

Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use. 

That strategy might be called stand-alone use, creating a new market by directly satisfying a customer need, before a different two-sided or multi-sided market can be created, where at least two distinct sets of participants must be brought together, at the same time, for the market to exist. Virtually any online marketplace is such a case. 

Others might call it single-player. OpenTable, which today has a marketplace revenue model, originally only provided a reservation system to restaurants, operating in a single-sided market mode, before it then could create a two-sided model where restaurants pay money for the booked reservations made by consumers. 

So OpenTable, which operates in a two-sided marketplace--connecting restaurants and diners--started out selling reservation systems to restaurants, before creating its new model of  acting as a marketplace for diners and restaurants.

The extent to which that also will be true for some internet of things platforms is unclear, but likely, even for single-sided parts of the ecosystem. 

The value of any IoT deployment will be high when there is a robust supply of sensors, apps, devices and platforms. But without many customers, the supply of those things will be slow to grow, even in the simpler single-player markets. Just as likely, though, is the transformation of at least some of the single-player revenue models to two-sided marketplaces. 

In other words, a chicken-and-egg problem will be solved by launching one way, then transitioning to another, more complicated two-sided model requiring scale and mutual value for at least two different sets of participants. In a broad sense, think of any two-sided market as one that earns revenue by creating value for multiple sets of participants.

Amazon makes money from product sellers and buyers, while at the same time also earning revenue from advertisers and cloud computing customers. 

Telcos have faced this problem before. 

Back in the 1870s and 1880s, when the first telephone networks were created, suppliers faced a severe sales problem. The value of the network depended on how many other people a customer could call, but that number of people was quite small. The communications service has a network effect: it becomes more valuable as the number of users grows. 

These days, that is generally no longer the case. The number of people, accounts and devices connected on the networks is so large that the introduction of a new network platform does not actually face a network issue. The same people, devices and accounts that were connected on the older platform retain connectivity while the new platform is built. 

There are temporary supply issues as the physical facilities are built and activated, but no real chicken and egg problem. 

The point is that at least some internet of things or other new services ventures attempted by telcos will eventually require the building of a marketplace of some sort providing value to multiple sets of participants. 

The video entertainment business already provides an example, where service providers earn direct subscription fees from viewers, but also advertising revenues from third parties. 

In some cases, where content subscription providers also own content assets, they may earn revenue from content licensing to other third party distributors as well. 

It remains to be seen whether some connectivity providers also will be able to create multi-sided markets for  internet of things or other new industries. There are potential opportunities around edge computing, for example.

The initial value might simply be edge data center functions. Later, other opportunities could arise around the use of edge computing, the access networks, customer bases and app providers. It would not be easy; it rarely is. But creating new revenue streams for some customers who just want edge computing cycles could create foundation for other revenue streams as well. 

source: Wikipedia

Early 5G in U.K. Now Offering Speeds 4X to Nearly 7X 4G Speed

Early mid-band 5G in the United Kingdom shows speeds twice to more than six times as fast as 4G, on U.K. networks.

In early tests, EE 5G downstream speeds in the fall of 2019 were running at 185.7 Mbps, while EE’s 4G offered  47.4 Mbps. So EE 5G was about four times faster than EE’s 4G. 

Vodafone 5G median downstream speed was 112.2Mbps. Median downstream 4G speed was 57.1 Mbps. So 5G on Vodafone’s networks is about twice as fast as 4G, according to RootMetrics tests in Birmingham between August and September 2019.

source: RootMetrics

Mid-band spectrum is touted for 5G as it offers better coverage than millimeter wave spectrum but higher bandwidth than low band frequencies. The latest Speedtest data on U.K. 5G show the results. Compared to “typical” speeds on all other U.K. mobile networks taken as a whole, 5G provides downstream speeds about 450 percent to 618 percent faster, according to Speedtest. 

Keep in mind: this does not mean 5G is that much faster than 4G. 5G is that much faster than the average of downstream data on all other networks in use. On the other hand, 5G arguably is just about that much faster than 4G. 

source: Speedtest

On EE, it is conceivable that 5G is about 400 percent faster than 4G. On 02, 5G might be 760 percent faster than 4G. 

source: Speedtest

5G Chicken-and-Egg Problems Not New for Telcos

Telcos and cable TV companies are used to solving chicken-and-egg problems. It is a problem they always face when building a new network or introducing a new service requiring customer purchase of new edge devices, and will be true of many 5G services.

Recall two old examples: facsimile machines or phone services are more valuable as the number of people using those devices and services grow plentiful. It’s a network effect, where the value of the network grows with the number of users. 

source: Strategic Toolkits

Chicken and egg strategy problems occur whenever the value proposition to two separate groups is dependent on adoption by the other. Developers will not have great incentives to create apps using 5G network capabilities until the network is substantially built out. Neither will potential users emerge until the apps and services are available. 

That is doubly true when network effects exist, where few suppliers mean few potential customers, but incentive to increase supply is quite low because there are so few customers.

Every next-generation communications network represents that sort of problem, and connectivity providers must always bet on the chickens. The network must be built; the investments made, before customers can buy. 

Some might note that there are a few time-tested ways to create value in the early going. One tactic used by connectivity providers is the “slow and steady” approach, building incrementally, on a geographic basis, neighborhood by neighborhood, and marketing to those neighborhoods as each new segment of the network is built.

Mass media marketing tends to be problematic in such cases, as touting the new service or app actually creates problems when customers are not yet able to buy. A historically useful tactic is neighborhood marketing, rather than reliance on “mass” techniques such as television or radio advertising. 

Many business services specialists use the same approach, building specialized networks in business parks or downtown cores, or building out to specific buildings, and then marketing only to those locations. Multi-city service providers often start in one city first, then expand to other areas. 

The “jumpstart” approach, useful when competitors are eyeing the same market, relies on shortcuts, such as leveraging another partner that already has a big customer base. It might seem odd that Google once used Netscape or Yahoo to gain entry into the search engine business, but that is what Google did. 

Etsy found that the people most likely to buy products on Etsy were those who also sold products on the site. This essentially turns the problem of satisfying two sets of marketplace participants into a single set, essentially. 

Likewise, Google created the Open Handset Alliance as a way of competing with Apple’s IoS ecosystem. 

A more expensive option is to subsidize consumption, as Uber did with discounted rider offers and driver payments. 

Service providers often partner when entering new markets, to build scale faster. That can mean use of channel partners, alliances with application providers, content or device suppliers to build scale faster, using existing customer bases to promote new apps and services. 

In other cases, some unorthodox way must be found to fulfill early transactions, before full-fledged systems can be built. 

Amazon made and fulfilled its own sales until it had enough volume to create the Amazon Marketplace, where it now acts to assist third parties in making their own sales. Airbnb used Craigslist to build its volume. 

Connectivity providers often rent or lease before building their own facilities, or use makeshift systems before at-scale in-house solutions can be created. 

Another approach might be to build one sort of business, adding to that initial business with other services or products, once the first is established. Some might point to Square, which started out offering low-cost credit card processing services for small businesses, but now operates several different businesses related to payroll, point-of-sale systems, e-commerce platforms and business loans. 

Yelp arguably did the same, beginning with information listings, and then gradually building an advertising business once scale was obtained. 

Another tactic is to focus on getting high-value users or customers onboard early, to attract others. OpenTable and Uber often are cited as having used that tactic.

5G is just one more instance of connectivity providers having to solve a chicken-and-egg problem.

5G Chickens Come Before Eggs

Big new markets always face a "chicken and egg" problem: investment is difficult when there are few potential customers, yet people have no incentives to buy when the service is not available. 

That is doubly true when network effects exist, where few suppliers mean few potential customers, but incentive to increase supply is quite low because there are so few customers.

Every next-generation communications network represents that sort of problem, and connectivity providers must always bet on the chickens.

The network must be built; the investments made, before customers can buy. That also means mobile operators have high incentives to get revenue-generating customers on that new network, as quickly as possible. That especially is important if the benefits to customers are not obvious.

You might find that an odd statement. Is not the whole point of 5G to supply order of magnitude faster speeds, to name one key example of benefit? The key word is "benefit."

So look at "benefits" from use of low-band, mid-band and millimeter wave spectrum. In many cases, low-band 5G will, in fact, not offer speeds much different--if different at all--from 4G. So there is little obvious consumer benefit.

Where mid-band or millimeter wave spectrum is used, speeds will be much higher, on the order of twice to three times as fast, on average. The problem? There are few consumer phone apps and use cases that can take advantage of such speed improvements. 

So supplier push rather than customer demand is going to drive early 5G subscriptions, since the experience advantages are going to be quite intangible in most cases. In many markets where 5G is launched using low-band spectrum, speed will not, in fact, be much different than fast 4G.

In other markets, where mid-band or millimeter wave spectrum also is used, consumer use cases will not be able to take advantage of the additional speed, with a few exceptions such as big file downloads, virtual reality or augmented reality. But how much time do consumers spend downloading big files? How many use AR or VR already?

And yet, 5G will be adopted. We do not know whether adoption will be faster, slower or at the same pace as 4G, but 5G will be purchased. One big reason is that 5G--though having eventual advantages for most consumers--has bigger advantages for mobile operators. 

Even if consumers might not experience much benefit at first, mobile operators will. 5G features lower cost per bit than 4G, which helps prop up the business model when more capacity has to be supplied at a relatively fixed price. 

Over the long term, consumers can only spend so much money on their communication services, so wallets budge only slowly, if at all. 

5G also has network features helpful either for cost containment or new service creation. 5G networks will be virtualized, which creates the ability to turn up virtual private networks (network slicing) rather easily, compared to legacy methods. 

In the radio network, virtualization allows mobile operators to contain radio network costs, since equipment from different suppliers increasingly will be mixed and matched with core networks. 

Longer term, 5G latency performance opens up potential space for a role in edge computing networks, vertical market applications and partnerships. 

And, as always, for some suppliers in each market, 5G represents a chance to preserve or upset existing market shares, if competitors cannot easily keep pace. 

Hence the paradox: Though 5G is, by design, supposed to have performance advantages over 4G for mobile service provides and customers, the early advantages will rarely be sufficient to drive consumer demand. Instead, supplier push will be at work. 

For customers, the advantages include faster top speeds and lower latency.  For mobile operators, the advantages include faster top speeds, lower latency, virtualized networks, which promise new features and lower cost, higher device density (supporting lots of sensors and internet of things devices) and lower cost per bit. 

That list is a clue to why 5G will be adopted, perhaps even more rapidly than 4G: it benefits mobile operators more than consumers. In fact, an argument might be made that 5G benefits mobile operators almost to the exclusion of consumers, at first. In the early going, using low-band spectrum, 5G might not be noticeably faster than 4G. 

When mid-band and millimeter wave spectrum is used, speeds will be much faster than 4G, but in ways that do not actually benefit the use cases most people have for their phones. Big file downloads will be faster, but what percentage of time do people spend downloading big files? 

At first, the early adopter desire to "get it first," where the driver is as much status as anything else, will be the driver. But there will be indirect drivers as well, such as the value of "5G comes with your new service plan." In many cases, 5G will be a "nice to have" attribute of a service plan, but it is the service plan that drives the switch. 

Perhaps that will change over time, as new use cases develop. But it might also be the case that 5G gets adopted because it provides value for mobile operators, who will create incentives to adopt 5G, even if the actual experience advantages might be hard to demonstrate. 

This can be seen in recent Opensignal measurements of speeds on new 5G networks. Where early tests of U.S. 5G rely exclusively on millimeter wave spectrum, the U.S. has the highest speed. 

Aside from big file downloads, the experience advantages are almost impossible to demonstrate. Faster might be better, but actual consumer smartphone apps cannot actually take advantage of the faster speeds, yet, since virtual reality and augmented reality are not yet widely used. 

Conversely, not that in some markets where low-band 5G has been launched, the speeds are almost identical to 4G, so there is no actual experience advantage. 

source: Opensignal

Compared to existing 4G, 5G in early days has doubled to nearly tripled real-world speeds in some cases, but had almost no impact on speed in a few cases. Again, the choice of spectrum, or availability, really do matter. 

Where low-band spectrum is the 5G choice, it sometimes does not life speeds very much. Where millimeter or mid-band spectrum is used, 5G speed advantages are clear, but app performance and user experience do not change much, with the exception of big file downloads.

source: Opensignal

Should Consumers Buy 5G Now?

A growing number of mobile consumers will have the option of buying 5G phones and 5G service in coming months. Whether they decide they should do so is the big question.

If I had to guess right now, I’d predict that much early consumer adoption of mobile 5G will be driven indirectly, the result of choices made about service plans and high-end phones, not 5G service specifically. 

There are, of course, value drivers unrelated to technical performance, namely the early adopter desire to first use a new product with the best specs. 

In fact, in some markets, where 5G is based on low-band spectrum, the speed advantage of 5G might be quite muted and hardly better than 4G.

In the United Kingdom and Spain, where 5G initially was launched using low-band spectrum, there was only a slight improvement in experienced internet access speeds. Under those conditions, it is hard to say what the direct value proposition might be. 

source: Opensignal

In markets where 5G initially is launched using mid-band spectrum, consumers might have a relatively straightforward value proposition: slightly higher cost, significantly-higher bandwidth, even if the use cases remain few. 

The point is that, in all markets, most consumers might struggle to find a direct value proposition unrelated to status or bragging rights, in the early going, as there are very-few consumer mobile applications or use cases that benefit from near-gigabit-per-second speeds, or even average speeds in the 100-Mbps range. 

Consumers who do lots of downloading on their mobiles are about the only users who will--at first--be able to take advantage of higher 5G speeds on mid-band or millimeter wave networks. 

Ignoring for the moment the few use cases where 5G speeds in the 100-Mbps to near-gigabit range are relevant, indirect drivers are likely going to be more important than direct value propositions, for most customers. 

The consumer direct value proposition might be low-band 5G, which offers slight or possibly even no real advantage over 4G; mid-band 5G, which offers quantifiable speed advantages, but few experience advantages; or high-band 5G, which offers huge speed advantages, but few experience benefits over 4G. 

Beyond that, some customers, including those in the U.S. market, will have to choose between 5G phones supporting low-band 5G or millimeter wave 5G. The early devices will not support both low-band and high-band. 

All of that suggests to me that indirect value will drive most 5G subscriptions. Customers will get 5G as a byproduct of their service plan or device choices.

AT&T to Launch Consumer 5G in First Half of 2020

AT&T plans to launch consumer 5G services in the first half of 2020, after a year of selling only to businesses. For mass market customers, AT&T plans to rely on low-band spectrum, using millimeter wave high-band spectrum for capacity reinforcement at large venues. 

In the coming weeks, consumer 5G service will launch over low-band spectrum in the Indianapolis, Pittsburgh, Providence, R.I., Rochester, N.Y., and San Diego market areas. AT&T plans to follow with  Boston, Las Vegas, Milwaukee, New York City, San Francisco, Birmingham, Ala., Bridgeport, Conn., Buffalo, N.Y., Louisville, Ky., and San Jose, Calif. 

source: AT&T

AT&T initially is focusing on coverage, rather than capacity, so although consumers in the new markets will see 5G speed boosts over 4G levels, they will not see the highest speeds available on the millimeter wave networks. 

Still, availability is likely to outstrip subscribership for some time, as past experience suggests fewer than half of existing customers able to upgrade to 5G will do so, about five to six years after launch in any market. 

In the 4G era, seven years after launch, about 38 percent of potential customers actually had signed up. Some believe that percentage could be higher in the 5G era, but there also are arguments that adoption could be slower, in part because of the controlled roll-out.

source: GSMA Intelligence

To be sure, low-band 5G should offer some speed advantages over 4G. But not always. Early evidence from some markets using low-band spectrum suggests users might not perceive much of a difference. 

In the United Kingdom and Spain, where 5G initially was launched using low-band spectrum, there was only a slight improvement in experienced internet access speeds. 

source: Opensignal

To the extent that consumers become aware of the differences between 5G and 4G, and when low-band spectrum does not offer startling speed advantages, it is not so clear that demand will be robust. 

Also, to the extent that good 4G service supports all the apps and use cases most consumers have, it is not so clear what compelling advantage 5G might offer, except indirectly. The actual reason for switching to 5G could come with a change of service plans or purchase of a new high-end device. 

AT&T, for example, seems to be offering consumer 5G access when customers buy its higher-cost unlimited usage plans. access to 5G service in the below plans at no extra cost when we roll out 5G in the coming weeks.

The AT&T Unlimited Elite plan provides 30 gigabytes (GB) of mobile hotspot data per line, 100 GB per line of unthrottled data, HBO and HD streaming all for $50 a month per line on four lines after autopay and paperless bill discounts.