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.

Platform, Techco or Digital Services Provider Vision is Not Often Matched By Reality

A recurring discussion over the past couple of decades has been held over the question of whether telcos could become platforms. Perhaps the latest version of this debate asks the question of whether telcos can become techcos or digital services providers. 

None of these concepts are easy to explain, or commonly understood. Some might argue the “digital services provider” evolution means offering services such as internet of things, connected cars, smart cities or smart homes. Presumably the concept is that a connectivity provider supplies the apps that provide the value. 

So a connectivity provider acts as a home security firm, an industrial IoT system supplier, a connected car app, traffic management system or energy management firm. In other words, the connectivity provider is the branded developer and provider of the application, not just the connectivity provider supporting any app or use case. 

It is no easier to explain--and have people agree upon--what a “platform” or “techco” evolution means. 

It never is completely clear why telco executives really mean in touting the transformation from telco to “techco.”

Many telcos--or those who advise and sell to them--say telcos need to become techcos. So what does that mean?

At least as outlined by Mark Newman, Technotree chief analyst and Dean Ramsay, principal analyst, there are two key implications: a culture shift and a business model.

The former is more subjective: telco organizations need to operate “digitally.” The latter is harder: can telcos really change their business models; the ways they earn revenue; their customers and value propositions?

source: TM Forum

It might be easier to describe the desired cultural or technology changes.  Digital touchpoints; higher research and development spending; use of native cloud computing; a developer mindset and data-driven product development or use of use artificial intelligence all might be said to be part of becoming a “techco.”

Changing the business model is the more-problematic objective. 

As helpful as it should be to adapt to native cloud, developer-friendly applications and networks, use data effectively or boost research or development, none of those attributes or activities necessarily changes the business model. 

If “becoming a techco” means lower operating costs; lower capital investment; faster product development or happier customers, that is a good thing, to be sure. Such changes can help ensure that a business or industry is sustainable. 

The change to “techco” does not necessarily boost the equity valuation of a “telco,” however. To accomplish that, a “telco” would have to structurally boost its revenue growth rates to gain a higher valuation; become a supplier of products with a higher price-to-earnings profile, higher profit margins or business moats. 

What would be more relevant, then, is the ability of the “change from telco to techco” to serve new types of customers; create new and different revenue models; develop higher-value roles and products or add new roles  “telcos” can perform in the value chain or ecosystem. 

We face the same sorts of problems when trying to explain what a “platform” looks like. 

Korea Telecom wants to become a digital platform company, not a telco. That ambition arguably is shared somewhat widely among tier-one connectivity service providers globally and has been a strategy recommended in some form by most bigger consulting companies. 

Simply, becoming a platform company changes the business model from direct supplier of products to a role as an ecosystem organizer or marketplace. That arguably is an aspirational goal more than anything else. 

What that aspiration means in practice is that KT as a digico “will shift our focus from the telecommunications sector, where growth is stalled due to government regulations, to artificial intelligence (AI), big data, and cloud computing businesses to become the nation's number-one platform operator in the B2B market," said KT CEO Koo Hyun-mo.

So there are qualifications. KT, if successful, would become a platform in the business market, not the consumer market. It would explicitly aim to become the center and organizer of an ecosystem for artificial intelligence, big data analytics and cloud computing. 

Purists and researchers will likely argue about whether all of that actually adds up to KT becoming a platform, in the sense that Amazon, eBay, Alibaba, ridesharing or lodging apps  might be considered platforms. 

A platform, definitionally, makes its money putting buyers and sellers and ecosystem participants together. In computing, a platform is any combination of hardware and software used as a foundation upon which applications, services, processes, or other technologies are built, hosted or run.

Operating systems are platforms, allowing software and applications to be run. Devices are platforms. Cloud computing might be said to be a platform, as systems are said to be platforms. 

Standards likely are thought of as platforms by some. 

In other cases components such as central processing units, physical or software interfaces (Ethernet, Wi-Fi, 5G, application programming interfaces) are referred to as platforms. Browsers might be termed platforms by some. Social media apps are seen as platforms as well. 

The platform business model requires creation of a marketplace or exchange that connects different participants: users with suppliers; sellers with buyers. A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. 

A platform orchestrates interactions and value. In fact, a platform’s value may derive in large part from the actions and features provided by a host of ecosystem participants. Facebook’s content is created by user members. Amazon’s customer reviews are a source of value for e-tailing buyers. 

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. 

So KT can increase the percentage of revenue it earns from supplying digital, computing, application or non-connectivity services without becoming a platform. As a practical matter, that is what most telco executives have in mind when talking about becoming platforms. 

For KT, even limiting its ambitions to generating more digital and non-connectivity revenue does not make it a platform. That would still be an important, valuable and value-sustaining move. But KT has a very long ways to go, even in its stated objectives of becoming a B2B platform.

Total KT revenue is about 24 trillion won. All B2B revenues at the end of 2020 were about 2.78 trillion won (about 11.5 percent). Information technology services were about 1 trillion won, or about four percent of total revenues. AI and other digital services were about 0.5 trillion won, or about two percent of total revenues. 

It might be a long time between non-connectivity revenues in the B2B part of its business are as much as half of total revenues. And those revenues might not represent a platform transformation of the business model.

KT could win significantly without ever becoming a platform. And some might argue few telcos can ever actually hope to become platforms in the classic sense. Perhaps the more important goal is simply to reduce reliance on traditional connectivity revenues.

Unfortunately, what platform, techco or digital services provider actually means in practice falls far short of the grander visions.

"Platform" is Overused, Misapplied and Difficult

Almost no word gets tossed around as a business “strategy” as “platform.” Becoming a platform often is touted as the key to success and a way to create brand value and escape commodity pricing. Compounding the problem are the likely different definitions people seem to use. 

In computing, a platform is any combination of hardware and software used as a foundation upon which applications, services, processes, or other technologies are built, hosted or run.

Operating systems are platforms, allowing software and applications to be run. Devices are platforms. Cloud computing might be said to be a platform, as systems are said to be platforms. 

Standards likely are thought of as platforms by some. 

In other cases components such as central processing units, physical or software interfaces (Ethernet, Wi-Fi, 5G, application programming interfaces) are referred to as platforms. Browsers might be termed platforms by some. Social media apps are seen as platforms as well. 

Platforms, in this sense, are a foundation upon which other things are built or created. That is true enough, but arguably too broad an interpretation to be useful when used with reference to business strategy.  

For purposes of business strategy, a platform earns revenue in a different way than most traditional products have done. Traditional products are sold with a “pipeline” business model, where one firm creates a product and then sells it. 

The platform business model requires creation of a marketplace or exchange that connects different participants: users with suppliers; sellers with buyers. A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. 

Perhaps the best models are multi-product e-tail firms such as Amazon, Alibaba or eBay; ride hailing companies such as Uber or Lyft; content exchanges such as YouTube; payment services such as PayPal; lodging exchanges such as airBNB; food delivery services such as GrubHub;  messaging platforms such as WhatsApp or social networks such as Facebook. 

source: Innovation Tactics 

A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. So you can sell the enormity of the challenge. A connectivity provider would be a platform if it enabled a huge ecosystem of suppliers creating and delivering apps over its platform, in nearly all cases without owning any of those apps, or even earning direct revenue, except in the form of a commission or fee for each transaction. 

Platform creation is not especially easy for a connectivity services provider. If you think about every business as either a “pipe” or a “platform,” then most businesses are “pipes.” They create a specific set of products and sell them to customers. That is a classic “one-sided market.”

This taxonomy illustrates why it is a challenge for any connectivity services provider to become a “platform.” Not only must “connectivity” (the current function) be provided, but also all the other functions that allow third parties to build applications on the platform. Note that the “networking” function is the foundation, but only that. 

source: Adnet 

A platform often creates value because of the scale and scope of the interactions between members of the ecosystem, so the range and depth of interactions might be a better metric for a platform. In other words, the platform is easy to join, easy for participants to use and easy to federate. 

Effective application program interfaces are one aspect. But effective logistics, settlements, data exchange, payments and information on ecosystem participant behavior might be other important aspects for ecosystem transactions and interactions. 

All that suggests any substantial connectivity provider platform would necessarily be built by some entity other than a single telco, no matter how large its operations. Among the reasons: creation of the ecosystem and platform would necessarily require adding roles and functions far beyond connectivity. 

In fact, the obvious paradigm already exists. The internet ecosystem functions with connectivity as an abstraction. It is assumed to exist. In that sense, the internet is the platform. 

What might remain to be created are industry platforms for apps and services with specific communications requirements that possibly are dynamic. Platforms for industrial use cases; healthcare or automated vehicles might provide examples. Or so many hope.

NextLight Grabs 60-Percent Market Share Competing Against Lumen and Comcast

NextLight, the electrical utility owned internet service provider in Longmont, Colo. says it has gotten 60 percent take rates for its fiber-to-home service, with similar take rates among business customers, after gaining about 54 percent take rates after five years of operation. 

Should many other competitive ISPs achieve such success, incumbent telco and cable operator ISPs could face serious challenges. 

It has been conventional wisdom in U.S. fixed network markets that two competitors are a sustainable market structure, typically featuring one cable operator and the legacy telco, with market shares ranging between a 70-30 pattern (where the telco only has copper access)  to something closer to 60-40 as a rule (where the telco is upgrading to fiber access). 

Telcos hope for market shares approaching 50-50 as FTTH becomes the dominant access platform over time. 

The new issue is additional providers, ranging from municipal or utility-owned ISPs to independent ISPs, including independent ISP operations that cover only parts of a metro area. In a sense, that is the mass market or consumer version of the competitive local exchange carrier strategy adopted decades ago, where suppliers target business customers in major office parks or downtown core areas. 

The American Association of Public Broadband cites 750 municipal internet service provider networks in operation in the United States, mostly serving smaller communities. Not all have full retail operations, though. 

Chattanooga Electric Power claims 175,000 customers in the Chattanooga, Tennessee area. The next-largest 10 such ISPs have fewer customers, often because they are smaller population centers. 

• City of Salem Electric Department (Oregon): 50,000

• City of Longmont Power & Communications (Colorado): 40,000

• Plum Creek Electric Cooperative (North Dakota): 35,000

• Jackson Energy Authority (Tennessee): 25,000

• City of Holyoke Municipal Light Department (Massachusetts): 20,000

• City of Boulder Municipal Electric Utility (Colorado): 18,000

• City of Dubuque Utilities (Iowa): 17,000

• City of Lawrence Public Utilities (Kansas): 15,000

• City of Lexington Utilities (Kentucky): 15,000

 

And other networks are launching in larger population centers. As with any set of contestants in any other industry, not all suppliers will succeed and not all will likely survive. Managerial skill still seems to matter, as do the other prosaic concerns such as managing debt burdens and picking the right areas to serve. 

Many for-profit ISPs now believe they have better opportunities in rural areas, for example, where a new fiber network can be “first” to serve the market. Up to this point few have attempted to compete in a major big city market. ISPs targeting operations in mid-size cities have generally only chosen to serve portions of their cities. 

The obvious broader issues are the roles and strategies traditional retail service providers can envision as their markets are reshaped by competition, new investors and virtualized or other roles beyond the traditional vertically-integrated model. 

The question naturally arises: how many of these new competitors will succeed, and what are the implications for sustainable market shares over time?

In a market with two significant suppliers, each serving the whole market, an ISP might require  market share of at least 30 percent to be sustainable. That has often been the pattern where a cable operator competes against a telco with copper-only access, where the available telco speeds are quite limited in comparison to a cable operator hybrid fiber coax network. In such cases, there is an order or magnitude or two orders of magnitude difference in top speeds. 

In a market with three significant suppliers, an ISP typically needs to have a market share of at least 20 percent to be sustainable, if competition across the full geography is envisioned. Such ISPs also tend to require more efficient operations. 

In a market with four significant suppliers, where we can assume as many as two of the four compete only in a portion of the metro market, an ISP typically needs to have a market share of at least 10 percent (of the full area potential market) to be sustainable, though ISPs serving only a portion of a metro area also probably need take rates higher than 10 percent in the areas they do choose to serve. 

If an independent ISP cannot get 20 percent to 30 percent take rates in its chosen geographical areas of coverage, it probably is not doing well. 

The best suppliers can take so much share from the incumbents (telco and cable) that severe damage to the incumbent business model is possible, turning those competitive areas into loss-making operations. 

A fixed network operator with sufficiently offsetting performance might survive actual losses in a few geographies. In fact, traditional monopoly fixed network suppliers expected permanent losses in rural areas, breakeven or slightly better performance in suburbs and most of the profits from operations in city cores. 

NextLight seemingly has avoided issues of cross-subsidization of internet access service by the electrical utility ratepayers, separating its financial operations from those of Longmont Power Company.

NextLight has its own board of directors, management team, and accounting system.

NextLight seemingly provides service “at cost,” plus a small margin to cover its operating expenses. The objective is to break even, rather than “making a profit.”

NextLight's network is physically separate from LPC's network, though critics might argue NextLight uses power company rights of way and other benefits of having a sponsor with an on-going business, which could translate to financial advantages. 

Others might argue there is some cross subsidy. There is a no-recourse surcharge on LPC's electric bills, used to fund the construction and operation of NextLight, and it is applied to all LPC customers, regardless of whether they subscribe to NextLight service.

That said, NextLight has gotten a legal opinion from the Colorado Attorney General's Office stating that NextLight is not engaging in cross-subsidization, and that the non-bypassable surcharge is a fair and reasonable way to fund the network. 

In fairness, what revenue-generating entity would not look to leverage its current assets to create new lines of business? Cable operators used their video subscription networks to create fully-functional telecom networks; use their fixed network to support their mobile service provider operations; extended their consumer networks to provide business-specific services; used their linear video customer base to leverage a move into content ownership. 

Telcos do the same, when trying to extend their core operations to new services. In the more-regulated era, they had to establish separate subsidiaries to enter non-regulated lines of business. That is less an issue in today’s largely-deregulated markets. 

The city of about 100,000 is about 30 miles north of Denver, so might be considered a suburb by some, a neighboring city by others. Using either characterization, population density varies quite substantially. 

The population density of Longmont, Colorado in its city core is 11,999 people per square mile while the population density of the outlying areas is 1,369 people per square mile  

 

Housing density and population density obviously are key indicators of potential access network cost and revenue possibility. Housing density enables and constrains home broadband market size, while population density is correlated with business revenue potential. 

To a large extent, housing and population density also affect network cost: the lowest-cost-per-passing networks can be built in dense areas while the most costly networks are in rural areas. 

Among U.S. internet service providers, the “average housing density is 400 locations per square mile, with Comcast sitting squarely on that level of density. Smaller telcos tend to serve more-rural areas and have housing densities an order of magnitude or two orders of magnitude less than the largest ISPs. 

Company	Housing Units	Average Housing Density (dwellings per square mile)
Verizon	58.2 million	1,500
AT&T	51.8 million	1,300
Lumen (formerly CenturyLink)	25.7 million	600
Charter	22.9 million	500
Comcast	19.5 million	400
Windstream	14.8 million	300
Brightspeed	1.9 million	40

At least historically, that explains why Verizon was early to invest in fiber to home facilities. It has the most-dense serving areas, so has the best economics. Only recently have many smaller and independent ISPs been able to make a business case for investing in FTTH in rural and exurban areas, though lots of small rural telcos have been doing so for years. 

Housing density	Cost per home passed
40 homes per square mile	$2,000
40 homes per square mile	$800
1,300 homes per square mile	$500

Figures of merit for FTTH construction might range from $1,000 to $1,250 per household at 400 homes per square mile but $1,500 to $2,000 per household at 40 homes per square mile, for example. 

At higher densities of 1,300 homes per square mile, costs might range from $500 to $750 per household. 

The business case also includes less revenue per account potential at lower densities as well. 

All that matters as attacking ISPs and infrastructure investors weigh their odds of success when competing with legacy service providers. To be sure,  FTTH payback models seem to have changed greatly since 2000. 

The economics of connectivity provider fiber to the home have always been daunting, but they are, in some ways, more daunting in 2022 than they were a decade ago. The biggest new hurdle is that expected revenue per account metrics have been cut in half or two thirds. That would be daunting for any supplier in any industry. 

These days, the expected revenue contribution from a home broadband account hovers around $50 per month to $70 per month. Some providers might add linear video, voice or text messaging components to a lesser degree. 

But that is a huge change from revenue expectations in the 1990 to 2015 period, when $150 per customer was the possible revenue target.  

You might well question the payback model for new fiber-to-home networks which assume recurring revenue between $50 and $70 per account, per month, with little voice revenue and close to zero video revenue; take rates in the 40-percent range; and network capital investment between $800 and $1000 per passing and connection costs of perhaps $300 per customer. 

In the face of difficult average revenue per account metrics, co-investment and ancillary revenue contributions have become key. Additional subsidies for home broadband also will reduce FTTH deployment costs. 

The point is that FTTH revenue models, and the ability to sustain a competitive ISP operation, either as an incumbent or attacker, now seem to make possible more competition than was previously thought possible. 

NextLight is a good example.