It has been a tough couple of decades for much of what we used to know as the “telecommunications” industry, but it is likely to get much tougher. Several cases in point:
With the death of monopoly regulation, profit margin is being wrung out of the business
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Wi-Fi now is becoming the biggest part of the “access network”
Value is migrating up the stack to “application layer”
App layer will relatively easily move “down the stack” to vertically integrate experience
None of those trends are helpful to traditional “telecom” providers. That, in turn, is why some believe “telecom” industry incumbents should not be more-heavily regulated. The basic thesis: it does not make sense to place more burdens on a declining industry, and that is what legacy “telecommunications” happens to be.
“Wi-Fi has long since passed cellular as the dominant connection platform,” says Craig Moffett, partner at MoffettNathanson. “We’re going to move to a model where cellular is going to be what you roll onto when you have to.”
Says Moffett: “We’re going to think about Wi-Fi as the first network and cellular as the second network, rather than the other way around.”
If you think about Uber, it is a way of unleashing latent resources using a new business model. The analogy to Wi-Fi is fairly clear, as well. As Wi-Fi has become a major method of offloading mobile network traffic, so Wi-Fi is emerging as a new platform for supporting untethered communications that have a mobile component.
The other angle is that value always has resided in the applications people want to use, not the access method. Under monopoly regulation, people purchased the ability to make calls. Access was necessary to enable that value.
That remains the case. People want to use apps, and therefore need Internet access. In one sense, it is not as though value is migrating to the “application layer.” Value always resides in the application layer.
All the other layers enable the app layer. With the rise of IP networks, with access separated from apps, the sources of value simply become transparent, where they once were hidden.
In other words, access is becoming commoditized in a new way because the apps and access are separate products for the first time.
We sometimes speak of “value shifting up to the application layer” in the new ecosystem. In truth, value always resided in the app layer.
It is simply that, under monopoly regulation, the access providers also had a monopoly on the valued app (voice).
“If you understand that Apple and Google want to control your experience of the cloud, you can understand why they would like to ‘uberize’ the entire wireless space so their brand dominates your cloud experience,” says Francis McInernery, partner at North River Ventures.
That is why “low cost” now matters so much in the access business. Though a reasonable strategy for a tier-one provider is to own some of the valued apps supplied over the access networks, access itself is becoming a commodity.
And that means the business model has to evolve towards “much lower costs.”
One knows that is true, experientially, when users understand they can switch between access platforms without endangering “experience.” That is the definition of a commodity: a product that has ample substitutes with fully-functional qualities (sugar, flour, gasoline, electricity), leading to easy substitution and hence, lower value, leading to lower prices.
To anticipate an objection, long haul transport is is one sense, not a full commodity. Capacity across the Atlantic cannot easily be a functional substitute for capacity across the Pacific, or between points within any single region.
Access networks still are geographically distinct, and thus "capacity" is not, strictly speaking, a commodity in the sense that buying trans-Atlantic capacity solves a trans-Pacific capacity problem.
But within any local area, the access function is much more susceptible to substitution. People can buy or use mobile, fixed network, cable TV, independent ISP or Wi-Fi access from multiple suppliers, with roughly equivalent experience.
