Tag Archives: telecommunications

Is Internet Creating or Destroying Value?

As usual in bad times, the debate on whether progress creates or destroys value comes back, as questioned in Martin Varsavsky blog, this time referring to how RSS destroys affects to blogs reducing the amount of displayed advertisement.

As Martin writes:

“I once debated Michael Porter at Davos on the overall value creation of the internet. I argued that the internet created valued and he argued that the internet destroyed value.”

Many examples come to mind, where Internet seem to be killing multi-billion industries:

– Skype is dropping the cost of voice to virtually zero. What before was a hefty business of international telephone calls, has been reduced by several orders of magnitude with VoIP.

– Instant Messaging killing SMS. We all know that SMS is terribly expensive in terms of price/byte. At a rate of 5 cents per SMS, considering 140 bytes per message, we are paying at $375 per Megabyte!! As you can imagine, with IM and unlimited data plans becoming popular, in the mid-term SMS will die.

Music Industry. Used to charge $20 for a CD with 8-12 songs, the labels are struggling as they see the  revenues from music downloads far too low to offset the reduction in revenues from CD sales. Music distribution in discs is likely to disappear in a few years, replaced by online distribution.

– Online Newspapers cannibalize sales from print editions, with online ads revenues not always compensating.

Are these examples really showing that Internet is destroying value? or is value simply shifting?

Looking back in history, it is not the first time there is a perception that technology progress destroys value. The Industrial Revolution saw workers protest as they lost their jobs to machines. Demand for unqualified workers doing repetitive activities dropped, forcing workers to get trained and qualified to build, operate and maintain machines. Those machines produced goods (and new machines) that were cheaper and in bigger volumes, deriving in more people benefiting from those goods. What initially seemed like job destruction, in fact it was wealth generation for the society by making goods affordable for more people.

History demonstrates that innovation simply removes inefficiencies, and in its way destroys industries if needed, shifting value to other parts of the economy, not necessarily within the same industry. And Internet is a fine example of that. Internet (and mobile) makes communications affordable to billions of people, and it is one of the engines behind Globalization, making knowledge and information available widespread.

So where is all this value (business) shifting to?

Let’s take the Music Industry. By removing inefficiencies (like physical distribution of information in discs or in print) the Digital Revolution is shifting the value from selling expensive disc copies to improving fan’s experience, by forcing artists to do more live concerts and spectacular shows as Madonna’s latest World Tour. Value is also shifting from the monopoly of recording labels to select the next star, to the most democratic system ever, with Internet empowering all sorts of musicians to publish their work. Labels and intermediaries are clearly losing business, but isn’t the Digital Revolution bringing more value to both fans and thousands of creators?

There are still many things to do to make this World a better place for our children and grandchildren. Let’s put the focus on improving it harnessing the power of innovation that Internet brings.

Obama made a wise address last weekend, reminding us that we need a strong purpose and that we still have a lot to do in green tech as well as in broadband.

Internet clearly creates huge value for the society. A different question is, are Internet start-ups with unclear business cases (other than getting funds from VC) sustainable? We got an answer to that question when the late 90s bubble burst. Now we are getting the same answer after Bubble 2.0 is bursting too.

Telecom at the Speed of Moore’s Law

While the IT industry has Moore’s law in their DNA, the Telecom industry (both telcos and vendors) have not yet been able to embrace the concept and many analyst keep raising doubts about the sustainability of Telecommunications decreasing margins.

Microprocessors, hard-drives and memory cards double its performance/cost ratio every year. The price of an 8GB SD card was $50 last year. Now you can get a 16GB SD card for the same money. The price of a mid-range laptop has been just under $1000 for many years, only that each year you get a substantially better machine.

The Telecom industry has not been able to find the trick. Voice has been the key revenue generator service for ages. With voice revenues clearly declining, the industry is only now, beginning to switch to fix monthly fee models with a cap on voice minutes. People use the phone more and more. So the focus of telcos is now to keep the monthly fee price level, but give more minutes for the same fee, instead of reducing tariffs. The model also applies to broadband. Mobile broadband is capped, but telcos will aim at sustaining the monthly fee price, and focus on adopting more performing technology that will enable to increase the volume cap every year while slightly increasing the monthly fee. On fixed broadband the game is not capping but increasing the bandwidth. If you plot the increase of broadband bandwidth over the past years the growth is also exponential, and telcos should not focus on capping, but on making sure the technology enables them to increase bandwidth every certain time.

Moore’s Law is the self-fulfilling prophecy that keeps the dynamism of the IT industry and a sustainable market. Consumers and enterprises are now used to renew their PCs even before those are 4 years old, so in mature markets the demand does not seem to decrease, but at least sustain. Add the next billion of PCs in emerging countries like China, India or south east Asia and judge if the industry is still healthy.

As IT and Telecom converge, can Moore’s Law bring the same dynamism to the Telecom vendors and operators? Will they be able to keep the pace?

Transforming Telcos: Telco 2.0

Two weeks ago I found, as a guest post at GigaOM, an interesting article from  STL Partners  on the future of broadband. While I disagree on a few points, it does bring some fresh ideas about the evolution of telcos:

Wholesale. Increasingly important model as we see in wireless with MVNOs reselling capacity from operators. New application service providers could be envisioned to re-sell connectivity as part of a Service, like high-def video streaming with some QoS assurance on top of the basic package. “Postage and packing included” models will proliferate, like the Amazon Kindle, where Amazon pays for the EVDO service on behalf of the end-user.

Two-side business model. Service providers will monetize revenues from new sources, like: advertisement, e-commerce or access to user profiles, location and presence.

– The control of the Home Network. What is simple for techies and early adopters it is still too complex for the mainstream. Telcos are in a privileged position to manage the home network for their customers and make life easy for their mainstream users.

Virtual Networks overlaid on Internet. Broadband Service  Providers can offer best-effort Internet as a standard package to comply with net-neutrality issues, and still deploy overlay networks with a guaranteed QoS for bandwidth demanding or sophisticated usages: Hi-Def Videoconferencing, Hi-Def live events broadcast, etc. This overlay networks could be provided from the telco as a wholesale for Applications providers to re-sell it bundled with their Service.

Where I disagree with STL Partners article is in the inability of telcos so sell applications or media content. IPTV and Mobile TV are in their infancy yet, and operators are still learning. Many telcos have launched successful services, like Telefonica Imagenio (IPTV), AT&T U-verse (IPTV), KDDI Lismo (Music) or Telstra Mobile TV, that demonstrate how user experience in content services can be improved through technology, and this is something telcos do master.

Is there a business case for WiMAX?

WIMAX promises Mobile Broadband at much lower cost for operators than current 3G technologies, thanks to better spectrum efficiency and an architecture conceived for IP. For the user, WiMAX will have a similar behaviour as Wifi -plus the advantage of ubiquitous coverage and mobility- i.e.:

High bandwidth Internet Access
Ease of configuration
– WiMAX support integrated in laptops (Intel is a strong supported of WiMAX)

Alternative operators with WiMAX licenses are preparing to compete with incumbent 3G mobile networks. Malaysia and Taiwan are two countries where WiMAX activity is frantic. Taiwanese Government interest in having a solid national industry for PCs, CPEs and handsets, are strongly backing new-entrants to WiMAX, such as Tatung or Global Mobile. The lack of quality broadband in Malaysia makes Wimax a compelling alternative.

But WiMAX operators success will depend on how they position in the market:

Pure Broadband Service Provider. Will they compete with Fixed broadband players, or complement them? Is the end-user likely to subscribe to both a fixed access provider and a Wireless one? Will a flat-fee for a pipe service justify the investment, or should they add applications on top, as IPTV, Music, etc?

NextGen Mobile Operators. Can WiMAX sustain an offer similar to that of 3G operators, including Voice, Messaging, and other VAS (Value-Added Services), only now purely based on IP (VoIP, SMS, etc) . Will the end-users accept to have a WiMAX handset, replacing their current mobile phone? Will they rely on VoIP as a replacement of the GSM/3G phone?

Recent news of Sprint stopping their huge bet on WiMAX (it was foreseen a 5 Billion USD investment), is a set-back as this was probably the largest deployment in the World, but WiMAX industry support remains healthy.

WiMAX is backed by almost all industry vendors: Alcatel-Lucent, Motorola, Nortel, Cisco, Intel, with the exception of Ericsson that keeps focus on improving 3G data capabilities with HSDPA and 3G LTE, to defend their current UMTS market share.

Strong user demand for Mobile Broadband exists. Will WiMAX operators find the way to satisfy this demand.. and that of their shareholders?