Wednesday, January 28, 2009

Marginalization – The biggest threat to Carriers

Carriers have called the shots in the wireless ecosystem. It is the carriers who have access to the consumers which has led to alignment of other players (handset manufacturers and VAS players) alongside the carriers. In most markets, carriers are the one stop shop for the consumers with carriers sourcing the handsets and content for them. However, now the dynamics of the industry is changing with movement by other players across the value chain (into carrier’s domain) and emergence of new players like Google, Apple and RIM.

With declining voice revenues; the only hope of the carriers is to increase the pie of value added services. Carriers in the past followed the “Walled-Garden” approach to maximize their revenue share and in the process dissuaded the consumers from using 3rd party services. The “Walled Garden” approach worked well when the industry was in nascent stage and the ecosystem was less developed. In this approach, the operator was responsible for providing the platform for services, marketing and billing of services and in return they charged a hefty revenue share (as high as up to 70% in many countries). The high revenue share made the VAS industry unattractive and prevented the content providers from becoming big. However, in the recent past, strong non-operator players are attempting to introduce services like navigation, music, gaming, etc. to garner revenues from this lucrative part of the value chain.

Carriers had many myths that are now being broken. The complexity of delivering services on mobile seamed to offer relevance of Carriers to consumers but now the technology has marched past them. Carriers thought that the location based services could only be offered by them as they own the cell sites and hence the location of the consumer. However, the advent of GPS as changed this thinking. The GPS based services can bypass the carriers and directly communicate with the consumer’s handset. Carriers long held the view that they would be able to provide and market all the services but now they are finding that they have limited resources and it is impossible to focus equally on all the services. With the increasing popularity of 3G, the consumers are demanding a near mirror experience of a PC. As in PC world, no ISP controls the ecosystem, is expected that the mobile services would also evolve the same way. The voice revenues are also under threat due to advent of VoIP. Does this mean that the operator would be reduced to a pipe? Will we see flat fee data plans in the future which would essentially be same as the ARPU of the subscriber as voice would also be over internet?

The carriers can avoid marginalization by focusing on collaboration with other players in the eco-system. The basic principle of collaboration needs to be fair play and equitable wealth distribution. They need to do the following:

* Lower subsidies on handsets and move towards the open market – This would help them save the precious cash that they can use for other activities. With global handset market size of 1.1 billion in 2008 and assuming an average of $40 (it is over $100 in markets like US, UK, etc. but the open markets bring the average down to $50), the annual subsidy bill to the carriers is a whooping over $40 billion. The subsidy bill is likely to increase even further with increasing popularity of the smart phones. Despite bearing the subsidy burden, the carriers are unlikely to benefit from the higher usage of services by smart phone users

* Lower the revenue share for services – Current revenue share levels is not giving the level playing field to the content provider which is forcing them to look at options of bypassing the carriers. Since most of the content providers are small, they are forced to align with either the carrier or a big player (handset manufacturer or Internet players). If they get a better deal from carriers, they are unlikely to align with the other players or at least the business model for the other players would look much worse. Better revenue share to content provider would mean more focus on higher quality content production leading to higher consumption of services

* Do away with the concept of “Walled Garden” – Carriers need to have just one APN and remove the walls of their walled garden. Their walled garden could become just another portal on the internet but the big advantage with the carrier would be its ability put the link to the portal on the SIM (discovery becomes easier). No “Walled Garden” would mean a lower marketing spends on promoting its services which in turn would help the carrier in reducing its portion of the revenue share

* Do not invest in proprietary platforms – Japanese and Korean carriers have invested in their proprietary platforms but are now finding it difficult to expand or integrate their services with other plays. This means that either the new service has to completely bypass the carrier or cannot be offered to the consumers. In either case, it is the loss of revenues to the carriers. The carriers would be tempted to collaborate with handset manufacturers (who do not have services platform) to form proprietary platforms. However, the results are unlikely to be favorable to the carriers as the consumer are becoming more demanding and more exposed in the globalized world

* Collaborate with all players in the ecosystem – Carriers would benefit by collaborating in the ecosystem and focusing on increasing the overall pie of the services. We have currently hit just the tip of the iceberg in realizing the services revenues. The adoption of most of the services is still below 5% and there is a lot on the table for everyone. Collaboration would mean that they would remain relevant and are likely to get their fair share

* Invest in startups in the services space hoping to roll-out compelling services in future. A few carriers have already started to invest in the new venture, e.g. Eventful, a location-based calendar service, announced a $10 million round that included money from Telefonica, Pelago, which is developing a mobile social network called Whrrl, raised $15 million, with some of it coming from Deutsche Telekom’s venture capital arm, T-Mobile Venture Fund

Carriers need to decide on the purpose of their existence. If they are looking to safeguard their profits, they could focus on becoming a really excellent bit-pipe. There will be steady returns for those who focus on reducing costs and increasing efficiency. Alternately, carriers could choose to embrace Internet-based services and become an aggregator, concentrating on facilitating access to Internet content rather than creating it. All I can say is that all is not lost for the carriers and there are exciting times ahead for consumers who might be spoilt by the choice.


Anonymous said...

Hi Mohit. Good platform to debate and discuss. Will even save on VoIP costs. Some good reading here. Agreed the ecosystem is evolving towards cooperative competition. However one cant undermine the fact that he who owns the customer is king. At this points its still the carriers. I think it will be sometime before this equation changes. Till such time there isn't voluntary sharing of this customer base, carriers will be tempted to follow an age old path of strategic lethargy making it difficult for partners to fully optimize this resource. Tiny glitches like working out interconnect rates, billing, inadequate POPs, whatever. Nothing significant to raise the ire of a strong regulator, just small speed breakers. Personal perspective.

Unknown said...

You left out an important aspect in the equation -- the prohibitive cost of proprietary OSS software in the back office. Operators find it difficult to be agile and react to market changes through new business models, often because it it prohibitively expensive or too time consuming to have their BSS/OSS support it -- especially billing. Right now, they are forced to be relegated to their traditional one-to-one role (i.e. subscriber consumes service, carrier issues invoice, subscriber pays), as opposed to treating their subscriber base as assets to be monetized and opening up that relationship to 3rd parties. There is a new technology refresh coming to the marketplace now (last one was 2000/2001) which is largely SOA/Web Services and Open Source will help remedy this problem. Transverse ( is taking this approach.