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War of the Worlds - Who Gets Broadband's Profits?
A maturing broadband market sets multiple industries on a collision course for profits
This report provides an overview of the strategic future of broadband competition. It is aimed primarily at telecom carrier, internet infrastructure vendor, and media company strategists, but provides a broad thesis that we hope is useful to investors and industry observers as well.
Broadband has always ultimately been about more than connectivity, more than the underlying technologies, more than “just telecom”
As an umbrella, thematic piece it sets forth our point of view on a number of strategic issues. It also serves as background to other, very narrowly-focused reports in this ‘War of the Worlds’ series, ranging from sector-specific investment theses, to product strategy and economics in, for example, enterprise communications markets (PBXs, corporate communication servers, etc.).
There are four basic ideas in this report:
- Multi-industry competition: a maturing broadband market creates a ‘War of the Worlds’ between telecom, media, internet infrastructure vendors and retailing—each aspires to larger portions of broadband-related consumer wallet share
- Anything is possible: today’s vendor positions are highly unstable—There is a wide array of possible five-year outcomes and these should inform strategists’ thinking today (Part I)
- Battle over innovation: at the center of the contest will be widely divergent industry approaches to product and service innovation models, with telecom at a fundamental, but remediable, disadvantage in this competition (Parts II, III)
- New broadband playbook: despite head-to-head competition, media, telecom, and consumer electronics will become increasingly inter-dependent as well. Telecom’s future competitive success rests on capitalizing on these growing interdependencies while addressing three major transformational issues: resolving where it stands on the content value chain, creating meaningful value-added wholesale services, and radically overhauling its capabilities in business development and strategy (Part IV)
Broadband Profits Redistributed
Broadband has always ultimately been about more than connectivity, more than the underlying technologies, more than “just telecom”.
The broadband market took longer than many expected to reach “mainstream” levels of penetration. But having done so, the path is now open for content, applications, devices, retailing, and support services to rapidly enlarge the broadband pie and claim significant slices of it along the way.
On the face of it this is good news for telecom—more demand. But as we discuss at length in Part II of this report, telecom faces the very real prospect of proportionally smaller, not larger, slices of broadband-related profits in its future (including wireless) despite the broadband market’s overall expansion. This is not because broadband profitability is a zero-sum game, but rather because value is already migrating away from connectivity to other sources of revenue, driven by a number of “new rules”:
- Value can reside almost anywhere: IP networks enable application functionality or content to be aggregated from many sources, including from the endpoint devices themselves. Unlike the legacy telephone network, in the broadband world application intelligence is a cleanly-separated layer above connectivity. Since customer applications or features can reside anywhere on a wide range of architectural “distributedness”, from centralized to highly-distributed peer-to-peer, this puts web portals, handset manufacturers, system software vendors, and telecom networks in head-to-head competition.
- Anyone can “build in” communications features: From multi-player communication in Microsoft’s Xbox Live, to eBay embedding VoIP connections in auction listings, more applications will build in communications (voice, video, instant messaging) as a feature, making it more valuable and convenient for the consumer – the context of the communication is pre-defined, simplifying addressing, setup, session initiation, and interworking with other application features. Instead of waiting for generalized solutions from telecom, applications are pragmatically building in whatever communications features they need.
Almost any application or content provider can source and integrate the elements of communications infrastructure to do this, without recourse to a legacy telco. The telecom value chain itself is now so disaggregated that even the specialized infrastructure required to be a connectivity provider (cable telephony, for example) is cheap and widely available. Some of it has even been packaged in the form of outsourced services (VoIP peering, PSTN termination, ENUM mapping, E911, CALEA, etc.)
- Capacity isn’t scarce, capabilities are: The competition genie is out of the bottle in developed-world broadband connectivity. Even in the “laggard” US market, most residential use of anticipated broadband applications can be more than adequately served with the available (and constantly improving) broadband performance. As higher bandwidth applications and content continue to arrive, both cable and telcos will have more than adequate capacity to serve them, and every incentive not to be the one who doesn’t.
Premium revenues will go to suppliers with the capabilities to create new applications and content, and to help both consumers and/or other suppliers to cope with increasingly complex device and service combinations in a broadband world.
- Consumers (still) won’t be excited by connectivity: Connectivity alone is rapidly becoming invisible – what consumer marketers politely call a “low-involvement category”. Consumers are excited by brands, lifestyle relevance, and functionality. No iPod user ever said “I’m so happy to be using AcmeTelco DSL as I buy songs from iTunes,” so tailgating on more relevant consumer brands (e.g. using Napster give-aways to promote BellSouth’s DSL service) will increase. And the marketing power of bundling will decline: as the components of connectivity packages get cheaper, the value of the discount is less meaningful.
Fast forward to the year 2010 combining these “rules” with (a) the effects of the media industry’s quest for new distribution models (b) the consumer electronics industry’s still-increasing cost pressures (China, Wal-Mart) and ever-shortening product cycles, and© the retail industry’s appetite for new product categories and service value added.
It would be an understatement to say this is a recipe for strategic instability.■
Download this article:: WotW - Broadband Competition.pdf [2.2mb]
12 October 05
