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What Service Providers and Auto Makers Can Learn From Each Other


June 12, 2009

What Service Providers and Auto Makers Can Learn From Each Other

By Jon Arnold
Principal, J Arnold & Associates


I recently posted about a presentation I attended on the future of the automobile. The focus was primarily around fuel cell technologies, so it only touched on one aspect of the sector. A broader discussion would have required far more time, but even this singular view gave rise to parallels I see in telecom and IP communications technologies.

Both sectors are highly capital-intensive and share a common history of dominance by a handful of players. Telcos have had a couple of serious downturns since the Internet came along, but none have been quite as severe as what the auto makers are facing now, especially in North America. While these are very different businesses, they both cater to the same mass market, and are actually besieged by the same set of problems.

With the ascendancy of IP-based technologies and the Internet, two new challenges arose that continue to threaten their long term survival today – lower cost alternatives and explosive innovation. As readers of my column know all too well, IP networks require much less Capex and Opex, and have matured to the point where they have not only matched the PSTN, but in many ways surpassed it.

On one hand, this has been a boon for incumbents to lower their operational costs, but it also gave rise to a whole new class of competitors, where time and money were no longer major barriers to entry. With lower cost operators in the game, prices for subscribers invariably fell, and the economics of telecom have forever been changed.

Compounding this problem for incumbents was the wonderful flexibility of open, standards-based IP technologies. We’re all familiar with the subsequent innovation in telecom services, and nobody would argue that today’s offerings are richer and more cost effective than what came before.

Not surprisingly, virtually all this innovation has come from the newcomers – some being competitive telcos, and others with no prior history in this market. This has left the incumbents struggling to catch up, and what was once the golden goose – legacy telecom – is quickly becoming an albatross, with no end in sight from life-long subscribers abandoning their landlines.

I’ve kept this brief synopsis generic for a reason. Just substitute auto maker with telco and you have a blueprint for what the car industry is going through now. The scenario is pretty much identical in terms of how lower costs and lack of innovation have been the culprits. Of course the rising cost of fuel is an exogenous factor for the auto makers, and telecom hasn’t been faced with rising electricity or broadband costs, which would be the comparable factors.

Early on, broadband may have been less abundant, but not to the extent that high gas prices have really hurt North American auto makers. On the other hand, people are still driving SUVs, high fuel prices be damned, but let’s not get into a discussion about irrational behavior.

Back to the topic. Much the same way the cablecos, Skype (News - Alert), some CLECs, and a few OTT/MVNO operators have made life difficult for incumbents, the Big Three have struggled against the “imports”. Aside from the established overseas majors – Toyota, Honda (News - Alert), Nissan – others like Hyundai, Kia and Suzuki have gained notable market share in the past few years. Why is it that these companies can enter the market with continual success, but there is no new blood coming from domestic producers?
Well, we all know the simple answer – imports are winning because they have been more innovative and build cars more efficiently, which translates into better value for the money. American auto producers seem hobbled by the same mindset and structural issues that are hurting our big telcos. This has opened the door to competition, and in both industries, the majors have had a very hard time keeping pace.

We could spend a lot of time debating where energy fits into the equation, since it impacts all auto makers equally. However, in my earlier post I re-visited the EV-1 – GM’s electric car. This would have been a true innovation, but they lacked the foresight to make a real shift away from oil. Not long after nixing the EV-1, along came the SUVs, making consumers more oil dependent than ever before, and you know how that turned out. Unfortunately, based on what I heard at the aforementioned presentation, fuel cells and hybrid electrics are many years away from displacing oil, and we’ve already seen the biofuel/ethanol craze come and go. So, let’s just leave energy aside for the time being.

As noted earlier, telcos and autos are very different businesses, but they do have one basic element in common. Both are in the transportation business – telcos move packets and cars move people. With that in mind, what they can learn from each other? With the Big Three on the verge of bankruptcy, nationalization and foreign ownership, this should be a serious wakeup call for the telcos to become ever more innovative and cost-competitive. That’s not news, but it was unthinkable a few years ago that our auto makers would be in this much trouble today.

Just as GM rejected the electric car, the telcos rejected VoIP. Both technologies represent the future, and if you ask me, the majors will not own either of them. They’ll be in great shape if they do, but I’m not optimistic. As such, they’ll need to innovate and reduce costs in other areas. It won’t be easy, but I don’t think they have any choice.

Along those lines, I’ll close by mentioning GM’s choice for its new leader – Ed Whitacre, the former head of AT&T (News - Alert). It’s very interesting to see a telco exec coming in to save GM, and things sure would get even more interesting if he could find ways to bring telecom innovation into the auto business. The car is one of the last frontiers for communications technology, and I have no doubt we’re going to see exciting innovation, especially in telematics.

That would be a great way for auto makers to differentiate themselves, but somehow I don’t think this particular marriage will produce such a result. Something tells me it will come from somewhere else, and very possibly from left field – who’s to say the likes of Apple, Microsoft, IBM, Google, Nokia (News - Alert), Cisco, etc. won’t have a hand in the car of the future? That’s where I’d be betting some of my money, and maybe that’s the lesson car makers can learn from telecom – be open to innovation - from wherever it comes.

The old adage about what’s good for GM is good for America has long run its course and they really need to invert their thinking. As telcos have learned with IP technology, the customer is now in control, and ultimately what’s good for the customer is good for GM. If Ed Whitacre can port that thinking from AT&T to GM, they’ll definitely be on the right track. I won’t be alone watching how that pans out, and something tells me I’ll be revisiting this topic before the year is out.

Jon Arnold, Principal at J Arnold & Associates, writes the Service Provider Views column for TMCnet. To read more of Jon’s articles, please visit his columnist page.

Edited by Stefania Viscusi

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