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Service Providers: Be Careful What You Wish For

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Service Providers: Be Careful What You Wish For
October 26, 2009
By Jon Arnold, Principal, J Arnold & Associates


Last week at Supercomm 2009, I took away a wide range of impressions, as well as several consistent messages about the state of the service provider space. One thing I really liked about Supercomm was its scope more so than its size. Aside from hearing from U.S.-based telcos both large and small, there were many international perspectives as well as voices from the cable and public sectors. Based on the conference agenda, along with my conversations with exhibitors and attendees, I reached one basic conclusion – be careful what you wish for.

That simple adage can mean many things, and that’s part of the story here. When this range of views is considered, one can see how there’s something bigger than the U.S. telcos. For the most part, these companies are strong – large subscriber bases, strong revenue streams and steady profits. At face value this is a good place to be, and not too many unregulated businesses can say the same.
As we know, there’s more to this picture, and that’s what I took away from Supercomm. Not surprisingly, IP and the Internet are at the root of such things, and as much as telcos embrace this as the future, continued success is no sure thing.
Basically, in the consumer world, smartphones have created unrealistic expectations, and as mobile broadband becomes a must-have, service providers have a conundrum on their hands. In our homes, we’ve become accustomed to flat-rate Internet access with broadband speeds that meet more of our needs. The runaway success of the iPhone (News - Alert) in particular has set the bar equally high for mobility, but wireless networks have not been able to ramp up fast enough to meet demand.
Mobile operators have their wish in the sense that customers want these new services, but the rush has come faster than expected, and must now accelerate their capex spending. This is a nice problem to have, except for two things. First, some subscribers will go elsewhere if the service isn’t up to par for them; although to be fair, most mobile operators face the same challenge.
More important, though, is the lack of price elasticity. Mobile broadband would quickly become uneconomical for subscribers if they had to fully subsidize the cost of network upgrades needed to keep supply and demand in check. If prices get too high, smartphone usage would drop off, and traffic would eventually shift back to wireline – or cable broadband networks.
What is a service provider to do? Not only is the demand for mobile growing exponentially, but with 4G and LTE (News - Alert) coming, mobile VoIP is poised to erode pricing much the way it did for fixed line telephony when VoIP came on the scene. The basic storyline coming from Supercomm is the recognition that the current model of both building and funding networks is broken. The status quo will only ensure an endless cycle of upgrades to keep catching up to the growing demand for faster throughput. Carriers have limited options to raise prices, and with mobile voice revenues set to begin their inevitable decline, there is a fundamental business case challenge to justify this continuing spending in terms of ROI.
There was talk from the major carriers about shifting to a common network infrastructure to support both fixed and wireless services. I see that being a necessary step, and one that was unthinkable a few years ago when these services were run as separate empires or by very different carriers. Today, fixed and wireless is simply another flavor of convergence, and the sooner the carriers adopt this thinking, the better.
Smartphones have turned the industry on its head, and for the first time, devices are really driving demand. This is the weakest link the in the value chain where service providers have control, and it is pushing them to move faster than they are ready for into the world of anywhere, anytime, any network, any device services.
To do this, service providers need fresh thinking about their networks, and it is not clear yet what the answer is. Some of this will come from within, where new architectures will emerge, but that can be a slow process, and there is little appetite for risk, especially with the economy still being fragile. I see two other paths that might be quicker fixes, and neither has to do with net neutrality, which is another topic altogether.
One would involve moving further down the Web 2.0 path, and start introducing advertising-based services. If mobile operators have one thing going for them, it’s the critical mass of subscribers who are highly engaged using broadband services. This scenario is tailor-made for advertisers, and it’s high time carriers started to leverage it. They may think the network is their core asset, but I would argue it’s their subscribers, and the goodwill that comes from being happy customers.
This idea of adopting advertising isn’t new, and you don’t have to look far in the Web services world to find advocates. It’s something else, though, when you hear this kind of talk from service providers themselves. That’s when you know it’s time, and this is where you might soon see closer partnerships form with Google, Microsoft (News - Alert), Yahoo and the likes to help drive search-based advertising revenues for the carriers.
At some point, carriers will have to draw a line in the sand and explain to subscribers that unless they’re willing to absorb major fee hikes, advertising will be way to continue to providing all these wonderful services at a reasonable price. In some ways, it’s akin to seeing advertising in movie theaters. Most of us balked at this initially, and now we’ve come to accept it as part of the movie-going experience.
The second path requires making a few connections, but I think there’s a case to be made here. Network upgrades are costly, and this is where vendors come into the equation. I would contend that the dominant telecom vendors – Alcatel-Lucent, Nortel, Siemens (News - Alert), etc. – have their own financial challenges, and can only do so much to help carriers upgrade their networks. Based on what I saw at Supercomm, I would contend that Asian vendors are well aware of this, and are highly motivated to break into the North American market. Huawei (News - Alert) is the most visible example, and I suspect they have some pretty good “white knight” scenarios in the works where they offer very favorable terms to help carriers keep their networks current enough to meet market demand. 
They are in a stronger position than their U.S. or European counterparts, and I think once this trend becomes established, it will be difficult to reverse. It could well be a panacea for service providers, but may also usher in a new balance of power among the vendors. Whether this occurs – and whether this is a good thing – remains to be seen, but service providers have their own interests to protect, and now that their wishes are coming true, they have a big job to do. So do the likes of Huawei, and in many ways they too may finally be getting what they wished for. We certainly live in interesting times.

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 Erin Harrison

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