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2010: It's Only January, but so Many Questions Already for Service Providers

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January 29, 2010

2010: It's Only January, but so Many Questions Already for Service Providers

By Jon Arnold, Principal

Spending time at the ITEXPO always generates new ideas about where telecom and the broader sphere of communications is heading. Aside from my takeaways there, I’ve come across a few other timely items elsewhere that collectively point to a continued seismic shift that’s coming into focus now, at least for North American service providers.

First, the ITEXPO showcased a lot of vision, not just from service providers like Verizon and Sprint (News - Alert), but disruptors and innovators who are each having a distinct impact on the telecom landscape. We heard from the likes of Digium, Yahoo! and Skype, and when you put all this together, there isn’t a service provider out there who can afford to stand still today.

Whether the focus is businesses or consumers, the service provider value proposition is becoming a moving target. Most of this is being driven by the confluence of two mega-trends – wireless broadband and the Web. That’s not news, and I’ve written about this before. However, these elements continue to accelerate, and their cumulative impact is forcing service providers to react faster than they’d like, and more importantly, fast than they’re able.

Just considering what was on offer at the ITExpo, the incumbent telcos can’t move to wireless fast enough, and are quickly finding themselves racing to build out 4G and LTE to keep up with exploding demand. While this is a nice problem to have, we’ve become spoiled by the Internet and expect things to be free or pretty close to it. Service providers cannot easily raise prices to reflect the cost of providing these faster speeds, as lower cost alternatives keep popping up. 

We all know how price competitive the consumer space is, and the ITExpo provided some great examples of more affordable options in the business market. Digium continues to lead the way with Open Source, and this trend keeps building momentum, especially with SMBs. For better or worse, Open Source is driving the cost of business communications down, and no service provider is immune here. When you add Yahoo! and Asterisk (News - Alert) to this, businesses now have a complete Web-based alternative, leaving service providers with a smaller piece of pie.

The same holds for Google, of course, and when they want a market, they know how to get it. And then we have Skype (News - Alert), who is making a serious run at the business market. I’ve advocated for some time that service providers should start looking at them more as partners than competitors. Their launch of Freetalk at the Expo is another example of a low cost telephony solution that SMBs will find attractive, but not as a result of anything the service provider has done.

One of my mantras is that communications innovation continues to come from outside the telecom world, and the above are all good examples of this. I’m sure you can see where this is going. If you think these companies are changing the game, most of us concede that Apple (News - Alert) does it better than anyone. Just in time for this article, they unveiled the iPad this week, which will create its own wave of disruption among service providers. Whether it’s Freetalk, the Bold or the iPad, the endpoint is becoming the main driver for defining value. This reflects the broader trend that applications are the true enablers of today’s 2.0 communications experience, and endpoints are supporting a richer environment at an increasingly lower price point.

So, what is a service provider to do? Well, if you follow the latest earnings reports of AT&T and Verizon, the answer is clear. Move away from wireline, cut jobs, and bet the farm on wireless. In fact, AT&T concedes that wireline’s time has passed, and I think the incumbents will soon become more vigilant in their attempts to move all their subscribers over to wireless. In the consumer world, wireline voice is becoming the domain of MSOs – not because they want to get into the voice business, but because VoIP is their point of entry to capture all of the home market’s wireline communications spend and run it over cable.

I should also add that the economy isn’t helping. As all these dynamics point to more usage of wireless services, it’s getting harder to justify the expense of carrying a landline as well. Whether it’s a business or a consumer looking to cut costs, wireless has become indispensible now, and the case for dropping landlines gets stronger by the day. When there are cost savings to be had, the attendant tradeoffs such as traditional 911 and TDM quality are easier to accept, and it’s hard to see this trend reversing, even as the economy improves.

There are several other associated trends that I’ll explore in future articles, especially around generational preferences, but I think there’s enough here for now. The main idea for this article is to illustrate how current trends are re-shaping the service provider world whether they like it or not. Their role in the value chain is changing, and will be seriously eroded if they do not become more proactive with both their subscribers and solutions partners. 

Service providers have simply not been part of the equation for innovation lately, and it’s clear to me they need to move faster – either with their own R&D or with those who are ahead of the curve now. And by the way, this second approach could simply be strategic partnering, or outright acquisition. We just saw a prime example of the latter last month with Telefonica (News - Alert) buying Jajah for $206 million. Aside from this being a lot of money in absolute terms, it’s about double the $105 million that British Telecom paid in 2008 for Ribbit. 

Clearly, the going rate for a good platform play keeps rising, and reflects the importance of having access to a steady stream of innovation that keeps pace with the ever-changing tastes of the market. The “fat dumb pipe” scenario has been out there for a long time, and if these trends continue, this will become a reality faster than you think, especially since there aren’t many platform plays left to acquire that are comparable to Jajah or Ribbit. In mind, this puts the onus on service providers to partner more aggressively. I expect we’ll see some interesting moves on this front in 2010, particularly once the potential of the iPad – and the broader category of e-readers – is better understood. Something tells me I’ll be writing more about this topic very soon.

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 Kelly McGuire

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