OECD “The operators and their future: The state of play and emerging business models”: an early 2020 review
The OECD published a report in Sept 2019 on '“The operators and their future: The state of play and emerging business models”. It’s an interesting read considering the various flavours or operators in this current era and highlighting three key trends:
A broader variety of services from telecommunication operators. Operators are acquiring media companies and Internet firms. They are also moving into new industries such as advertising, banking, health services, home monitoring systems, insurance and sports franchises.
Increased specialisation rather than diversification. This development, partially illustrated by the move of wholesale-only operators to share infrastructure, covers both fixed and wireless networks. Proponents say that financial, organisational, regulatory and market factors are driving the trend. The shift indicates the development towards what they see as a utility-like business model.
Expanded role of terminal equipment and online service providers that now serve end users. These providers are aided by applications with a global reach and propelled by their leadership in research and development (R&D).
At the very least, the Executive Summary is worth a read for those with time constraints. What is an understatement is:
The different types of operators have transformed their business models, portfolios of offered services and technologies, as well as entered each other’s markets. Voice and video are still important, but are often no longer the core businesses of telecommunication and cable providers. In response to changing demand, a combination of access and data transmission has replaced voice and video.
This is like discussing lighting for an electricity provider. Sure, it’s the most critical service provided by electricity - it’s all well and good being able to power all the various devices we own and use by consumers and industry, however removing ‘darkness’ from society opened up the countless amount of hours that were once largely unusable. However, do Electrical companies have their business depending on lighting? It’s a rounding error in energy usage, and therefore revenue. Voice, similar to lighting, is critical but also trivial in data. Let’s use this 2013 article as a baseline, with an average call of “one minute and forty seconds”. If we use some basic numbers, that’s less than half a megabyte (0.5MB) of data. For context, just opening this page on my site from a recent popular article, is 15MB - that’s overly excessive, but you get the idea: even an hours worth of a phone call is a trivial amount of data (18MB). IP Carrier has a recent report showing “mobile Voice Revenues to Fall from $380 Billion to $210 Billion in 2024” - $210 billion is still a significant sum of money, but it’s just distracting from new opportunities. In short, alarm bells ring that this is even being discussed in this paper: voice and video are BAU and table stakes and if the cost isn’t already as good as zero, it is treated as such. The new revenue and opportunities exist on the Internet and in the new realm of cloud computing: which also strangely doesn’t get significant mention throughout the paper.
The new Limb: cloud
Imagine the International Space Station. It’s a functioning system, operating away and generating its potential. Then, something new comes along, a whole new habitat that gets bolted to the platform, and in doing so this same platform is also given control of the original systems. Cloud computing, and in particular Amazon Web Services (AWS), Microsoft Azure and Google Cloud Platform (GCP) are these new modules that has been added to the global network and going forward, many of the main services and systems will be hosted on these platforms. The Cloud Computing companies are the equivalent to the telephone operators or exchanges: EVERYTHING routed through them and this is where the value was generated for Telephony companies in a previous era. It’s evident by the growth rates for these companies that all future growth lies here. There were various announcements through 2019 of further link-ups between telcos and the cloud providers, but I’m not sure I see the benefits to the telcos, whereas the cloud providers get to more closer and closer to the consumers. Read this description from Amazon on their new Wavelength product:
AWS Wavelength brings AWS services to the edge of the 5G network, minimizing the latency to connect to an application from a mobile device
Think about it. They are explicitly stating they can’t get good enough connectivity through operator networks so are embedding their own equipment directly in the telco network to bypass as much as possible (this is a slight fudge as this system will also do some local processing, however, the point remains, they can’t get the service they want).
Again, from elsewhere online,
Connectivity providers have not been comatose in exploring ways to enter other parts of the value chain, but it has proven quite difficult. The existential danger is that, over time, value in the ecosystem will continue to shift to appliances and devices; applications and platforms; marketplaces and commerce.
The Self-Driving and Remote Surgery 5G misdirection
I found some of it slightly out of touch which was surprising considering who the material was supplied from. An easy way to check any document discussing future telecoms trends is to check whether it mentions autonomous vehicles and low latency for vehicle-to-vehicle communications. Yes, every vehicle will be connected allowing over-the-air software updates, but they will not need to connect continuously to navigate roads. Any vehicle being designed with self-driving, or safety, in mind now is being built to assume it won’t be connected: and I believe that if they are transmitting any ‘safety’ data it will not require ultra-low latency as expounded by many demos/papers: it will be to alert of break-downs, crashes, etc.. See the always-smart Benedict Evans expounding on this also.
It’s not to say I’m completely disagreeing with cars communicating instantly. But we’re not there yet, and really there’s no real point. For one obvious reason: coverage isn’t global on roads. In cities, sure, but outside of major cities (and even in some of those), there are various black spots. There will be a time in the future when this isn’t the case, but it’s not anytime soon. In the prophetic words of Marc Andreeson:
“It’s less a question of is it going to work, and more a question of when it’s going to work”
What is key here is that there is a range of other opportunities that are available. We’re only really scratching the surface of data usage. As a recent test by Nokia demoed (right), it’s likely there’s so much more we’ll be using network connections for going forward. Industry alone has to jump on board and connect every single device (likely multiple times through multiple sensors) and in doing so, the quantity of data here will explode. Remote surgery? Whether low latency is critical for all these use cases is up for debate, however. Speaking of latency…..
Latency Latency Latency Latency
Interestingly, the OECD paper approached download speeds from the perspective of gaming, and in particular using Steam. I get the logic for using gaming (it’s usually one of the sole consumer requirements for low-latency), but….it also expounds the ISP, Blade SAS, which provides a gaming service only and is largely a replica of other game streaming platforms like Google’s new Stadia platform. I.e. they are not an ISP as it is only gaming. Is this not like purchasing a VPN service, or any other service over the Internet? I get the sentiment they’re going for here, and trying to expound future use cases, but….it’s still not clear how they conflated both.
Aside from striving to reduce costs and increase efficiency, vertically integrated fixed and mobile operators are rethinking their business models to expand opportunities for revenue. As always, some operators are striving to extract higher rents from the networks they connect with to exchange traffic. In an environment where IP transit costs continue to fall, this is unlikely to be a successful long-term strategy. This is why most operators are instead seeking to move into other parts of their value chains. They are either creating new services or leveraging on the data they can access for analytical services (i.e. big data). Still others are moving into new industries such as banking, insurance, advertising and many others.
As one consideration, operators must choose to integrate services as extensions of vertical operations or as apps. Either way, they want to provide services across all geographical locations, not simply in their own areas of network coverage
It’s positive to see the Telecom World finally recognise they don’t own the most cable either. I was so confused to see them let Google, etc. take over this market in the late 2000’s - you could see it already then it was occurring. We’re starting to see more and more encroachment now into Telco’s networks with recent announcements such as Amazon’s Wavelength being brought into operator networks. Again, lots of positives as I’m sure there’s a financial arrangement there, but is this not opening more access into the inner network?
Future Technologies
Some technologies on the horizon such as blockchain, pCells, artificial intelligence, virtual reality and others may augment or disrupt operators in the future…
….While blockchain could benefit future operators in several ways, it may also lead to disruption. One example is Ammbr Network, a wireless mesh network that aims at extending connectivity through a shared Wi-Fi approach (Ammbr, 2017[96]). It is not owned or controlled by any single company, but rather by a community of users and infrastructure owners.
I’m yet to see any ‘community’ networks overtake a global business: it’s been tried in various forms against modern software companies such as Facebook, for example, most recently by Wikipedia founder, Jimmy Wales, with his WT:Social. None really make a dent. Community Mesh networks definitely exist and will likely continue to rise in various locations - in particular areas with low financial incentive for operators to build out their networks - however, as a global replacement? I doubt it. Having said that, there is one new type of network that has real potential…….
It’s strange, almost bizarre, that no mention whatsoever of the likely imminent low-earth-orbit (LEO) satellite internet providers such as SpaceX (see my report here on this service), Amazon, or OneWeb? All items listed above such as blockchain, AI are interesting, however, I’m uncertain how significant an impact they are to telcos (other than increased data usage if we start broadcasting ultra-high-definition Virtual Reality avatars and worlds around - think ReadyPlayerOne). LEO providers, on the other hand, could be BIG. If the latency is as good (low) as they say so it’s usable for real-time connectivity without all the lag inherent in current space-based connectivity at present, and can provide high enough bandwidth, there’s a very real change it could be ‘good enough’ for a lot of people in various parts of the world. SpaceX alone is estimating it could generate $25-$30billion revenue: a not insignificant percentage of future revenue that would be going to a new Service Provider, and not to the traditional companies. Remember also, if the first generation of these satellites are able to be ‘good enough’, what speeds are possible by the 2nd, 3rd, 4th or 5th generation of these satellites?
The key statement
Given that access to infrastructure is a prerequisite for digital transformations, network operators play a key role in this development.
At the end of the day, this is the telecoms business’ strength. They sit in the middle of all communications right now (albeit not controlling as much since cloud computing become the hub, as discussed above). They also control the licenses to the frequencies and the cabling in the ground.
They have historically built, invested, operated and provided telecommunication services. The migration to all IP networks has decoupled services from transmission. This has fundamentally changed the market, making it possible for applications and content to flow seamlessly across networks…
..
This report highlights three overall trends, which influence the dynamics of the market.
i) A broader variety of services from telecommunication operators. Operators are acquiring media companies and Internet firms and moving into new industries. These industries include advertising, banking, health services, home monitoring systems, insurance and sports franchises.
ii) Increased specialisation. The move of wholesale-only operators to share infrastructure partially illustrates the trend towards specialisation. This development covers both fixed and wireless networks. Proponents say it is driven by financial, organisational, regulatory and market factors. It indicates the development towards what they see as a utility-like business model.
iii) Expanded role of terminal equipment and online service providers that now serve end-users. This role is facilitated by applications with a global reach and propelled by the leadership of such providers in R&D expenditure….
…
There is no single operator of the future, but rather a wide range of types of operators with different roles in providing services. It is critical for policy makers that the sector continues to invest to facilitate new generations of networks. Meanwhile, the available evidence indicates these actors continue to invest in a robust manner. Although profit margins have been under pressure over time, they seem to be relatively healthy across the different types of operators. Still, policy makers should closely monitor developments to facilitate digital transformations in their economies and societies.
My main observation is this report appears to have been written by individuals within telecoms. However, Telecoms is a circle on a Venn diagram and some of the other bubbles are heavily encroaching on telco’s: where is the input to articles such as this from those digital companies, or even more importantly, the LEO satellite providers?
If telecoms companies want to successfully make the transition, it involves separating the transmission layers from the service layer, as well as consider where they can find value in the services layer.
Reference
OECD (2019) ‘The operators and their future: The state of play and emerging business models’, (287), p. 79. doi: https://doi.org/10.1787/60c93aa7-en.
a16z (2019) Why You Should Be Optimistic About the Future. 6:30. Available at: https://www.youtube.com/watch?v=UnU5Dikdr2U&t=951s (Accessed: 19 December 2019).
‘How much data does a Voice-over-LTE call use, and does it bill against your data plan?’ (2015) MikeBeach.org, 4 September. Available at: https://mikebeach.org/2015/09/04/how-much-data-does-a-voice-over-lte-call-use-and-does-it-bill-against-your-data-plan/ (Accessed: 24 December 2019).
‘IP Carrier: Mobile Voice Revenues to Fall from $380 Billion to $210 Billion in 2024’ (2019) IP Carrier, 19 December. Available at: https://ipcarrier.blogspot.com/2019/12/mobile-voice-revenues-to-fall-from-380.html (Accessed: 24 December 2019).
‘IP Carrier: Facebook Creating its Own Operating System Points to Telco Strategy as Well’ (2019) IP Carrier, 20 December. Available at: https://ipcarrier.blogspot.com/2019/12/facebook-creating-its-own-operating.html (Accessed: 24 December 2019).
Tim Anderson 9 Dec 2019 at 15:08 (no date) Outposts, Local Zone, Wavelength: It’s a new era of distributed cloud, says AWS architect. Available at: https://www.theregister.co.uk/2019/12/09/outposts_local_zone_wavelength_its_a_new_era_of_distributed_cloud_says_aws_architect/ (Accessed: 10 December 2019).