The Los Angeles Times this weekend reported the now widely publicized story that Verizon Communications Inc.(VZ) expects to migrate entirely to VoIP within seven years. As noted in xchange’s coverage of the story, just as interesting were CMO John Stratton’s comments about Verizon’s view of its business model: “Increasingly, we are in the business of selling, basically, data connectivity,” Stratton said.
This is interesting, but it also could be viewed as further evidence that telcos, particularly AT&T Inc. (T) and Verizon, have given up on the vision of developing and delivering value-added applications as a way to drive their margins and cement their place in history.
While Stratton is correct, Verizon basically has become a dumb pipe in many cases, it may be an oversimplification of where he thinks things are going. From what xchange sources tell us, the big U.S. telcos now are pushing toward delivering quality of service, settlements, billing and security to set up themselves as (paid) enablers of said applications through the creation of partner ecosystems.
Analyst Tom Nolle refers to this new ecosystem model as the iPhone-ization of the public network. Tim Krause, CMO at Alcatel-Lucent, told me he sees it more in terms of making telco networks more like PCs, which can support any application.
But, however they see it, telcos, vendors and analysts seem to agree that creating these ecosystems and positioning public network operators as the trusted sources for the underlying infrastructure and related support could be the key to longevity for facilities-based service providers.
“The service providers that I talk with, which is pretty much all the big ones, their focus has pretty much moved away from killer services and they’re now less service-focused than what I’ll call ecosystem-focused,” said Nolle of CIMI Corp. “The thing that I’ve seen, the big transition in the last six months, has been the notion of what the GSMA calls third-party access, which is that the service providers are kind of taking an iPhone-ish look at the future service market. They’re saying that if revenues are going to be generated increasingly by consumer services and by innovative services, then we have to focus on creating an ecosystem where third parties will build those services rather than trying to build them ourselves.”
At the same time, and seeming to go against the comments of Stratton, Nolle added that telcos need to “sort of ... forget about bits.”
“There’s very little opportunity to make incremental revenue from selling connection and transport because revenue per bit has declined by 50 percent per year for the last five years, and there’s no indication that that’s going to stop happening,” he said. “So as revenue per bit drops, then even the difference between what some call thin bits and fat bits — or QoS-oriented versus non-QoS-oriented bits — wash out because the difference between zero and 1/100th of a cent is still only 1/100th of a cent. So, realistically speaking, most operators have determined, I think, that premium bandwidth is something that you could probably incorporate in a higher level service framework, but if you don’t know what that framework is there’s not much value in worrying how you’re going to create it.”
But Krause said it’s not just about bits. It’s also about offering security and billing and settlements. The telcos already have widespread broadband networks; large billing systems, which can allow them to handle settlements with and between partners; and provide bills to large numbers of customers, so could probably fairly easily add one or more application-related line items to the bill.
That’s what the telcos can offer to ecosystem partners — like Google and other popular and lesser known content and application companies — to insert themselves into the Web 2.0, over-the-top services value chain, Krause said.
And if the telcos can indeed do that, and make an acceptable profit from it, it will be those companies that arguably created the most fear and upheaval for our sector that will be the network-based service providers’ saving grace.