Vodafone acquired C&W and is now apparently in merge talks with Verizon and considering acquiring Fastweb. In the meantime Telefonica is selling their fixed line business to Sky and launches TuGo (an Over-The-Top communication service). Two operators, two very different strategies. Nonetheless their origins, and their historical business models, are identical. Did one spot a business model expiry date label that the other is still looking for?
Let’s give a bit of background. The business model of a network operator can be summarised like this: you lay cables (or erects antennas) that provide raw connectivity to buildings or individuals, and once the asset is in the ground (or in the ether), you rent it out. It’s like real estate: your real estate just happen to be fibre-filled ducts, and the more fibre capacity you rent, the more money you make. This model is assets heavy and is intrinsically restricted to the coverage of the network (i.e. you can’t sell services outside of the coverage of your network). Sure, you can then extend the model by becoming a “real estate agent”, i.e. reselling somebody else’s network in the areas outside of your network, but essentially you’re still renting a property.
Then came Skype, Google, YouTube, Netflix, Spotify, etc. They do something very different: they concentrate on delivering a service which is independent from the underlying network (hence “Over The Top” players). Although infrastructure is still required, the model is people heavy (you need software developers, content rights negotiators, etc. and although you might capitalise these costs, they’re not cables and switches, they’re people). As such the model is extremely lean and flexible: you can flex your capacity up and down pretty easily, and you can steer it in a different direction pretty quickly. Try to compare that with taking cables off the ground in a commercially inefficient location and redeploying them in another location. Moreover, the independence from connectivity implies that the target market are the worldwide households or individuals (especially if you sell online), that can be served from a geographically limited infrastructure and organisation. People can market, sell and maintain a software from a central location, while you need them on site to market, sell and maintain a physical network.
The past 20 years of the ICT industry can be read as a competition between these two business models. The network operators have been selling raw connectivity (you pay for broadband connection / speed / download amount), in most cases competing on the easier, but most dangerous, marketing mix lever of all: price. When mobile operators needed to accelerate income on their 3G network investment, they dropped prices and created unlimited tariffs. In building the national fibre infrastructure, fixed operators are still competing on “price per kilo” (or price per bandwidth), in my opinion not the most creative of all possible competitive strategies.
The “Over The Top” (OTT) players have instead been selling something closer to what users value: experiences. Movies or songs are sold on a “per experience” price (not by their weight, or network load): a new successful movie costs more than an old / boring one; a movie in High Definition costs more than one in Standard Definition. That’s because their value for the customer is different, not because of their network payload. Ever heard of a network operator charging you by the number of movies you download?
In fact, I think that network operators have done a bad job in understanding what experience they were delivering to customers, and hence they’ve been building, marketing and selling raw connectivity on a “price per megabit/s” and now find themselves pushed towards commoditisation (commoditisation of the customer perception, since service is undifferentiated apart from speed, and commoditisation of their P&L and evaluation multiples, that are tumbling towards utilities’ ones). And while they were digging roads and getting bits closer to the speed of light, OTT players were busy creating the services that customers want to access through the network. What surprises me is that if you’ve been running a pipe building and management company all along, today you shouldn’t be surprised of being relegated to a pipe building and management company.
The net neutrality debate, the GSMA Joyn initiative, etc. can all be read as an attempt of network operators to bully the OTT players in “sharing the pie”. I think they’re missing the long term vision, with some exceptions.
Telefonica has spotted the expiry date of the network operator business model, and it’s trying to get “asset light” (the sale of O2 Broadband), and investing heavily in OTT (the launch of TuGo); they are doing this in a differentiated way, as their OTT play is leveraging on their existing O2 customer relationship (for billing, for example). At the same time, Vodafone is following a very different path, trying to put more preservatives in their business model, hoping that a more integrated fixed / mobile infrastructure will have a longer expiry date, generate higher value for the customers and, ultimately, for the shareholders. But this is simply doing more of what they’ve always done.
Which one is right is hard to predict; one of the greatest free strategy lessons I got in my life was when Pietro Guindani, former CEO Vodafone Italy, told me that to get the long term vision right is one thing, but to get the timing right is a different matter…
Only time will tell if infrastructure will always have a value for customers. One day Netflix, Google, Spotify, etc. might just give away connectivity, subsidising it with the fees of the services they run on top. Google fiber experiments might be just a beta trial of this business model.
disclaimer: all views expressed are my own.