Once upon a time communications were the preserve of state monopolies. Then came the first wave of liberalisation. The state monopolies were privatized and new entrants licensed to provide competitive offerings to enhance service quality and bring prices down. At least that was the theory and to some extent it worked. The incumbent operators fought off the new entrants by engaging in predictable obstructionist tactics, whilst the new entrants tried to piggy-back on the incumbent’s existing infrastructure with the help of regulations forcing the incumbent to open up its network. By and large however, the players were dealing with technologies and associated services which were broadly rooted in a linear two-way communication model.
That was then. The arrival of the internet and more recently cloud computing, which enables greater scalability, cost flexibility and agility, has generated a new breed of digitally native, over-the-top services (OTT). OTT players such as Skype, WhatsApp, Google Hangouts or Tencent’s WeChat are eating into the conventional operators’ traditional sources of revenue by offering attractive communication services coupled with diversified ancillary add-ons, which often rely on content enhancement. According to some of McKinsey’s estimates, by 2018 the OTT players’ share of messaging, fixed voice and mobile voice delivered in an all-Internet Protocol (IP) environment could be as high as 60, 50 and 25% respectively.
OTT providers may be able to bypass traditional distribution channels and put telcos’ baseline under significant pressure, but the traditional operators are fighting back. So far, their response has been varied. Companies in this field usually lack the capabilities to create offerings that would enable them to re-position themselves in the market. Therefore, many have sought to consolidate or pursue so-called ‘acqui-hiring’ strategies, i.e. talent acquisition in adjacent markets.
While AT&T is seeking to complement its distribution network with Time Warner’s storehouse of content, Verizon’s past purchase of AOL was about getting a foothold in the digital environment. Other examples include Sweden’s TeliaSoner taking a stake in Zound Industries, an audio accessory start-up, and Australia’s Telstra investing in DocuSign and Ooyala, a video platform. At the same time, most have also sought to streamline their operations. For example, France’s Free Mobile replaced its large store network with service kiosks in key retail locations.
The mounting pressure from new entrants means that telcos are being forced to recalibrate their services. As investments in future network technology drive profits down, telcos will necessarily have to change the way they deliver their services. Time-division multiplexing (TDM), which has been the backbone of the telcos’ technology base, will give way to Voice over Internet Protocol (VoIP). VoIP offers affordable scalability, low cost calling and add-on features which TDM cannot compete with. The carriers will have no incentive to maintain two networks that perform the same function, especially since VoIP systems are more cost-effective. They render much of the stationary equipment redundant and do not add to the costs of transmission as everyone is already paying for the internet.
The transition from TDM to an IP-based environment is therefore inevitable and, when it happens, telcos and media companies will become indistinguishable. In fact, earlier this year, Sky already took what is possibly a trend-setting move, and announced that it would offer a range of its products, both linear and on-demand, as an OTT service over IP.
The remaining question is whether the digital natives that are currently re-shaping the market will, at some point, fully displace the incumbent operators. The fierce competition between Amazon and Walmart in the retail sector may be a taste of things to come. The disruption caused by the tech giant forced the retail behemoth to forge new partnerships and amass the right talent to defend its position. Will the telcos be able to fight off the new barbarians at their gates?
