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22 Jun 2017
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%
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?