Sunday, 9 June 2013

Reimagining the telco; impact of the internet economy on the telco industry part 2/4

“The future telco is the ISP”

In the previous post, I postulated that a major shift is underway by observing trends, that would be transformational to the telco industry.  This post looks at the whys then endeavours to reimagine this sector, one that is destined to grow significantly larger in an expanding internet economy.

What changed?

In this post, we’ll explore the rise of the data industry, deregulations and the internet as plausible reasons.

The telephone was invented in the 1870’s in the midst of the industrial age.  How ironic then that the first call made on 10 March 1876 in Alexander Bell’s successful experiment with the telephone was his speaking to his assistant, Thomas Watson, in the next room.  That first phone call used analog technology.  Another Thomas Watson, Thomas Watson Senior (IBM) it was that in the early 1920’s had a huge role in the commercialisation of computers, the data machines that uses digital technology.  Historians I think already attribute the invention of computers to the start of the information age.

Telcos started as necessary monopolies as the massive investment necessitated governments to grant them monopoly status.  In time, this monopoly and the huge profits generated made them haughty, ruling with a command-and-control culture within the industry and without.  I know, I faced a wall when I was setting up my first ISP in 1990!  Such a culture impedes their potential in an internet economy.

As the industry started to de-regulate, competitors got in.  Competition allowed a second tier of voice resellers into the market, buying wholesale from the first tier telcos to resell.  Re-sale brought the price of voice down and further reduced it when they used the internet to lower their costs.  In time history may timeline this as another transition towards internet voice.  It had a hand in the packaging of voice into data (packets) on a large scale commercially.  This deregulation also allowed the early ISPs to be set up.  Then ISPs were non-telco ISPs and it was only later that the telcos started getting into the act.

But it was computing that lead to the invention of local area networks or LANs (the early networks based on data) and the internet (first commercialised through the ISPs) that really changed things for the telco industry. 

I sense that most people think that the internet is a natural evolution of the telcos, it is not.  It is critically important for telco planners to understand this.

Because computers are data devices, the network designed to allow them to ‘talk’ to one another should be based on data technology but there were only the telecommunication voice networks then.  Thus data networks were invented in the mid-1970’s.  The early data networks were local area networks such as Ethernet or Cambridge Ring and they are called ‘local’ because they operate within short distances, say within a building.  In the early days of long distance connectivity when there were only the telecom networks, modems (remember acoustic couplers?) were developed to translate between content based on digital data to analogue form to be transported by the analogue telephone networks and then converted back to data, the language of computers at the receiving end.  Having to translate was not efficient.  Remember the days of dialup internet access using modems?  Modems allowed data to flow over a voice network (data-over-voice)  As data networking technology improved and internet usage exploded from the mid-1990’s, economics dictated that the telecommunications networks (designed primarily for voice calls) be replaced with data networks since internet traffic was 100% data.  Using a data network to transport data is obviously cheaper and faster than piggy-backing it over a voice-based network.  Today broadband and Ethernet private lines, both based on data tech are replacing traditional leased lines and telephone lines.

With the ISPs, the infrastructure for the internet economy (which is only clearer now) was being built, replacing the legacy telecom infrastructure.  With wireless, the shift of the celco industry towards LTE also means the mobile infrastructure becomes a data infrastructure.

The first telecom networks were built with analogue technology.  With the advent of digital technology, they were re-built by digitising voice into digital packets over a mostly digital infrastructure.  But because the PSTN, the telecoms’ network, was designed for carrying only voice, it was designed very specifically and efficiently to carry voice packets.  It was fine then but....this fixed 64 bit packet (the most efficient size for voice application) network became a ‘lame duck’ when we started using it for internet access because web pages or video consumes vastly bigger sizes.  It was totally inefficient.  It is like a train where every seat is in its own carriage!  This is why accessing the internet in the early days (even now as it takes time to replace the entire PSTN with data networks) was slow.  Ill conceived attempts by the telecom industry to force the use of their own brands of data networking technology such as the ATM and ISDN (shockingly now because they were based on the 64-bit format even when it was known then that this format is terribly inefficient for internet traffic!) failed miserably wasting billions of dollars, some of which came from the tax payers.

Voice is now mostly transported over data networks ie. voice-over-data flipping over from the days of data-over-voice.  Another milestone is reached when sms, the telecommunications industry’s own ‘data’ service was overtaken by WhatsApp in traffic volume in 2012.  Unlike sms, WhatsApp is free and contrary to the conventional telco business model, free has value in the new economy (see a previous post - free now has value).

And when say 80% of the world’s telephone-based networks are replaced with data networks, a sea-change shift will occur.

(1)   Mainstream voice calls will become free like email.  Voice cannot then be monetised directly just like most web content can’t because the economics of the internet changes its value.  Some are made valueless in a conventional sense.  Others will have their value dropped precipitously.  Alternative ways to monetise is necessary. New revenue models have evolved and will continue to evolve.  Email for example is monetised indirectly and so is WhatsApp’s messaging service.

By then since the build up of data networks are essentially carried out by ISPs, the ISP becomes the de facto telco. (Here I separate the ISP from the traditional ‘voice’ telco although today the biggest ISPs are a part of telcos.  There are also many independent non-telco ISPs in this sector)

(2)   Thus the future telco is the ISP.  And the telecommunications industry is transformed.

(3)   Since the term telecommunications company or telco commonly refers to the voice business and as that business disappear to be replaced by the data business, the term telco becomes a misnomer. Communications may be a more appropriate term.

A changed business model of data rather than voice must affect the telco industry, its revenue stream in particular. 

But of course we are now in transition and the industry must balance a voice strategy to one based on data.  There is still a lot of money to be made from voice (though for many telcos, the data business has become the prime business).  However in any transition comes opportunity for the fleet footed.  Will a non-telco broadband provider with focus and without baggage move ahead?  Should major strategies be based on the voice business or data business, even now?

So it was the rise of the data industry aided by deregulation that changed the voice industry forever.  Historians may say it is really the world moving from the industrial to the information age.

We’ll take a look at other factors that may have an impact on its revenue model by comparing the telco model to the ISP model in the next post.

I’ll end this post with an event worthy of note.  The original telco, AT&T, founded by Alexander Graham Bell which went on to create an entire industry is no more.  Southern Bell in 2005 took over AT&T (but kept the namesake renaming the combined company AT&T).

But the telco industry prospect’s bright.

LinkedIn – dr tommi chen (goggle + profile not completed)

©Chen Thet Ngian, (2012, 2013).  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Chen Thet Ngian and with appropriate and specific direction to the original content.