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March 20, 2008

Rethinking the Service Provider Business

By Jon Arnold, Principal, J Arnold & Associates

It’s great writing a column like this, which to me is a cross between a blog and a conventional magazine article. I have the freedom to write on my own terms just like on my blog, but as a guest contributor to TMCnet, I certainly have to play the other side of the fence to make sure my writing is publication-grade. I’m totally fine with that, and feel fortunate to have this forum, so here we go.



 
Last week I participated in eComm2008, which is the successor to last year’s eTel conference. Titled the “Trillion Dollar Rethink,” I’m sure you get the idea of what this conference was about. We all know that service providers face a growing set of challenges, but of course there are plenty of opportunities, so things are far from hopeless. I’m not going to rehash eComm, but I do want to touch on one of the important themes here, and others will follow in future articles.
 
There is a lot to rethink in terms of business models, and the gist of eComm was that most service providers are still married to what Martin Geddes refers to as the “one-sided” business model. In other words, their revenues are 100-percent subscriber-based, which works very well when the balance of power lies with them and their network. In the IP world, the balance shifts to the subscriber, and in that mode, the value of the network has a different foundation. An important theme from the sessions was that the network now becomes more valuable not for its physical assets and sunk costs, but rather for the IP-based services it can enable that have value for subscribers.
 
This brings us to the “two-sided” business model which is based on two types of revenues - upstream and downstream. The subscriber provides the latter, while the former comes from a wide range of other channels, all of whom have a desire to connect with this audience. Today, this is driven primarily by advertising, but it includes other channels such as government services. The key here is that service providers need to recognize that their greatest asset is not their network, but their subscribers, and the underlying database that defines them.
 
It would be shortsighted to look at Google’s (News - Alert) model and think that advertising revenues will save the day for telecoms. As successful as they have been, advertising is a fairly small piece of the pie compared to subscriber revenues. Martin Geddes points out that these platforms can be very cost effective, and clearly are able to scale easily, which makes them very attractive to service providers of all stripes. However, service providers have something that the Googles of the world lack — and sorely desire — subscribers. As mentioned above, this is really their most valuable asset, and in my mind is the central message I want to convey from eComm.
 
There are many facets to this notion, and I’ll just touch on a couple here. As I have cited in earlier columns, IP changes everything, and for that reason this includes the very definition of a service provider. IP lowers barriers to entry and has flooded the market with competition and ever-lower prices for voice services. We all know that the landline monopoly is over and that traditional telephony is a dying business. That was a core message from eComm, and if traditional telcos and incumbents are to survive the name of the game is innovation.
 
An advertising-based business model is not innovation. I would even say it can be a step backwards. Sure, it represents a new revenue stream, but it comes with a price. Advertising models shift the dollars away from subscriber in exchange for services they typically do not pay for. Not only does this raise expectations about them getting free services, but it opens the door for platforms such as Google to develop bonds with subscribers — which ultimately will weaken the bonds carriers have spent years, if not decades, building up. This can be a dangerous strategy, and to minimize the potential risks, carriers need to innovate on their accord, and directly with their subscribers.
 
There were dozens of very interesting presentations at eComm that demonstrated the scope of innovation available to carriers today, and in my mind there is no excuse for carriers to not embrace at least some of these ideas, either for their consumer or business subscriber bases. The key to all of this is to understand and unlock the latent value inherent in the carrier’s subscriber databases. Focusing on offering cheaper voice services is not innovation. Same for blindly embracing the advertising model. Offering services that speak to the specific needs of specific segment of subscribers, or solves a real business or communications problem, however, is at the heart of innovation.
 
How can telcos do this, and get closer to a two-sided business model? First, they have to move away from the race to zero with voice. As these revenues decline, they must provide value to subscribers in other ways. Carriers have more to gain from protecting their existing customer base than trying to grow by stealing away someone else’s. To do so, they must innovate around re-defining value, and that means gaining a deeper understanding of their subscribers. This is easier said than done, but for carriers who invest the time and energy, it becomes clear that many business models and opportunities are viable once they learn how to innovate along these lines. On one level, this implies that telcos need to become platform plays instead of voice providers, and that may not be such a bad thing.
 
I’ll explore this further in my next column, along with some of the ways they can better understand their customers and leverage this into sustainable revenue.
 
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Jon Arnold (News - Alert) is Principal of J Arnold & Associates, an independent telecom analyst and marketing consultancy with a focus on IP communications. Previously, he was the VoIP Program Leader at Frost & Sullivan (News - Alert), where he was responsible for managing their subscription service for Global VoIP Equipment Markets.
 
 
 
 
 
 
 

(source: http://sip.tmcnet.com/topics/service-provider-solutions/articles/23353-rethinking-service-provider-business.htm)

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