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August 29, 2011

For Service Providers, Search for New Revenue is Urgent

By Gary Kim, Contributing Editor

The Internet has caused major disruption of business models for virtually every legacy business and created the foundation for many others. In just about all cases, it has brought more price transparency to every market, complicated pricing issues for suppliers.

The Internet also improves user access to information about products, the higher transparency accelerating adoption of products perceived to be better and accelerating the rate at which inferior products are identified and abandoned.

In many industries, including telecommunications, newspapers, magazines, music and now video, the Internet is undermining traditional revenue and business models rather directly.

Consider the tablet device Amazon is expected to announce in late September or October 2011. One big problem so far has been that iPad competitors have priced their devices higher than Apple (News - Alert) does. That doesn’t provide much incentive to buy any device but the iPad.

But observers expect the Amazon tablet to sell for “hundreds less than the entry-point $499 iPad,” something that Amazon can do not because of manufacturing wizardry, but because of a different revenue and business model.

Apple and other device suppliers have to make their money directly from sales of the devices. Not so, Amazon. Amazon can subsidize the tablets, as mobile service providers price their smart phones, because the revenue model is not the device sale, but the subscription, the book, content or product sales.

One can note many similar examples of the way the Internet rehapes, cannibalizes or destroys legacy revenue models. Skype (News - Alert), Netflix and iTunes provide examples of substitute products that displace legacy revenue.

We may debate the speed and extent of video cord cutting, but most observers think disruption is inevitable.

The haunting fear, in many cases, is not simply disruption in the form of lost market share, but actual destruction of the revenue model. Newspaper and music executives, as well as telco executives, have been among those who have seen the disruption first hand, or are starting to see such disruption.

Since its mid-1990s launch, the online magazine Slate has been a study in whether a Web-only news organization can support a staff of professional journalists churning out original, reported content. This week, Slate signaled the goal remains out of reach: It laid off a number of key employees, including its media critic, Jack Shafer, arguably the site's best-known voice.

“Traditional advertising simply cannot be carried over to the internet, replacing full-page ads on the back of The New York Times or 30-second spots on the Super Bowl broadcast with pop-ups, banners, click-throughs on side bars,” says Eric Clemons, Professor of Operations and Information Management at The Wharton School of the University of Pennsylvania. No substitutes. “My research suggests that there are three general categories for creating value that can be monetized, including selling real things, selling virtual things, and selling access.”

The point, for service provider executives, is not simply that competition means cable operators are taking more voice customers, or telcos taking more video customers, but that former revenue sources might simply dwindle away. In addition to much current fixed-line voice, executives must rationally expect pressure on mobile voice and now text messaging services as well, as the range of substitutes grow. SMS disruption

That is one reason industry executives are spending so much time investigating new revenue sources, most building rather directly on network, billing or customer base capabilities. In many industry segments, historic revenue sources are dwindling.

Want to learn more about the latest in communications and technology? Then be sure to attend ITEXPO West 2011, taking place Sept. 13-15, 2011, in Austin, Texas. ITEXPO (News - Alert) offers an educational program to help corporate decision makers select the right IP-based voice, video, fax and unified communications solutions to improve their operations. It's also where service providers learn how to profitably roll out the services their subscribers are clamoring for – and where resellers can learn about new growth opportunities. To register, click here.

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Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Jennifer Russell
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