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Networks & Infrastructure
Telconomics – market dynamics and potential responses
New destinations for an incumbent operator
by Darrell Jordan Smith and Jennifer Belissent
Initial equilibrium
Basic economics asserts that if you took a snapshot of a specific
market, all things being equal, there is a given demand curve along which
as price changes demand changes — lower prices generate more demand,
higher prices generate less. For example, in the market for
telecommunications services, the price per minute of a call determines
how long a caller talks — depending of course on who pays for the call.
A lower price per minute most often translates into a longer call — all
other variables being the same.
There is also a given supply curve with the opposite dynamic — higher
prices provide more incentive to supply a good or service and as prices
fall, there is less incentive. Or put another way, at higher prices, more
suppliers can deliver services, which actually provide them a return —
obviously needing to take into account the costs of providing the
service. Again, these assertions assume that the market itself is fully
competitive with no restrictions on market entry.
In this scenario, the intersection of the two curves determines the
market price. (See Figure 1.) Let’s take a look again at voice services in
the United States. For a long time, prices of phone calls stayed the
same — there was an equilibrium price — 10 cents for domestic long
distance, 6 cents for local toll calls and free local calls.
Changing market dynamics
Now what if something external changes the picture, and things are no
longer equal, breaking the assumption that all things are equal? The
snapshot changes. The curves change.
In the telecommunications industry, technology innovations have
changed market dynamics. The emergence of VoIP technology lowered
the barriers to entry into the market for supplying voice services. At the
same time, deregulation also changed the game, allowing easier entry
into the market. These market dynamics dramatically shifted the supply
curve to the right. At every price, more players were able and willing to
provide voice services. And, the resulting “equilibrium” price dropped.
From the perspective of the market as a whole, there was possibly more
revenue to be had. Consumers were also better off with lower prices
and more choice of suppliers. But, for incumbent players in the market,
lower prices meant lower revenues at least in the short term. How were
they to respond? Just accept the price? Or use technology to
dramatically change the landscape in their favor or increase demand?
Incumbent players, and even new players, are compelled to increase
demand for services, to increase the price that customers are willing to
pay for those services. Players need to find ways to dramatically shift
the demand curve to the right, to increase demand for products and
services.
Discovering new destinations
Dramatically changing the landscape requires moves to new
destinations — metaphorically and literally. New and better services
attract new customers. Geographical expansion into new markets
captures new customers. And, new business models better monetize
existing content and customers.
Destination experience
The traffic on social networking sites has grown exponentially. In the era
of Web 2.0 applications, of Google and Facebook, successful companies
are those that offer new services and new experiences to their
customers. Even in markets where Internet use is high and mobile
penetration is over 100 percent, “new customers” can be found by
offering new and compelling services.
Just think of social networking. Not
long ago did any of these sites exist. Classmates.com was one of the first
to emerge in 1995. It is now vastly overshadowed by scores of others,
with the list headed by the likes of MySpace with over 125 million visitors
and Facebook, which experienced triple digit growth over the past year.
Creating or aggregating new services can certainly attract new
customers.
Providing a better experience can also bring in new users. Both the
experience in terms of the services and user interfaces provided, and the
experience in terms of customer service and support, improve the
attractiveness of a provider, particularly in a competitive environment.
The ability for an operator to know and understand the customers can
improve the user experience dramatically.
Telecommunications operators are actually in a good position to leverage
their vast amounts of customer data to create a tailored destination
experience. But, they must find a way to leverage this information into
relevant new services and destinations — either of their own or in
partnerships — that increase customer loyalty and customer spend. How?
First they must aggregate and analyze the data. Identifying and
aggregating subscriber data is no small task. Data exists in application
repositories, on the network, and often with third parties. Operators
need a robust system to capture and aggregate static profile data such
as billing information and preferences, application data such as usage
patterns, as well as network-based data such as location, presence and
device capabilities. Ideally, the solution collecting and aggregating this
data would also provide mechanism to ensure that the data is easy to
store in data warehouses and is consumable for other uses such as
business intelligence and application development.
Once the data is available, highly targeted, mapping a subscriber’s profile
and usage information to a carrier’s service offerings can create
personalized services or advertising. These services could target specific
demographic segments of a subscriber base, or be personalized to a
specific individual. For example, advertisements could reflect locations
frequented by a user to offer promotions from local businesses. Or
services such as access to or notification of new preferred types of
content. Systematically and automatically leveraging the data on hand
makes this type of personalization cost-effective. Targeted services and
advertising are then little more than basic service delivery. This type of
personalization makes services more useful and more compelling, and
improves the customer experience. Moreover, better services attract
better customers, or those more likely to pay higher margin for
individually tailored content and services.
New destination markets
In addition to becoming a destination by creating or aggregating new
services, operators are also looking into literally discovering new
destinations by entering new markets. Over the next five years there will
be 1.4 billion net additions to the existing communications networks in
Brazil, Russia, India and China, versus 175 million in the established
markets. By 2010, 70 percent of the fixed and mobile connections in the
world will be in an emerging market — fueling Compound Annual Growth
Rate (CAGR) of about 16 percent. Including the rest of Asia, Africa,
Eastern Europe and the Middle East, the growth opportunity is clear.
Most global telecommunications operators are expanding operations in
emerging markets, and local operators are becoming major players with
subscriber bases growing exponentially.
While opportunity is obvious in densely populated cities where purchasing
power is increasing rapidly, the incentive to invest in less populated,
largely rural, and often poorer regions is less clear. Although long-term
growth is expected, the cost of the first subscriber tends to be
prohibitively high. Operators with a long term, strategic view of these
emerging markets must invest in infrastructure that makes initial build
outs cost-effective, with the lowest possible cost of the first subscriber
in order to develop profitable operations in markets where ARPU is initially
low. Investing in standards-based, commercial-of-the-shelf products
rather than developing proprietary infrastructure for these build-outs
helps lower the cost of the first subscriber and enables cost-effective
expansions as the markets grow.
New businesses and business models
Industry dynamics influence not only decisions about product mix and
target market but have a significant impact on business models as well.
As more players provide free services and content, incumbent players
must learn how to adapt their business models. Content and service
providers must find new ways to monetize their content and services.
In the traditional media market, content has always been free, paid for
by advertisers. Yet, cable operators in the television market
demonstrated that customer were willing to pay for certain content.
On the other hand, telecommunications operators traditionally charged for
services through one-to-one billing. Customers paid for their personal
usage of interactive communications services. Now that these media
and telecommunications markets are converging, there are opportunities
to apply the one-to-one customer intimacy and interactive nature of the
communications market with the concept of paid-for content from the
media industry. The outcome is personalized services, targeted
advertising, and one-to-one billing for these highly tailored content and
services.
In addition to leveraging customer relationship and data assets, another
new business opportunity is to leverage infrastructure assets as a means
of improving access to content and services. One option is for operators
to establish themselves as content delivery networks (CDN), providing
services such as caching.
The CDN market is a large business with
annual revenues at approximately US$2 billion, and a growth rate of
nearly 50 percent year over year. Incumbent operators can provide CDN
services at lower cost than current CDN provider because they do not
have to pay for broadband ISP termination costs; they own this
infrastructure. Access costs to last mile ISPs are the highest cost item
for current CDNs. Leveraging existing infrastructure in this way will
provide an operator immediate new revenue.
By leveraging both subscriber information assets and infrastructure
assets, the CDN platform can also be used to offer high-margin value-
added services to content owners and aggregators. For example,
operators could host and provide caching services for archived content
from content owners such as National Geographic, the BBC or any other
traditional content owner. Combining this content with subscriber
information enables targeted programming or advertisement, new usage
analytics, and better access controls.
Leveraging existing assets in new ways enables telecommunications
operators to become a "destination" for both users and for potential
partners. Becoming a destination, or discovering new destinations,
enables incumbent players not only to survive the affects of telconomics
but also to thrive within this new environment. The real question,
however, is how many of the incumbent players are going to be able
adapt to the new environment. Which will be the most fit to survive?
Darrell Jordan Smith is the Vice President of Sun Microsystems’ Global
Communications Media Practice. Jennifer Belissent is Group Marketing
Manager of Sun Microsystems’ Global Communications and Media Practice.
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