The profits warning by KPN (Netherlands) in Apr set off alarm signals. When the CTIA, the wireless telecoms industry association of the US, announced that SMS traffic had grown only 8.7% in 2010, the lowest growth figure for a decade, it raised a red flag. The revenue-generating staples of the telecom sector are diminishing fast across markets.
None of this is surprising. Indeed it was foreseen by many, although apparently not by that many in the telecoms sector itself. Just as the rise of China has changed the global economic landscape, so the rise of the Internet has changed the economics of communications globally. The era of the network is drawing to a close and being replaced by the era of the application, and all those companies associated with network development, from carriers to vendors, who have shown such stellar performances for the past 20 years have or will give way to those companies associated with the Internet and especially with apps, although exactly where along the supply-chain the greatest value will be extracted, and by whom, remains in the lap of the market.
For the telecoms sector, there were many harbingers. VoIP was an early one. But perhaps the first real sign of the confusion the Internet caused telecom companies was 3G. Telcos thought that they could own the customer and therefore built revenues anticipated from web-based services into their valuations (and their spectrum bids) of their 3G businesses. They could not easily conceive that the network would not constrain users and therefore would not constrain vendors of apps to sell via (rather than over) the networks. Just as the liberalization of international markets allowed 3rd parties to by-pass expensive IDD call charges, so the Internet allows everyone to by-pass any given network.
Where does that leave the networks? Clearly local carriers with fast local loop broadband connections retain a lot of market influence, from billing their customers to control over network management, and are well positioned to offer local content distribution network services on a revenue sharing or some other basis. These are utility incomes for the most part, steady in demand, but slowly declining in value. A second route for telcos is to reinvent themselves as Internet companies, but unless they can do so with global reach their chances of being anything but niche players are slim. This route suggests M&As on a global scale, which at least may be more acceptable to regulators than on a domestic scale. The third and most dangerous course is special pleading. When Vittorio Colao, CEO Vodafone (Financial Times Jun 6) writes in support of President Sarkozy’s G8 appeal for greater national controls over the Internet, the real message is hidden 2/3rds down his column: “European carriers carry the costs of complying with all the safeguard legislation… Internet-based communications services should be subject to the same rules and costs, to ensure the same trust and a level playing field.” This is arguing for 20th century rules to be applied to a 21st century situation. On 9th Jun, Google announced it was redirecting traffic from Kazakhstan following the government’s requirement that all traffic be threaded through Kazakh servers. “I am very concerned we shall end up with an Internet per country” (Eric Schmidt, cited Wall Street Journal Jun 10). No one is suggesting President Sarkozy, or Vittorio Colao, want to see that happen, but that is the logical implication. That is exactly the world that gave birth to the telecom companies.
