Network operators have been moaning for almost a decade about profit-per-bit declines. While addressing these concerns...
by reducing their costs at a faster pace is sensible, in the long run, telecom services providers need to address the revenue side of the picture.
To do that, they need a revolutionary notion of what services to sell that will help the bottom line. While most operators can tick off candidates, they don't seem to be homing in on specific strategies the way newer over-the-top (OTT) services providers have.
In case operators wonder what revolutionary opportunities look like, three possible classes of new service opportunities exist for network operators. All three -- hosting, information processing and experience services -- could introduce new connection features, but their utility all depends on totally new operator capabilities.
Taking advantage of hosting services
The first opportunity is for hosting, which means supplying carrier cloud resources in the form of cloud computing services. Applications run on a telecom provider's carrier cloud could belong to enterprise customers or be offered by OTT providers. The advantage of this class of revolutionary opportunity is hosting is still a utility service with which operators are comfortable. The downsides of carrier-cloud-based hosting services are competition and low profit margins.
In terms of OTT competition, telecom services providers, in particular, have a natural advantage in terms of hosting services. As former public utilities, they have traditionally operated at a lower ROI and have been able to make large prepositioning infrastructure investments to enter a market. The ability to take advantage of lower ROI means they can price a service lower than competitors with higher ROI targets, while making early infrastructure investments allows them to deploy services to achieve a significant economy of scale before demand could truly justify it.
It's hard not to see hosting as another service that leads to profit-destroying price competition, however. Given the three major OTT services competitors already in the hosting space -- Amazon, Google and Microsoft -- as well as specialty competitors, like IBM and Oracle, operators are increasingly reluctant to jump into the hosting market. They'd rather ease into it later, after they established better profit margins on another opportunity.
Information-processing services opportunities
The second new telecom services opportunity that could affect OTT competition involves processing services, which means rolling out options that process information in the form of messages or events and combine hosting with more differentiated software features. Some operators think of processing services as the service provider equivalent of SaaS, while hosting would be equivalent to IaaS or PaaS offerings.
Because processing services offer a value-add similar to SaaS, they can command higher prices. The downside is, to make processing services a successful opportunity, each service would have to have a recognized need.
IoT offers an example of processing services, where operators could link useful event storage, analysis and correlation with various event types. For example, driverless cars or even enhanced navigation services need information on traffic conditions both in the form of local conditions and widespread general traffic. Rather than have each vehicle process events directly and pose the risk of overloading sensors, operators could syndicate the events for sharing, or interpret them and share the interpretations to simplify in-vehicle processing.
The problem with this approach is service providers have been uncomfortable in the role of IoT event processor. Operators love the idea that every intersection and every vehicle would be equipped with a 5G connection that someone paid for, even though it's not clear who that someone would be or how quickly a critical mass of sensors could be created.
The role of event processing in IoT applications could be broadly recognized in the future. If that happens in the future, however, the competitors to operator-provided processing services will probably already be in place.
Experience services opportunities
If there is a single truth about the revolution in networking created by the internet, it's that the concept of OTT services created an industry driven by combining basic connectivity services with content or application features to create experiences. The truly new thing in networking is these experiences, and this opportunity would put telecom services providers squarely in the middle of the revolution that they -- and nearly everyone else -- realize is already underway. But the revolution has proceeded so far without the operators.
Experience-based services can be viewed as the real driver of the internet. While the internet has been used to provide connectivity, its greatest achievement has been to serve as a clearinghouse for users to connect with experiences, rather than with each other. Social media is an experience; of course, so is streaming video, online music and online retail. The greatest value created by over-the-top players, which telecom services providers often envy for their revenue growth and high profit margins, has been in the offering experiences.
Sadly for operators, experiences have been the opportunity most difficult to grasp. Operators are often accused of having a culture problem with offerings like OTT services, but it would be fair to say they have a people problem with OTT services. Startups that enter an OTT experience market space will hire whiz-kid software professionals and pay them well, reward them with stock and perks, like free lunches and dinners, even child care. Operators have a difficult time fitting these benefits into a corporate structure that already has legions of workers who don't -- and won't -- receive the same attention.
Most operators today agree that to get into the experience business, they'd have to purchase an OTT services company and run it as a separate business unit -- as Verizon does with Yahoo, for example. Doing that puts hosting and process efficiency at risk, though, because OTTs don't typically base their offerings on the same technology, which makes it difficult to achieve economy of scale.
You can see the three revolutionary service opportunities represent a climb up the value chain toward a totally new telecom services model for operators and a corresponding increase in risk and discomfort. Hosting and information-processing services would let operators play a broader role in experience creation and hosting, but they still wouldn't control the retail vision of the new services. Experience services would give operators complete control and make them full competitors in the new service age.
In the end, experiences are the brass ring in the service revolution game, but they'll be the hardest for operators to grasp.