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Saturday, January 21, 2012

800+ providers of telephony services in a shrinking market? Consolidation to Telco-OTT, not federation, is the answer

Every telco, fixed or mobile, operates its own telephony service. Some operate two or more - either with separate enterprise platforms, IMS (mostly fixed, but VoLTE for some in the future), or OTT-style VoIP.

This is ridiculous.

The conventional telephony market is peaking, and in various areas declining. Apart from emerging markets with new users, even mobile telephony is reducing in price and popularity, as people switch to messaging or in some cases Internet-based VoIP alternatives. Pricing regulation, and accounting changes, are also driving down the measured market size.

Yes, we see some consolidation in terms of networks for various reasons, but really, given that data use is growing and voice telephony is falling, it makes sense to decouple them. Telephony service consolidation is massively overdue, and has been hampered by legacy constraints about numbering, interconnect, roaming and so forth. Some of those constraints are regulatory, and some are about commercial inertia.

The advent of Skype and its peers is changing this. Skype is taking over a significant share of the most "open" part of the market, international direct-dial calls. That's a good and easy starting point, because pricing is egregiously-high, and most calls are from fixed locations, but there is much more to come.

The current "federation" model where each network owner runs its own voice service and they interconnect is a quirky legacy. The telecoms "establishment" would have you believe that on-net telephony will always be the highest quality. But the QoS argument is a red herring on at least two counts:
  • Customers pay the highest prices for the lowest QoS guarantee - when roaming, where your home operator has very little visibility or control over the quality of the visited network.
  • Continued insistence by operators and vendors that (if Net Neutrality laws were permitted) they could offer guaranteed QoS to third party providers such as Skype.
If you take the latter point to its logical conclusion, it suggests that, ironically, Net Neutrality is the only thing that allows operators' own telephony services to differentiate quality from third parties'. Today, the only voice service that most operators are allowed to optimise is their own.

If you stop to think about it, the economics are ridiculous. maybe 1000 global companies each offer the same simple service, locally, with expensive equipment, which could easily be centralised or redesigned with different architectures. That is 1000 providers of a flat or declining "electronic" service. They typically tie the "phone service" to other products like Internet access or  TV. Ten years ago, there were probably 1000 global mid-size retail chains of booksellers.

Even in banking and finance (a traditional national-oriented industry), we see cross-border acquisitions and centralised functions. We have centralised currency trading hubs, rather than each country having its own marketplace.

I recently flew between Singapore and London on Qantas, the Australian airline, quite literally "over the top" of both places. There's no mandate that anyone walking into (accessing) Changi Airport only uses Singapore Airlines.

In future, it will be ridiculous to suggest that anyone using AT&T or Vodafone's network can only use their telephony services. Obviously in fixed networks, various models of unbundling have been possible for years, and that will make similar logical sense in mobile as well. Either QoS mechanisms will be good enough to allow "managed" third-party access, or VoIP software will be good enough not to need it.

Looking ahead, I expect to see massive consolidation in the provision of basic commodity telephony services. The GSMA/ITU view that each network operator should have its own telephony service is an anachronistic, obsolete picture. We may well see innovative "non-telephony" voice services tailored to particular demographics, geographies or customer bases, but basic "Person A calls Person B for 5 minutes" will surely see aggregation.

We will also see some telephony move away from being a "service" altogether - speech will be a feature of the web, with spoken forms of words essentially little different to italic or bold. HTML5 and WebRTC are already starting that next phase of development. Some telephony will just become a mere feature or function of browsers or apps, rather than a third-party administered "service".

I predict that maybe 3-5 global players will dominate in "telephony services" by 2020, plus perhaps some regional or country-specific companies, for example if regulations are limiting factors in market evolution. There will also be some low-end vertically-integrated operators that just run 2G or 3G networks, for which 3rd-party telephony service is a more complex proposition - but even there, much of their back-end infrastructure is likely to be provided wholesale, by a company with more scale.

The obvious contenders from today's perspective are Microsoft/Skype, Google and maybe Facebook or Apple. Maybe also an infrastructure UTF player such as Ericsson or Huawei, offering their own direct-to-consumer voice services, hollowing out operators or just using them as a wholesale channel. Other newcomers like Viber or Vox.io might also spring from nowhere, with innovative approaches garnering massive support almost overnight.

But telcos could still have a role to play, if (and only if) some of them break free from the shackles of linking access and telephony service, ignore new "one-deployment-per-network-operator"  blind alleys like VoLTE, and emulate the new winners.

In my view, there is scope for a few telcos to become Tier-1 Global telephony players in 2020, after the market has consolidated massively. Those that win will be those that become proficient and successful at what I term "Telco-OTT" forms of voice service.

The current industry trajectory, of international operator groups sharing some core-network and application-layer infrastructure gives some scale benefits, but not enough. It lacks the "viral" nature of the best Internet-OTT players, which can capture users' minds, hearts and wallets, irrespective of their access providers.

The federation model can never win again - it is too slow-moving and bureaucratic, and cannot evolve services fast enough to keep up with the needs and whims of today's fickle communications users. The tired "ubiquity" argument is one which Facebook, with close to a billion users, and Google, with probably 2 billion+, have already won. There are close parallels between today's telephony and 2001's email market.

So, there will likely only be 1 or 2 telcos with major revenues from "vanilla" telephony in 2020.

And the real value will come from additional services, perhaps based around innovative voice and messaging concepts. Apple is showing the way here, with Siri. Microsoft may well do something clever with Skype and its other properties like Kinect or XBox. Google might do real-time translation in the cloud. Facebook might do some clever form of "social voice". None of those would work in "federated mode", based on the legacy telecom interconnect/standards worldview.

The Telco Telephony winners in 2020 will not only be those who can implement "Telco-OTT", but also those with a true vision of the "Future of Voice" that goes beyond just protecting the 100-year accident of linking phone service to network access.

Disruptive Analysis' new strategy report on Telco-OTT Services & Strategies is out next week. 

For details, email information AT disruptive-analysis DOT com, or see my pre-announcement blog post here.


Kevin Sandlin said...

It's odd that we now think consolidation is the answer. 28 years ago, the monster of all telco monopolies was broken up. Better for the consumers and way better for shareholders of the resulting companies. Competition is good. Consolidation will occur as a means of competing.

Dean Bubley said...

The regulators from 30 years ago didn't expect that competition with integrated (access+service) would instead lead to near-cartel situation (federation, roaming etc).

Also didn't predict the ease of disaggreation of access & service via IP networks (especially the Public Internet) & Moore's Law applied to devices.

Aswath Rao said...

Regarding "Federation model can never win again.": Isn't federation part of the basic ISP service? This is the reason there is no need for federation agreements at the application layer?

Anonymous said...

"hollowing out operators or just using them as a wholesale channel"

That statement sounds pretty scary to operators. Of course, that is not to say it isn't accurate. Just scary.

Mark Grayson said...

Hi Dean

agree that the Telco world is challenged taking their legacy model of "regional UNI" plus "federated NNI" and competing effectively against the "global UNI" of the OTT players.

The necessary federation drives towards a lowest common denominator approach and retards adoption/change compared to the rapid evolution enabled by the "global UNI".

Martin Geddes said...

We couldn't introduce a service like 800 numbers today, as the market is so fragmented (cf sender party pays data). My guess is that we'll see a lot of re-verticalisation, with (as you say) telcos providing wholesale access to cloud services giants.

It is possible that many of the functions that telcos currently perform will be eliminated as unnecessary complexity. For example, metered application or service usage and attendant billing and support complexity.