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Monday, April 12, 2010

The incumbent telcos' attack on YouTube looks like a suicide pact

There is a right way and a wrong way to go about finding new business models for broadband services. Having just published a report jointly with Telco 2.0, I've been spending a lot of time delving beneath the surface of two-sided business models, and the opportunities for operators to make additional revenue from "upstream" companies like media and Internet properties.

Picking a fight with Google about YouTube traffic is categorically the wrong way to go about it.

Yet Deutsche Telekom, France Telecom and Telefonica are all trying to tweak the lion's tail. According to the FT, they're even suggesting that regulators could "supervise a settlement" if they can't persuade the Big G to hand over a slice of its advertising and application revenues.

Google's recent stance with China over censorship doesn't suggest that it is going to be happy playing that sort of game. But what bemuses me most is that the operators seem to be chasing after the wrong target. Google pays for its network connections like anyone else. That's the way the Internet works. It's not like phone calls, where there are originating and terminating ends to a connection. If end users start *uploading* traffic to Google's servers, are the operators going to be happy to pay for the traffic to be terminated in Mountain View?

There certainly are potential revenue-earning opportunities for the large telcos - either from Google or other players (Governments, application developers, other operators, media companies and so on). There are already signs that two-sided models are emerging to serve specific device types, specific customer groups, or "third-party paid" data traffic. But for those type of services to work, the operator needs to add value above and beyond connectivity.

Some form of toll-gate is not a value-add.

Payment mechanisms, authentication, managed security, guaranteed SLAs, device management and numerous other options represent value-adds. Partitioning a broadband connection and giving absolute guarantees of speed, latency, jitter and so forth might qualify. But simply attempting to gain a "free ride" on Google's skillful aggregation of services will not.

My view is that it will be extremely difficult for operators to derive additional monetisation from services that terminate on PCs. Smartphones, TVs and other devices are different - and those are some of the areas where they should be focusing their marketing and executive firepower. It is possible that this is just an opening skirmish before YouTube starts trying to pitch full HD-quality video for living room TV sets, in which case there is definitely a discussion to be had.

But otherwise, it wouldn't surprise me to see Google start to think about charging operators for carrying its content: after all, as DT's CEO says "There is not a single Google service that is not reliant on network service"... which could well be inverted to say "There's not a single broadband user that isn't reliant on Google's service".

It would also be remarkably easy for Google to offer free advertising to a given operator's competitors, less inclined to consider forms of extortion. Of course, in a properly competitive broadband market, there should be no barriers to operators trying whatever strategy they like - as long as there are no unfair attempts to block subscriber churn.

If operators are really going to push for non-neutral Internet connections, are they also prepared to deal with the fallout from non-neutral Internet services as a response.

If you are interested in the new Broadband Business Models report, which identifies a multi-$bn amount of Telco revenue opportunity via much less-confrontational approaches, then more details are here. Or email information AT disruptive-analysis DOT com.


David Deans - BTR moderator said...

Dean, it's been some time now that the concept of the 2-sided business model has been debated. Are there signs that this concept will be executed by some European telcos in the foreseeable future?

I'd appreciate any examples of where the concept has gained momentum, and results that have looked promising for others considering this path to new revenues.

Davide said...

I agree with your comments. Operators realized that some bits (the one involved with services and ads) are more worthy than others and want take part of the revenues Service companies like Google are making, without providing any added-value beyond simple connectivity.

Absurd as it may look, Google could perfectly answer to FT and others: "BTW guys, if you want your mobile broadband users to access to google search and services, you should pay me a premium..."

Dean Bubley said...

Hi David

Yes, there are a few examples of 2SBM in play already - I commented on Vodafone's deal with a local govt agency to provide broadband to citizens recently. Also clearly some work on advertising, and some (slow) movement around APIs via projects like GSMA OneAPI.

However, it's not easy - there are substantial problems in terms of reconfiguring OSS/BSS to support these approaches, working out sales channels and pricing and so forth.

It may be that there has to be a new set of intermediaries to help lubricate the process - for example Jasper Wireless on M2M connectivity, or a number of the larger vendors offering new platform plays (eg Ericsson, ALU).

Some areas remain quite weak though - especially around voice and messaging, which in theory ought to be the big winner. The problem there is that there is often no team inside telcos that has responsibility for "product development" around voice.

If this is an area of interest, please get in touch as it's something I do a sizeable volume of client work on.