MARCH 5, 2012
By Tom Wheeler
Just before the Barcelona Congress Cisco released their annual Mobile Data Traffic Index which found that for the fourth year in a row wireless data demand more than doubled. The installation of LTE is supposed to help meet this challenge with high-speed, high-capacity networks at lower incremental costs. Already, however, forecasts are suggesting the new capacity won’t be sufficient.
But it’s not just a bandwidth squeeze operators are worrying about. There is a revenue squeeze as well. According to Ovum Research, carriers lost almost $14 billion in text revenue last year as OTT providers siphoned consumers from highly profitable proprietary SMS services to free Web-based messaging platforms.
The other news from Barcelona was how the industry’s leaders were dealing with the OTT challenge. One wireless CEO after another took to the podium to complain about over-regulation, the high cost of spectrum licenses, and how OTT was enjoying an unregulated free ride. “The operators are now formally under attack,” the noted analyst Rajeev Chand observed.
Beyond complaining about over-regulation, the CEOs’ response has been a group grope for network-based solutions. The Wholesale Applications Community (WAC) was the late-2010 response to apps stores. Last week they tried again with the introduction of Joyn, a service designed to take on the SMS cannibals with a common “Rich Communications Suite” platform.
The problem with such common solution approaches is the dichotomy between network-think and consumer-think. While the folks who think in terms of networks are spending time and effort solving for a common platform, the OTT providers have already shot out of the starting gate. Network people think in terms of perfection, consumer apps developers think in terms of getting to market quickly with a first generation service and then improving it on the fly. As a result, by the time the operators have checked all the boxes, the OTT folk have accumulated a huge following of loyal users; and from that point on the speed of their updates keeps them in front.
The great landmark of LTE deployment thus becomes the ultimate movement away from the network to what that network enables. The dirty little secret that built the wireless business was that the network was in control of what consumers received. LTE networks consign that era of network dominance to the ashcan. The most powerful and pervasive platform on the planet – the wireless network – is now subordinate to the device manufactures and applications suppliers who use it. Because LTE is all-IP everything on it – from voice, to text, to Angry Birds – is simply an app. The all-IP network thus disintermediates its builders. The dreaded “dumb pipe” looms.
It is not the first time a network provider has faced this challenge. Perhaps the experience of the cable television industry in the 1980s can be a roadmap for mobile operators. Cable, too, was facing the “dumb pipe” nightmare. Their business was transmitting someone else’s product (sound familiar?), only this time the product was television signals owned by major networks. Cable’s response was to own the next generation services. They couldn’t buy NBC, ABC, or CBS, but they could own channels that were uniquely available because of the cable pipe. From Discovery, to CNN, to QVC and more, cable operators invested in and controlled the next generation of television services. Not only did they redefine themselves to avoid the dumb pipe, but also an industry whose expertise was stringing cable exposed itself to a whole new generation of thinking.
It’s too late for a mobile operator (or consortium) to buy Facebook, Google, or Twitter. But it’s not too late to buy what’s coming next – and we all know there will be a next…and a next…and a next. As a case in point, Apple just bought Chomp, an app search engine that allows users to find apps based on their functions, not just their name. The usage statistics make it clear that smartphone owners spend more time using apps than they do searching the Web. Finding your way around over half a million apps in the iStore is virtually impossible; no wonder Apple bought Chomp. But why did it have to be Apple that was looking for the next smartphone service? Why not a mobile operator?
The cable model suggests an infrastructure provider can successfully expand beyond its network roots. Some mobile operators have begun edging in that direction by starting incubators and development centers to work with early stage app and service developers. Some have invested in new apps (Deutsche Telecom’s venture arm just invested $7.5 million in Pinger, an OTT texting company, for instance). And Verizon, AT&T and T-Mobile are reportedly investing $100 million to create a separate company, ISIS, to work its way through the morass of mobile payments.
The most interesting evolution from network pipe to content provider is happening in South Korea. Long an innovator in mobile services, South Korea Telecom has created SK Planet, a separate company for investing in and owning the next generation of wireless services – and not just for SKT subscribers. The new company will put what it owns into the mobile ecosystem for consumers to use on anyone’s network, anywhere in the world. SK Planet has turned the mobile world upside down by making a mobile operator an over-the-top provider!
Deutsche Telecom CEO Rene Obermann told a Barcelona audience that mobile data was like chocolate, “once you start eating, you can’t stop.” The new LTE networks are going to be the data chocoholic’s dream come true. The question for mobile operators is whether they want to stay in the business of making the delivery boxes for someone else’s chocolates or whether they want to develop their own recipes.
Tom Wheeler is Managing Director of Core Capital Partners, a venture capital firm specializing in early stage companies, including next generation wireless services. For almost a dozen years prior to joining Core Capital he was the president of the Cellular Telecommunications & Internet Association.