Share-of-wallet structural shifts

Our communications services revenue growth is being driven by continued strong top-line performance in data, Internet and international – three of the fastest growing and most profitable areas within communications services.”
Bernard Ebbers
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For those of you who don’t know, Bernie Ebbers was the CEO of WorldCom. He was also convicted of fraud and conspiracy in 2005 in relation to falsified financial reporting at WorldCom and a subsequent loss of billions of investor dollars. I’ll let you make up your own mind as to whether that has any relevance to the comment above after reading the rest of this blog, or it’s just an irrelevant footnote. 🙂

There has been discussion about OTT (Over the Top) service providers stealing revenues from traditional CSPs and being at war with them. I see it as being more of an evolution of wallet share and changing environments, as described in the table below:

Phase A. Technology B. Network C. Comms Service / Application D. Content E. Regulatory
1. Analog telephony CSPs + OEM vendors CSP (PSTN) CSP (telephones) Users (ie telephone conversations) Primarily monopolised
2. Data OEM vendors CSP (PSTN & Data) & ISP (Data) CSP (telephones & network termination devices) Users (ie phone conversations + data transfer) Partial network deregulation, (near) perfect competition in applications
3. Digitalisation Software vendors CSP (PSTN & Data) & ISP (Data) CSP (Network Services) + Application providers (eg Skype) Content framework providers (eg Facebook) + users (blogs, tweets, net-conversations, photos, videos, etc) (Near) perfect competition in networks and apps

Okay, I admit that the table is highly simplified / generalised but I’ve done so to simplify the story.

In the early days of telecommunications (row 1), CSPs were pivotal in developing and delivering the technologies, the networks and the services. This meant that they had a dominance over the end-to-end share of wallet. It was the CSP‘s services that generated great revenues (with technology and network costs amortised into service charges). Interestingly, the subscribers didn’t actually want the service per se, they wanted the content (ie the ability to communicate). Content was effectively created / consumed for free by the CSPs‘ subscribers (ie individuals making phone calls), but without the CSP‘s service they couldn’t create the content remotely.

During the next phase (row 2), data services proliferated, allowing subscribers to transfer data, which may have been in the form of documents, photos, etc. The technologies became more specialised and CSPs lost dominance to OEM (Original Equipment Manufacturers). Deregulation (ie removal of monopolies) and the advent of ISPs (Internet Service Providers) also led to a dilution of wallet share in the data network and service sectors. Some content remained free, but there were now providers that charged users to consume their content (eg subscription services). CSPs still maintained great revenues from telephony services though.

Our current phase (row 3) has seen a structural shift, with data services being open to near perfect competition (ie lots of network providers), which has led to commoditisation of these services and will likely to continue to do so. Services that allow users to create, consume and share content have now been digitised and accessed via a vast array of applications. Share of wallet has shifted towards content creation / consumption, which is what subscribers always valued. See this earlier blog for more discussions on structural shift.

What CSPs and OSS providers alike need to consider is how to extend their relevance from networks and network services into applications and content. This earlier blog provides some additional thoughts.

I believe there is probably a fourth row already developing, that of Datafication. Services relating to data science are likely to develop to help subscribers to sift through the masses of content / data to find truly valuable insights.

CSPs and OSS providers have a unique position of strength to leverage the data that they store, but interestingly it appears to be the OTT application providers that are innovating more heavily in this space and stealing an advantage. If it does play out this way, CSPs could potentially lose even more share of wallet.

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