The tree analogy – a tale of two eras of telco business models

With the holidays almost upon us in many parts of the world, I thought I’d share an analogy. Like many analogies, it’s a bit oversimplified. It’s also possibly a bit inflammatory in some circles. Hopefully though, it gives a different frame of reference for how the telco business model has changed over the years. More importantly, it gives a different point of reference for how telcos might look at their business models into the future.

If we look back at the telco industry 30+ years ago, there were only a small number of communications services, as represented by the handful of leaves on the sapling at the left in the image below. Those leaves represent services that mostly revolved around voice / telephony.

In those days, the telcos owned almost the entire tree – the networks, the handsets at the customer premises, the interconnections to other telco networks, the easements that the networks traversed, the service offerings, the contracts. They owned almost the entire share-of-wallet. Not only did the telcos own the tree, but they also tended to hold monopolies within a geographical region.

The leaves (telephony services) were incredibly desirable, with every home and business wanting them. Telephony services facilitated business, personal and social endeavours globally.

The tree on the left has grown into the tree on the right in the ensuing decades.

As we all know, the Internet (and data networking in general), has brought about a massive proliferation in the number and type of available communication services, apps, content sources, etc. The leaves (PSTN / voice) have almost disappeared, making way for fruit, flowers, etc. There’s an incredible variety of service offerings available today, with new ones appearing every day. These services are no longer owned, controlled or even managed by telcos. They’re offered by a vast number of organisations – a true long-tail of innovation.

There are a few other important considerations here:

1. It’s simply impossible for telcos to control the entire tree as it once did. It can’t even partner with every other organisation, every type of fruit / flower due to the vast diversity. The long-tail of offerings is just too large. That ownership / control genie has left the bottle
2. Clearly this represents a massive mindset shift for telcos globally – from owning the market to being just one player in the ecosystem. I’m not sure that this mindset shift has completely sunk in for all telcos. There’s still the pervading belief within telcos that they are the most important part of the ecosystem
3. To define the paradox more clearly here, let’s shift perspective to the end-users of comms services. Customers value the bounty, not the trunk. They’ll pay a premium for the fruit and flowers, not for the trunk of the tree. This perception of value is why traditional telco services, the networks, bits and bytes, are commoditising and profitability of the telco industry is also in decline. The market is telling the telco industry that telco services are not as valuable as telcos might think
4. However, I don’t want to downplay the importance of the telco industry. There’s no doubt the trunk is incredibly important to the delivery of the bounty. The fruits and flowers can’t grow without the trunk or the nutrients it provides.
5. The important thing to note here though is that it’s never really been about the network, the trunk. Customers have not wanted a network per se. Customers have always wanted the bounty. In the old days, they wanted the leaves. In current times, it’s the fruit and flowers. When telcos owned the whole sapling, there was arguably the perception that the trunk was what was important. Not true. It’s always only ever been a facilitator
6. Speaking of the trunk, you’ll notice the tree trunks / branches (the access and core networks) have become bigger and stronger to support the plentiful bounty that relies on it today. Bandwidths supported by the networks are many times larger, networks are more resilient, and in many areas network connectivity is nearing ubiquity. The tree itself is clearly more valuable

So, what is the moral of the story / analogy?

To an extent, many telcos are stuck in a mindset between the two worlds, the two eras.

Their core strength is in being able to build, refine, operate and maintain the trunk and branches. They have a structural advantage via their existing access networks. These are almost impossible to replicate as they require too much cash. There is an art to being able to navigate local conditions and regulations to deliver ubiquitous, reliable networks like the telcos have for many decades. They have the systems, processes and skillsets to do this 24x7x365. I’ll call this the Network Service Provider (NSP) business model.

But the trunk isn’t sexy. The trunk doesn’t offer premiums. The trunk doesn’t excite customers or investors. Customers just want a trunk that allows them to access the fruits they want, when they want.

The fruits are also attractive to telcos and their investors. They want to get their hands on some of those premium services. This has caused the desire to transform into Digital Service Providers (DSPs) and even discard their NSP heritage. They’ve diverted significant capital into trying to transform into DSPs. In fact, with the trend towards selling off tower assets, you could argue that many telcos are offloading value from the NSP model to fund the ambitions of the DSP model.

However, if telcos are to truly pivot to become DSPs, they need to either create their own unique fruits (within an ecosystem of competition) and / or create fruit-salad (through partnership and value-add) that’s attractive to customers. Both of these represent drastic business model pivots that require changes in tooling, skillsets, sales / marketing, mindsets, offerings, etc.

Telcos have proven to be adept at being NSPs for decades. They have proven far less adept at competing with digital native organisations like the hyperscalers. Can telcos take the funds raised from selling NSP assets (ie towers, property, etc) and convert it to DSP assets of higher value? I’m leaning towards the negative on this quiestion, but as always, I am delighted to hear from anyone who disagrees. I’d love to hear your thoughts via the comment section below.

Just as an aside, it’s important to note that most countries have removed telco monopolies, meaning that there’s no longer just a single tree available. The complexity and cost of building wide-spread access networks mean that near-monopolies still exist structurally though. Innovations like Low Earth Orbit (LEO) satellite networks could significantly disrupt the status quo here though. This will also have a big say in business model strategies for telcos.

Note: the imagery from the tree on the right has been sourced from https://www.thriftyfun.com/tf597555.tip.html and modified to tell the story of this analogy.