While I have discussed this topic before, it has gained renewed interest as currently financial analysts are now finally joining business analysts, such as myself, questioning the value of the vertical integrated business model used by most incumbent operators in the world. However, Australia’s liberal policies towards the incumbent allows Telstra to be one of the most vertical integrated companies in the world.
I discuss below my vision on how the telecommunications equipment industry and the telecommunications carriers (infrastructure) will merge over time to form one industry. This trend is part of a more wide-ranging trend that will see the five industries, currently making up the IT&T, merge into three industries. This issue was addressed in the Telecommunications Outlook Study from the University of Southern California, in which I participated.
This study identified the following current industries:
- Pages (Photography);
- Text (Publishing);
- Voice (Telecommunications);
- Data (Computing);
- Audio/video (Entertainment).
All of these industries have their own functions:
- create and collect content;
- distribution and transport;
- processing and applications;
- storage (memory devices);
- display (devices).
What will happen is that over the next 5-10 years these industries will be totally realigned from vertical integrated to horizontal function-based organisations. The three converged industries will be:
- Information content;
- Information highways;
- Information appliances.
All three industries will be global and multimedia in nature, and incorporate voice, images, data, text and audio/video. The prime drivers behind this change are the digitalisation of technology and the personalisation of marketing. There will no longer be any difference between text, an image or a video, nor will there be a mass market either. These trends are supported by other dramatic changes currently taking place in the telecommunications and computing industries.
The large fixed costs, in manufacturing and in infrastructure development, will see an early merging of these types of industries as addressed below.
Companies that will thrive in this environment are those:
- who have a bias towards personal rather than institutional markets;
- who have expertise and experience with digital media/technologies;
- who have a functional edge (experts in a niche market);
- whose experience is tilted towards video (rather than text/image).
Vertical vs. Functional Business Models
Vertical Integration Model
Resist efforts to force network open to third party content and service providers.
Establish own ISP service and fight to win customers from other ISPs, providing all the support functions that go with a diverse range of Internet users.
Try to limit customer’s choice to (own) products and services in order to maximize revenue per customer.
Strive to uphold pricing of bandwidth as a multiple of telephony capacity.
Where wholesaling capacity to third parties erect ‘Chinese walls’ but compete vigorously at the retail layer.
Lose a customer whenever they churn to another provider’s service.
Amortize the cost of the network over only (own) products and services.
Welcome all third party service and content providers to give real choice to the consumer.
Partner with many major ISPs and cooperate in enhancing service to their tens of thousands of established customers through provision of broadband access.
Promote broadest possible array of services and products in order to optimise the value of broadband connection to the maximum number of customers.
‘Lead the charge’ in introducing broadband communications capacity at prices designed to foster higher usage.
In collaboration with service providers, promote all products and services that are available through the network and share in the resultant revenues.
Amortize the cost of the network over multiple service streams, service providers and services.