Networking

Peter Cochrane's Blog: Telecoms - get creative

Don't go backwards just because your service is now a commodity

Written in Helsinki and despatched to silicon.com via a free wi-fi network that reached every room, bar and lobby in my hotel.

Sooner or later it seems everything becomes a commodity. Throughout my life I have watched as food, wine, beer, clothing, furniture, most domestic appliances and electronics goods, and lots of office equipment have become commodities. Almost everything that was scarce and expensive in my childhood and adolescence now seems plentiful and ridiculously low-cost.

Depending on the reference source you use, the old and established definition of a commodity goes something like this:
  • Items that are bought and sold
  • Something people value and find useful
  • Product, goods, services, something that can be traded
  • A substance of product that can be traded, bought and sold

So far so good but I think it is time for a subtle update in the face of accelerating commoditisation. It seems to me that we find commodity items and services useful by definition! But when the price has fallen sufficiently, we no longer value them. That is, we tend to take things for granted and at some point consider their availability as good as free. Water and electricity are two good examples. We turn on the tap for a drink and flick a switch for light without even a second thought.

And so it has become with telecommunications. Who worries about the phone, mobile and ISP bill? Seemingly no one! Everywhere I travel on this planet people are using these facilities as if they cost nothing.

In the market place the competition has become fierce, with multiple suppliers vying to catch the attention of customers with cheaper rates and special offers. But by-and-large no one is interested, as all the elasticity has gone out of the market. So in the next face it is the package or bundle that wins. 'Buy your fixed and mobile services from me and I'll give you broadband for free' is one of the latest marketing moves that is catching on.

Of course, there is nothing new here. You can see this approach to selling commodities in the supermarket every day. The bundle is a well-established technique but only now being applied to the telecom sector as it sinks lower on the radar of the public perception. Yes, the telecom industry provides valued services - but no, we just don't expect or want to pay for them. And so the concept of free becomes a necessity for the seller.

As an aside I call this marketing behaviour 'the degradation of free'. We now have many different Grades of Free including:
  • Gratis - costs nothing - a gift
  • Buy one get one free
  • Free with six gallons of petrol
  • Buy these tools and get a free toolbox
  • Free when you return this coupon
  • Free if you watch/listen to these adverts
  • Free for $35/month

Perhaps an updated definition of a commodity might then be: something we find useful and/or essential but are reluctant to pay for.

So here we are, an industry that was prized and happily operating with greater than 15 per cent profit margins 20 years ago is now looking at the prospect of becoming something akin to the local supermarket.

What is the reaction? Does it start to adjust to this reality by deploying optical fibre to increase efficiency, reduce manning and operating costs whilst releasing even more bandwidth in order to cope with even more competition and slimmer pickings in future?

No! Quite the reverse!! Telecoms actually wants to go back 50 years to an age when time, distance and bandwidth were expensive and chargeable. But I'm afraid the genie is out of the bottle and it ain't going to go back in.

In the US for example we have telcos trying to carve up the net traffic so they can charge a premium rate for heavy users. They actually want to charge the profitable service providers for generating net traffic and users for consuming bits. Ouch! Who us, a two-tier net, a society divided by access speed?

As for the mobile operators - especially those who invested heavily in networks unlikely to break even from their licence loading for many years - they complain that data services are starting to exceed voice but say only voice was 'properly dimensioned' for charging. Worse still, the customer base is using their phones and the networks in ways that were never intended.

Well, welcome to the 21st century!

How about taking a trip to Japan where 16Mbps is the lowest rate broadband provision at $29 per month, and plans are now in place for 1Gbps for everyone at $50 per month. Or nearer home, look at Finland, where wireless-access is profuse, low-cost and often free. If these societies and companies can figure it out, then so can everyone else.

This is not about technology! It is about business models and mindsets. When things become a commodity everything changes, especially the perception and position of the customer base. Competition is a wonderful vehicle and the customer a brilliant driver. Failing to fully understand this can really hurt! Any fixed line or mobile operator that clings to the past, or tries to return there, is unlikely to survive - let alone prosper.

The good news is: in my crystal ball I see rafts of new technology coming along that will accelerate and exacerbate the change. Even better, I see legions of new people and companies that are capable and waiting to accept the challenge. My advice to the incumbent operators is to follow the payload, provide the services and facilities people really value.

About

Peter Cochrane is an engineer, scientist, entrepreneur, futurist and consultant. He is the former CTO and head of research at BT, with a career in telecoms and IT spanning more than 40 years.

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