The future is…egg shaped

  • Posted by Keith Willetts
  • February 11, 2015 11:49 AM GMT
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Consolidation of the telecom sector continues apace with BT’s $19bn acquisition of the T-Mobile / Orange joint venture EE and the expected acquisition of Telefonica’s O2 by Hutchinson. Five UK mobile operators down to 3 in a short space of time and maybe more to come.

Digital WorldThe UK, along with the US, pioneered telecom liberalisation back in the 1980’s, yet both markets are now consolidating fast. So has liberalisation failed?

No - it set alight the digital revolution we see today that has transformed lives of billions of people. Service capabilities have rocketed upwards while prices have tumbled – surely the best testament to the power of a competitive market.

But there are flaws - the realities of continually investing billions in multiple competing networks is breaking down because of the economies of scale that operate on infrastructure investment and that’s beginning to show up in declining quality of service on many networks. Regulators forced telecom infrastructure competition yet running multiple water pipes, electricity grids, rail or gas networks would seem silly.

The pace of change is so fast today that networks have to be continually rebuilt to add capacity and speed, so the bill for equipment and fees for spectrum licenses are astronomical but, according to a report from PwC, the return on that capital is now negative. Hence network sharing deals and increasing merger and acquisition of infrastructure based players.

So how can you get the benefits of market liberalisation without the diseconomies of scale on infrastructure? Even a decade ago, if you wanted to run voice, messaging, video or whatever you needed deep pockets to build the infrastructure because each service needed its own specialised network. But an all-digital world allows all types of service to co-exist and the network and the service have become two separate things and a single network can be shared between many service providers.

But that is still not fully reflected in much of the existing telecom world and many network operators are struggling to be both types of business. These are very different– networks demand long term investment strategies while services are about fast innovation and smart marketing. They’re symbiotic businesses but if you try to do both, you compete with the very people you need as partners.

So expect to see more separation with a small number of increasingly large companies providing network and computing infrastructure partnering with a rapidly mushrooming number of fleet-afoot service providers. It’s what I called the egg-shaped market in my book “Unzipping the DigitalWorld” – small at the bottom, fat in the middle.

Will we get down to just one infrastructure provider in any country? Potentially yes because one, heavily loaded network is the most efficient. Of course, going back to a monopoly position would have to have strong regulation that ensures, openness, net neutrality, universal service, price caps and so on but much of that exists anyway.

What really matters is that we quickly get to a sustainable equilibrium where investors in infrastructure can get a decent rate of return to provide the platform for ever more innovative and smarter services that enrich our lives.

Keith Willetts is the founder of industry consortium, TM Forum and a regular writer and consultant on the digital world.

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