September 19

Facebook: 4x more relevant than telecoms players? The loss of the network effect

Telecoms

3  comments

Historically, Service Providers enjoyed the benefit of the network effect via the ubiquitous connectivity provided by the public switched telephony network. However, today’s larger Web players are dwarfing the connectivity provided by individual Service Providers.

Network Effect - Value per User Telecoms Reach Analysis

For Service Providers to exploit the network effect in the future, they need to partner with other Service Providers in their home market, target specific communities of users or aggressively promote a compelling Web-based offering themselves. Failing to do this will relegate the Service Provider to providing services to individual users (such as plain broadband access and TV), bereft of the value-generating network effect.

The value of a network

The value of a general communications network has traditionally been estimated, using Metcalfe’s law, to be proportional to the square of the number of users. However, Andrew Odlyzko and Benjamin Tilly disputed this approximation on the basis that Metcalfe’s law assumes every connection between two users is equally valuable. By reasoning that adding extra connections follows a law of diminishing returns to each user, they make a strong case that, as a rule of thumb, the value of a network for an average user grows as log(n), resulting in an overall network value of nlog(n) rather than the n^2 assumed by Metcalfe.

This value per user is an important measure of the potential importance of a particular network to its own user base: the value of being able to communicate with other users in the network.

The actual importance will depend on a number of practical factors: the ease of locating correspondents within the network and establishing a communication with them, the richness and quality of the communication medium, the price, and so forth. But these areas are tactical concerns to be addressed by execution, whereas the potential value of a network to its users is a strategic factor: an asset and platform for value creation.

Facebook: four times more relevant than a typical UK mobile SP?

In this context it is interesting to estimate the relative value per user of a number of service provider and ‘over the top’ networks. The graphic above shows the results of my calculations for:

  • The global public telephony network, with around 7 billion fixed and mobile connections
  • Facebook, with around a billion million mobile active users worldwide at the time of writing
  • The approximately 70 million connections of the UK mobile operators
  • Facebook UK, currently at around 30 million monthly active users
  • The customers of a single UK mobile operator, with a 25% market share

The results are enlightening:

  • The global telecoms network, as expected, remains the most significant network. However the PSTN’s per-user value is only 9% greater value than that of Facebook.
  • The per-user value of Facebook is around 15% greater than the UK mobile operators all together.
  • A single UK mobile operator has an per-user network value that is only 22% of that of Facebook.

Network effect 2.0?

This helps explain why service providers are failing to deliver substantial innovations in the realm of personal communications. An individual UK mobile operator, for example, may decide to roll out a new communications service for its users (for example, photo sharing, or high fidelity voice calls). The value of such a service will be proportional to the value the user attaches to the service provider’s on-net users. The figure above demonstrates clearly that users would find the same service 4–5 times more attractive if rolled out by Facebook.

Service providers have historically been the guardians of the ‘network effect’; International bodies set standards that were rolled out ubiquitously. The effects of this remain today: the network effect of the public telephony network is still the greatest in the world.

In the Web 2.0 world, with users increasingly using web tools to collaborate and communicate, service providers are faced with a dilemma. Standards bodies will not be able to identify develop and roll out new services at the required speed; and communications innovations rolled out across an operator’s own on-net user base (such as high-fidelity voice calls, for example) will likely fail due to the low network effect that such providers can muster compared with their OTT rivals (as illustrated by Figure 1).

If telcos want to play in the A.C.E. Space, there are three main avenues for telcos to pursue in order to capture a meaningful network effect:

  • Operators must collaborate with each other to create services that work seamlessly across their networks. This does not require global co-ordination: Figure 1 indicates that the three to five main service providers in a country can create a network effect that is a match for even the largest OTT social networks.
  • Telcos must target specific consumer and business communities to create a network effect, and monetize this by deploying tailored on-net networks services to these groups.
  • As well as network-based services, service providers need a Web (OTT) strategy. Successful A.C.E. services of the future will be measured in 100s of millions of users, well beyond the reach of most providers’ network footprints. Orange Libon shows what can be done even within a very traditional operator set-up.

For executives at many Service Providers, used to regarding their peers as competitors, the idea of collaboration will come with some difficulty. However, as Web players develop an ever-stronger network effect independently of network footprints, service providers should work together to collectively grow their addressable market, rather than simply fight each other for a share of a diminishing pie.

In the wake of many failed “telco collaborations”, is this vision of SP partnerships an unrealisable dream? Or could telcos find a new way to work together that avoids the mistakes of the past?

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About the author 

Richard Medcalf

Strategist, consultant and business leader with 15 years experience in helping companies thrive in an Internet world. Formerly a partner in strategy consultancy Analysys Mason; now at Cisco Systems, developing new strategic partnerships with leading telecoms players.

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  1. What is the rationale for telcos partnering with each other to increase network effects, rather than partnering with Internet companies?

    I’d argue that your premise “Operators must collaborate with each other to create services that work seamlessly across their networks” has multiple problems. Firstly, there is very little evidence that such efforts work – numerous attempts at creating national mobile messaging, payments and API collaborations have failed. Fiascos like Weve and Joyn abound. Secondly “This does not require global co-ordination” overlooks the fact that national operators will often be members of international groups that have their own imperatives for a common platform. Thirdly, one of the pre-requisites for standardised services will be standardised networks. This approach may make it harder for network providers to differentiate on QoS, policy management, charging policies, rollout of 4G/5G/small cells and other issues.

    I’d say it makes much more sense to collaborate with web or device players. One of the few successful telco-led partnering activities of the last decade was with RIM at its heyday, with various operators successfully collaborating with BlackBerry to create and sell new services. Other deals with Opera, Facebook, Google and even Skype have been interesting. Currently, we see Telefonica working with Mozilla/Firefox as another example.

    Conversely, I struggle to think of telco collaborations that have borne fruit, apart from in the M2M space.

    Reply

    1. Permit me to add a bit some context to Dean’s observation about the success of M2M.

      I contributed to the mobile industry’s strategy to develop the M2M market with the aim of scaling it up to levels comparable with the then dominant handset market. This was a market led strategy (I did the market research); by contrast, many other initiatives seem to be motivated by technology ‘push’.

      What this meant is that the M2M market development strategy, coordinated by the GSMA, included some technical work to address architectures as well as hardware costs. More importantly, however, the strategy included objectives to address market evangelization, to optimize operational deployment and to foster business model innovation.

      This example should be a lesson for future efforts, especially where success depends on creating a functioning eco-system across value chain partners. After all, this is a market reality that shows up in your ‘network effect’ analysis.

      Reply

  2. Thanks Dean for your typically well-considered comments. You are right that telco collaboration has been a failure in the past, and that a lot would need to change for it to be successful in the future… and you do make a good point about the international group effect.

    Now you may not need standardised networks for standardised services. You need “compatible networks” for “interconnected services” which is not the same thing, and what compatible means will depend on the service being offered. As BSS/OSS and networks themselves become more open/programmable, however, some of the technical barriers may ease.

    My overall point, however, is that if a network operator tries to differentiate on its own footprint alone (i.e. with a web or device maker alliance!) then it will not be able to take advantage of a significant network effect (online services will win, as they have global reach from the get-go). However, a national footprint is, for many service types, practically as valuable as a global one, hence the incentive to collaborate with other telcos.

    The biggest problem, I agree, is implementation – and telco culture plays a large role here. There is still a bigger desire to compete with other telcos than to expand the pie – and when collaboration is on the cards, it is an engineering-led exercise that misses the market opportunity.

    Example of successful telco collaboration? Cellular roaming? Wi-Fi roaming/federation (in some markets)? But I agree, there aren’t many.

    Richard

    Reply

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