Telecoms has a been a ‘race for place’
Since the telecoms market liberalised – over 15 years ago in the USA and most of Europe – the primary battleground for competitive advantage has been at the Place layer of the FASP4 framework. There was simply not enough physical telecoms infrastructure – ducts, cables, towers – and so there was a prime opportunity for those with enough cash to build out.
And, since exclusivity is the prime driver of value in the Place business, these early movers were often handsomely rewarded.
The ‘race for place’ happened time and time again. Cast your mind back and remember:
- The rise of the undersea cable market
- The Pan-European fibre networks in the late 1990s
- Fixed wireless access companies – getting beaten almost immediately by the surprise emergence of ADSL around the year 2000
- CLECs digging up central business districts to lay fibre
- Cable companies rolling out HFC networks in residential areas
- Cellular companies securing tower rights (and in increasingly dense configurations as technology generations advanced)
Notice that although the businesses that emerged were often vertically integrated (operating across the FASP4 model), the asset that was really generating the value was often the ‘place’. Indeed, the ‘space’ layer (network) in the backbone often became a very difficult business: the economics of fibre meant that oversupply rapidly became an issue in the backbone. This led to massive consolidation and survival only for the leanest and largest players. But that’s another story. The point is that being the first to lay fibre in any area was the fundamental source of value, rather than lighting up that fibre and operating the network.
Now, exclusivity in the last mile has been preserved for longer. As a result, around two-thirds of the end-to-end value of a link has traditionally been in the last mile. But now we see multiple parallel paths being established even there. Here’s a parable to explain what’s been going on.
Hacking down the jungle of non connectivity
Imagine an isolated house owned by some wealthy homeowners in the overgrown jungle of ‘non connectivity’.
The only route to this house was a tiny overgrown path that looped from the nearest settlement, TeleTown, and back. You could barely squeeze along it. But that small path was enough for TeleTown, whose residents made a fine business from the little house. A trader from the town brought boxes of provisions to the house each day, and was paid handsomely by the isolated homeowners. The trader in turn paid a whole load of his townsfolk to maintain the ‘loop’ (as the path was known) and keep it usable.
Many years later, there was a great commotion in the jungle as a rival trader from a new settlement, CableCity, hacked a new, wider path to the same house using the new Highway Forest Cut (HFC) technique. This allowed regular deliveries by bicycle of a bundle of fresh entertainment (a large package of newspapers!). Never had so much timely produce from civilisation landed on the doormat of the homeowners, and again they rewarded the delivery man well. The whole CableCity economy boomed as content was sourced, packaged and delivered, and the cycle path was continuously maintained.
Over the years, the trader and the bicycle delivery man eyed each other enviously. The trader from TeleTown realised that cutting a wider Dark-Jungle Supply Line (DSL) would allow him to get a small cart to the house, allowing him to deliver all sorts of produces and goods, and even the same newspapers as the bicycle man. The CableCity residents realised that they could make their path wider and wider too, with their Deep Overgrowth Cutting Special Iron Saw (DOCSIS). This allowed them as well to use a cart to carry both an extensive array of provisions and even more entertainment to the house.
Soon there were two massive highways to the little house. The jungle had been thoroughly beaten back. Traders from both towns regularly came with truckloads of produce, far more than the little home could consume. Buying from both was pointless, as each carried the same array of goods, and each was offering significant discounts for one-stop shopping. But each trader had mortgaged their home to build the highway to the little house, and couldn’t afford to walk away with nothing. So the traders stood at the front door, offering lower and lower prices to the bemused homeowner in the middle.
Suddenly, both traders looked up in the sky… and saw provisions falling into the front garden on small parachutes. Three helicopters from different Cellular City States were also making deliveries – from the air!
The game changes when exclusivity is gone
Place businesses require heavy investment because they tend to be about digging holes and negotiating with landowners. But the logic of these investments crumble away when exclusivity is gone. That is why we are seeing tower companies set up to sell to multiple MNOs, why mobile players are sharing sites, why ISPs are agreeing infrastructure sharing deals to deal with the costs of FTTH rollout.
In my view, this all points to one conclusion. Telcos should increasingly get out of the ‘place’ game – and sell/leaseback the telecoms infrastructure passive assets whilst there is still some exclusivity left in them! They don’t even need to sell them to one player, since scale is a not a big factor in the ‘place’ market. Why not let each local authority manage their own ducts and tower sites? Or every resident fund their own physical duct/fibre connection?
This would be a major overhaul for the industry, but would result in a much-needed mind shift. The massive investments and long payback horizons can be passed to entities better able to manage that kind of business. Value is no longer in being the first to lay down the physical asset… so the game can be played elsewhere.
Do you agree that the time has come to move away from ‘place exclusivity’ (passive telecoms infrastructure) as the battleground for telecoms? What caveats or nuances would you add?