July 25

Are ‘OTTs’ making network economics unsustainable?



“Much of the growth in the overall telecom ecosystem has been captured by the electronic products companies that make smart- phones—the devices, ironically,that have put so much pressure on telecom networks and forced operators to invest so much money in upgrading them to handle the ongoing data tsunami they face” ~ Booz Allen

Are OTTs making networking unsustainable

Do you agree with the received wisdom amongst telecoms players: that online service providers are generating unsustainable demand and free-riding on telecom networks? I don’t.

Three reasons for painful network economics

  1. It is true that there are periods of oversupply in networks (the FASP4 space layer). This is often due to occasional technology upgrades (e.g. 2G to 3G, or 3G to 4G) briefly creating an abundance of capacity. It can also be because of new entrants with empty networks entering the business and pricing under average costs to build their customer base. But this is a competitive issue, not a demand issue.
  2. As access technology has converged, exclusivity in the place layer has eroded, meaning that multiple infrastructures are competing for the same customer. These infrastructures are largely fixed costs, so players may be motivated to price on incremental costs only, leading to unsustainable price levels. But this is a market structure issue in the Place layer, not a demand issue.
  3. The Internet players are obviously cannibalising old cash cows at the A.C.E. layer of the FASP4 Framework, like voice and messaging. But that’s not a traffic volume issue, that’s an artefact of cross-subsidies. It doesn’t change the Space-layer network economics.

Online service providers are a good thing for networks

Smart phones and online service providers are generating increased reliance on connectivity. This is a good thing! They have been responsible for the massive uptake in mobile data plans and their associated revenues: you can’t have one without the other. Let’s face it, until the iPhone came along, the mobile operators mobile data businesses were hardly booming.

They are not generating “unsustainable demand” for connectivity – unless you have an unsustainable business! Put it another way, nobody has forced operators to upgrade their networks to deal with the data tsunami. Presumably, the decision to invest was made given competitive dynamics: better to invest than to lose customers. Now – if you lack differentiation and have an inefficient cost base, and you are competing with a leaner and meaner competitor, then it is going to hurt. But don’t blame the source of demand for that.

Are Web players a good thing for the network business, or are they free-loaders?  Leave your thoughts in the comments below…

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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. Hi Richard,

    I agree. Instead of being overly fixated on protecting their historic dominance in the “ACE” layer (by way of discriminatory gate-keeper practices like zero-rating own video and cloud services while overpricing generic internet usage, telecoms operators should be focusing on getting the their “Space” & “Place” business models right.

    In the “Space” & “Pace” business it is important to understand that it is to a large extent a fixed-cost business (as you rightly pointed out), and it needs to be reflected in the retail and wholesale pricing models. In “Digital Fuel Monitor”, a service where we track competitiveness of mobile internet access in all EU & OECD markets we break down operators’ pricing schemes to “Base (0 gigabyte price)” and “Incremental price per gigabyte”. Interesting to see that there are huge variations market by market. In some countries charge very little per smartphone SIM but have overly expensive gigabyte prices, in others the base (0 gigabyte) price is quite high but the marginal cost for the end user to use the gigabyte is nearly zero (in some cases zero).


    1. Pal: Good thoughts, thank you. I do think that, as you say, the “ACE” layer focus of telco executives is leading to a lack of focus on the Space & Place layer businesses. Interesting comments on your “Digital Fuel Monitor” service. Do you believe more in a “high 0-Gigabyte price/low incremental price” strategy, or vice-versa?

      1. Hi Richard, as the base stations gets smaller and smaller, cheaper and cheaper more and more IP,and closer and closer to the end customer, the marginal cost of transferring mobile gigbaytes converges to zero. At the same time the traffic independent costs of serving customers and their devices(technical, like the cost of installing the base station but also other: customer care, marketing etc etc) are unlikely to drop so fast. So in competitive markets (like e.g. Finland) I expect that the reasonable 0-gigabyte price, low incremental price models will prevail — reflecting today’s fixed broadband pricing models.

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