Social Machinery

If there is something that keep CEO’s at night in today’s mobile telecom industry is the scary thought of becoming a “Dumb pipe”. At least this is what most Telco analyst has predicted as the worst future scenario for mobile operator’s fate.

In a open an booming web 2.0 landscape, Telco’s have little or no control on several aspects of the eco system. The control rests either with the internet/web 2.0 disruptive innovators like Google, Yahoo, FaceBook, Twitter or lies with the OS system holder Nokia, Apple, Google, Palm, Microsoft among others.

The operator has been squeezed in to the value chain making their money through connectivity and that’s it. It is exercising less and less control over Content, Consumer or the Devices.

With voice moving towards zero tariffs (Skype, Google and others) and mobile broadband commoditizing fast, the margins of the operators who have been the unchallenged players in the Telecom eco-system is under huge pressure. In Summary,  the operator is at a threat of being used simply to transfer bytes to and from the customer’s device and not being able to increase their position or add any additional services besides simple network access. The scary dumb pipe scenario is coming to chase mobile operators as it happened with ISPs some years back.

The tipping point

Five years back operators and their portals were the only way to get an app into your mobile, so their role was crucial in the content and media value chain. But today it’s all about the marketplace; meaning is a wide open Multimedia space; meaning that you can completely circumvent the operator if you wish so.

Probably the reassert of this phenomenon, occurred during 2008-2009.

First of all, the last two years has seen an exponential growth of mobile data worldwide, not only in terms of subscribers but data traffic. Wireless network operators worldwide are reporting record growth in data traffic between six to eight times from 2006. This phenomenon has also occurred in Western Europe, North America and Asia Pacific regions, with tier-one operators reporting data traffic growth of 200% per year.

The explosion in mobile data usage can be attributed to an increased network performance, the rapid shift of internet user behavior, the decrease in data plan prices and an open marketplace.

Most mobile operators started rolling out high-speed mobile networks in 2006. At the same time, service tariffs have decreased roughly 2 to 16 times in the past two years, making mobile data both affordable and convenient. While usability continues to improve, we may not have seen the bottom of the price decline yet.  Besides, we have a new type of anywhere consumers who wanted to be connected anytime, anywhere with their social graph. In fact the rise of social media as the main online user activity on internet is forging a new type of consumer and an explosion of internet traffic. Everyday, more than 1 Million pieces of content are uploaded to Facebook and more than 100 Million Youtube videos are watched every month. This is just a reflection on how consumers are moving into digital life, where most of their lifestyle and activities and in some way or another linked to internet usage.

How bad is to be a bitpipe?

So, is the much-talked-about threat of operators becoming a “dumb” pipe real?

As the operators fight it out on the price front, mobile device manufacturers, media companies and web 2.0 innovators are trying to divert the consumer’s wallet and time away from the operator’s domain.

A classic case is the incredible success of the Apple iPhone. IPhone has launched a completely new mobile ecosystem where operators are essentially reduced to bit pipe providers. The consumer’s interaction with the operator is limited to voice and some billing services. The operator currently plays no role in the content business for iPhones other than that of data connectivity. Also there a clear signs that iPhone model will be adopted by more handsets manufacturers especially in the case of Android.

So, is there a business case on being a mere bitpipe? First of all, is important to understand that this already happened in other industries and telecom should be smart enough to look other case studies and applied lessons learnt.

Just take the airline industry, extremely mature marketplace, where some few companies realized that there was a growing segment just looking for convenient ways to travel. No frequent flyer discounts, not VIP lounges, no “nice” meals. Just pure connectivity at the lowest price possible. Today’s most profitable airline in the world is Airasia, A low cost carrier offering cheap flights at a reasonable quality in the Asia Pacific region, probably something that nobody in the airline industry could predicted 15 years back.

I believe learning from other maturing industries, where the competitive landscape outlook is less attractive can be applied to the telecom industry.

Also, the financial performance of some utility industries like electricity that can be compared to a Telco bitpipe scenario is not necessarily unattractive (Probably less sexy). According to Fortune 2008 Most profitable industries ranking, Telco is ranked 19^th with 5.1% of profits as % of revenues. Electricity and Gas utility industry is ranked 12^th with 8.1%.

 Emobile Case in Japan: A profitable bitpipe

Emobile is the fastest growing mobile operator in Japan only focused on mobile broadband; currently they provide HSPA speeds up to 14.1 Mbps covering all major urban areas of Japan. Emobile is a reverberating success story; they will soon reach 2 million subscribers and is three times bigger than the market leader and two times more than its competitors when it comes to mobile broadband subscribers. Emobile’s market share is growing faster than industry and is outsmarting most analysts and current strategy paradigms.

EMobile’s model is simple; it offers subscribers’ unlimited data access using mobile broadband technology (HSPA+) for around 50 EUR per month.  This implies that even if users upload or download enormous amounts of data including services like P2P, Skype or VOIP or watch or upload movies all-day eMobile doesn’t throttle those connections or charge extra.

In most of the countries where mobile broadband has been implemented the current established model is based on “fair usage policies”, service throttle for services such VOIP or P2P and capped plans that try to demotivate users to utilize more than 3-5 GB per month. After this traffic usage levels operator’s enforcement will come either via throttling the speed or by charging exorbitant amounts per KB.  For most operators, Emobile model will sound as a commercial madness. But emobile showed their first profitable quarter and they expected to break even next year.

So, what are Emobile key success factors? Emobile focus on high usability of network based on standardized and cutting edge technology, competitive low cost construction and operations and simple business model that attracts internet users.

Emobile is not afraid of being a pipe, but an efficient pipe that provides a high quality mobile broadband service.  Their focus on just broadband business, leaving content, handset specifications control, prohibitive devices subsidies and applications to their competitors, helps emobile to put all their efforts on mobile broadband operational excellence and creating a strategic alignment of all their assets like network, marketing, sales and finance.

A low cost, but high quality mobile network that can improve usability of available spectrum and their network performance. Is like bringing the low cost airline model from successful companies like AirAsia or Ryanair to the mobile broadband space.

Obviously the main question everybody is asking is whether emobile is profitable. The answer is almost yes, emobile expect to become profitable at the beginning of next year and they already show their first positive quarter results.

Their future strategy is very straightforward; they expect to attract more than 5 million subscribers by March 2012 , in a market with almost 100% penetration. Their view is that an anywhere consumer will need to have mobile broadband access anytime, anywhere so mobile broadband will become a “must have” item in your daily lifestyle. Thinking in a market like Japan, with more than 100 Million inhabitants and a low mobile broadband penetration, the outlook is exciting for them. 

The future looks interesting for bitpipes

By 2020, 50 billion devices will be connected using mobile broadband, even do most of this devices will be using RFID technologies, approximately 5 Billion devices will use 2G, 3G or 4G technologies. The main verticals affected by the rise of the machines will be Automotive (Connected cars), Utilities (Smart metering) and Home appliances (Connected home). This will imply that in most of mature markets the growth will come from devices connections rather than subscriber connections. Nevertheless, Machine-to-Machine will require a reliable, efficient and lean operator as the ARPU and margins are lower than current subscriber ARPU.

Also, the revolution on broadband policy management will enable operators to control in a most smart way things such priority, network utilization, dynamic bandwidth allocation and quality of service. Therefore bitipes could become smarter in the way they distribute and manage connectivity.