Telcos have transformed their business once every decade since the 80s: fixed voice, mobile voice, fixed data, mobile data. Fixed and mobile data for homes, offices and individuals will continue to be required in ever greater quantity, but will be difficult to monetize further (see Connectivity Explosion). The next wave for the 2020s seems embedded connectivity for everything. Embedded connectivity holds substantial promise but requires a rethink of many traditional telco orthodoxies.
A sector in continuous revolution over half a century
Telco might be a 100-year old sector but Moore’s law has allowed a continuous transformation of the products it offers during the last four decades:
- The 80s were the last decade fully devoted to fixed voice in the home and the business premises. It was also a decade of transformation, with voice lines being fully automated and digitalized, finally eliminating human operators in calls. I am old enough to have seen some of the last human operators routing calls in a small village of northern Spain when I was a young boy.
- The 90s were the decade of mobile voice for the individual. First in the car and briefcase, moving gradually to pockets. While early analog systems launched in the 1980s (1979 was NTT in Japan, the earliest system), it was only the decade of the 1990s with 2G that really saw the explosion of mobile phones. Deploying mobile telephony at scale was a huge undertaking which required creating new companies, often owned by the former fixed monopolies but independent from them.
- The 2000s saw the resurgence of fixed, through fixed data for internet connections. In the late 90s no one expected fixed and cable players to be able to capture much value from the internet revolution. Up to 2001 ISPs like America Online or mobile players with 3G seemed to be a much more attractive investment. However, the open internet based on a standard TCP/IP and HTML broke down walled gardens and was powered into broadband by ADSL and cable (DOCSIS). This gave back value to fixed operators who gradually transformed their business from voice to data, and over the next decade from copper to fiber
- The 2010s saw the promise of mobile data finally materialize through the smartphone. The mobile data promise of 3G didn’t materialize, except in Japan where i-Mode created a walled mobile internet one decade ahead of the rest of the world. This lead to a crisis for mobile players in the 2000s, with voice penetration already saturating which was somewhat alleviated by SMS and blackberries. It was only in 2008 when Steve Jobs and his iPhone saved the industry and provided a way to leverage mobile data fully. The smartphone came to its own with the deployment of 4G and created a mobile internet which has quickly overtaken the fixed one in time spent. It is dominated by the two smartphone OS duopolists, Apple and Google, who have created a “semiwalled garden”
All these developments were always unexpected and full of uncertainty. Today they might look like sure things, but at the time they were uncertain strategic bets. Mobile telephony was a niche proposition. According to a mythical consulting study mobile phones had a ceiling of 3 million subscribers globally (they got it at least three orders of magnitude wrong). Fixed data came out of the internet, something that seemed reserved for tech geeks in the 1990s and only came to the fore in the internet boom. Even in the internet boom it was ISPs and browsers that where expected to capture most of the value, not telcos. Mobile data took a decade longer than expected in coming, and was created almost singlehandedly by an industry outsider with an iconic device that a decade later has created the first trillion dollar company.
The candidates for the next wave
There are many candidates for the “Next Big Thing” beyond the smartphone in terms of the next user interface: Augmented Reality, Virtual Reality, Artificial Intelligence, Blockchain… As covered in Connectivity Explosion all these technologies will indeed require exponentially more connectivity with significantly enhanced performance, which telco technology is perfectly ready to provide.
However, as we are already seeing over the last five years, regulation and the ultra competition it engenders will not allow to capture increasing revenues in the individual mobile connection or the home/office fixed connection. Users will get increasingly better performance that will cover the needs for these “Next Big Things” at similar prices. The telco sector will continue to provide its 99,5% price-performance discount as it has done decade after decade (only semiconductors and hardware have managed a similar feat). This will slightly shrink the weight of communications on household expenditure and business expenditure, as traditional connectivity revenues grow slower than GDP.
The next wave will take us beyond individual and home connections, to connect everything else in the world. This phase has been called “Internet of Things” or “Internet of Everything”, embedded connectivity seems more precise. It has to do with embedding connectivity in everything in the physical world, so intelligence and interactivity expands from digital to physical. This explosion has the potential to be as transformative and significant as fixed data or mobile data.
The 2020s and embedded connectivity
This new wave of embedded connectivity has already started haltingly with M2M and IoT. However, it is not growing at a pace at which it looks poised to transform the industry yet. It is like fixed data before the internet craze really got on, or mobile data before the iPhone. Something that looks like an attractive niche rather than a transformative wave of growth. Telco valuations are suffering from this, as the previous waves of growth have already saturated and the new one is not ready to take off.
Embedded connectivity also seems to require a rethinking of the model at several levels. First, connections will be numbered in the billions and trillions, so current ARPU levels are completely out of questions, we need to move from “connection scarcity” to “connection abundance”. Moreover, it is just too complex for the customer to pay a monthly fee for each object, so we can expect one-offs that are embedded in the initial purchase price or in a subscription related to other services. Finally, customers don’t want connectivity, they want intelligence, so connectivity will become a component in a larger value proposition sold by another business to a third party, an “Intel Inside” B2B2X model.
The last part of the 2010s is proving a very tough period for telcos, as the new wave still needs to take off. As usual, financial markets can not see beyond what is already in the P&L and this has lead to extremely low valuations, similar to fixed assets before the ADSL boom. We can expect the cycle to reverse as embedded connectivity kicks into high gear during the 2020s, but it is difficult to forecast if we will have a specific event that triggers the change (like the iPhone or the internet boom) or if we will see a steady growth beyond all previous expectations (like with mobile voice in the 90s).