If Service Providers are Becoming 'Irrelevant', the Issue is Where and Why

By Gary Kim September 20, 2012

Matthew Key, CEO of Telefónica’s Digital division, has argued that mobile operators must invest in innovation, because they are becoming “commoditized” and their relevance to customers is “decreasing.” That is an uncontroversial statement, these days.

At some level, it is hard to argue with the notion that what people “want” is the applications and services the Internet provides, and not “broadband access” as such.

Nor is it especially unusual to hear an industry executive argue that service providers face becoming "irrelevant" to consumers, though it might be unusual to hear it said in public.

But the issue is somewhat more complex than sometimes believed. Such statements are partly an acknowledgement that people don’t so much “want” to buy shovels; they want to buy “holes.” 

Image via Shutterstock

In other words, people buy broadband access because they want access to apps and services supplied by providers using the Internet. In that sense, nothing about broadband access is less relevant than before. In fact, the opposite is true. Broadband access is becoming more important, for more people, all the time.

The “irrelevance” comes in another area, namely the value of the carrier-supplied voice and messaging apps, not the access to the Internet.

In the final analysis, one access provider supplies value that is fairly indistinguishable from equivalent services supplied by any other provider. But that doesn’t mean such access is in any way irrelevant.

Nor is there any reason “dumb pipe” Internet access is synonymous with “low margin” or “low gross revenue.” Current margins are high enough. The danger is what could happen in the future, if demand grows much faster than retail prices.

Broadband access isn’t the problem. It’s the competition over the top apps represent for carrier voice and messaging that is the core issue.

In other words, the problem is not “access,” but “product substitution” for voice and messaging products.

Key said mobile operators must “change the business model” otherwise they will soon become “irrelevant” as customers increasingly use services such as Skype, BlackBerry Messenger and WhatsApp, which allow them to communicate without spending money on texts or voice calls.

“The ecosystem is changing, our relevance to customers is decreasing, we have to admit that," he said. One might argue the opposite case as well, namely that broadband access now has become a foundation service nearly everybody must have. In that sense, relevance is higher.

It’s just that service providers arguably are less relevant as suppliers of voice and messaging.

Of course, that's precisely why Telefónica, which owns mobile operator O2, set up the new "Digital" division in September 2011, to develop new products and services that create new customer value.  

Edited by Brooke Neuman

Contributing Editor

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