Times Up for Minutes
Renting communication infrastructure (i.e. selling minutes of use) generates a total of $500 billion in revenue for the regional telecom incumbents AT&T, Verizon, NTT, Telefonica, France Telecom, and Deutsche Telekom. Building global computing infrastructure generates similarly large numbers for infotech companies, but telecom and infotech operate at opposite ends of the rent versus buy spectrum. End users tend to pay usage (i.e. rental) fees for communication and own their computing infrastructure. The differences between rent and buy transactions account for much of the difference between the two industries.The dominance of rental transactions in telecom represents an anomaly, because people prefer ownership over renting in most circumstances. Two times the number of people buy rather than lease homes and automobiles. DVD sales exceed rental revenues by a similar ratio. Taxis represent an efficient solution for transportation, but nearly everyone purchases a car and leaves it idle in their driveway most of the time. Purchases are motivated by an effort to maximize options. Renting arises as a last resort where there exists no other option. The difficulty of owning a automobile in New York City leaves many residents dependent on taxis. Owning usually cost less than renting over the long term, but people frequently can not afford to buy.
The adversarial nature of the landlord tenant relationship explains a lot about the behavior of telephone companies. The pursuit of profit demands maximizing rent and minimizing expenses. Landlords and telco's do not invest except where there exists a competitive imperative. Landlords and telco's neglect basic maintenance until tenants complain vigorously or threaten to leave. Landlords and telco's require contracts and create other obstacles making it difficult for tenants to move to another provider. In the case purchase transactions and infotech, creating demand for new products requires an R&D investment sufficient to make earlier products obsolete and deliver better value than competing offers.
The telcos work very hard to preserve a (non)competitive environment allowing them to rent the same product to all customers. The average teenager gets the same voice quality and reliability as the CEO of IBM. The variety of cell phones owes to the fact end users purchase the handset. The strategy offers economies of scale that maximize operating margins, but it weighs heavily against the demand necessary to sustain growth. End users limited to a rental transaction and a single service option seek to meet no more than basic needs. Demand for infotech products can go significantly beyond basic needs given the value of having a reserve against future and unexpected needs or simply a prestige factor.
Most infotech companies miss the artificial nature of the communication rental status quo and presume telecom incumbents as their only channel to end users. Applying marketing and R&D resources to address pent up demand for end user ownership of communication infrastructure represents a better strategy the emerging infocom industry. The collective resources of the infotech industry would go a long way toward overcoming obstacles to community based wireless and fiber deployments. Cisco might look to enable functionality that makes a Linksys VoIP handset interesting on its own in terms of applications and content without a connection to the telephone network.
The loss of policy battles in the 1980's prevent AT&T from keeping end users in rental mode for telephones and inside wiring. The Internet provides new ownership options for end users as VoIP does not depend on the elaborate switching and database infrastructure otherwise known as the telephone network. A generic Internet connection and SIP registration provide a mechanism to connect any two VoIP devices anywhere in the world. The way forward requires building new communication ecosystem as there exists little prospect for improvement in the landlord tenant relationship.
posted by Daniel @ Tuesday, August 12, 2008
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