What's the point of a telco?

One night last year, a man and his colleagues stood outside in the cold and filmed a short selfie video. The effect was electrifying. We are here. We’re going to fight.

That message was carried by a wireless telco operator. When you post, or stream video, from your phone, it sets up a channel to carry the data across the ether to the nearest cell tower, which in turn sends it to a piece of software, rather grandly called a packet core. Cell towers, packet cores, and all the infrastructure needed to get your data to the Internet are run by these wireless operators. Now that we live in a world where a tweets and videos rally a populace to fight, it’s worth restating: this network stuff is important.

It’s also strangely difficult to make money at. Let’s look at the 5-year stock performance for a few bellwethers:

Oof.

Faced with this, operators must ask themselves: what is our purpose? Will people pay for what we are good at, and, if they won’t, what should we do? There are a couple of ways that this plays out.

1. We have the best network. People will pay a premium for that, surely.

   The message is unambiguous to both the customer base and to the employees who actually have to implement it. An operator who takes this path is on the hook to support continual expansion and capacity improvements to keep the network humming along. Somebody somewhere at this operator is going to spend many hours poring over network telemetry and JD Power surveys. It’s also very expensive to pull off. It doesn’t help that operators already carry lots of debt, and interest rates are rising, so it’s difficult to spend their way to happiness. On the bright side, there is a lot of scope for innovation if the operator can overcome their traditional aversion to risk: use of AI for network monitoring, deep automation of the network, and other modernizations could transform how operators run their networks (but note the cautionary tale of NFV, discussed elsewhere).

2. Network, blah. Let’s get hold of content, and charge for that.

   There’s charging for access to content, and there’s owning content. The cable operators know how to do the former, because they’ve been holding sports fans hostagemanaging rightsholders for years. When you own the set-top box, you can negotiate the toll that even OTT providers must pay to be featured in front of the viewers’ eyeballs. Of course, if you are smart, you’ll play nice, or else your customers will all buy Rokus and relegate you to being the cheap pipe again. In any case, gatekeeping won’t work forever: the device manufacturers (TVs, phones, etc.) all have their own financial incentives to take control of the user experience, and Google/Apple make it nice and easy for them.

   Or you could take a deep breath and buy content. I can think of only one operator that has pulled this off, Comcast (NBC Universal, 2011), and you could argue that they already knew what they were doing since they owned several TV channels and media properties already. And, were not a wireless operator in their DNA. The others…eh, not so much. AT&T/TimeWarner (2018) is now a business school case study in failure and the best that analysts could find to say about Verizon/AOL/Yahoo was “at least you only burned $4B” (CNBC report). But all you armchair quarterbacks need to sober up: leadership made tough calls with imperfect data.

3. Why do the content people get all the money? We should be charging them rent for using our pipes.

   This is the repeal-Net-Neutrality argument in the US, and in Europe, the Fair Share one. The Internet hive-mind is profoundly opposed to this, but the request does comes from a place of genuine pain, as opposed to merely rent-seeking. Mobile data traffic on AT&T increased by a factor of 1,000 in just seven years to 2014. None of that was AT&T’s doing: they just got crushed by the combination of phones that could handle video and Netflix being more than happy to oblige. It’s anybody’s guess whether we have reached “peak data”, but, assuming not, then networks are going to continue to be capacity constrained, and wireless operators are going to continue to ask their governments and regulators for relief. In a supreme irony, operators have such an unfortunate reputation for taking government funds and not delivering on their promises that this path may end up being closed to them for political reasons.

4. Consumers are fickle gods. Let’s sell more to businesses.

   Internet service. Private 5G networks. Office 365 seats. Security features. Wireless operators could sell these and other products. But here’s the unpleasant secret about operators: the most lucrative products either have terrible margin, high customer acquisition costs, or are not available to wireless telcos. An operator can sell a ten thousand 365 seats…but most of that money goes to Microsoft. They can sell Internet circuits, bit that’s not a wireless play by definition. Fixed operators can sell this (“DIA”, in the lingo) with their eyes closed…but it takes 60 days at best before the customer is generating money, because the address has to be checked in a giant IT system to see if fiber passes the building, someone has to order a box for the customer, the customer needs to successfully install the box (or the operator has to do a truck roll), …and DIA is the easy case that, the one that operator sales people love to sell. Try getting them to sell private 5G or hosted voice PBX services and they will nod and smile and mentally calculate how much quicker their commission check arrives if they just carry on selling Internet. (Notable exception here are the smaller fiber operators that serve their communities, who can get you service in a far more respectable timeframe.)

5. Shareholders above all. Squeeze every penny out of the customers that stay, and jettison the rest

   This is the easy button, up to a point. Did your bill go up, for no obvious reason? Congratulations, your operator is in this bucket. Cell service is remarkably sticky (churn rates are under 2%, and 2% would be considered worryingly high). What about the jettisoning part? If your large wireless operator also serves fixed (landline) customers, they would love love love to be able to move these customers over to cell service or junk them completely. Unfortunately regulators like the US FCC take a dim view of that, and it doesn’t help that the places with a lot of legacy landlines also tend to be in rural places that don’t have good cell coverage. We won’t see any movement here until a more agreeable regulatory and legislative environment takes shape. It’s been possible to deliver voice over Internet and over cell service for getting on 25 years and yet here we are, so I don’t think much is going to happen here. Ironically the smaller telco operators, who are closer to the communities that they serve than the national operators, might be in the vanguard here.

So there you have it. If that all seems a little gloomy, it’s not - more a recognition that despite the billboards, Super Bowl ads, analyst briefings, and all the other assorted noise, an operator is a utility, and the market should treat it as such. It is high time that operators stopped trying to convince the world that they are just like the cool kids in the Valley, and regained their self-respect as key providers of an essential infrastructure.