Away from the popular discussion topics of declining ARPU and ever-increasing investment costs, and in an industry where new competitors are rare, there is an entirely new challenge on the horizon to telecommunications firms. Most alarmingly, it comes in the unfamiliar and cash-rich form of the internet search giant, Google.
Google has long been threatened in the telecoms domain by the control that operators have over their users’ access to its services, and has already begun to invest in its own infrastructure in addition to aggressively growing its popular mobile operating system, Android. It has started slowly, testing the water by providing telecommunications infrastructure both in the USA and in emerging markets such as sub-Saharan Africa. As part of a plan to connect a billion or more people to the internet, it is clear that building a position in which Google manage the entire way that people access the internet could prove hugely profitable for its core business of advertising. The data that they collect could provide very profitable insight into the huge disconnected and unbanked populations in key emerging markets, who large global firms are fighting to sell to.
It is clear that this insight will have tremendous value in enabling firms to provide innovative and relevant solutions for the unique lifestyles of these consumers, and it is therefore in the interest of businesses in all industries to support expansion in these markets. But, once connectivity is established, interests of Google and telecommunications firms are not necessarily aligned. As connectivity prices fall, telecommunications firms will be increasingly challenged to cut costs and seek additional revenue streams while Google will only benefit from increasing numbers of subscribers and greater advertising revenues. Interestingly, Google will need to develop partnerships with local telecommunications firms to build or lease the infrastructure required to make the rest of the journey to the ILEC (incumbent local exchange carrier) but it is not yet clear how the details of such a deal would work. Clearly there is a trade-off between telecommunications firms benefitting from contributions to their investment costs against aiding the expansion of a network that will be low cost or free to their potential customers. Google would like to see telecommunications services becoming increasingly commoditised, as they will profit from rising numbers of increasingly well served and internet savvy users. This long term misalignment should be recognised as a real threat by telecommunications firms as partnerships are negotiated and agreed.
Meanwhile Patrick Pichette, Google CFO, has openly stated that the firm is consciously retaining large balances in cash and short-term investments ($48.1bn at the end of 2012) in order to retain its “strategic ability to pounce”. To put that $48.1bn in perspective, the BBC estimates telecom-related government and private investment in the whole of Africa to be approximately $21bn a year in total. Clearly the ability to pounce is there, and it is a threat that should be taken seriously.
At the technological level, things get even more interesting. Google’s now much-referenced patent of February 2003 for a “High altitude platform control system” provides a number of interesting diagrams which indicate potential methods for controlling what are essentially highly technical blimps to provide wireless connectivity over wide areas. These are a remarkable way of building what is essentially a very tall mast, to vastly increase the range of transmitters and cover substantial distances more cheaply, enabling easier and cheaper connections to be made to large rural populations.
On top of this, Google’s Android is growing in dominance in Africa and is arguably the operating system most likely to take over the sector, with Apple’s devices largely too expensive and other competitors (such as Symbian) lacking the open-source accessibility and low cost that Android offers. Google have been able to build an ecosystem of low cost devices around its operating system aimed at the emerging market customer, further broadening the scope of their control over how the world’s population accesses the internet.
In an industry that has seen little in the way of new competition in recent years, now is an uncertain time for the mobile telecommunications giants. Business models are changing and technology is taking us quickly to an all-IP world, while in the meantime there is potential that Google could build a capability that takes rural communities in emerging markets and builds backwards to urban areas, collecting data insight and the attached revenues along the way. Telecommunications firms need to clearly define their value propositions and business strategies to avoid the potential pitfalls ahead, and be wary of the long term divergence of their strategies with that of Google.
How will telecommunications firms compete after Africa has been connected? Will there be sufficient value in provided access to normal telecommunications services? Or do firms need to innovate with their revenue models and value propositions?