Tag Archives: telecom

economics, innovation

Carriers need to stop selling dumb pipes

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I was not happy with my article Carrier Billing and Micropayments, when I first published it over a year ago. I did not feel that the ideas I was trying to communicate were distilled into a coherent formulation. What follows here is a second attempt at trying to convince Communications Service Providers (CSPs) to stop selling dumb pipes.

Most CSPs are old incumbent carriers with large loyal customer bases, established business models, and products that are substantially unchanged for decades. These enterprises are risk-averse. There is little tolerance for changes that would be disruptive to how business is run.

CSPs are in the business of selling dumb pipes (e.g., Internet access, mobile phones). The dumb pipe business is experiencing decreasing revenue per bit. CSPs know that this trend of diminishing profitability is unhealthy, and they are highly motivated to expand into new products (e.g., video).

Since the rise of the Internet, CSPs have seen Over The Top (OTT) services (Internet platformed services) thrive. OTT providers have even invaded the CSP’s spaces. While CSPs expanded into television and video services, OTT video services like Netflix and Hulu caused many customers to terminate their traditional television services. Customers prefer unbundled video streaming. This is especially true now that Disney Plus, ESPN+, HBO Max, and other premium video packages have become available à la carte (no longer exclusively bundled with television service). Unbundling of video services is once again relegating CSPs to selling dumb pipes, which undermines their efforts to expand revenues up the value chain.

CSPs have stodgy business models, because they are afraid of competition further eating into their revenue. CSPs suffer from their inability to formulate new product strategies to better monetize 5G investments. Technical features like network slicing, low latency, higher reliability, low power, high bandwidth, expanded radio spectrum offer possibilities for innovative applications, but carriers have struggled to translate such potential into desirable products beyond the standard offerings for the already saturated market for mobile phone service with mobile data.

From Tom Nolle:

Other articles:

Beyond 5G mobile and fixed wireless features, CSPs also have ambitions of expanding revenues through Edge Computing and “carrier cloud”. CSPs view the construction of their own cloud infrastructure in their own data centers as a core competency that is strategically important to the operation of the Network Functions that provide their communications services over their own network infrastructure.

Again, from Tom Nolle:

CSPs have ambitions to offer products to their customers based on carrier cloud, but they suffer from competition from hyperscalers (AWS, Microsoft Azure, Google Cloud Platform, Oracle, IBM). They aim to leverage their own data centers to provide cloud services for Edge Computing at the provider edge, believing that low latency in the last mile to the customer will offer performance advantages to certain types of services. Unfortunately, there is no evidence that such an advantage exists for CSPs. Performance sensitive components would likely need to be deployed at the customer edge in close proximity to the customer’s devices (such as for near real-time control of industrial processes). For all other types of services, it is difficult to see how regional CSPs can compete on price, scale, and reach against hyperscalers, who have global reach and performance characteristics that are not materially disadvantageous for those use cases. If customers need the performance, they will need computing at the customer edge. Otherwise, when their requirements are less stringent, public cloud infrastructure from hyperscalers is sufficient and economically advantageous.

CSPs must become more open to transforming their business models to find better revenue opportunities. They should look to Apple’s market success as one example of how to think differently. Apple forged a lucrative business model based on their iPhone and iOS ecosystem by taking a 30% cut of third party revenues earned by distributing applications through the Apple App Store. Because the potential for applications and in-app purchases is unbounded, the opportunities are enormous for Apple to earn revenues based on the innovations and work of innumerable third-parties using Apple’s platform. This is proven out by Apple’s incredible financial performance since launching this ecosystem.

CSPs should look to where their own businesses have strengths and advantages. CSPs have a large and established customer base, who entrusts the carrier to take automatic payments every month. That kind of trust relationship and reliable revenue stream is precious. Carriers have not learned to monetize that relationship with OTT service partners or extend such relationships to third parties, as Apple does. One of the biggest impediments to online businesses converting sales for digital subscriptions is the resistance among customers to trust the business enough to create an account and authorize their payment card for automatic recurring payments. That lack of trust is an enormous barrier for most businesses. CSPs can leverage their advantage in Carrier billing to enable micropayments and easier monetization of third party services through the carrier’s infrastructure, billing, and payment platforms. This would enable CSPs to apply Apple’s business model to charge third party services a percentage of subscription fees by owning the customer relationship and the monetization of those third party services.

Let’s explore a concrete scenario to illustrate this point. As a customer of online digital services, each of us has routinely been the victim of multiple unscrupulous vendors. One crooked technique these vendors employ is to be unresponsive to termination requests for subscriptions that have recurring monthly payments automatically charged to a payment card. Sometimes such paid subscriptions are opted in by misleading a customer to try a free introductory offer. Often, intervention from the bank or payment card company is required as a remedy. These kinds of costly and upsetting incidents ruin it for all online digital services, because customers become wary of authorizing payments for any business whose reputation is unknown. Every time a customer shares their payment card information with another vendor, it is a calculated risk that the vendor could be unscrupulous or that the payment card information can be stolen by a data breach (hacking). After being burned, most people would be extremely hesitant to subscribe to a dozen low cost ($0.99 per month) content providers (i.e., magazines, journals, newspapers, etc.), each taking payments separately.

However, for a customer already being charged $200 per month by a CSP for their family’s multiple mobile phone and data services, adding an extra twelve $0.99 charges to their bill (an increase of less than 6%) with the peace of mind knowing that the carrier’s billing dispute and adjustment processes are reputable, friendly, and reliable is a comfortable commitment to enroll in. Now, imagine every product company taking advantage of this easy entry into the market for digital subscriptions, where they would otherwise have found the barrier to entry too daunting. You will see connected running shoes, connected tennis rackets, connected exercise equipment, connected vehicle dash cameras, connected home security cameras, connected home appliances, connected irrigation systems, connected pool circulation systems, connected everything become viable market opportunities for the smallest (and most innovative and entrepreneurial) of vendors. If CSPs bundled monetization with access to their 5G capabilities and their Edge Computing resources for a cut of the third party service’s revenues, that arrangement becomes even more attractive to innovative and entrepreneurial startups who may build the next killer app that no CSP could dream of themselves—and that would be impossible to nurture into existence through partnerships.

For CSPs who envision that the Internet of Things (IoT) will provide new revenue streams in high volumes, they must realize that for things to be connected to the Internet in an economical way, the digital services associated with those things must be monetizable easily and with low barrier to entry. For there to be sufficient uptake, not only do ordinary physical things in everyone’s every day lives need to be connected, but it must be inexpensive and convenient. Technical capabilities, convenience, and low cost come about by leveraging the CSP’s infrastructure, services, monetization platform, and established relationship with the customer base.

As a stodgy incumbent, a CSP is resistant to revamping how they do business. Their belief in their products is entrenched. They believe their own role in the market is entrenched. Incumbency and entrenchment are impediments to transforming their business. So long as CSPs cling to the belief that they must defend their declining revenue-per-bit dumb pipe business against OTT services, CSPs will not be motivated to engage in transformation. They need to understand that their advantage is not in dumb pipes. Their advantage is in owning strong customer relationships that can be monetized on behalf of third party services that are unbounded in potential revenue opportunities. Digital services want to receive payments from subscribers, and CSPs can broker this through their own reputable, ethical, and trust-worthy billing and payments platform.

CSPs must move away from primarily selling dumb pipes. They should re-orient the business to enable an ecosystem that uses the CSP’s infrastructure and platform to sell digital services from all vendors to the installed base of loyal customers. This will open up unbounded opportunities for passive income as all the risk to develop innovative new products based on OTT services is borne by third party digital service providers, while the CSP reaps the rewards of their use of the CSP’s ecosystem.

innovation

Carrier Billing and Micropayments

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According to Diffusion of Innovations theory, crypto-currencies like Bitcoin are in the early adopter phase. How might we develop technologies to bring crypto-currencies into the early majority phase, where its use becomes mainstream? Micropayments through carrier billing might be the answer.

The obvious place to start is digital services, since crypto-currency transactions are necessarily digital. Digital services will begin accepting Bitcoin or other popular crypto-currencies as payment, as acceptance grows among the general population. Most services rely on payment gateways to interface to the payment card industry, but this assumes that payment transactions are denominated in fiat currencies.

We must consider whether adoption of crypto-currency will be advanced by the payment card industry (Visa, MasterCard, American Express, Discover). PCI is extremely stodgy, being in bed with central banking and the financial services sector. This sector has their crony ties to the political establishment through regulatory agencies and the Federal Reserve. You can pretty much count them out as a trustworthy partner in any radical anti-establishment endeavor.

PayPal, Square, Stripe, and other more progressive payment processors may come around, but their ties to fiat currency and PCI may hinder them. The obvious place to begin is with crypto-currency exchanges, which can already provide conversion services between fiat and crypto. The problem with crypto has been high transaction fees, slow transaction settlement, opposition from the regulatory establishment, and lack of integration with payment systems for retail transactions.

Loyalty Networks

An unexplored opportunity is to enable digital service providers to use other forms of pseudo-currency that have low transaction fees. Whereas Bitcoin remains obscure for conducting business between ordinary people, consumers are already quite comfortable with vouchers, coupons, rewards, loyalty points, or gift cards. Pseudo-currencies suffer from a closed network of vendors (limited fungibility) and non-convertibility, but the end user doesn’t incur transaction fees, because the vendors eat the cost of operating the network to benefit from the cross-selling opportunities generated within the network. Perhaps this vector for adoption can provide crypto an acceptable way of infiltrating the mainstream economy without raising regulatory ire, since loyalty reward programs are already well-established. Adding convertibility between a loyalty pseudo-currency and crypto would provide backdoor access into retail transactions within closed loyalty networks. It’s a beach head.

The value proposition is that service providers can be given the option to join a network of vendors who accept the same pseudo-currency (as a proxy to crypto).  This allows customers who earn loyalty rewards from one vendor to spend them at another within the network. This is the same concept as how airlines, hotels, and rental car companies can join in alliances, like Star Alliance, Oneworld, or SkyTeam. The difference a pseudo-currency system would make is that it would provide the infrastructure that would allow merchants throughout the world to join together into alliances, and to create such alliances arbitrarily between themselves. This opens up this valuable capability to small and medium sized businesses, who would otherwise not be able to afford the global infrastructure such a loyalty reward system would require.

Telecom carriers are in a good position to provide a loyalty reward system for partners, who offer digital services using the carrier’s network and infrastructure.

Micro-payments

Today, content publishing platforms, such as Substack, Locals, and traditional corporate media sites, offer subscription services. The subscriber is charged on a monthly recurring basis to gain access to paywalled content. Users who follow a link to read an article must sign up for a subscription even when they only want to read a single article without being obliged to a long-term commitment.

Moreover, users are loathe to authorize many online services to take automatic payments from their payment cards, especially less well-known brands of unknown reputation and with no established relationship. Naturally, users are reluctant to provide their payment card information indiscriminately. Fraud and hacking are legitimate concerns. All of these concerns, which are critical barriers to converting clicks into revenue for content creators, can be ameliorated by offering digital services as partners with a trusted telecom carrier who can charge the subscriber through carrier billing. This would provide a better user experience to access content, and this would improve conversions to generate revenue by removing friction.

One of my friends on Facebook had this thought.

Magazines and newspapers: You know we’d be happy to pay you by the article, right? That if you offered that option instead of slamming a monthly-subscription paywall in front of us, we’d pay for a few articles a month and our micropayments would add up to the equivalent of many monthly subscribers. Maybe more than you’d lose, since those who subscribe are happy to do that and the rest of us would be posting and linking, bringing you micropayers who just navigate away from your paywall now? Yeah, just saying.

I’m guessing micro-payments are not offered today in part because payment processors charge transaction fees with some minimum that make this unprofitable, and also inputting payment card information from a customer to make a one-off micro-payment would seem like way too much work to collect a few pennies.

If we could solve the micro-payments problem for cloud services, that would open up huge opportunities throughout the digital economy. We do see hints of technology emerging to enable this, such as “super chats” in YouTube, where viewers of a live video stream can tip small amounts of money to support the presenter. But the real need is for this capability to be generalized to enable arbitrary micro-payment transactions in every context on the Internet, and for this to become prolific everywhere. The revenue opportunity is enormous — equal or larger in scale to Google’s ad revenues, as this change in paradigm is precisely the replacement for ad-based revenues. The ad model supports “free” content, but it relies on users to tolerate the clutter of ads, while also luring some users to convert ad impressions into clicks and purchases. The ad model is known to create perverse incentives for Big Tech platforms to implement algorithms that place users into information bubbles, manufacture outrage to increase engagement, and keep users occupied on the platform for longer durations (promoting addiction). Micro-payments supported content would ameliorate the harms of an ad-supported model.

Ad monetization is like a micro-payments platform. Each click is charged a few cents, and these charges are accumulated over a billing period at which point the bill is settled. Because of the threat to ad revenues, you will not see Google blaze the trail for micro-payments.

We should look to carrier billing to take advantage by solving this problem through aggregation of charges, as carriers normally do for service usage. The connection between how customers are billed and invoiced and how money flows decouples the payment flow from the buying flow. This means that the carrier acts somewhat like a “bank”, of sorts. That is, postpaid purchases are aggregated into itemized charges on a bill. The bill collects all the charges together for settlement on a monthly basis.

Unbanking

Then, look at how African carriers enable unbanking for poorer people by leveraging the subscriber’s account balance to become positive or negative (like a bank account), and to enable money transfers between subscriber accounts to facilitate financial transactions. This exact paradigm should be seen as an opportunity to expand the two features (carrier billing with account balances that work like bank accounts) to innovate in the area of enabling a micro-payments platform that revolutionizes both the online world and commerce between individuals.

What I envision is the following. What Zelle is to banking — an integration between banks to do money transfers between users via email or other methods of communicating a transaction between users — the Internet needs a general purpose “money flow” protocol that facilitates integration between web sites and entities that can facilitate money flow — be they carriers or other commercial entities that can handle the charging, billing, invoicing, and settlement functions. The key is to enable arbitrary web sites to integrate to participate in money flow (easy setup like Zelle), and for the end user interaction with these web sites to enable one-click confirmation of a micro-payment (“do you want to pay 5c to read this article?”). And of course, for these integrations to fall outside of PCI-DSS compliance; otherwise, it is not viable from an ease-of-integration and cost perspective.

Opportunity for Carriers

Whereas the imaginary killer apps for 5G (augmented reality, IoT) still have no concrete implementations yet that are compelling in the market, the revenue opportunity for carrier billing, micro-payments, and unbanking are more immediate, realistic, and obviously under-served.

This strategy is synergistic with the roll out and adoption of 5G capabilities to develop killer apps of the future. Carriers can offer to partners to host their digital services without charging for utilization of the carrier’s network and infrastructure resources. Instead, use Apple’s successful revenue model of taking a fixed percentage of the partner’s revenue from selling their digital services. With carrier billing, the carrier handles the revenue sharing and settlement, as they are adept at doing today for roaming.

Then, a network of digital service vendors would join this micropayment ecosystem. As these purchasing transactions are performed by users, the carrier records these charges. On a monthly basis, each vendor gets paid an aggregate amount from all users. It’s equivalent to an ad network micro-payment platform, except products are paid for directly, and there are no ads. People hate ads.

Using this strategy, carriers can package together their network infrastructure, their platform services, their monetization system, and their loyal customer base to offer digital (over-the-top) service providers privileged access as revenue sharing partners. By doing so, a carrier would then be able to hitch their wagon to high margin revenue opportunities created by innovative new digital services, instead of being relegated to the ever-decreasing profit-per-bit dumb pipes business.