Knowledge Network

Service providers in transition

Sameer Padhye, Vice President, Worldwide Service Provider Line of Business, Customer Advocacy, Cisco Systems, Inc

Service providers are living in interesting times. Customers are demonstrating an increasing desire for ubiquitous access to information and communications. Increases in computing and networking speed and capacity have enabled fundamental shifts in business and personal productivity. Business models are shifting as people take advantage of opportunities presented by these changes.

At the same time, economic forces have service providers focused on issues as revenue, debt reduction, and free cash flow. Virtually all communications services continue to experience usage increases, but changes in competitive industry and buyer behavior have put service margins and revenues under pressure. Put in a nutshell, service providers are drawn out to accept that they operate in a dynamic market which is user-driven and consumer –centric. This has forced service providers to seriously evaluate how they fundamentally manage their overall businesses.

Industry Forces

There are three major industry forces operating now that are pushing service providers towards a new way of doing business. And, while all of these forces have occurred before in the communications industry, they have not existed concurrently. These forces are changes in regulation, networking technology, and the “Empowered Consumer”.

Regulation

The first is the external and sometimes unpredictable force of government regulation. In the Indian scenario, the 1998 Prasar Bharti Act has been responsible for some of the most significant changes in communications services, such as the de-linking of Radio and Television from direct State control and the privatization of various telecommunication services. But most of these changes occurred during periods when other industry forces were relatively weak.

Networking Technology

The second major force is the global shift in networking technology. Over the past few decades, communications networks have become increasingly interconnected. These interconnections have strengthened the development of networking standards in order to ease the connectivity effort. But the proliferation and acceptance of these standards has also reduced the proprietary aspects of networking services, affecting the inherent competitive advantage for service providers. Technology changes have been a major force in the past, such as the shift from analog to digital switches. But again they have occurred during periods when other forces were weaker, allowing them to be more readily digested.

In addition, the industry is currently assimilating significant technological change. New technologies provide opportunities for new services and considerable operational savings. Networks are being transformed from circuit- to packet-based, consolidating multiple communications services onto a single network. The pace of change has increased as well, resulting in shorter product lifecycles and the emergence of several potentially disruptive technologies.

Empowered Consumer

Perhaps the biggest force operating today is that of the “Empowered Consumer”. There are 4 stages that have led to the empowered consumer can be clearly demarcated as the Connect, Transact, Interact and Empower stages – an evolution from ‘One service fits all’ to complete customization. The advent of pervasive, high-speed connectivity and enabling technologies such as mobile devices has resulted in the reversal of the relationship between consumer and service provider – the consumer now is focused better customer services and value.

Empowered consumers are demanding to have a say in the products and services they have the ability to purchase, and are sharing their views, perspectives, personal experiences and product reviews through various social networking platforms. In such a milieu, service providers are faced with the challenge of creating new ways of interacting with the consumers to increase sales and productivity, which requires a fundamental change from traditional business models.

The Transition from “Time and Distance” to “Bandwidth and Services”

In order to increase revenue and profitability, the industry and market forces described above have pushed service providers to consider a serious change in their business models. In regulated telecommunications markets, resources such as long-distance links were expensive and limited. Business models based on time and distance were developed to manage these resources. Calls were charged based on where you called and how long you talked. As data services emerged, they naturally followed this time and distance model. In fact, throughout the entire history of communications, the progression has been to start as expensive and limited services. As a result of economies of scale and technological improvements, prices dropped, the addressable market expanded and usage increased.

While the time and distance model worked for many service providers, customers did not really like it. Dr Andrew Odlyzko, Director of the Digital Technology Center, and Assistant Vice-President for Research at the University of Minnesota address this issue in a paper entitled ‘The History of Communications and its Implications for the Internet’. According to Dr. Odlyzko, users prefer simpler pricing models because it protects them from suddenly large bills and reduces the need to calculate the value of each transaction.

As customer requirements change, service providers adjust to a new business model built around bandwidth and services. For example, mobile phone plans are now structured around blocks of minutes (the bandwidth) and calling features (the services) as opposed to the “time of usage” and “distance called” model when they debuted.

Like any business transition, the shift from time and distance to bandwidth and services has its challenges. The current economic situation only increases these challenges. IT and telecom budgets are flat or under scrutiny in many organizations. And, in the face of challenging marketplace, service providers will need to look at delivering bandwidth and services that move value from other existing expenditures. Doing this involves a more vertical and niche focus than has been typical for communications services.

The Customer Value Chain

As we experience significant change in the telecommunications industry, as well as a slowdown in the global economy, it is crucial to understand the customer’s problems from an economic perspective. Where do they spend their time and resources? What is keeping them awake at night? By answering these questions, carriers will identify the specific bandwidth and services that can improve the customer’s value chain -- translating to competitive advantage and additional revenue for the service provider.

The telecommunications value chain can be deconstructed at various points. Service providers have immense opportunities in Optical Services, Virtual Private Networks, IP Telephony, IPTV, Mobile Services and Broadband that they could leverage in the near future.

Summary

The transition to a bandwidth and services business model provides enormous opportunities for carriers. Historically, there was a strong economic relationship between the flow of goods and the flow of information. The spread of communications is unraveling this bond (see Blown to Bits, by Philip Evans and Thomas S. Wurster, Harvard Business School Press). As the prime movers of information, service providers are uniquely positioned to explore the value chain of information flow, and to develop new economic models that benefit them as well as their customers.

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