Benedict Evans had an interesting post out over the weekend, “Railways and WhatsApp”, in which he makes a good analogy between wireless operators and railways. His point being that the wireless operators are hard to disrupt because: 1) building mobile networks is not easy; and 2) and those networks have scale economies which are hard to compete against. He goes on to say that the operators still have many more pricing and marketing levers to pull to defend themselves. My favorite part of the note is when he points out that WhatsApp, and other similar over-the-top apps, are just a form of pricing arbitrage. I appreciate it when people make economic analyses of technology. That’s what I try to do here, hence the name of the blog.
So I like the article, but I would add a corollary. The core point of Evans piece is that buses and trains are different technologies. Buses are more flexible, but you cannot link eight of them together and make a train. Mobile networks are big and expensive because they have to be, without that complexity you would not get the efficency or mobility we have today. He argues further that WhatsApp does not disrupt the operators’ business, it just forces a change in pricing. And smart operators have ways to deal with that (i.e a data bundle).
I think there is a key point buried in this comparison. The wireless operators’ business is providing local access for mobile devices. The really hard part to replicate is their ownership of spectrum and the energy they spent building base stations and antennae all over the world. Those are a problem which cannot be easily solved with smarter software. But beyond that ‘access’ every other service they offer is just the way in which they monetize. In the train analogy, people pay for a ticket to ride, and they may also buy lunch on board, but riders may choose to get that meal through an alternative provider. The wireless carriers have gotten all of their paying passengers to buy meal service in the form of charging for voice and messaging services. The OTT apps cut into that business, just like a McDonald’s opening up a To-Go only outlet in a train station. To torture this analogy a bit further, prior to the iPhone launch, the carriers had a lock on all the services on a phone, just as if the train operators forbid people from bringing outside food on the train.
So on the one hand, there is little anyone can do to disrupt the wireless operators core service, but the pricing structure will have to adapt. Evans makes a similar argument. I think the hard part for the wireless operators is recognizing that they are no longer in the business of providing voice or messaging or video services. They need to rethink what services they offer and charge. The airlines are in a similar position, having now started to charge for luggage and even restroom use. The wireless operators may have to consider charging for things which were once part of the bundle. The hard part for the industry is figuring out what those are. This search is not new. I have seen many equipment vendors pitches over the years with a whole laundry list of services for carriers. The are armies of consultants working on these kinds of projects. So far there is no easy answer.
Brilliant. Very thought provoking, as usual.