Bold prediction: telcos will become wholesale providers

There's been a lot of noise in the press lately: on one side, the dying monsters of another age - the telcos - led by BellSouth whose CTO recently announced that they would be justified in charging content providers like Yahoo and Google for access because those companies are making lots of money by using the telco's network.

On the other side are those who believe that the era of Centralized Command and Control withered away with the old Soviet Union and that, like it or not, this is the age of competition and open networks. For the latter, BellSouth's pronouncements are outrageous threats made by a monopoly that continues to thrive only because it showers millions of dollars on lobbyists in US federal and state legislatures.

The telcos' desire to eat out of two pots - charging customers for access to the network and content providers for access to those customers - is nothing more than fantasy perpetuated by nervous managers to calm down nervous investors, who suspect that, indeed, the Age of Big Telecom has faded into history like bowler hats and crinolines.

There are several reasons why telcos cannot eat out of two pots and why they will end up as wholesale providers:

(1) there is now a business model that allows companies such as Google and the people who partner with them (municipalities, ISPs, content providers) to offer free Internet access, free voice calls and even free entertainment programs;

(2) there are other parties offering high speed broadband (cable companies, municipalities, private providers) and these are often more innovative and closer to the consumer;

(3) the telcos underestimate the contempt that most people feel for them and politicians will not back an industry that is so universally loathed;

(4) the open network model has been proven in Europe and Asia to lead to higher rates of broadband penetration, lower prices and more bandwidth; and

(5) high tech companies such as Intel, Microsoft, Google, Yahoo and Apple simply won't let them.

The telcos are already losing customers to mobile carriers. They are also losing customers to VOIP providers like Vonage, Skype, and the cable companies. In the Netherlands, it is estimated that 20% of households do not have a PSTN line (according to James Enck, Daiwa Securities London telecoms analyst). The Netherlands also happens to be no. 2 in broadband penetration (after South Korea).

The charge-the-customer-for-access business - for plain vanilla voice telephony or broadband service - is a lousy one. So BellSouth and Verizon have decided to look to those with deep pockets, companies like Google and Yahoo, to see if they can squeeze that money from them. The telcos couldn't be more mistaken. Google has been buying up dark fiber and has entered the municipal wireless arena. Municipalities and regions are building out fiber (see Paris and Amsterdam) and wide-area wireless networks (Portland, Philadelphia and San Francisco) that follow the open network model: this means any provider can buy capacity at wholesale prices and provide service.

How these providers make the money to pay for the capacity is their business; they can make money through advertising or by charging their end users. Nintendo has already bought network capacity from a wholesale Wi-Fi network operator in the UK called The Cloud. Nintendo wants to provide Wi-Fi gaming access to its customers. Obviously Nintendo covers the fees it pays to The Cloud from the money it collects from customers who have bought game machines and game cartridges. That is one excellent way of providing access to customers for free.

So where does the telco fit in this universe? It still owns copper lines and fiber. It knows how to operate a network. What it cannot do is charge the content provider at the same time it charges the end user. Which one is more lucrative? Which one is more difficult to serve?

Because it will be harder to charge individuals for basic broadband access (let alone phone service), I believe telcos will simply stop serving them. Instead, telcos will provide access on a wholesale basis to other providers - entertainment and gaming companies, portals like Yahoo, applications providers like Microsoft and even Google. Where they do not have sufficient capacity, they will also purchase access from municipalities and private companies that own fiber and wireless networks, and resell it to large enterprises as part of a package of services (broadband, VOIP, entertainment, managed networks).

Today telcos have to compete with the cable companies that already offer bundled services, and with municipalities and broadband service providers like Earthlink and Google that serve end users' broadband needs through a variety of free and paid models.

Although telcos will try to postpone their fate by lobbying US federal and state legislatures to impose restrictions on municipal broadband deployments or prevent the unbundling of the local loop, pressure from consumers will make it difficult for politicians to continue bowing to the telco lobby especially when the United States sinks lower in broadband penetration, affordability and speed when compared to other industrialized nations.

Finally, as companies such as Google and Apple become richer and more powerful, they will be able to find and pay for alternatives - they will buy up dark fiber or partner with non-telco providers such as municipalities to provide access to end users. The cable companies, publishing conglomerates and consumer portals like Yahoo will bundle better broadband+telephony+entertainment packages (TV shows, music, gaming, social networking) than any telco, whose foray into IPTV will be a disastrous campaign. Telcos will have no other choice than to live in today's world. And in the not too distant future, our children will find it odd that we once got billed by companies called BellSouth and Verizon.