Climbing up the Value Chain

There is a lot of fear in Telecom about becoming a “dumb pipe.”  Is this a problem and if so, why. Let us start by looking at revenue to market cap and see if that  provides any insight. I’ve created a real-time Google Spreadsheet that pulls in the current market cap for 6 companies in each sector (Internet vs Telecom) and their revenues for 2008. The implication is that the “over the top” players get approximately a 3x boost in market capitalization by virtue of their business. In other words, if the same multiplier ratio of capitalization to revenue was given to the traditional telecoms companies, their market cap would triple. So what is going on here?

A great article on Light Reading  titled Amazon lessons for telcos features Amazon’s CTO Werner Vogel’s talk about opening up the Amazon platform to third party developers and what lessons telecom companies can learn from the Amazon experience.  This means opening up the telecom platform, letting various people experiment with the system, and leverage the key assets telecom companies have – billing relationships, device details, and location. However, that being said I am going to go ahead and make an assertion that this is actually not in the telecom DNA. It is not that this is impossible, it is just that you can’t get there from here. This observation follows directly from my earlier article titled Lack of Smart Engineers Considered Harmful.  Here is a great quote about this:

“[wireless operators] seem frightened of their own networks, and are heavily dependent on consulting from their suppliers.” – attribution withheld on request

If you are frightened of your own networks, and you are reliant on consulting, you will never be able to make the transition from being a dumb pipe provider.  I can’t fathom how you can claim to run a network that is not a commodity if you can’t even operate it in-house. Giving hundreds of millions of dollars to consulting companies to differentiate you will have only one consequence: Consulting companies richer by hundreds of millions of dollars, while you get generic networks that are late and over budget. There is a lot of value to be squeezed by owning the “deck” on a mobile phone, but as we have seen with the iPhone and Android and the older Palm Treos, the majority of the users of more sophisticated platforms are going to turn the telecom into a bit pipe while they happily use the services on top.  The rate at which Apple and RIM are taking profit share should be a clear indicator that the old model is being cannibalized. I am a telecom guy to my core and even I will admit that getting insanely great people to work at a telecom company, especially software geeks, is next to impossible – and it’s the software, stupid. Of all companies in this space, I believe Comcast gets closest to getting it, hence their hire of some insanely great people who understand systems – Mark Muehl, John Schanz, Kevin M. et al.

So, to sum up:

  1. Stop being afraid of your own networks, take charge. This is not rocket science.
  2. Hire the right people.
  3. Accept you cannot be all things to all people. No matter how good you are, someone will come up with a better application that runs over your pipe.
  4. Focus on getting cost out of the network, cut the organization down (do you really need a director of test?). Automate everything, so you can make a decent margin on the dumb pipe.
  5. Be faster (see #1). By definition, if you don’t own your own network, you can’t react quickly.
  6. Partner with people, make your platform open so applications can use your core strengths and work with you, as opposed to working against you (hello VZ Wireless, how is that GPS lock going?)

There are probably more to be added, but right now, this is about the limit of what I believe is achievable.

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4 Responses to Climbing up the Value Chain

  1. director of test says:

    To comment based upon my observations of the legacy telcos:

    1) They are afraid of their networks because they are still using their playbooks from the 70s and 80s. Some of the escalation procedures used are directly taken from NASA operations and procedure books.

    To make matters worse, the number of people within the empires want it to stay this way. Want to make a drastic change? You need to increase headcount all around, because the very thought of making a change increases risk.

    2) Hiring is hard, especially when ran by telco dinosaurs who actually operate on degree = pay. One very large telco has a HR guide that says this:

    Distinguished MTS (21% bonus):
    PhD 14 years of experience
    MS 16 years of experience
    BS 18 years of experience

    Lead MTS (19% bonus):
    PhD 10 years of experience
    MS 12 years of experience
    BS 14 years of experience

    Principal MTS (15% bonus):
    PhD 4 years of experience
    MS 6 years of experience
    BS 8 years of experience

    Senior MTS (12% bonus):
    Any PhD
    MS 2 years of experience
    BS 4 years of experience

    Why should an outstanding performer join when the club is going to be this exclusive?

    How many PhD’s out there can be useful when you need to integrate a network with a short timespan? Or what about a massive outage where operations has escalated up the chain? What are you going to do then? Call Cisco?

    3) The telcos already know this.

    4) Testing is a perfect example of telco bloat. The testing practices have stayed in place since the 70s and 80s and continue today. Things were different back then, especially when there was no one else in the world doing what you were doing and the vendors had limited testing capabilities. Nowadays, everyone has an IP (and even MPLS) network. Vendors are well familiar with the requirements of their customers. Even if you need to keep all testing in house, why are cycles taking so long? How many testers skew the numbers by reporting cosmetic CLI issues as SEV 0.

    5) Its hard for telcos to move fast when the senior management in the organization is used to a 70s/80s era where there was no competition.

    6) Its old school vs. new school. Too much of the legacy at telcos make them not want to disclose any information nor partner with anyone who could potentially be a threat. Mobile networks get this a bit better than the wireline folks, but they’ve got their own issues too.

  2. just_a_hater says:

    The most inefficient layer of the protocol stack is the telco…

  3. rick tait says:

    Brilliant article, VG. I nearly blew coffee out of my nose when I read your “how’s the VZW GPS lock going”!!! I was lamenting that very fact last night.

    I love your here-and-there notes to the IP list. Keep it up sir.

    Best,
    A Fan in Hollywood

  4. […] somehow manage to survive. Oil for one. But wait a minute!  Whatever happened  to “climb up the value chain?” The answer is nothing. You have to decide what business you are in.  Moving up the value […]

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