Net Neutrality Friday

As I pick back up my thread on the changes in the Communications Business, I want to talk about ISP consolidation. This is a topic that comes up in the news periodically as one provider buys another. People get concerned about the concentration of power and lack of competition. These are real concerns, but here I want to talk about why it is happening. These companies are not sitting around trying to collude on this topic. It has to do with the business drivers involved.

Let me start by talking about what these companies want out of these buyouts. The answer is simple. They want improved profits. They expect to achieve these profits by accomplishing 3 goals at the same time. The first is that they can increase revenue by selling more to the customers that they have. This is because the ISPs often have some specialty services that they can sell, and they are able to sell them to a broader audience. The second is simply to acquire new customers. The alternative would normally be to build new networks that are parallel to the company that is being bought. It is cheaper to acquire these customers by buying the company. The third and final element is cost saving. This comes in two forms. There are many overlapping organizations when you combine two companies. This creates redundant positions that are then eliminated. The other is that the larger a customer is the better discounts it can ask for. If you read my other material, ISPs are trying to solve for the Cost of Customer Acquisition versus the Life Value of Customer problem. The solution for about the last 15 years has been consolidation and there seems to be no end in sight on that front.

Which leads me to the other concern, why are ISPs not building over each other’s networks? Well, that is really simple. There is not a great business case to do so. Right now in the US, most consumers have at least 2 choices for wireline service and 4 for wireless (not counting Mobile Virtual Network Operators or MVNOs). A new company needs to get significant market share to make the large capital investment of building a new network of any value. Studies have shown that third entrants into these kind of markets end up with only about 10% market share. You can see how this is in the Wireless Network market shares where Verizon and AT&T have over 1/2 the market between the two of them. It becomes difficult to make money at low market shares given the commodity nature of the product.

Commoditization is one of the issues. Being a commodity means that the switching cost is very low, not that the product has a low price. If you think about it, even the 4 wireless carriers are pushing down pricing after the iPhone change (in other words the introduction of Smartphones as we know them today). You hear it in their commercials. They compete primarily on price. Coverage is the only other competitive term that you hear. That means that Wireless Phone service is a commodity. This implies that it is highly unlikely that we will see the building of a 5th National Wireless Carrier. In fact, you are more likely to see it go to 3.

So, the implications are that the Providers we have will continue to build and grow their networks. But we are unlikely to see dramatic changes in what we get and how we get it for some time. The business case is just not there. If it was, someone would try to build it. The last one that tried was Clearwire (now part of Sprint). To me that means consumers and regulators have to get what we want out of the existing ISPs.

There are some alternate carriers and I want to talk about them next time!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

 

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