How dumb is the telco industry?

For the last 20 years our industry has been compared to the water industry. If we become just ‘dumb pipes’ we will lose value the thinking goes.

The dumb pipe analogy is always presented as a bad thing. But let’s unpick it a bit. Firstly it’s important to recognise that this analogy isn’t a comment on technology – in fact, the water industry, like telecoms, involves a lot of complex engineering to deliver clean water reliably to our homes. They just make it look simple.

Instead the analogy refers to the business model. Provided the water is clean (to regulated standards) and available, the story goes, it’s not differentiated and only worth a fraction of a pence per litre.

But that isn’t the whole story is it? Water is actually highly differentiated and people have very strong opinions about it. They think they can tell the difference between different kinds of water and are prepared to pay significant sums because of those perceived differences.

The water we get from our taps may be regulated to a high standard, but it isn’t the same. As anyone who likes tea will readily tell you, water in Yorkshire is not the same as water in London. Mostly people just debate this issue because lack of competition prevents them from shopping around (unlike in our industry). The alternative is to pay a huge premium to buy a ‘better’ product. The difference in what people are prepared to pay for this superior product is staggering. The average cost of tap water in the UK is 0.1 pence per litre and the average cost of bottled water is 65 pence per litre. This is a 64,900% increase. For so called ‘branded’ bottled water you pay even more.

Not only has the water industry somehow managed to convince people to pay thousands of times more money for a relatively homogeneous product, but the water industry has another lesson to teach us, and this one is far more worrying.

Recently, people in the UK spent less on bottled water. I’d like to think this was for environmental reasons and people finally waking up to the fact that they could just fill a glass bottle from a tap at a far lower cost, but there’s something else here that we can learn from.

There was far less mobility in 2020. People working from home can make tea or drink water directly from their tap. Sales of bottled water are significantly driven by meal deal bundling and impetus buying (you’re thirsty when out so you buy a bottle). With less movement of people there is less need for the convenience of a plastic bottle of water. The consensus is that this is a semi-permanent state of affairs to some degree or another and that the business world is not going to revert to pre-COVID commuting levels. Many industries will be affected by this change, both positively and negatively.

This should focus our minds on something that is currently being buried beneath the 5G narrative, although whispered in socially-distanced halls of telecoms power worldwide. If people work at home more, and WiFi is readily available in local pubs, restaurants and cafes as a lure to workers in the Work Anywhere era, isn’t this going to significantly impact the already uncertain business case for 5G?

But worse is yet to come and hubris is widespread.

Like many people, my mobile data usage has withered. To the point where after twenty years I’m considering moving to prepay because I’m just not using my phone all that much. Or rather I’m not using the cellular network. My phone is attached to WiFi and I’m doing plenty of WhatsApp calls. I have unlimited texts in my bundle and yet I sent maybe a dozen last month and received less than that. I’m doing video calls on Microsoft TEAMs and calls via Alexa, not cellular-to-cellular calls. There are millions of customers in a similar situation. As contracts come to an end, and with more people financially constrained, will customers maintain their mobile spend at 2020 levels?

The hard truth is that while connectivity is essential, people are far less bothered about the technology delivering that connectivity. And while the telecoms industry has been so busy railing against becoming a dumb pipe, it’s ignored the fact its business model is even dumber. In fact there are a number of hard truths we’re going to have to face up to:

  1. The water industry is far more successful than the telecoms industry in differentiating its product and charging wildly different price points for essentially the same thing.
  2. The water industry is divided into two parts – the utility providers and premium service providers who emphasise convenience, higher quality and health. The first is a highly regulated volume business that delivers reliable returns; the second is an innovative retail business that delivers far higher value. Some telecoms firms are content with being the former. Some want to be the latter but don’t know how.
  3. The water industry is significantly better at marketing than the telecoms industry, and far better at creating differentiation in the minds of its customers.
  4. Both the water industry and mobile industry are going to be challenged by new work-life behaviours. The mobile industry has done little to preemptively address this but has relied on inertia (yet again). There is a widespread assumption that because mobile has been the commercial hero of the last 20 years, it will continue to be so. In fact, less mobility of customers places the ball firmly back in the broadband court.
  5. Innovation in pricing and packaging in telecoms is woefully inadequate. Instead of focusing solely on volume or quality of ‘water’, the telecoms industry needs to focus on how it sells more effectively. We may be technologically brilliant but we’re far less marketing savvy, which means we’re not maximising the value from our investments. We don’t even make it easy for our customers to buy from us.
  6. With the main demand for 5G coming from rural areas for FWA, these are the areas that should be prioritised for build out, not city centres which are experiencing a ‘doughnut’ effect. We could very well be building a network that few need or value, in areas where it isn’t actually needed. That’s an ice cold sobering thought for you.