The Evolution of the Telecommunications Industry

The Telecom Industry Evolves: From “Old” and “New”, to App-Focused Telcos

Over the past 20 years the telecommunications industry has undergone two fundamental transitions: first, from “old telco” to “new telco” and now, to application-focused telcos.

As Martin Fransman, Professor of Economics at the University of Edinburgh wrote:

“The demise of the Old Telecoms Industry began in the mid-1980s when, due to different combinations of political-economic circumstances, the monopoly of telecoms was ended in Japan, the UK and the US”.

Fransman continues. “In the 1990s a new set of influences, that had begun thirty years earlier in an initially unrelated set of activities, brought about fundamental forces that further transformed the Telecoms Industry into the Infocommunications Industry. These influences came from the Internet based on its triad of core technologies: packet-switching, Internet Protocol (IP), and the World Wide Web”[i].

As a result of these industry wide sweeping changes, the standard definitions of telecommunications companies no longer apply. I would like to propose a new set of definitions, classifying telecommunications companies as facilities based (FACTEL), virtual (VIRTEL), or application-focused (APPTEL).

FACTELs include all companies with cables either in the ground or on poles, or significant physical and distributed infrastructure. This would include traditional ILECs, CLECs that rent facilities from ILECs, cable operators, and facilities based mobile operators. All have spent millions or billions of dollars on capital spending for infrastructure, and primarily recoup their investment by charging for dial tone.

This classic economic telecommunications model often requires years of customer usage before these providers break even. As the rate of change in telecommunications increases and the diversity of competition expands these models will come under increasing economic pressure.

Much of this economic pressure is generated by VIRTELs, which house their entire infrastructure in centralized, in-the-network, data centers and utilize IP circuits to support hosted VOIP solutions. Since these solutions work over existing Internet links, a VIRTEL does not need to buy nor build a cable or last mile infrastructure. This gives them an economic advantage and is the reason why VIRTELs such as Skype and Vonage are able to deliver dial tone at highly competitive prices or perhaps for free.  (The ‘free’ approach has not yet been proven to be profitable, calling into question the viability of the business model).

Finally, APPTELs leverage universal telephone access to deliver advanced applications to any telephone. For example Google Voice is based on Google’s ability to terminate or place a telephone call to any traditional telephone number.

Although Google does host a sophisticated call routing infrastructure to deliver calls, it is similar to VIRTELs in that it does not incur last-mile or cabling-based costs. In fact, an APPTELis able to deliver calls to telephones provisioned by FACTELs and VIRTELs.

While FACTELs and VIRTELs compete for a customer’s dial-tone dollars, APPTELs charge for applications with much less competition and are easily able to differentiate their service offerings.

A crystal clear case in point is Salesforce.com. It’s an example of a comparable economic model to the APPTEL business approach.  Salesforce does not provide Internet connectivity yet it utilizes the Internet to deliver its services.

The Salesforce application works equally well over any Internet connection. Because it is an application Salesforce is able to value price their solution while the Internet ISPs compete in a tightly defined price band for connectivity dollars. 

This very same dynamic applies to one group of the telco industry, APPTELs.  APPTELs are able to value price solutions with measurable business benefits while dial-tone providers compete for increasingly scarce dollars.

With the addition of SIP trunk connectivity options from companies such as Ifbyphone, FACTELs, VIRTELs and call centers, are able to integrate an APPTEL solution into their platforms. This integration provides FACTELs and VIRTELs with a powerful value-priced addition to their product lines.