Earlier this week the Financial Times reported that Deutsche Telekom, Orange Group and Telefonica had mounted a joint assault on Google, accusing YouTube of taking ‘a free ride’ on telcos’ networks. The argument is that with the immense growth of video traffic on networks that the internet giant should be helping to alleviate the costs, and that this might in some way help the media industry too. Are they blindly pursuing self-interest, or are there more sophisticated business model options available to them in supporting online media?
The Telco 2.0 View
Telco 2.0 has recently published a briefing on Google: where to cooperate, where to compete, and a full new Strategy Report on New Mobile and Fixed Broadband Business Models that covers the issue of charging ‘upstream’ players for services like delivering video in some depth. [Ed. These topics will also feature in our session on ‘Living with Google’ at our 28th-29th April 2010 Executive Brainstorm in London.]
Further, in How Google’s Chief Magician Stole the Show, we analysed Eric Schmidt’s address to the GSMA back in February. In that write-up we likened Eric Schmidt’s performance to a cross between a magician and Zorro, producing sparkling surprises while deftly fencing off the slings, arrows and gushing flirts from the audience with aplomb.
In this analysis, we applaud the telcos for at least starting to defend themselves, but if we had to characterise this skirmish, we’d liken it to the classic scene in Western Movies where the farmhands try to challenge the gun-toting stranger of uncertain morals over a call in a game of saloon poker. It is not clear quite what they want, whether they will win, or who else in on their side. And it looks rather like Neelie Kroes, the EU telecoms commissioner, has already gone some way to spike their guns as the FT reports today.
Overall, we argue the telcos might do better by having intelligent and creative conversations with Google and the Media Industry about it, and we outline below how they might achieve this.
What, exactly, is the problem here?
First, it seems a little unclear what the telco posse are demanding. According to the FT, César Alierta, chairman of Telefónica, said Google: “should share some of its online advertising revenue with the telecoms groups, so as to compensate the network operators for carrying the technology company’s bandwidth-hungry content over their infrastructure.” So Google should pay, but what, when and how?
The FT also reported that Mr Alierta went on to say that the regulator(s) should get involved if no settlement is reached. That seems quite an unspecific, and frankly, a rather risky threat. Regulators are usually necessary when the market fails, but what exactly is failing here, which regulator would be involved, and what would they be expected to do? Telco 2.0 suspects that Google has some smart lawyers too, so is unlikely to be worried about this at present, other than the threat of a rising legal bill.
Secondly, whose interest are the telcos protecting? Stéphane Richard, France Telecom’s new chief executive, said: “Let’s see the development of digital society in terms of the winners and the victims. And today, there is a winner who is Google. There are victims that are content providers, and to a certain extent, network operators. We cannot accept this.” So how will it help the media companies, the alleged victims, if Google share the loot with the telcos?
René Obermann, Deutsche Telekom’s chief executive, said “There is not a single Google service that is not reliant on network service… We cannot offer our networks for free.” Yet surely, the networks are not offered for free – consumers and businesses all over the world pay for them, don’t they?
Turn the challenge around for a moment: imagine if Google or YouTube wasn’t available via your Broadband Service Provider (BSP) – how would you (and your kids) feel about your choice of BSP. Might you switch to a BSP that did? A non-representative poll of Telco 2.0 offspring and employees carried some potential danger signs for the telcos, and Google could argue that telcos have benefited from the success of their services as well as incurred some costs.
The Case for Business Model Innovation
You might expect us at Telco 2.0, enthusiastic purveyors of the ‘two-sided’ telecoms business model with its core concept of serving ‘upstream’ players like Google, to leap onto the band-wagon with gusto and demand telco revenues from Google.
So why aren’t we doing just that? Well first, let us clarify that we’re not saying there’s never a case for upstream players paying, but we do think that successful business models are usually based around good reasons for paying for something. We question the argument that just because the telcos have got an end-user pricing model that now no longer works for them, that this should immediately be a problem for Google because consumers happen to like Google’s free services.
The Vexed Question of Data Costs
Yet there must be a balance in the cost debate, and an outlook of rising costs without redress with additional revenues is unsustainable for any industry. But just how much additional cost does the video traffic add to the networks?
The answer to this important question is somewhat disputed. Part of our line of enquiry is to conduct a detailed syndicated research study Fixing Wireless Data Economics to answer this question directly, and with the involvement of the main players.
A number of major telcos and vendors have expressed an interest in this project, as have Google. Might doing it together with us be a better (and cheaper) way of aiding the process of reconciliation than firing up the regulatory departments and the big city lawyers? We think so, so if you would like to find out more about participation in this important project, please email FAO Chris Barraclough at contact@stlpartners.com.
There are other solutions
Moreover, however much of a problem the rising costs are, there are other solutions than purely charging Google, and we explore a number of these in our latest strategy report Mobile, Fixed and Wholesale Broadband Business Models.
The report includes a mobile-to-fixed data offload use case and outlines our more detailed views on when it might become acceptable to charge upstream video providers.
Working with the Media Industry
Rather than pointing fingers (or guns) at Google, we think the best way forward is to help the media industry and the telcos understand how they could support each others’ business model better.
To this end, we’re running a special brainstorm with senior execs from the major Film and TV studios and telco execs in Santa Monica, California. For those based in Europe, we are running a ‘Digital Entertainment 2.0’ Summit on 29th April in London, as part of the 9th Telco 2.0 Exec Brainstorm.
Based around a set of new ‘use cases’ the brainstorms will define a set of strategic word-wide growth opportunities for the entertainment industry that leverage telco assets in new ways. Specifically, how to:
• Protect intellectual property
• Engage directly with billions of consumers via the mobile channel
• Increase the methods of monetisation for Film, TV and Gaming content
For Telcos, the aim is to define more creative ways to serve the global entertainment industry:
• Generate new sources of revenue from the online content market
• Improve the mobile user experience
• Complement the Cable, Internet and Apple channels
The brainstorms will use Telco 2.0’s special interactive methods and tools.
‘Jaw-Jaw is better than War-War’
The dynamics of the online content delivery value chain are changing. Google has massive market power through the dominance of its search platform, and the profits from this are enabling them to invest to invest in many other areas.
However, as Neelie Kroes has shown this week, going via the regulator is a risky path for any of the players at this point. Telco 2.0 contends that, in any case, the pages of the press, court rooms and the back offices of the regulators’ palaces are not the best places to attempt to deal with the issues that Google, the Telcos, and the media companies all currently face – and they are certainly not the only ways and means.
We think the key is for the parties to understand each others’ objectives, and find ways to build mutually supportive new business models. Google are an advertising lead business, media players want a return on their content, and telcos can bring both to their markets and a wealth besides. We will continue to work collaboratively with all parties to facilitate this through our published research, EMEA and Hollywood Brainstorms, and syndicated project work.