Thinking Big About Telecom Innovation

After the AT&T-Bell South merger, the future depends on creative thinking by the industry and regulators.

A question arising from the AT&T – Bell South merger announcement is the impact the deal will have on innovation in the telecommunications sector. The commentary swings between two poles: This deal will be good for customers because it will accelerate the deployment and adoption of broadband and wireless technologies and services such as VOIP; and this deal will be bad for customers because there isn’t a ton of competition in every local market.

The wild card here is government regulation. Congress and the FCC play a significant role in determining not only where the telecoms are allowed to do business, but how they sell their products and services. I’m not an expert on the economics of the telecom industry, but the market seems to be telling us that it can’t support lots of smaller service providers (whether telecoms or cable) because there are huge costs to building out and maintaining the infrastructure. The industry needs economies of scale to justify such investments. And so, there’s logic to the government allowing consolidation. As long as there is at least some competition for customers (these days I can choose between two cable providers and a telecom), there ought to be pressure for carriers to offer new service packages and improve how they treat their customers. A few years ago, when cable providers began nipping at Bell South’s heels, the company revamped its pricing systems so that customers could customize their service packages. We gave the company an Enterprise Value Award for the project this year.

But there’s a way that consolidation could end up squelching innovation, depending on how the remaining companies approach the problem of “Net Neutrality.” Congress is now debating legislation to enforce Net Neutrality– a policy under which telecom providers can’t discriminate against competing application or content providers by charging them more for carrying their traffic (for more on this topic, see my colleague Ben Worthen’s blog posting here. CNET also has a good overview.)

The big telecoms oppose the current Net Neutrality proposals. And the objection sounds reasonable. They want the flexibility to charge more to high bandwidth users like Google who are profiting from the network infrastructure. But, despite assurances to the contrary, there’s not much stopping them from pricing providers of competing services out of the market while they ramp up their own offerings.

Consider this: If the end customer doesn’t want to buy VoIP phone service or get their on-demand movies from AT&TVerizonQwest, maybe it’s because the big guys aren’t offering such a good deal–or haven’t yet gotten their act together to offer the services that customers really want? In other words, if Vonage didn’t exist, how long would it take for one of the big boys to create it? Even in a deregulated telecom market, the Baby Bells weren’t the first companies on the block to offer Internet services. Remember CompuServe?

My point is that since deregulation, the big innovations in telecom technology have come from upstart competitors. These innovations were adapted, bought or co-opted by the Baby Bells and long-distance providers once the upstarts demonstrated a market for them. I’m not saying that AT&T et.al don’t have the capacity for innovation (we wrote about Verizon’s IT innovation mandate last spring), but it’s not clear that they have the incentive to do it, absent prodding from somewhere else. What if the next great telecom technology (whatever it is) never achieves critical mass because the network access fees make selling it uneconomical? The telecoms will have shut off a critical pipeline for fast product and service innovation.

Maybe what we need is a new business model for telecom and cable. Regulators could separate the infrastructure from the services. Some companies (they would probably be big) provide the networks and resell content and services provided by others. Consumers (and enterprises, too), could chose their services cafeteria style (at home, pay for the 10 channels you watch and not the 75 or more that you don’t; at the office, more transparent pricing for voice and data services). This may result in higher prices for high-bandwidth or popular uses in the end, but the prices would be dictated by demand for bandwidth and services (perhaps with some provision made for public sector, non profit or educational uses).

I know it’s not that simple, and there are lots of you out there with more knowledge than me who could work out what’s right or wrong with this idea. But think of it as an exercise in innovative thinking—what if protecting your existing business model isn’t the best thing for your future? What if your customers want—and need—something else?