King Kong v. Godzilla

In a post from one month ago, Geddes poses an interesting question to telecoms - How's your Google Strategy?. He advises warns telecoms to start developing a "Google Strategy" because it appears that there is a coming convergence between IT and telecom industries. He cites the graphic below, which I find compelling as well.

At the 21C Global Summit a few week's ago former BT Chief Scientist Peter Cochrane - an industry 'guru' who likes to shake things up - presented a number of thought-provoking ideas about telcos competing with Google, including this rather cryptic slide:

This post highlights several trends that spell trouble for telecoms who have grown accustomed to being BMOC (from Wikipedia: "Big Man on Campus", an American colloquialism for a popular high school or college boy involved in some high-profile activity, such as varsity sports or school government.)

First, telecoms sell services in a constrained, low-competition market, and they derive high margins from the voice product, and they have had success in doing the same with Internet access... in Geddes words "by selling it by the sachet (via telephony) rather than the bucket, profitability has been maximised through fine-grained price discrimination." In some instances, they may even give away voice services in order to support the continued sales of their high margin access product.

But what happens when a Goliath from a neighboring industry sees an opportunity to come in and do the same in order to support their core business? Goliath doesn't much care that King Kong is ruler of the jungle, after all.

The way this scenario unfolds, according to the graphic above: Big Telecom is moving to be more like Big IT, because of the Internet. But Google, which makes tremendous margins on its advertising, sees access and telecom services as a complement to its core business. By getting into data access (and voice, ultimately), Google can gain a much larger audience that will then contribute more revenue to its high margin advertising core business. Makes sense, and we see this all over the place - not hard to imagine.

- WalMart adds pharmacies and McDonalds to its stores to increase foot traffic and promote more retail sales.
- Having already added Wi Fi access to the cafe experience, Starbucks is now moving into music sales, now offering iTunes cross promotions at their counters
- Someone told me the other day that Fry's Electronics started out as a grocery store, until the owner noticed the much higher margins in electronics (wait, I guess that doesn't fit entirely, since they junked most of the grocery core business and switched businesses - never mind...)
- I just heard that Best Buy is looking at metropolitan broadband - why not?
- Craig's List gives away what newspaper's used to sell - listings to transact business with your neighbors
- blogs give away what newspapers used to sell - the New York Times finally threw in the towel on their pay model
- YouTube gives away what cable companies sell
- I could go on and on, but I think I've made my point

The bottom line is that as the Internet continues to mature and extend its reach into every corner of our society, it makes commodities out of more and more digital products. To continue to try to sell a digital commodity at a premium price is a great trick - if you can get away with it, that is. I believe what Geddes is getting at is that the handwriting is on the wall, so to speak, on what is likely to come in the next few years. We're not sure how it will happen, but both voice and access will become commodities, and with a low enough cost and price, some will try to give them away to support other business models.

That will be great for consumers, not so great for incumbent providers.