Wireless internet access and cellular connectivity has played a central role in the creation of today’s digital economy and the enabling of many new products and services. AT&T, for its part, has long been one of the leading service providers in the United States, and has benefitted tremendously. Therefore, it might seem counter-intuitive that I’ve labeled it as a digital loser. However, I would argue that it is poorly positioned to remain competitive in the mid- to long-term in the wireless business.
How does AT&T create value?
AT&T’s value creation is simple, and eminently relatable for any reader who’s ever used a phone: it operates a telecommunications network that allows users to connect phones, tablets, or other wireless-enabled devices to the internet, as well as providingg voice and text services. Users include both consumer and business accounts. In fewer words, AT&T provides wireless internet and phone service. It is a central element of daily life for many people around the world.
What about value capture?
AT&T charges its customers for access to its network. While accounts can be either pre-paid or post-paid (the more valuable customers), at the end of the day AT&T is billing customers monthly based on their consumption of voice and data services. It’s a fairly simple utility model.
If it’s all so simple, what’s the problem?
The problem comes down to AT&T’s operating model, and technological shifts in the underlying assets. AT&T’s network consists of a nationwide coverage of cellular radios, networking infrastructure, and data centers that provide coverage for the users and allow the network to function.
The network relies on massive data centers full of bespoke hardware, the networking infrastructure, and a myriad of cellular radios mounted on towers around the country. It also relies on the dedicated spectrum licenses that AT&T holds which permit it to provide services to its users. It’s an asset-heavy business with huge operational leverage, economies of scale, and barriers to entry. Unfortunately for AT&T, many of these traditional network components are changing.
- New cellular radios and standards are allowing seamless transition between the RAN and wi-fi access to wireline networks, making
- Advances in software defined networking and antenna capabilities are making so-called heterogeneous networks, consisting largely of much smaller radios, are erasing barriers to entry by lowering the capital required for new entrants, especially in dense urban environments. Additionally, data centers become cheaper to establish and run.
- New spectrum availability and supporting technology will make services on shared spectrum possible, lowering the value of AT&T’s dedicated spectrum licenses and lowering another barrier to entry.
These changes combined will have a negative impact on AT&T’s business. AT&T’s competitive advantages and economies of scale will begin to disappear and new, more flexible business models will begin to emerge. These will put AT&T under significant pressure and potentially pave the way for more nimble competitors or competitors with better infrastructure for the new network architecture (e.g., Comcast).
Additionally troubling is that two potential avenues for continued to success appear risky. First, AT&T’s bid to merge with Time Warner is an attempt to move closer to content and gain a competitive advantage that way, and avoid being just another “dumb pipe.” However, it’s unclear whether AT&T will be able to leverage it effectively, just as Verizon struggled with its Go90 content play, or indeed whether the deal will go through.
Second, carriers look for Internet of Things to drive revenue growth. However, their current value capture models are usage based and unsuitable for Internet of Things applications, many of which will not drive meaningful network volume compared to usage like HD video download/upload to phones and tablets. Combined with lower barriers to entry, it’s unclear that AT&T will be able to win in that market when it emerges.
So you’re saying one of the largest providers of a service critical to the digital economy is a potential loser?
Pretty much! Nothing is certain, and AT&T may prove nimble enough to counter these threats to its business and operating model, and/or successfully leverage content to move up the value chain. However, technological innovation has placed its business model under threat and promises to lower many traditional barriers to entry, making AT&T a digital loser.
 NEC, via http://blog.3G4G.co.uk