Amazon's Lessons for Telcos

What can network operators learn from Amazon.com Inc. (Nasdaq: AMZN)? A whole lot, to judge from Amazon CTO Werner Vogels's stirring call to action at the TM Forum 's Management World conference in Nice this month.

The buzzword in Nice was "transformation," and Amazon is an inspirational example of transformation at work. In 1997, Amazon sold nothing but books and CDs to consumers. In 2009, Amazon earns almost as much revenue from other products as it does from "media" products – a transformation in itself – but its dedication to reinvention goes much further than that. Though most people still see it as a retailer of consumer goods, it is now believed that the company makes more money from third-party sellers than it does from selling direct.

Taking the decision to open its platform to those third-party merchants was a tough one, Vogels told delegates in Nice, because it looked so counter-intuitive. Why open your most valuable asset to companies that are effectively competitors? Because, according to Vogels, Amazon's creed was and is "to be the most customer-centric company on the planet." And since customers wanted to buy from all sellers, that's what Amazon did.

That's far from all it has done. Vogels walked his audience through Amazon's long list of recent innovations, including its Merchant platform; the Associate Model, which drives buyers on other Websites to Amazon's site; the Web Store Platform, which enables sellers to create their own site but use Amazon for fulfillment; and the Enterprise Platform, which is used by major Websites such as Marks & Spencer. Most recently, Amazon created the Infrastructure Platform, which provides virtualized cloud-based computing, messaging, and storage services to enterprises. And that's not to speak of Kindle, which Vogels didn't even reference in his whirlwind tour.

All of which means that Amazon continues to dominate its sector, achieving a rare double in 2008 of very rapid growth (up 30 percent in 2008, to just more than $19 billion) and healthy profitability and cashflow.

Why should that matter to telcos? Because the vast majority of network operators have been agonizing for years over how and why they should open their platforms to third parties. And while they ponder, the market marches on. On the fixed network, thousands of third-party services now run "over the top," and telcos add no value to those services other than the connection and the bandwidth. On the mobile network, things are going the same way, as companies such as Apple Inc. (Nasdaq: AAPL) lead the way.

This raises an obvious question: Do telcos actually have anything to sell to third parties, apart from bandwidth? Do they, in other words, have a platform that is, or might be, as valuable as the platform that Amazon offers to its myriad enterprise clients and to its half-million-strong developer community?

Perhaps they do. Among other assets that telcos own and could expose to third-party developers and Websites are a billing system able to handle micro-payments, a ton of data about customers and their behavior, information on devices in use, knowledge of customer locations, and the ability to securely authenticate and authorize individuals. It's not a trivial (nor a complete) list, yet their record to date in exploiting it has been woeful.

Space precludes a full litany of failed initiatives here, and the jury has to be out on whether the rash of new efforts to work with third parties, mostly by wireless operators, will be successful. The Salt SA Partner program is the largest of these to date, but it doesn't have anything like the traction of Apple's AppStore, let alone Amazon's platform. Others, such as Verizon Communications Inc. (NYSE: VZ)'s Open Development Initiative, have achieved little. And it's too early to know whether new programs such as the AppStore-like initiative announced by Vodafone Group plc (NYSE: VOD) this week will capture developers' imaginations. (See Vodafone Puts Its Apps in Gear.)

There are also some creditable efforts to get operators to work more effectively together to make their collective assets more valuable to developers. But these efforts, such as the OneAPI program announced by the GSM Association (GSMA) in February, are also at a very early stage.

In some ways, the slow progress made to date is understandable, since the challenges are formidable. The focus at Management World was on transformation of OSS and BSS – a topic Heavy Reading will be exploring in October at a one-day event in London, OSS 2.0: Driving the Services Revolution. But since many telcos have literally hundreds of different systems installed, exposing the information locked up in this forest of silos in an Amazon-like manner will be near-impossible until operators have begun to rationalize the current mess – an enormous and expensive task.

In a panel debate after Vogels's speech, a skeptical audience suggested that network operators simply don't have what it takes to achieve the transformation that Amazon has. That may be right; but it's surely at least worth trying.

Asked what advice he had for network operators seeking to work more effectively with third parties, one senior TM Forum official put it as plainly as possible: "F***ing get on with it." Maybe that robust advice can be adopted as the inspirational slogan that telco executives hang over their desk in the difficult months ahead.

— Graham Finnie, Chief Analyst, Heavy Reading

fgoldstein 12/5/2012 | 4:04:31 PM
re: Amazon's Lessons for Telcos

Amazon figured out early that it lived in a competitive world, and would have to find ways to make money that didn't depend on simple price selling.  So Amazon became more than a bookseller.  It is a software company, a specialized ASP, that sells stuff on behalf of many companies.  It understands that while its bookstore is the biggest, its competitors would manage to get their sites on the air with or without Amazon's help.  If you don't cannibalize your own business, someone else will eat you.

Bells don't get this.  They're culturally hung up on the 1930s model of vertical integration, total control of everything associated with their operations.  This works if you have a statutory monopoly, and it works for a while if you have a natural monopoly over an essential input (like loops).  But it is not sustainable in the long term, and it is far from ideal.  They're not maximizing their own revenues or profits.  They're not building their own futures. They're digging their claws into the past, and trying to reset the clock to a pre-Carterfone era.

This is harmful to their competitors, of course, which is why they do it.  It's also harmful to the economy, and to themselves.  The scorpion stings the frog. It's just the scorpion's nature.  We used to regulate the telcos to keep them out of trouble -- their unregulated actvities were never as profitable as their regulated ones -- but they are now emancipated children, lawless and foolish.

Several years ago, Amazon was on a death watch, but they defied the pundits and found a profitable business model that took revenue from multiple sources.  ILECs turn away revenue and profit, and their apologists tell bubbemeisers about below-cost regulated wholesale pricing and what nice folks they are in giving granny an affordable phone.  Shareholders should take them out back for a good whuppin', if the regulators don't get around to it first.

rjmcmahon 12/5/2012 | 4:04:30 PM
re: Amazon's Lessons for Telcos

A natural monopoly is sustainable because the cost  of duplicate facitilites is too great.  It's about the best durable advantage one could ever hold.  The railroads ran for over a century (the front part were massive losses for investors - expected of a nautral monopoly where sunk costs are prohibitive) and the build out only occurred with subsidies and things like federal land grants.  Once built, the robber barrons milked these infrastructures for multiple decades only to lose out after the federal government decided that the monopolists' rents were to great (during things like WWI and WWI) combined with an auto leadership that realized government was part and parcel to any solution for their industry.  (Compare that to the libertarians of today that lead technology companies - except don't notice folks like T.J. Rodger can't make a profit.)  The policy push for "Roads and Airports" essentially funded by auto taxes (gasoline fees for roads, parking fees to payback airport revenue bonds) combined with the suburbiazation of the country put that ball into perpetual motion.

So the telcos just need to walk the line of not pissing off government too much (and keep sending D.C. the graft)  and the natural monopolies will remain a cash cow for a long time to come unless there is some real movements towards truly progressive communications policies (sadly, which seem to be taking a back seat to propping up financial bubbles and the institutions that create them.)

digits 12/5/2012 | 4:04:21 PM
re: Amazon's Lessons for Telcos So, the carriers need to change, but.... their business logic tells them to resist change?
How long do they have? 10 years? 20 years?
can we conclude that the telecom operators are nearing extinction?
toes_that_twinkle 12/5/2012 | 4:04:12 PM
re: Amazon's Lessons for Telcos

Not extinction.  Punctuated evolution.  At some point crisis will force the rapid development of a new species from the old.  At least it had better do so, extinction would make it hard to send traffic across infrastructure that doesn't exist anymore.

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