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A friend of mine works for a Telco and of late we’ve been debating the prognosis for Telcos in the face of threats from internet businesses. He gave me some figures detailing the revenue of some internet businesses versus some large Telcos (obviously the Telco’s revenue was massively bigger than the internet companies), and reminded me that al these web services we love to use rely on a Telco providing the network layer.

His perspective then was that all the SaaS businesses in the world are mere leeches, wholly dependant on Telcos to earn their dollars.

Given the current status quo of course he’s right - but in this age of mass disintermediation, there has to be another alternative.

What’s to stop a massive internet player from disintermediating the network layer - building massively scaled wireless networks that obviate the necessity of using the current Telco’s networks. Forget for a minute the arguments about the efficiency of DSL vs Fibre vs WiMax and think about the concept here.

Currently Telcos make their money from network provision - sure they talk abut being service companies and selling value added products - but essentially it’s about providing pipes. As such you have the following equation for a web service;

Total cost = (Telco pipe price + Margin) + (Web Service Cost + Margin)

So let’s, in the words of Tony Blair, find a third way. Imagine a world where (for want of a better example) Google owned an alternative network. The equation in that instance would look like this;

Total cost = (Network Cost + Web Service Cost) * Margin

In recent days we’ve seen rumours of a plot by global Telcos to create some sort of Skype rival, surely this (if it’s true) proves my contention. The Telcos are trying to disintermediate the disintermediaters, creating a point to point offering that is vertically integrated.

My friend pointed out that, given the wildly higher revenue and market capitalisations of the telcos, compared to the internet players, it’d be more viable for them to do the integrating. While I agree that it would be easier from a capital point of view for the process to work this way, we come to some cultural roadblocks that, in my mind, make it more plausible for the internet players to win.

Telcos have grown accustomed to mega-profits and and large ARPUs, it’s hard to take that model and morph it into a long tail one where you make billions a penny at a time. Yet this is the very model that long tail providers are used to - they’re more likely to be able to stomach a lower ARPU, a lower margin and a more aggregative revenue stream than Telcos. Add to this the fact that Telcos have fixed infrastructures they wish to protect and the result is quite some barrier to Telcos winning the war.

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