Amazon has tested a wireless network in California, using spectrum from satellite company Globalstar, Bloomberg reported. This story is part of a bigger trend, in which Google, Amazon and Facebook increasingly dominate the world - and not Apple, Samsung or telecom operators.
Let's first take a step back. Traditionally the telecom market is divided along fixed lines: fixed telephony, mobile telephony, TV and internet access. But the convergence of fixed and mobile and the rise of over-the-top services suggests a new, more logical division: enablers and services. The fixed/mobile differentiation does not play a direct role in this division, and the difference between managed services from operators (voice, SMS, TV) and OTT services is even less important.
- Enablers: devices and access (broadband).
- Services: communication (voice, chat), entertainment (TV, video, music, print, gaming) and e-services (care, education, security, automation, etc.).
Google already has a significant portfolio of devices and access services:
- Devices: from the desktop (Chromebox) and laptop (Chromebook) to the tablet (Nexus), smartphone (Nexus, Motorola) and more (Google Glass, Chromecast).
- Access: FTTH in the US (Kansas, Provo, Austin), Wi-Fi (numerous local initiatives around the world, as well as in Starbucks), satellite (stake in O3b Networks), balloons (Google Loon).
- Devices: the Kindle e-readers and tablets, as well as continuous rumours of smartphones, a set-top box and a gaming console.
- Access: WhisperNet for wireless access on Kindles, as well as the test mentioned above.
Facebook is not nearly as active, but is also the subject of frequent rumours about for example its own smartphone. Facebook is also one of the founders of Internet.org, an industry initiative to expand affordable internet access in developing countries. It's no secret that all these players strive for lower prices, so that the hardware is available to support sales of content and advertising.
The web giants are using their power, name recognition, scale, cash positions and infrastructure in order to commoditise the enablers (devices and broadband). This is bad news for players such as Apple and the telecom providers, as it could see them move from being premium brands (with high margins and/or highly leveraged balance sheets) to being commodity brands. This means lower market capitalisations and possibly the need to strengthen their balance sheets (see the rights issue at KPN). This doesn't have to mean the end for these companies; even in a commodity market, there's money to be made, assuming one has enough scale. But the transition is painful - that's clear looking at the malaise in the telecom market.Google, Amazon and Facebook can commoditise today's premium markets (devices and broadband) in order to further grow their volumes. Revenues equal price times volume, so if the price is low (commodity) then it's important to maximise volumes. And this is what they are all after, helped in part by the rise of Big Data, that treasure trove of user data that can be used to grow revenues in all sorts of ways. These internet companies already operate in commodity markets: Google and Facebook's core activities are advertising, while Amazon sells content (entertainment). This makes them immune to further commoditisation.
Going back to our market delineation (see above), commoditisation is a threat on all fronts:
- Devices: for the moment it's Google and Amazon playing a role here. It's possible that Facebook may also enter the devices market. In terms of power (and over the long term), this is bad news for Apple; it will be difficult for it to maintain its status as premium brand.
- Broadband: it may seem a stretch, but at a local level initiatives such as Google Fiber (USD 70 a month for 1 Gbps) do result in some commoditisation.
- Communication: telecom companies are undergoing a difficult period due to the commoditisation of managed services by OTT services.
- Entertainment: commoditisation is already well advanced, thanks to Spotify and Netflix. Incumbents on the TV market (cable and satellite providers) should prepare themselves.
- Advertising: a commodity market where Google thanks to its technology already has a huge lead. The revenues from this allow it to make all kinds of investments. Facebook has big opportunities here as well, and Yahoo! probably, too.
E-commerce could also be added here, where Google is increasingly making its presence known, alongside Amazon and eBay.
Conclusion
Of course, it will not all go so far. But still. The internet companies are using their market dominance to commoditise the enablers, in order to maximise their volumes (advertising, content, commerce). Big Data is helping in this. Rumours of smartphones and the like are as such not so unusual. Apple will face difficulties sooner or later. Broadband is a more protected market, with high barriers to entry - anyone ever try to duplicate an operator's fixed network? Google Fiber shows though that the market is not completely safe. And there are all the other fibre operators that don't shirk from commoditisation in order to sell more OTT services. They are focused on broadband and are making their companies OTT-ready/OTT-friendly. Examples include Citynet in Hong Kong and Free in France. With a bit of entrepreneurial flair and a sack of cash (Dik Wessels/Reggefiber, Xavier Niel/Free, Google) this could end up the case all over the world.
