GO THROUGH THEM OR AROUND THEM?
(UPDATE BELOW)
What do these four, seemingly unrelated tech-related headlines today have in common?:
- Yahoo! does a deal with Tivo (via NY Times) to offer Yahoo! content and services to Tivo users.
- Google rolls out software for cell phones to access its mapping and other services.
- Yahoo! rolls out mobile services in partnership with SBC/Cingular and Nokia.
- SBC spokesman tries to spin and retract (via Washington Post), his CEO's earlier comments in a BusinessWeek interview regarding web service providers like Yahoo!, Google, Vonage, etc.: "Why should they be allowed to use my pipes?"
What is the common thread here? They all represent anecdotal examples of what I call the "Big Bypass Battles" on the infrastructure side. That's in contrast to the "Big Bypass Battles on the content side (media companies, music companies, etc.), a subject for a future post.
They are about the consumer tech industry, lead by companies like Google, Yahoo!, Microsoft, Apple and AOL trying to provide services and content to hundreds of millions both in the US and abroad increasingly ACROSS not just PCs, but TVs, cellphones, PDAs, and other devices and venues. I'll call these guys "The Good Guys" for the remainder of this post.
But they're confronted with what I would call the "Big Bypass Bottlenecks". These of course are the "Bad Guys" in this post.
In each case though, these are oligopolistic AND verticalized industries that are trying to act as gateways to these same customers, and trying to extract tolls along the way. Their biggest fear is that they're relegated to being just "dumb pipe" and/or "dumb box (as in cable box)" providers.
As a result, there are at least three mega bypass battles to be fought over the near future with these "bottlenecks". They are:
- Traditional Telephony Providers: Both long-distance and local phone service, involving the big oligopolistic carriers we all know and have to live with: Verizon, SBC, etc.
- Traditional Wireless Carriers: At least in the US, most of them are subsidiaries of the big telcos listed above, including of course Verizon Wireless, Cingular (SBC), T-Mobile (Deutsche Telekom). Sprint/Nextel are relatively independent and a tad more competitive in the MVNO market (see this post for details).
- Cable companies: You know these guys...just look at your monthly cable bill,, and this post here (Comcast, Cox, Time Warner, etc.)
Now just being oligopolistic is not necessarily a bad thing, as long as it's horizontally oligopolistic. That's a mouthful, so let me explain.
The Search/Portal market is an oligopoly in the US, with the leading companies Yahoo!, Google, AOL and Microsoft having the majority of the market share. But they're primarily services and software companies and don't provide underlying services like Access (with the exception of AOL and Microsoft's decaying narrow-band access businesses of course).
They of course compete aggressively with each other, including start-ups, but don't need to invest in and, as a result "protect" the business models of other horizontal oligopoly layers that provide their underlying infrastructure.
So, empowering these companies are an oligopolistic layer of hardware companies like Dell, Lenovo, Toshiba, Gateway etc. that provide the PCs.
Then there the oligopolistic layers of component providers for the PCs: the semiconductor chips (Intel, AMD and others), the graphics chips (NVidia, ATi, etc.), the hard drives (Seagate, Toshiba, etc.), to name a few.
Underlying them is another oligopolistic layer of companies that provide the networking infrastructure like Cisco, and so on.
But no one company controls the entire vertical stack. They used to in the old days pre-PC days before 1979 (remember "Big Blue" IBM, DEC, etc.)
As a result, innovative start-ups have the potential to enter any of these layers and provide better services than the oligopolistic incumbents in that horizontal layer, but still have the ability to have their product and service take advantage of the other horizontal layers.
For example, a new search engine company could still come from nowhere and out-Google Google, leveraging all the infrastructure that Google currently leverages.
In contrast, the industries blocking the horizontal players today in the "Big Bypass Battles" are both oligopolistic AND verticalized. Which generally means higher prices, less choice and selection and more inefficient markets for the end consumers.
And NO inter-operation amongst the networks, other than of course for high-cost "roaming charges".
To understand the mentality and arrogance of the typical "Bottleneck" company, consider this extraordinary quote from an interview by BusinessWeek with SBC/AT&T/Cingular CEO Edward Whitacre this week:
"How concerned are you about Internet upstarts like Google (GOOG), MSN, Vonage, and others?
How do you think they're going to get to customers? Through a broadband pipe.Cable companies have them. We have them.
Now what they would like to do is use my pipes free, but I ain't going to let them do that because we have spent this capital and we have to have a return on it.
So there's going to have to be some mechanism for these people who use these pipes to pay for the portion they're using. Why should they be allowed to use my pipes?
The Internet can't be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo! (YHOO ) or Vonage or anybody to expect to use these pipes [for] free is nuts!"
His spokesman had to try and backtrack from the furor caused by this statement later (via the Washington Post):
"SBC spokesman Michael Balmoris said Whitacre was not talking about charging companies for letting customers access their Web sites. Rather, he said, Whitacre was referring to access Internet companies may want to the "managed and secure" portions of the fiber-optic network SBC is building largely to deliver video to customer homes."
Tom Evslin by the way has a good post on all of this if you'd like to read more.
The Good Guys are "Good", both from a consumer perspective and from an economic point of view. More horizontal competition means a lot of goodness for the economy in the form of more private and public investment in new companies, more jobs, more growth, more global competitiveness.
Most of the Good Guys have long been aware of these Bypass Bottlenecks, and for the most part have tried to employ what I would term a "Co-Pass" strategy. By that I mean a cooperative bypass strategy that involved cooperating with the bottlenecks today, learn more about providing these services, get consumers used to them and hopefully dependent on them, then ultimately use their greater leverage with the consumers to negotiate better distribution terms and/or entirely bypass the bottlenecks are technology makes other alternatives hopefully possible.
That's what Microsoft, AOL, and Yahoo! have done to date both through Web 1.0 and now into Web 2.0. This is why Yahoo! this week announced a "Co-Pass" deal to roll out wireless services with SBC/Cingular and Nokia, hoping to essentially "Divide and Conquer".
One advantage of the Co-Pass strategy is to reduce the amount of upfront infrastructure investment required, thus keeping one's margins high. That's a good thing if you're a high valuation public company.
But as I've mentioned in earlier posts (here and here), this time around the consumer companies are going to have to be more aggressive on stepping up on the infrastructure side.
The one consumer internet company that seems to be eschewing the "Co-Pass" strategy for now, is Google. Whether it's potentially rolling out its own Wi-Fi internet access service a while ago, to rolling out its maps on mobile phones today, Google seems to be focused on the ByPass strategy. As Om Malik observes in a pointed post today,
"In sharp contrast to Yahoo, Google is going to launch a piece of software that can be downloaded over-the-air on most phones that support Java. The software will be a Google Local application, which will allow users to conduct searches for local services and see them on a map. I do find it interesting the divergent strategies of the two fierce competitors. Yahoo is in bed with the carriers, while Google is betting on neutral networks."
The one thing the Good Guys can do that they haven't until now is to publicly and aggressively back industry initiatives of their own that both PUBLICIZE these bottlenecks for mainstream consumers AND INNOVATE around them, through open technology initiatives.
For example, instead of Yahoo!, AOL working with Tivo to bypass the cable company's stranglehold on TV viewers, they, along with the rest of the "Good Guys" work with and promote third party technology companies via standards consortia that encourage the faster development and propagation of devices that help bypass the cable box.
It's happening slowly in the background, but it could potentially be accelerated, albeit at the cost of alienating some of the Bottleneck partners.
The Yahoo!/Tivo deal announced today, as exciting as it seems on the surface, is potentially usable only for a third of Tivo's 3.6 million user base. The rest are controlled by DirectTV, which acting as a bottleneck, has decided to disallow the Yahoo! interactive features to work via their network. And of course this deal does nothing for reaching the tens of millions of cable subscriber customers of the major cable companies.
On the other hand Yahoo!, Google, Microsoft and the other consumer internet companies, are aggressively investing in commercial and user generated video content being made available via the PC.
So they all need faster and cheaper ways to get those feeds to the TVs in mainstream consumer homes, preferably without each one having to negotiate separate agreements with each of the main cable and telco players. That would naturally take years longer than it should.
The "Co-pass" strategies were fine for the Good Guys a few years ago. For example, they enabled Yahoo! to gain millions of subscribing customers via joint ISP marketing deals with the phone companies.
But that was in the Web 1.0 days, when the amount of content itself was not growing at exponential rates....and most of it was commercial and locked away under lock and key, driven by piracy fears.
It's different this time around with:
- the explosion of user generated content and the sharing/re-sharing that's going on with Web 2.0 technologies.
- Also different this time is the explosion in paid-search advertisers looking for more and more places to put paid-search advertising.
- Not to mention the explosion of high-powered cell phones and PDAs that are going mainstream next year with the power of a high-end PC just a few years ago, including hard drives and digital/video cameras.
So it's going to be more important to be there faster than ever for mainstream consumers and the one-by-one "Co-Bypass" strategies may not be the best thing this time around. They may need to be complemented with more aggressive Bypass strategies.
Fasten your seat-belts everyone...sharp curves ahead.
UPDATES:
10.18.05 Robert Cringely has a great post on how Google potentially can out-bypass the telecom/cable industries titled "Google-Mart"...RECOMMENDED. Also, my thoughts on the post here)
Interesting post Miachael.Interesting post, Michael. I’ve actually been thinking about this issue for some time. I believe that the content market is moving towards a vertically disaggregated model like the one you described in the PC market. But while inevitable, the carriers have enormous quantities of cash and tight consumer relationships that they can use to distort the market for some time to come. While we have seen some movement on the parts of the studios to begin seriously looking at bypassing the existing access oligarchs, this process will most certainly take years given the impending release of HD-DVD/Blu-Ray. In fact, what appears to be happening is that the studios feel that they can use the Internet as a distribution channel for low-quality and physical media for high-quality. And I think most would argue that this model will exist for some time.
I would agree that complete bypass would work if consumers were united with the hardware providers, portals and content owners, but the fact is that the carriers are in a close partnership with the content owners and this relationships shows little sign of collapse (at least in the immediate future). Therefore, portals and hardware providers do themselves service to provide cooperative bypass situations that reveal the upside to consumers and content owners (even with exponential rise in user generated content we have a ways to go before this provides enough of a carrot by itself.) This eventually unites all sides against the carriers (who are really the bad guys, although Apple could go either way).
This is why the relationship between Yahoo and TiVo is so interesting. It will eventually provide consumers with a smoother transition from the world of today to the world of tomorrow. It will do this by unifying the process it which consumers select and consumer both broadcast and broadband content. Google may be there to pick up the customer after the transition due to low switching costs, but the result is still the same. Vertical disintermediation along the supply chain and open competition within each horizontal. But frankly I think you get there faster when you provide the consumer with a smooth transition.
Posted by: Alex Rowland | Tuesday, November 08, 2005 at 02:55 AM