Telcos need to find new ways to make money

The past year and a half has arguably been one of the toughest times for local telecommunications industry.

Usually regarded as one of the most profitable companies in the country, Philippine telcos were suddenly faced with a maturing market and stiff competition that made margins alarmingly thin.

Paris-based Alcatel Lucent, however, feels that the best of times for the telecom industry still lies ahead. But to get to the proverbial promised land, companies need to change the way they make money, and fast.

“The free ride is over,” says Wims Sweldens, president of Alcatel Lucent’s wireless division.

In the next few years, he says telecommunications will become a bigger part of everyday life than it ever has before.

For the past decade, telecom companies have been content with providing electronic “pipes” where data in the form of voice calls, text messages and more recently, Internet content pass through.

This was fine at first, when companies only had to deal with calls and texts from one user to another, and subscribers were charged accordingly.

No longer a mere pipe

But today’s age of broadband Internet-where consumers’ voracious appetite for more content and faster speeds is rivaled only by their reluctance to let go of their hard-earned money—being a mere “pipe” will no longer cut it.

Sweldens’ challenge is how to keep up with the explosion of Internet use, which has put a massive strain on mobile phone networks, while at the same time finding ways to get consumers to pay up.

“The challenge is that revenues are not increasing, but bandwidth is growing exponentially,” he says in a recent interview with the Inquirer’s Business Friday. Sweldens says the way forward for telecommunications companies would not be easy, but if successful, their efforts would be rewarded.

The first step, Sweldens says, would be to increase revenues by charging different rates for different applications. “Today, the way telcos operate is that they treat each (kilobyte) the same way. But the end-users’ willingness to pay varies from bit to bit,” Sweldens says.

Sweldens adds companies still consider Internet connectivity as a service in itself. A shift will have to happen that will make the Internet a mere vehicle to deliver different kinds of services, each of which will be charged a different rate.

The importance of different Internet applications differ from user to user, Sweldens says. In the Philippines, for instance, most families use the Internet to stay in touch with their loved ones abroad through video-calling applications like Skype.

Treating ‘bits’ the same

“What telcos are doing today is they are treating all ‘bits’ the same. But flat plans are a bad idea in the long-term,” Sweldens says.

Sweldens says by charging different rates for different “over-the-top” applications, instead of just offering unlimited Internet connection plans for flat monthly fees, companies will post better margins while delivering improved services to consumers.

He adds that the revenues earned for delivering different services should be directly proportional to the amount of strain these services put on a telco’s network.

Heavy applications such as voice calling will be delivered more reliably, but will be a bit more expensive. Conversely, lighter applications such as posting tweets or sending e-mails will be cheaper.

But telcos should not just pass the buck to its consumers. A larger part of the burden should be carried by companies as well by improving the way their network infrastructure works to make it more efficient.

He says delivering better services to consumers was not merely a matter of building a “bigger pipe” by accelerating spending.

‘Light radio’

This is where revolutionary technologies such as Alcatel Lucent’s “light radio” comes in. But Sweldens says the new device, which looks more at home in a child’s playpen than in the hands of the world’s brightest engineers, will spell the “death of the base station.”

“This will let operators build up their networks in a fundamentally new way in order to deal with growing data traffic while reducing cost of ownership,” Sweldens says.

Sweldens says what the company has been able to do is to shrink a cell phone tower and all of its components into a six-centimeter cube. A single cube, which supports 2G, 3G and 4G mobile frequencies, can cover a radius of about 300 to 400 meters. And thanks to the cube’s modular design, operators simply need to add more cubes to cover a larger area or to serve more subscribers.

Using “light radio” technology also consumes as much as 50 percent less electricity, resulting in massive savings for telcos, not to mention the fact that they no longer have to build big base stations. These savings can then be passed on to consumers in the form of lower rates.

“There will be no rent, no need to send crews. All of that operating cost disappears,” Sweldens says. “Everywhere around the world, operators are running out of space. All users want five bars of signal on their devices, but no one wants to live next to a cell tower,” he says.

Sweldens adds that since these smaller antennas can be deployed almost anywhere with minimal cost, subscribers will experience better network coverage. It also promotes the better utilization of precious bandwidth capacity.

“What’s happening in the Philippines is happening around the world. The challenge for operators is how to grow their networks efficiently,” Sweldens says.