Home / Blogs

The Demand and Supply Imbalance in Telecoms

You can’t open a newspaper today, listen to the radio, or watch TV without hearing about the enormous explosion in the use of telecommunications technology—be it fixed or mobile broadband, the internet, social media, smartphones, tablets, wearables, IoT, cloud computing, the list is endless. Every day hundreds of thousands of new devices, as well as new people, are added to the telecommunications networks that span the globe and there is no indication whatsoever that the demand is going to slow down any time soon—we see it continuing for decades to come.

Yet, at the same time, many telcos and ISPs are struggling to maintain their profitability.

This defies economic logic. Market economics will tell you that when demand increases companies are stimulated to build more in order to sell more; and if that doesn’t happen other companies will happily step in to take up the slack and compete for that extra demand. But this is not happening in the telecoms market. Operators are dragging their feet in the building of new infrastructure—in particular new fixed infrastructure such as FttH.

In the mobile market also we see great problems on the supply side, with network congestion and network breakdowns; in many developing economies mobile broadband services can only be used effectively between 1am and 3am.

So the economics in telecoms are apparently different. The business models of the operators—fixed and mobile—are essentially based on making profit from services that customers don’t use. For example, if you buy a $50 package for monthly broadband access and only use $40 of it—that $10 is extra profit for the operator. So why would they rush to increase the supply?

In developed markets mobile ARPUs remains steady, with little indication that people will pay more for access. So, under their current business models, why would an operator increase the supply?

It seems that there is little economic incentive for the operators to build extra capacity. Instead there is a financial reward for maintaining short supply, charging high prices and gambling on those who are paying too much for what they are buying.

And, rather than this boom in demand resulting in new competitors entering the market, the opposite is happening. The trend is further industry concentration. Developments in the USA are perhaps the most classic, and most frightening, examples of this, with the enormous market dominance that is occurring among the three major players in this market.

This phenomenon is global, so it is unlikely that a business model can easily be developed that will correctly balance the demand and supply sides of the telecoms market. Market dominance and market scale prevent any newcomers from successfully entering the market, so there is no longer a market-led situation that will see a proper increase in the supply in order to satisfy the increase in demand.

In an economic sense this points towards market failure and in analysing this it is easy to see what is happening. Telecommunications is no longer a nice-to-have luxury good. There is nothing special about it anymore. The product looks and feels the same wherever you are in the world, and the competition mainly takes place around price—not all that different from, for example, the petrol market.

Telecommunication infrastructure has become a commodity and it is about time we started treating it as that. The added value no longer resides in the commodity itself, but in what you can do with it; new revenues are not coming from the commodity but from the products and services that are built on top of it.

This is something we, at BuddeComm, have been talking about since the early 00s. We were instrumental in getting that message across in Australia, which led to the structural separation of Telstra. In Australia there is now a clear differentiation between utilities-based infrastructure and retail services. Both now have different business models and investment risk patterns attached to them, and this makes the future direction much clearer for everybody involved—customers, investors, operators and services providers… and it opens up a whole new market for value-add competition.

In Australia, Telstra was given a choice in the recent review of the country’s NBN, and it has clearly indicated it does not want to go back to the old vertically-integrated business model and, having followed the company over the last five years, the reason for this is clear—its success in the market—as a much more (customer) focussed organisation—is increasing the company’s value in a spectacular way. It is rapidly becoming the example for incumbent telcos around the world, identifying where the future of these companies lies. There are very few national telcos that are as successful as Telstra.

So, once the industry bites the bullet and begins to see the different business and investment models that are required to successfully use the increased demand in the market to their own advantage we will see a return to a properly functioning demand and supply market. In the meantime those who are still sitting on the fence (the majority) will keep their countries in an environment of totally unnecessary and distracting sideshows, such as battles about net neutrality, the gaming of competition regulations, endless negotiations of network and facilities sharing, infrastructure taxation and so on.

All of these issues will go away if we start to treat telecoms infrastructure as what it is—a utility and start concentrating on offering more and better competition in the value-added part of the market.

By Paul Budde, Managing Director of Paul Budde Communication

Paul is also a contributor of the Paul Budde Communication blog located here.

Visit Page

Filed Under


3 areas of fundamental change Michael Elling  –  Jun 6, 2014 2:28 PM

Paul, I agree with much of your article, except, “Telecommunication infrastructure has become a commodity”.  Nothing could be further from the truth witnessing the rapid and dramatic change occurring at the core (aka the cloud) where enormous creative destruction is happening at every layer and boundary point.  The real issue is about what is happening at the edge.

The restructuring of service providers at the edge needs to take into account 3 clear shifts that have occurred in the past 30 years, namely:
1) value is captured at the core, not the edge.  But they are inexorably linked.
2) horizontally scaled intranets that afford vertically completely solutions scale drive costs down more effectively than vertically integrated models, because
3) markets are driven by demand which is both growing rapidly AND diverging.

So while supply has converged, it’s being driven by core entities that have a better or more holistic view of demand and can better capture that demand.  What’s lacking is coordination east-west between core and edge and north-south between app/content and infrastructure layers.

Comment Title:

  Notify me of follow-up comments

We encourage you to post comments and engage in discussions that advance this post through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can report it using the link at the end of each comment. Views expressed in the comments do not represent those of CircleID. For more information on our comment policy, see Codes of Conduct.

CircleID Newsletter The Weekly Wrap

More and more professionals are choosing to publish critical posts on CircleID from all corners of the Internet industry. If you find it hard to keep up daily, consider subscribing to our weekly digest. We will provide you a convenient summary report once a week sent directly to your inbox. It's a quick and easy read.

I make a point of reading CircleID. There is no getting around the utility of knowing what thoughtful people are thinking and saying about our industry.

Co-designer of the TCP/IP Protocols & the Architecture of the Internet




Sponsored byDNIB.com


Sponsored byVerisign

IPv4 Markets

Sponsored byIPv4.Global

New TLDs

Sponsored byRadix

Threat Intelligence

Sponsored byWhoisXML API

Domain Names

Sponsored byVerisign

Brand Protection

Sponsored byCSC