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Brislen on Tech: Vertical Integration 2.0

Paul Brislen, Editor. 18 September 2020, 2:22 pm

Last century we fought the vertically integrated wars. It was us versus them, David versus Goliath and in the end regulatory jujitsu was required to wrestle our opponent into submission.

I'm talking about the phone companies and one in particular - Telecom - which was structured in such a way it could fend off competition while managing to appease the regulator for the best part of two decades.

The company was responsible for everything in the network stack from the trenches in the ground to the cables that were laid to the devices that could connect (remember the Telepermit?) to the billing relationship with the customer, the whole thing. Phone calls from Auckland to London cost a fortune even though the network had been upgraded and in reality the calls were cheaper than a call from Auckland to Taihape.

Ultimately competition arrived in the form of Clear Communications and then the internet landed and it's all a blur of acronyms and faded memories (0867 numbering scheme? Ihug? Cabinetisation? Loyalty schemes?) but eventually Telecom faced a stark reality: split into two different companies or be overbuilt by the government.

The monopoly control was broken and competition has flooded into the market ever since. We have three competing mobile networks, a regulator with teeth to ensure every player is equally unhappy (surely the best a regulator can deliver?) fibre to the home for a large part of the country and fixed wireless service for remote and rural areas.

It's not perfect but it's a damn sight better than we see in a lot of other countries and with the Level 4 lockdown many of us found we were better able to work from home than from the office. Productivity went up for many companies and we may have turned a corner in terms of soggy middle managers clock watching on our behalf.

But with every silver lining there comes a cloud and for the telcos it's the dumb pipe.

When they controlled everything from cable to app it was easy to pay for new, somewhat risky propositions because they earned a lot of money from bits that really didn't cost a lot to run. The international phone call is just one example - there was the monthly fee for doing nothing, the toll calling if you happened to be on the wrong side of the motorway, the bundles of TXT messages, the email service, the international roaming charges  - it all chipped in to the giant coffers and when competition reared its ugly head you had a healthy buffer from other services to fend it off.

Without that integration parts of the business had to stand on their own two feet and for some that was difficult. Market share and profitability have both fallen dramatically.

Of course, for users it's been great - costs have fallen and services have improved (although the Commerce Commission does point out that we all still buy services that exceed what we actually use so we're still paying more than we should. Ring your phone company and see what they can do for you or find one that can sharpen its pencil) and we have faster speeds, greater data capacities, in more places and with more choice than ever before.

But in parallel with this disruption and the race to the bottom, the telcos have become providers of network and little more. They are the dumb pipes that carry all the bits of data (and don't get me wrong, that's an essential service, literally so these days) and other companies provide over the top services.

These OTT providers make a lot of money. A lot. They don't need to provide the network, they don't need to provide the devices the users crave, they don't need to provide the content the users share - they'll create it for you! Instead, these companies saw that opportunity and began offering all those add-on services the telcos used to sell for fat margins but for free.

Google started it with Gmail. Nobody had time for Xtra or Vodafone or Ihug mail after that (it took a while to filter through but honestly, why would you pay a service that wasn't as good as the free one?). Who would have thought messaging apps would eat into TXT messaging's dominance? Or that free calling in the form of Skype wouldn't just be across your toll area but across the planet.

These companies made money in other ways and didn't need to put up barriers like fees because the product they sold was the user base itself.

Today's telco world is very different from that of 2010 never mind 2001. Back then you were a telco customer who used a certain type of phone. Today you're a phone user who happens to use a network. Back then you complained that services were expensive and limited to voice and TXT (if you were lucky). Today I can buy songs, books, television shows, movies, games, apps, I can be productive for work, write a novel (who has the time?) or compose music.

Our kids use their phones to film the most astonishing sequences for media studies and cut together great music videos or fake TV ads for school while making themselves internet famous (as if there was any other kind) on TikTok and they do so without any thought to what network they're using.

The era of the telco is over, but the era of the OTT provider is upon us and if anything it's about to get just as fierce as it was back before the market was regulated.

This week Apple has announced it will offer a bundled app service that includes music, television, games, news and fitness features all rolled up with a chunk of online storage to go with it. Companies that have existed around the edge of the Apple world are shrieking with horror - music streamer Spotify is claiming it's anticompetitive and fitness companies like Strava are revisiting their business plans for the year ahead.


Apple has built a powerful ecosystem around a device (now a family of devices) that locks the user in to products Apple authorises and apps that Apple approves. If you think you can make a better app than one Apple has in the store you might not get the chance to find out because Apple has been accused in the past of blocking access to the app store to prevent competition.

And with Apple clipping the ticket (to the tune of 30% for some items) on every dollar spent through its devices, it's no wonder these competitors are crying foul. Apple, and Google with its Android operating system, have found a way to sit at the centre of the supply chain and ensure they clip the ticket from both developers and content producers alike, not to mention the users as well.

However, the wolves are starting to circle - Apple's stoush with Epic Games (makers of Fortnite) has reached the lawyers-at-ten-paces stage and regardless of how this ends, it won't be pretty for anyone.

The vertically integrated model is back, it's just not all that bothered about the network end of town, just with the users and the consumption of content. It's vertical integration 2.0.


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Ron Segal 21 September 2020, 7:56 am

Thanks for another thought provoking article Paul. Lack of openness of hardware/software platforms to third party applications certainly does appear to be another kind of Telecoms monopolisation in the making.

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