Quality Arbitrage – Who will be the ‘Uber of telecoms’?

What is ‘quality arbitrage’?

When networks went from circuits to packets, they gained a huge increase in efficiency. This was done by sharing the transmission resource more intensively through ‘statistical multiplexing’.

At present, all telcos are holding the risks of statistical multiplexing without extracting the corresponding quality of experience (QoE) value. This is because the very nature of packet-based statistical multiplexing gives rise to the potential for ‘quality arbitrage’.

It results from a mix of under-delivery and over-delivery of quality (versus that needed by each application or user), together with an associated mispricing of quality. Time-shifting demand (at all timescales) exploits the arbitrage and extracts a ‘QoE profit’.

Customers (or rivals) can also exploit this arbitrage. For example, Kent Public Service Network (KPSN) reduces their costs by around 30% this way, despite their lacking the economies of scale of the incumbent UK operator.

This arbitrage opportunity also extends beyond each operator’s own network footprint. Rather than a threat, any operator can exploit it as an opportunity by arbitraging third-party networks, like KPSN has done.

The size of the business opportunity

Most telecommunications providers currently deliver packet data services that are much better than required most of the time. This is in an attempt to avoid episodes of poor quality that cause customers to complain and churn. Despite this commitment to over-delivery, poor quality still occasionally occurs. These occurrences are typically treated as ‘faults’.

Maintaining this over-delivery is very costly. My colleagues at Predictable Network Solutions Ltd have not only measured the nature and scale of this arbitrage in multiple networks. They have also constructed new services to exploit it.

Based on this experience, we believe the potential ‘yield’ gain is typically 100% to 500%+ versus the current revenue/cost structure. Hence exploiting this arbitrage is worth billions of dollars/euros, and is big enough to ‘move the needle’ for even the biggest global operators.

Make QoE reflect willingness to pay

We believe that all operators have the opportunity to create more performance-segmented products (in terms of quality and reliability). The way to achieve this is to get better control over the QoE risk.

In other industries, customers are prepared to trade cost for uncertainty, and the products reflect the variability in willingness to pay for QoE. For instance, airlines charge different prices for standby, non-changeable and fully flexible tickets. Premium passengers will be given precedence in being reallocated seats when a flight is cancelled.

In telecoms, some customers are willing to take on more QoE uncertainty for a reduced price; their traffic can be used to run the network ‘hotter’. Conversely, by reducing QoE uncertainty, you can increase the value of the service to other customers, and charge a premium.

Appropriately managing the network resource ‘trades’ enables both of these to be done at the same time, i.e. to execute the ‘quality arbitrage’. This arbitrage offers a rare opportunity to create a highly disruptive business model that extracts much more value from the underlying data transmission assets.

A new demand-led business model

To exploit the arbitrage you need to make more ‘good’ resource trades versus ‘bad’ ones than is currently the case. This means you must consider a network as a resource trading space. In this paradigm, a network is more like a commodity futures trading platform than a ‘pipe’.

In telecoms, the commodity’s supply is ephemeral, whereas demand can be deferred (from microseconds to months). You make trades by time-shifting (and space-shifting) the demand.

This in turn requires you to predict the impact of a trade on QoE, and hence willingness to pay. Predicting the effect of a trade requires you to appropriately characterise the demand for QoE and hence performance (at least in broad terms). The job of the ‘retail trader telco’ is performing that characterisation function, whereas the ‘wholesale trading platform’ executes the trades.

This is a new demand-led ‘digital telco’ business model. It contrasts with the traditional supply-led model we are all familiar with, with ‘one size fits all’ circuit and broadband products.

Who will be the ‘Uber of telecoms’?

In a demand-led model, the nature of the customer relationship evolves. The retail/services telco function helps customers to describe their demand in terms that reflect the performance levels on offer.

This is more of a customer intimacy play than that of a traditional scale-led telco, or the lock-in from vertical integration. More profit comes from better characterisation of the demand for QoE (and performance) than the competition.

The wholesale telco function manages the ‘QoE portfolio’ and creates mechanisms that support the most attractive set of ‘trading options’. Profit comes from a ‘platform fee’ for executing trades.

This is more like an Uber or Airbnb than a traditional telco. There are still underlying network assets needed, but like Uber and Airbnb, you don’t need to own them. This opens up the opportunity to create pure ‘software company’ revenues by arbitraging your rivals’ asset investments.

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