How is the telecoms industry to prosper?

Are operators in the telecoms industry becoming slum landlords?

In the 1950s and 60s, large numbers of immigrants came to London from the Caribbean and other Commonwealth countries. They had few resources, yet needed somewhere to live. Many fell prey to exploitative landlords. These unscrupulous rentiers packed tenants into formerly swanky parts of town, which then became slums. This process even birthed a new word in British English – “Rachmanism” – to define the archetypal unethical treatment as practised by one notorious landlord.

Eventually those immigrants, through hard work, gathered economic and social strength. Their financial needs and means grew, regulation was strengthened, and the slum landlords no longer prospered at their expense.

Digital immigrants have been flocking to broadband services in the past decade, to enjoy the riches on offer and build a new online life. Availability of these services had previously been restricted to a narrow corporate elite.

Could offline history be repeating itself online with broadband access?

To illustrate what is going on, this tale reframes the telecoms business as if it were more like a physical property empire, housing digital citizens in hotels and hostels.

The key message is simple: telcos have unwittingly ceased to be true service providers, and have instead set themselves on a path to become slum landlords.

Landlords and service providers

Let’s get some terminology sorted before we begin. Telecoms comprises two distinct sets of activities. One is a civil works business that builds and maintains the shared physical infrastructure. The other is retail service provision that turns that infrastructure into user services. This is rather similar to how a shopping mall creates a space in which other retail businesses can establish themselves.

A typical network operator will have its in-house retail division, as well as wholesale operations to other (virtual) retail telcos. This is a bit like department stores that house other brand franchises.

The infrastructure business is at its heart a pure landlord and tenant operation. This structure is evident in longhaul fibre-optic networks, where a consortium may build trans-oceanic fibre. Other companies then add a services wrapper: some light it and wholesale it, and retail providers re-sell that to end users. In that process, the raw conduit becomes a richer value-added service like voice, a content delivery network, or broadband Internet access.

Openreach in the UK is a good example of a landlord business that operates access networks. They have many wholesale and retail operations stacked on top, and a clear (regulated) boundary layer is in place. Openreach sub-lets each residential or business line to a wholesale or retail operator that provides the services layer. As Openreach have moved from passive lines to active packet-switched access networks, they have preserved this structure.

Welcome to British Hotelecom

Historically, many telcos have been vertically integrated, so there was only the in-house retail operation. Therefore the boundary between the landlord activities and service provision were relatively hidden inside a single organisation. That didn’t matter so much in the days of pure circuits, because the distinction was largely philosophical, rather than practical.

You can think of a traditional circuit telecoms business as being like a hotel. A hotel takes a large and fixed infrastructure resource, which is then sub-divided by space into rooms, and by time into reservations for those rooms. There may be connecting doors to aggregate rooms into larger resources, in a similar way to how conference centres have movable sound-proofed partitions.

Each user has a contract that gives them an irrevocable use of that space-time resource. The service a hotel offers is the absolute reservation of a certain subset of its resources. That means there is a perfect equivalence between service provision and sub-letting.

In old fashioned telecoms, time-division multiplexing is that technology of sub-letting. It is how the telco landlord business makes its money.

Do not disturb

What is notable about this model was that the hotelco knew or cared little about what went on in its rooms. Whether you wanted to host a meeting, sleep the night, or enjoy other intercourses and liaisons was entirely the user’s own business.

In this sub-let model, users were given a choice of two purchase models:

  • Turn up and stay by the day. Under the Hotelephone & Facsimile brand you could have short stays. These were expensive and inflexible, as they only rented out meeting rooms for talk or presentations, not bedrooms for sleep.
  • Long sub-lets. In a plush deep-carpeted office you could sign a lease on the exclusive upper-level Circuit Club floors. Here you could reserve a room for, say, every Monday night for the next year, and then do whatever you liked in it.

This setup was somewhat inconvenient for users. Many wanted fleeting use of the rooms to sleep in, and others resented paying for space that went unoccupied for much of the time.There was also increasing demand for bigger rooms that were good for both meetings and overnight stays, which prompted the development of Integrated Suite for Dreaming and Nattering. The Germans loved the comfort and convenience and exclusive use of a sunbed on the balcony, but nobody else could afford the high prices.

Interval Stay Providers

Along comes the new-fangled “Internest”, an international accommodation brand with a unique shared-stay hotel model. You could participate by signing up with one of the many drive-up Interval Stay Providers.

These intermediaries helped users to overcome the limitations of the old hotelco system. They sold sleeping bags and portable cookers from the famous Modem & Browser outdoor digital adventure store. As a result you could sleep in the meeting rooms, and not just hold meetings there. That made short-stay rooms into a more general-purpose resource, and the hotelco could no longer enforce a “talking and no sleeping” rule for meeting spaces.

Furthermore, they themselves bought up the sub-letting rights on long room lets, and then began to re-sell them to users as a service. Rooms could be kept at high levels of occupancy, and users were attracted by the resulting lower prices.

Despite being intermediated by the Interval Stay Providers, British Hotelco still saw themselves as being service providers, rather than landlords. After all, the business to them seemed very similar to before. Besides, these new entrants seemed to generate a lot of welcome custom and room usage. Trade in the adjacent Restaurant Video was growing, with mandatory bundled breakfasts being a high-margin growth area.

Have a nice stay!

Over time, British Hotelco noticed a drop in demand and prices for their traditional direct hotel business, as users were switching to using the Interval Stay Providers. In order to compete in retail services, they had to restructure their business. Users were clearly attracted by extra space, as the Integrated Suite for Dreaming and Nattering had previously shown, albeit at a price that most folk could not afford.

So the hotelco underwent a major renovation programme, and took away their partition walls between the rooms to turn themselves into a large dormitory hostel. Adverts throughout the land proclaimed the re-launched business: “New Broadbed Hostel service from British Hotelco. More space than ever, at a price you can’t resist!”.

Early customers found the Broadbed Hostel chain’s properties to be very spacious – palatial indeed, compared to what they were used to. The prices were affordable by everyone, and you could turn up any time of the day and night. Guests could easily stay sufficiently far apart that they would rarely be too close to someone snoring all night. If they did find their preferred bed occupied, they didn’t have to wait long to get an empty bed.

In those early days, Broadbed Hostel had same number of guests staying as before when they were a hotel. There were no complaints, so they added more. There were still no complaints; therefore British Hotelco could charge substantial rents to its Broadbed Hostelco division, whose impressive growth pleased investors.

Booming broadbed business

The word spread: there is this lovely hostel, built by the famous and reputable British Hotelco, in an ideal location, which is almost empty, and has keen prices for a place with so much room.

Users would pay to get in, but nobody at British Hotelco was really keeping track of how many were in the building at any one time. Those outside the building also had no visibility of the conditions inside, or how many people intended to arrive each night. On some nights people would turn up and the place could take no more guests, due to fire regulations. Having already paid for an annual membership via the British Broadbed Hostel Association, many were upset, but they were assured they were welcome to try to stay again on a later date when things were bound to be quieter.

Those who could stay found the experience never quite matched those early heydays. The lack of walls meant certain nocturnal activities just disturbed all the other sleepers, who would shush you at every attempt. The snorers were terrible, and the queue for the toilets in the morning peak hour was no fun at all. Meetings were hard to hold, as the din from other people chattering in the daytime just got in the way. It was impossible to hold a meeting at night when everyone else was sleeping.

Every weekend the Bedtorrent Brigade would turn up and its members would throw wild parties, many dressed up in splendid pirate outfits, all attracted by the low prices and great space. They did their best to stay when the business people (who complained endlessly) were away, but naturally some were always hanging around still and grumbling.

Beware biting broadbed bedbugs

Newspaper articles began to appear, criticising the conditions and the space per person on offer. The regulator, Ofbed, was unhappy at adverts that simply emphasised the total floor space on offer, which didn’t represent actual living conditions. Users started to write in complaining of the noise and over-crowding, and the resulting squalor.

The management of British Hotelco started to have some concerns about their Broadbed Hostel product. The problem was clear: overcrowding meant there was not enough space. Broadbed Hostels offered to pay its parent British Hotelco for more space.

So the builders were called in, and construction began. The property was extended, with additional floors and wings. The marketing group re-launched the business: “British Broadbed: now more space than ever! Great superbroadbeds for everyone!”

The marketing services team then had a brilliant idea: they had so many new beds, and the costs per bed were so low, they could offer an unlimited stay package for a fixed price! Users were delighted with the offer, and signed up in droves.

Yet, predictably, the same thing happened again: the low prices and great space encouraged swarms of customers, but their willingness to pay was blunted. Businesspeople resented the Bittorrent parties, because they couldn’t hold business conversations at the same time. The party-goers were unwilling to buy empty beds to keep the place quiet enough for the traditional core business customers to work and sleep in peace.

The sad slump into the slum

Whilst the Broadbed Hostel was in a good state of cleanliness most of the time, standards of hygiene began to slip at peak holiday periods. There was a growing stream of complaints to management about the state of the property, and bad reviews appeared on Hostel Advisor.

Some customers kept on coming in pairs and only staying in a bed for an hour. This puzzled the receptionists. How could someone sleep six times a day for such a short period? It wasn’t their job to inquire too closely, and they didn’t report it to management.

Families who thought they could stay at any time would find themselves packed together, five or six to a bed. Again, the management didn’t know or care – they were only counting the takings, not whether the customers were really happy.

Eventually over-crowding resulted in outbreaks of bedbugs that sucked away the quality of experience for guests. Press reports began to ask whether Broadbed Hostels were truly habitable, and indeed many thought they should be condemned. Ambitious rival Sly Hotelestays were capturing customers with their great food, and towering new Vitrine Mediamall hostels offered compelling all-inclusive resort-like facilities.

As margins crumbled, so did maintenance of the property. The roof began leaking, and there wasn’t money to repair it. Guests were told it was great in summer, and they mustn’t grumble. After all this is a British Hotelco property they are staying in.

No more room in the hostel

What could management do to keep the business growing profitably?

At first, the response was entirely tactical. New rules were instituted to only allow Bedtorrent Brigade parties when the place is otherwise empty. This lost a lot of their business, but who wanted it anyway? Guests who had bought an unlimited stay package were quietly discouraged from continuing their custom by being put into cold and windowless basement rooms. Obscure “fair stay” contract terms were brought out to punish the most frequent guests, whose contracts were abruptly ended. Those who stayed more than a few nights found their customer service requests repeatedly ignored.

The marketing effort was stepped up, to keep the properties at high occupancy during slack periods. Images of empty and well-lit dorms were shown to encourage new customers to switch to the Broadbed Hostel brand, with winter free stays for months at a time for new customers. Some customers noticed that the pictures of the façade still reflected the previous British Hotelco era, and complained to Ofbed.

Public campaigns began to replace the old brick hostel with a glass-fronted skyscraper – at huge cost – to bring in more light and allow even more space in the hostel. British Hotelco was already struggling to make returns on its existing extension wing investment, so didn’t want to make the hostel bigger. The numbers for this investment just didn’t seem to make sense. Wouldn’t the same thing repeat all over again?

Bedroom vs breakfast

As a result, there was an increasing investor pressure to diversify the business. The hostel Restaurant Video was still doing reasonable business, although the customer base tended towards cheap basic food, rather than gastronomic treats, so margins were falling. Nonetheless, a new star chef was brought in, at huge expense.

Industry bodies like Hotelco 2.0 were promising a profit bonanza from installing a new Multisided Spa centre, which one Korean hostel chain had made a success of. Nobody was quite sure whether British bargain stay hunters really wanted hot stone and mud bath therapies, but many thought it might be worth a try.

The continuing struggles puzzled the board of British Hotelco, so management consultants were called in to review the situation. They came to a startling conclusion.

The report to the board stated that they had misunderstood the nature of their business, and had become confused about their value proposition. This required substantial structural change to fix.

Bad new for British Hotelco’s board

In the old days of British Hotelco, users had exclusive use of the facilities. The hotelco didn’t care what it was people wanted the hotel room for; just that they were willing to pay their annual membership. The only feedback mechanism was complaints, of which there were very few.

However, what was valuable was what people used the room for, not the room itself. The hotelco hadn’t realised that people were paying for the diverse activities that took place in the room, because they were blind to those needs. Yet the essence of service provision was to recognise and satisfy those needs.

Instead, the hotelco had continued to act as if it was in the sub-let landlord business. Its retail Broadbed Hostel division had leased buildings from its British Hotelco parent. It in turn had ended up selling sub-let furnished floor space to users. Indeed, its actions had continued to divide up the resource and over-fill it as if there was no end to that process.

The end result was Rachmanism in action: they had “subdivided large properties into flats and let rooms, initially often for prostitution”. It was becoming a slum, with over-crowding, unattractive customers, and increasingly unethical management behaviour.

Service providers deliver fitness-for-purpose

As a result, key profitable guests were no longer getting the value they sought. The intermittent outcomes meant that the accommodation offer was not fit-for-purpose. In particular, business people (who had the most money) could not rely on the space for important meetings; party-goers were also fed up with the complaints about their raves.

The management consultants noted how the Interval Stay Providers hadn’t really created any new property space, but had merely unlocked the value of what was already there. They were essentially arbitrage businesses between the Circuit Club sub-letting offer, and the public’s desire for flexible short-stay space.

Their business model was unsustainable, as British Hotelco’s revenues came under increasing pressure. Many complained at a margin squeeze as the British Hotelco prices for Circuit Club products rose. Yet Broadbed Hostel was essentially just an in-house replication of the arbitrage model, itself driven to its logical and unprofitable conclusion.

The consultants recommended that only creating fit-for-purpose outcomes could provide the money to invest in new hostel space and glass towers, and create a sustainable economic model.

Retail is detail

They advised that what people really wanted was the accommodation service, not the raw floor capacity. That meant partitioning the space appropriately for the different kinds of use, and supplying the right ancilliary services to make the space fit-for-purpose.

To do this they had to do what all good hospitality retailers did: understand what their customer needs were, in terms of service quality and cost, and deliver it.

For a true service provider, the customer is able to express what their purpose is – “I’d like to host a wedding reception” – and the provider can either accept the order, or reject it. If they accept it, then they are responsible for ensuring that it is fit for the purpose the user expressed. If it is not, the user can reasonably ask for recompense. This transfers risk from the users to the retailer, for which the retail can charge extra. The retailer can only do this if they understand the risk, and can cost and mitigate it.

Simply emulating the Interval Stay Providers and offering a Broadbed Modem for digital adventures did not constitute service provision. Nor did having a call centre to handle orders and complaints. That was to confuse support services for the actual value proposition.

Hotelcos didn’t mean to be evil

In the case of Peter Rachman, his business practises were acts of commission: he deliberately set out to ruthlessly exploit tenants via unethical business practises. He died young and unlamented.

We should have some more sympathy for telcos. They have become drawn into being slum landlords. Whilst they have sometimes acted in evil ways, it is not that they are evil. Gollum-like, they have become perverted by the perceived promise of one broadband protocol to rule them all, and the early (and fleeting) profits that offered.

To retain and regain health, telcos need to make a trade with their users. The users need to voluntarily offer information about what outcomes they seek. (Opening the hotel room doors to see what is going on is not permitted!) In return, the telco needs to deliver something that makes those outcomes take place.

Hence if the telecoms industry is to prosper, it needs to create a clear line between landlord and service provision businesses, and manage both to their respective and different ends. Confusing service provision for sub-letting is slowly driving the telecoms industry towards ruin.

NB – All hotelcos appearing in this work are fictitious. Any resemblance to real telcos, living or dead, is purely coincidental.

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