Venture capital - portals

The next beachfront property

Like sand on the beach, profitability in telecommunications is shifting from the subscription-based cableco/telco world of pipes to the advertising-based Internet world of portals, and the “beachfront property” in these sectors is all in play.

This new view revolves around developed versus developing properties. Developed properties, though exciting and attractive, inevitably need consolidation, renovation or even more drastic measures. Developing properties, once desolate expanses of figurative sun and sand, are now the most bid-upon assets around. Neither is immune to change.

Consider the following:

* Renovation. Think of established companies in the industry as well-known properties on the beach at Waikiki. To be competitive with encroaching upstarts, they’re focused on renovation of existing brands. Incumbent players, legacy businesses and private equity firms are reordering the landscape through such deals as the AT&T mergers and Rupert Murdoch’s acquisition of Dow Jones & Co.
* Reinvention. Envision Saint-Tropez, where successful, established companies are reinventing their landmark assets to reshape current business models: Apple and the iPhone, eBay and Skype.
* Invasion. Move down the strip to Miami’s South Beach, where companies are shaking things up as they look for new ways to grow and pre-empt aggressive interlopers. Google’s purchase of YouTube is a prime example. Telcos are moving into Internet television, wireless firms are in video and the cablecos are going wireless.
* Invention. Finally and figuratively, look to Dubai, where inventive players create spaces on the virtual beach. Sprint Nextel is betting on WiMAX, while Google and other nontraditional wireless operators are bidding for new FCC spectrum.

What’s driving these shifts? Three forces: portalization, stickiness and convergence.

The telecom industry — initially built on proprietary, closed pipes — is now in the portal business. AOL, Google, and Microsoft are mere clicks away from being telcos. They already control number ID and bearer information to enable click-to-call and dial-around while they cherry-pick various telecom applications. Telcos themselves want to portalize, but they lack the skills and ability to aggregate content like a Yahoo!

The definition of stickiness has also changed: from friends and family calling plans in the 1980s and walled gardens in the 1990s to social-networking sites such as Facebook and MySpace, where eyeballs are glued for hours. These portals combine and update content from one place, giving them the inherent advantage of stickiness. With the increasing attractiveness of mobile devices (the iPhone, for example) and one-stop access to video, Internet and telephone, the sticky portal gets stickier.

All these roads lead to convergence. It’s the Holy Grail — the next step up in technology and the ultimate offering. It’s the quad play of seamless convergence of voice, video, Internet and wireless, and it’s driving the gathering storm closer to the shore. True IP-based session management across all modes is now a reality.

Whose sand castles will remain and whose will be washed away? That’s the big question as Wall Street continues to fund Waikiki-style renovation and privatization of big iron pipes, telcos, cablecos, system integrators and others, while venture capitalists continue to mine the world for the next Dubai-style market invention. Google will become a virtual, global wireless services player, while Apple moves into home portals. Cisco Systems will design and market its own handsets, while Rupert Murdoch owns 80% of the world’s eyeballs. AOL, EDS, Motorola, Nortel Networks, Sprint and Yahoo! will cease to exist as independent companies.

Anything can happen where the surf and sand meet. At the beachfront, you always have to stay ahead of the next wave.

Alex Liu is vice president of A.T. Kearney’s wireline practice.