Dumb pipe vs. smart pipe: A futile discussion?

My background is not in telecom or software development, but business. Perhaps that is why I get lost in translation when our industry discusses the future role of Communications Service Providers (CSPs) in terms of dumb pipes or smart pipes. In my view, the discussion should probably go in a different direction.

According to Wikipedia, the term smart pipe refers to “an operator’s network which leverages existing or unique service capabilities as well as the operator’s own customer relationships to provide value above and beyond that of just data connectivity. The use of the term ‘smart’ refers to the operator’s ability to add value for additional (and often unique) types of services and content beyond just simple bandwidth and network speed.”

In other words, by becoming smart pipes, CSPs preserve the value of their pipes while enabling new business models and generating new flows of revenue.

Also taken from Wikipedia, the term dumb pipe refers to a service provider’s network “being used simply to transfer bytes between the customer’s device and the Internet. The use of the term “dumb” refers to the inability of the operator to add value for its customers beyond just simple bandwidth and network speed.”

A typical example of dumb pipe has been the iPhone. The argument here is that AT&T is just the dumb pipe that offers network connectivity and bandwidth because it is Apple, and not AT&T, that actually controls the end-to-end user experience and on top of that, when acting as a dumb pipe, the operator must pay a percentage of the customer’s monthly bill.

CSPs as dumb pipes is probably like comparing them to utility companies. That is, a business that sustains an infrastructure that offers a public service such as electricity, gas, water or sewage.

Perhaps the argument may have been somewhat valid when telephone services were only wireline and state-owned, but not anymore. Communications services are not like water or electricity for two main reasons. First, utility services involve the attribute of essential (and necessary to get “access to the house.”) We can’t live without water, but we can survive without a phone, Internet or TV, and as opposed to water or electricity, we can decide what type of services we want and how we would like to consume them. Second, due to the evolution of technology, an operator’s pipe can transfer more than just water (that is, voice, text messages or ringtones).

I’m not convinced that the dumb/smart pipe analogy is appropriate.

Communications as retail business

In the current scenario, communications pipes – an operator’s network – can and should enable more than utility-type services. But that doesn’t mean they are exactly like smart pipes either. They are not just pipes, whether they are dumb or smart.

It is a far more multifaceted scenario that is more like retail. In other words, communications services could be compared to malls or department stores. Just like department stores, CSPs have both a big “physical” and “virtual” infrastructure that offer an outlet, a platform or a display place for others to expose their products and services. In other words, department stores offer the experience, but don’t develop any of the “content” that is offered at the stores – what they do define, develop, deliver and charge for is the experience.

Different CSPs can offer the same or different products; it doesn’t matter; since it is the experience that matters. I typically buy my shoes at a specific department store, but I could also get the same pair of shoes at several other outlets. What I choose is to have the same retail experience time and time again when I buy my shoes. In communications terms, it shouldn’t matter who sells the iPhones as long as the retail experience is a differentiated one, and there will always be a new thing out in the market, so the strategy based just on technology may be just short term.

Of course, the difference between traditional retail and communications retail services is in scope - and there lies the opportunity. The communications retail business is far more ubiquitous and wide-ranging than traditional retail (it can even include and/or enable traditional retail channels). Why more ubiquitous? Over the next few years, phones will be able to interoperate with consumer devices - allowing for content to be accessible across multiple devices, creating a real anytime, anywhere scenario. Hence, the business opportunity to manage customer access across multiple interconnected devices, services and locations is enormous and can enable major new revenue streams from an ever-increasing array of new services.

Yes, CSPs should keep their pipes up-to-date by means of technology in order to deliver a cutting-edge communications retail experience. But thinking in terms of retail services means that we are entering into a world that requires a different approach to the communications business – it is a more omnipresent model. Why?

Because it is far beyond the products or services that are being offered or displayed by the CSPs on their technologically advanced “window shopping” (the phone’s screen), and it is even far beyond the network and technology they utilize. Of course, technology is important, but in the past, we were technology and network-centric and because the CSP business was about the pipes, we had to care about whether the network worked and whether we had the latest technology or device to offer.

But in this new retail scenario, the network may work and a CSP may offer the latest gadget, but they may still deliver a bad experience (that is, not what a customer desires), and unavoidably end up having their customers move over to a different retail service. As opposed to traditional communications services, the new retail services inevitably would put the power in the hands of the consumer, who can actually decide to move (and when to move) to a new “department store.”

In this new scenario, customers have more options, more power and the experience is measured in every interaction and across multiple channels. So what will be the Achilles’ heel for communications service provider in the “communications retail era”? When we talk about retail, differentiation can only be demonstrated, so business survival becomes essentially about one thing – the retail experience. Each transaction counts and the experience received would determine whether the customer will come back again. Here’s where things get a bit uncharacteristic, and strong marketing departments comes into play.

The communications retail experience

In a retail scenario, when a store cannot differentiate itself, the customer will almost always base the buying decision on perceived lowest price or convenience. But as we can learn from retail, differentiation must be not only demonstrated, but also communicated, and it is not just about advertisement.

The communications retail experience is everywhere, not merely when the service is delivered or charged for, as is mostly the case with traditional communications models. For example, mobile operators would require integrating their physical retail stores to their overall customer experience. It is not just about having a physical store, but about the experience it delivers. The quality of the in-store experience is an important aspect in a customer’s decision to do business with a communications service provider. Is the product that I want available at the store? Is the stuff on the ball about a specific product or feature? How are they dressed? How do they “walk the walk”? How do they treat me? Is there a lounge where I can hang out? How fast do I get served?

Physical retail stores for communications service providers are not going anywhere but actually are becoming more relevant to the experience. Apple knows the importance of retail stores all too well, but that is just one channel in the experience. I could have a good experience at the physical retail store, but then I go home and what is my online experience like? What if I contact them by phone? If I have a billing or service issue, what kind of service do I get?

A consistent and integrated experience across all channels is essential, and every shopping experience or interaction must be delivered with a smooth image, whatever that image may be. The physical retail store, online, phone and actual user experience are different aspects of the same experience. In fact, when the retail experience becomes seamless, the consumer‘s issue becomes not about which retail service to use, but rather which provider to trust. But in retail, not everybody goes to a Starbucks shop seeking the exact same experience. For instance, I don’t care whether they have Wi-Fi; I go for the cinnamon scones I like. One retail store can mean different things to different types of consumers.

But how many parties are involved before that pair of shoes that I want to buy reaches my local department store or that cup of iced vanilla latte is made at my local Starbucks? The retail business is more than anything about the art to manage a long, complicated value chain and bring the product to the store in a way that, regardless of what happens behind the scenes, the customer gets the same experience time and time again.

We’ve been talking about complex value chains for a while, but the issue is that the focus should be placed in a different direction, which becomes a lot clearer when we compare CSPs to retail services, as opposed to pipes. It’s simply about managing the value chain and enabling the distribution of their products.

There are some very creative steps towards this retail scenario that I’ve already seen in emerging markets even without the availability of smartphones (that is, the latest technology or gadget) or network infrastructures that work with zero faults. For instance, supermarkets that let customers know about discounts and coupons while they shop or stores offering loyalty programs on mobile phones, just to name a few examples.

My experience in some emerging markets has told me one thing: it’s not exactly about just winning the technology battle, but about enabling channels that make money at all times. I’m not implying that acquiring the latest communications technology is not substantial, but there are far more options that CSPs can take advantage of while they “walk the walk” that can help them generate additional revenue, change the way they bill for things and share the profits across the value chain if they think retail all the way.

In conclusion, if we could just see CSPs as entities offering retail experiences and we build the next business model on that image, as opposed to pipes, then the next big thing may not be such a long, complex process. The control of the communications retail experience can actually begin now.

Monica Zlotogorski is editor of TM Forum’s Inside Latin America and vice chair of its Latin America Advisory Board

This article originally appeared on TM Forum's Inside Leadership newsletter