Without High Switching Costs, Telecom Looks Vulnerable to DeWi

In a new feature for CoinDesk called DePIN Vertical, I’ll be exploring the burgeoning field of decentralized physical infrastructure through this op-ed.

Building 5G networks from scratch by telcos requires an additional investment of around $250bn or more, leaving corporate boardrooms unenthusiastic due to a limited number of compelling use cases at present. Consequently, mobile network infrastructure providers face hardships as they grapple with the high capital requirements and intricate coordination challenges associated with constructing a telecom network. This burden proves insufficiently rewarding for centralized companies, leading to Ericsson’s recent shocking financial report revealing an almost 20% decrease in sales from the previous year.

The demand for cloud computing is soaring, leading to a rapid increase in the need for more bandwidth. But the rate at which technology is advancing shows no signs of letting up. So, how will we meet this steep rise in requirements?

As an analyst, I would describe decentralized wireless (DeWi) networks in the following way: I believe DeWi networks represent a smart solution for extending 5G capabilities efficiently, as they enable individuals to contribute to network development by deploying devices that provide bandwidth to others. The beauty of this approach lies in community-driven collaboration – anyone can become a provider and earn compensation for their services. In essence, DeWi networks transform local communities into valuable resources, monetizing their internet connections and creating a self-sustaining network infrastructure.

The secret to DeWi’s achievement lies in the commoditization of telecom hardware: what was once heavy lifting done by intricate towers and containers now falls to software. WiFi offload has become a crucial factor enhancing 5G, as most mobile activity takes place inside buildings.

Although in its infancy, this innovative approach to constructing telecommunications infrastructure has shown promising advancements. Depending on the model, such as DePIN networks like Helium, have established significant supplier presences, providing thousands of hotspots. By merging their network of hotspots with T-Mobile’s extensive cellular coverage, Helium introduced Helium Mobile to offer affordable phone plans to consumers directly. The endeavor is still in its initial stages, with approximately 100,000 subscribers and 10,000 suppliers, raising doubts among some if it will ever succeed given the existence of free phones and two-year exclusive contracts that present substantial barriers for switching.

Although the demand hasn’t grown as quickly as investors initially anticipated, it’s important to consider the evolving context that’s progressively lowering the hurdles for entry into this market.

As an analyst, I’ve observed for decades how big telecom companies have employed lengthy contracts to keep customers tied to their services and made the process of switching providers challenging. However, this trend is shifting. The traditional physical SIM card, a crucial component in this strategy, is gradually losing relevance. Take, for instance, Apple’s new iPhone 14, which supports multiple eSIMs (electronic Subscriber Identity Module). This digital alternative to the SIM card allows users to switch carriers effortlessly by simply making a few taps on their phone instead of physically visiting a store.

As a small business owner, I can tell you that the recent shift in the telecom industry has been a game-changer for companies like mine. In the past, switching providers was a lengthy and complicated process that took days to complete and involved significant costs. This left us at a disadvantage when competing against the telecom giants, who could offer longer-term contracts and more attractive deals to their customers.

The FCC is challenging the final stronghold of the high switching cost model – customer lock-in – as proposed by its Chair today. This proposal aims to prevent carriers from restricting phone usage of other eSIMs after a six-month period. Consequently, consumers will be free to switch carriers effortlessly after this time frame, regardless of any prior contract terms or price promotions.

The telecom industry could experience significant disruption with this policy change, as the practice of providing free phones with long-term contracts becomes obsolete. Consequently, fierce price competition is imminent as service providers can no longer rely on bundled deals to retain customers and must focus instead on selling basic data plans.

The battle for per-unit bandwidth is one that DeWi has an unfair advantage in: the community deployment model adopted by protocols like Helium will always cost more than the equivalent centralized incumbent, with some scale. The three biggest cost buckets suffered by incumbent carriers are: spectrum costs, capital expenditures on hardware, and tower maintenance fees.

The key to DeWi’s success lies in delegating the costs of real estate and tower infrastructure to individuals who choose to set up their own internet-providing routers. This approach eliminates the need for significant financial investment from DeWi. In return, network members are rewarded with tokens, encouraging expansion within the community.

In the present day, businesses such as Helium are engaged in cutthroat competition within the telecommunications industry, offering contracted phone plans. However, the future landscape of competition is shifting towards supplying on-demand bandwidth. In this emerging market, community-driven networks possess a significant edge. Unlike traditional telcos, these networks don’t bear hefty upfront costs and don’t depend on long-term customer contracts to generate profits.

Across the realm of cloud services, a similar shift in customer habits is occurring. Companies such as AWS are compelled to transition from traditional contract-based software-as-a-service (SaaS) offerings to on-demand infrastructure-as-a-service (IaaS) models. In this arena, Decentralized Peer-to-Peer Internet Networks (DePINs), including Helium, are tackling significant global challenges through the power of crowdsourcing. As the trend towards IaaS gains momentum, DePIN projects like Helium will likely garner increasing attention due to their cost-effective and adaptable service offerings.

As someone with a deep interest in the dynamic world of cryptocurrencies and blockchain technology, I have closely followed CoinDesk’s insightful columns. However, it is important to acknowledge that the perspectives expressed in these articles are not necessarily my own. My professional journey has taken me through various industries, and while my personal views on this topic have evolved over time, they remain grounded in a commitment to staying informed about the latest trends and developments. The diversity of voices at CoinDesk ensures a rich, nuanced exploration of the crypto landscape.