Open APIs: A race to the bottom

It's a familiar refrain: Be careful what you wish for, you just might get it.

For telecom operators, the siren's call of the past few years has been to open up the functionality of their networks via open application programming interfaces (APIs), much as major Web players such as Amazon and Google have done. The idea is that such openness would boost innovation and speed new service delivery, two bits of progress much needed in the telecom world.

The problem with such an approach, and evidence of it has become apparent in recent months, is that what you end up with is a race to the bottom, where competitors embrace the economics of the Web, open source and emerging cloud computing technologies to turn a high-value game into a low-margin — or even no-margin — one.

Amazon and Google so far haven't become the direct competitors we all thought they'd be. But smaller players have begun to emerge that use their infrastructure, including Google's App Engine and Amazon's EC2 infrastructure services, to build API-driven telecom businesses. Consider it a sneak peak at the future — and it isn't pretty for incumbents.

One company to watch is Twilio, which recently announced its initial funding and first customers. The start-up doesn't even own its application infrastructure, instead running its application servers on Amazon Web Services. If it grows, it buys more capacity by the drink. If it scores a big customer, same thing — it turns on the spigot for a while. Ringful.com, another mashup player focusing on mobile apps, uses a similar combination of Amazon and Google infrastructure as well. Other players include Ifbyphone, Tropo.com and, more on the enterprise side, Jadaku — which recently hired mashup king Thomas Howe as its new CEO.

Such new-age telecom companies leverage the same economics on the telecom side, tapping the heavily arbitraged voice-over-IP wholesale and peering market for minutes-by-the-half-cent — or less.

The challenge of such an approach is clear, especially at a time when many incumbents have all but frozen their capex spending. These competitors can enter the game with almost no upfront capex spending at all and compete in entirely new ways with an entirely new cost structure.

Telecom incumbents can do the same thing. And some — such as BT, Orange, Verizon and others — are. But as we've seen on the voice minutes side, competing for the low-cost customer can be a losing ball game. Be careful what you wish for.