In search of replacement revenues

When one revenue stream (landline, anyone?) shrinks, the challenge for service providers is to find another revenue stream that can grow to replace it.

For savvy carriers, those revenues are likely to come from the most unlikely places.

Need an example? Consider the music industry. Pummeled by file trading, CD burning and lower-margin digital sales, the music industry has spent more time complaining and prosecuting its users than working to find new business models and new revenues.

But that may be changing. This year has brought lots of publicity about a variety of new approaches, such as the digital giveaway from Radiohead that actually led to strong physical sales, or the use of video games such as Rock Band or Guitar Hero to promote bands and distribute music.

Or if you're looking for an even more unlikely revenue stream, consider this: Digital royalties paid to composers, songwriters and music publishers in the U.K. are growing strongly, boosted in part by self-made videos in which users lip-synch to their favorite songs and post them to popular video sites such as YouTube, according to MCPS-PRS Alliance, a U.K. group that collects and pays royalty fees to music artists. That's right, videos of girls singing into their hairbrushes.

Turns out that sites such as YouTube have cut deals with the record labels to cover the right to lip-synch to those songs on behalf of their users. The users won't pay for those rights themselves so video sites are doing it for them. Driven by such unexpected — even odd — licensing requests, online royalties in the U.K. in the first half of this year rose by 40% — from $10.4 million to $13.3 million — even as CD royalties fell by 9% over the same period.

If the incumbent music industry is to survive, it's critical that it milk such alternative streams for all they are worth.

The same goes for the telecom industry. As landline revenues continue to fall and even wireless usage reaches a saturation point, telcos are challenged to find new revenue sources. Some potential sources, such as triple-play bundles and video subscriptions and offerings, are already on the radar. But those new businesses can be tough, with margins lower than the services they replace.

The concept of replacing old revenues with new revenues from new sources is at the heart of the “Telco 2.0” business model, described most eloquently by U.K.-based consultancy STL Partners in its influential Telco 2.0 Manifesto, released in a new version earlier this month. The Telco 2.0 business model focuses on new “two-sided” markets in which carriers can play more of a middleman role, delivering an array of wholesale and business-to-business services. It's that kind of out-of-the-box thinking that is required to find new businesses to replace rapidly-declining landline revenues.

Where do you think new service provider revenues will come from? I am starting work on a new story on the topic of “Finding New Service Revenues” and would love your input. E-mail me directly at rkarpinski@telephonyonline.com.