Without High Switching Costs, Telecom Looks Vulnerable to DeWi

High switching costs and long-term contracts have previously made telcos impossible to compete against. Key changes in market structure today are allowing challengers with unique crowdsourced supply to challenge them, says EV3's Mahesh Ramakrishnan.

High switching costs and long-term contracts have made it nearly impossible for any company to compete with big telecoms. But key changes in the market structure are allowing challengers to enter the fray with unique crowdsourced supply.

As big telcos grapple with a debt burden that has been supercharged by COVID, the prospect of at-scale 5G this decade is becoming more of a meme than an inevitability. While it’s likely a shock to customers who already see a 5G icon on their phones and assume they have full service, the 5G buildout is in its nascency.

This op-ed is part of CoinDesk's new DePIN Vertical, covering the emerging industry of decentralized physical infrastructure.

It will take another $250 billion-plus for telcos to build 5G themselves, a prospect that is causing little excitement in corporate boardrooms given the dearth of use cases today that require it. As a result, mobile network infrastructure providers are suffering. Ericsson shocked financial analysts this past quarter when it reported sales down almost 20% from the year before. The capital intensity and coordination complexity of building a telecom network just isn’t worth the effort to a centralized company.

But the rate of technological progress isn’t slowing down: Skyrocketing demands for cloud compute will require an exponentially increasing supply of bandwidth. Where will this step function improvement come from?

Decentralized Wireless (DeWi) networks offer an efficient way of bridging the two outcomes by outsourcing the work required to build 5G networks. The secret ingredient in DeWi is community-driven collaboration: Any person can deploy a device that provides others with bandwidth and be sure they will be paid for the service provision. By incentivizing people to monetize their internet connections, DeWi networks turn their communities into their supply chain.

Key to DeWi’s success is the commoditization of telecom hardware: While complex towers and boxes used to do the heavy lifting, now software does all the work. Wi-Fi offload has emerged as a key component supercharging 5G, as the majority of mobile use occurs indoors.

While still nascent, this model of building telecom networks has seen promising developments. DePIN networks like Helium have created meaningful supply side footprints, supporting thousands of hotspots. By combining their footprint of hotspots with T-Mobile’s nationwide cellular network, Helium launched Helium Mobile to sell cheap phone plans directly to customers. The experiment is still early, with ~100,000 subscribers and 10,000 suppliers on the network, and many are skeptical it may ever work as free phones and two-year exclusive contracts present meaningful switching costs.

While demand has proved far slower to emerge than investors expected, the skeptical view ignores a changing context that is rapidly reducing the barriers to entry.

For decades, big telecom companies have kept customers locked into long-term contracts and made it difficult to switch providers. But that's changing. The physical SIM card, once a key part of this strategy, is becoming obsolete. Apple’s new iPhone 14 supports multiple eSIMs, which are digital versions of SIM cards, meaning one can now switch carriers with a few taps on the phone instead of visiting a store.

This shift drastically reduces switching costs and levels the playing field, allowing smaller companies to compete with the telecom giants. What used to take days to switch providers now only takes minutes. This challenge has been reinforced by regulators, who aim to limit the ability of telcos to lock customers into exclusive contracts.

The last vestige of the high switching cost model, customer lock-in, is under attack by the FCC today. The FCC Chair is advocating for a policy that would stop carriers from blocking phones from using other eSIMs after six months. This change means that after six months, anybody can switch carriers easily without any restrictions, regardless of the original terms and price promotions associated with the contract.

This policy could shake up the telecom industry, ending the profitable strategy of bundling free phones with long-term contracts. As a result, the industry should expect intense price competition since carriers can no longer rely on package deals to keep customers and will have to compete on selling commoditized bandwidth.

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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 less than the equivalent centralized incumbent, at any scale. The three biggest cost buckets suffered by incumbent carriers are: spectrum costs, capital expenditures on hardware, and tower maintenance fees.

The secret sauce of DeWi is outsourcing all three of these costs to people willing to host internet-providing routers themselves, obviating the need to spend money on real estate and towers. By paying them in tokens, DeWi networks allow community members to participate in the upside and incentivizes viral growth.

While companies like Helium compete on telco turf of contracted