Two-Sided Telecom Markets and the Unintended Consequences of Business Strategy

Leonard Waverman, Apr 19, 2007

A two-sided market is one where two different parties are connected to each other through a third-party platform. Examples are many: nightclubs and dating clubs are platforms that bring together people wishing to meet other people; newspapers are platforms providing advertising and content to readers. In this brief paper, I examine the two-sided nature of telecommunications. It is clear that a traditional telecom is a platform allowing a calling party (C) to connect to a receiving party (R). However, it is, in a sense, too easy to label economic activity as two-sided. Without clear limits, most activities appear to be of a twosided nature. Therefore, I begin by examining whether telecoms meet the conditions of two-sidedness as defined by Tirole and Rochet in their 2007 paper. I then turn to examining briefly the history of pricing in fixed-line and mobile telecoms. The pricing structure we see today in many markets is a result of historical business models. In most countries, the calling party pays all the costs of the call, while caller and called pay for access to the network. I show how the pricing structures first developed in fixed-line telecoms had unintended consequences on subsequent developments in new mobile telephony. Since pricing structures and not just the level of prices are important in two-sided markets, these unintended consequences need to be recognized, and dealt with, if possible. I then turn to the brave new world telecom operators providing content and being the platform for IP services and applications.