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Summary:

As it becomes ever easier to get both video and voice over a broadband connection, telecommunications providers increasingly appear to have a one-way ticket to commodity status as a dumb pipe. Consolidation of services on the part of consumers alone has the potential to reduce a […]

As it becomes ever easier to get both video and voice over a broadband connection, telecommunications providers increasingly appear to have a one-way ticket to commodity status as a dumb pipe. Consolidation of services on the part of consumers alone has the potential to reduce a triple-play bundle that costs more than $100 and reduce it down to the $30 or $40 cost of a naked cable or fiber-based connection.

Plus, especially on the wired side, ISPs have to follow federal net neutrality regulations that require them to allow all content over those pipes without interference, cutting off revenue schemes that would involve either consumers or content providers paying more to deliver their programming to consumer’s homes. It also prevents them from blocking potentially competitive technologies, such as VoIP. So far they’ve also been stymied when it comes to offering up consumers to advertisers, although that still holds promise for both wired and mobile broadband providers.

Given these pressures, carriers seem to be adapting to the realities of the business in three primary ways, with some even trying out a mix of these options, depending on the competition in their home markets.

Squeeze The Customer Base

Time Warner Cable, AT&T, PlusNet in the UK and most other UK broadband providers are  experimenting or have implemented caps or consumption-based plans as a way to boost their revenue from providing the pipe. The pipe is still dumb, but different pricing plans mean that carriers can make more money off of them. Benefits of this to the ISP are higher revenues (and presumably profits). The downside is that in a competitive market, carriers will get stuck with the low-end user as a customer base, and as those consumers die off or discover high-end services, they’re going to dump the pipe.

Focus on Luxury

Verizon and Cablevision have taken the opposite approach, building out faster networks so that they can offer higher speeds at higher prices. The goal is to sell the consumer more high-end services such as online backup or home security, while driving down the total operational costs of running a network (for cable providers, this will mean eventually moving to DOCSIS 3.0; telcos will move to fiber). On the wireless side, the shift to LTE will enable this same model. Already broadband providers, be they wired or mobile, are trying to attract original content or services to differentiate themselves with as faster speeds become more common.

Dump the Pipe and Focus on Service

So far in the U.S., Sprint seems to have been the most aggressive with an outsource-the-network strategy, although India’s Bharti has outsourced its network as well. Sprint got rid of its 4G network through a partnership deal with Clearwire, and it’s also reportedly in talks to outsource its 3G network to Ericsson. It’s a risky bet, since giving up control of the pipe seems akin to Intel giving giving up its fabs, but if Sprint can create a compelling mix of products and services using its understanding of the wireless world, it may be the one laughing all the way to the bank.

  1. It’s not the fear of becoming a “dumb pipe” that’s the issue, its the inevitable impact on revenues and margins that’s scaring them shitless. They saw it happen with international telephony, they saw what happened with wholesale IP transit and now they’re skidding down a slippery slope with consumers.

    It’s not hard to draw a projection that puts the ROI for telco investments below the cost of capital. Any industry faced with the proposition that they may be better off investing their money elsewhere – not in their own business, has got to be looking for a solution.

    I don’t think outsourcing the network is a long term solution. There are short term gains but the underlying problem is still there.

    Innovation is the only choice they have.

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  2. I don’t know why carriers have an allergy to simply selling pipe. if one of them would simply sell nothing but GREAT bandwidth with lots of reliability and service (ie. visibility to network status, latency, etc.) and cut costs accordingly they could print money.

    they would actually be doing something they are pretty good at and avoid doing all the things they suck at (customer service, providing services on the Internet, marketing).

    first one to do it wins.

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  3. I have no sympathy for any of them. It IS a dumb pipe – the internet is designed that way. And their profit margins increase about every 10 seconds.

    We seem to have forgotten that back in the 90s they took a huge amount from the taxpayer because Congress said they had to build out 100Mb pipes. Then in late 90s that requirement was dropped because they had “spent” all the cash and hadn’t met the target. We’re talking billions of dollars here.

    Then, even though their margins naturally increase over time they have a law allowing them to increase our rates in the future through 2012.

    Now Time Warner says they can’t do 3.0 in my area because they cannot afford it.

    No sympathy at all.

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  4. I have no sympathy for any of them. It IS a dumb pipe – the internet is designed that way. And their profit margins increase about every 10 seconds.

    We seem to have forgotten that back in the 90s they took a huge amount from the taxpayer because Congress said they had to build out 100Mb pipes. Then in late 90s that requirement was dropped because they had “spent” all the cash and hadn’t met the target. We’re talking billions of dollars here.

    Then, even though their margins naturally increase over time they have a law allowing them to increase our rates in the future through 2012.

    Now Time Warner says they can’t do 3.0 in my area because they cannot afford it.

    No sympathy at all.
    Sorry… forgot to say great post – can’t wait to read your next one!

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  5. Prior to the Carter Phone decision back in the late 60′s Telcom was a total monopoly, you could not buy ur own phone or get service unless you got it from MA Bell. With the Carter phone decision companies and individuals could purchase their own phone systems and stop the monthly rentals. Ma Bell cried and said that the national system would be damaged if you attached non Western Electric phones/systems to the network. Never happened – so the boys came up with other ways to scam the public. Things have not changed in terms of pricing schemes. Let’s be honest, the network is a pipe that allows 0′s and 1′s to travel down it From my perspective there is no reason that customers need to spend $100-$200 a month on it. The infrastructure is built, software is running and hundreds of thousands of telcom workers are long gone. Operational costs are way down and it does not take that many employees to run the system today – so forget the over the top profits and serve the customer.

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  6. TELCOS CAN INNOVATE BY BEING BETTER AT MARKETING & DISTRIBUTION

    Carriers will not hire designers, futurists, engineers etc. to come up with new products of their own. They can innovate by doing better marketing and packaging of their offerings. At present they market their phone services – they need to market their other services better. They will collaborate with third parties to offer VAS etc. The telco companies need to become better at marketing and distributing their diverse offerings even if they do not develop them in-house.

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  7. IMHO, being purely a broadband Internet access provider, without value-add services, is still a viable business model — as long as that strategy is executed by purposeful intent, rather than merely a failure to innovate and demonstrate meaningful incremental value.

    That said, the network *is* increasingly becoming “the platform” for new service innovation. Consider the fact that many broadband service provider already offer managed service, hosting services, and soon will add a variety of high-value cloud services to their portfolio.

    My point: the problem arises when service providers don’t articulate a clear business strategy to their employees and customers. Those that play to the middle are in big trouble — “we’re sort of a low-cost provider, but then again we can also meet all your needs” is not a credible business strategy.

    However, those service providers who successfully unite their IP NGN infrastructure, robust fail-safe data centers and superior technical support capabilities will be able to deliver substantive value to customers — both consumer and enterprise.

    Therefore, perhaps the question that remains is how many will actively progress to one end of the value spectrum or the other — rather than stay stuck in the middle zone and ultimately perish? Time will tell, and 2009 is likely a pivotal year for many SPs. Bottom line, choose wisely and decisively — one way or the other.

    David Deans
    Business Technology Roundtable

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  8. James Fisher Monday, May 11, 2009

    James Fisher from Sprint here. Your posting throws around terms pretty loosely, and inaccurately – let me clarify with some facts. First Sprint didn’t “get rid” of its 4G network; we own a 51% share of Clearwire and our CEO Dan Hesse, among other Sprint executives, is on the board. This arrangement allows us to ensure the nation’s first national 4G network is deployed the most efficiently and economically, bringing value added services to customers well before the competition. Second, just after the reference to 3G network outsourcing discussions, you use the phrase “giving up control of the pipe.” We’ve said we’re looking at options for having a vendor perform some network services, but we’ve made no decision on whether this is the right move for us. But if we did move in this direction, “giving up control of the pipe” or selling our network would have no part of it.

    Wireless companies throughout Europe that have employed these partnerships still own their networks and make the key decisions. But they are able to bring to their customers a network with the expertise and experience of thousands of more engineers, technicians and other experts to add on to the existing carrier’s network team. More people; more skills. When this happens some of the existing teams have been rebadged – but they stay in place, doing the same job with more resources, more highly advanced software, access to global best practices, etc…

    Generally, while retaining ownership of its network, the carrier interacts directly with the customer. The carrier plans network investment and expansion and the kind of strategies that ensure the customer receives value-added services beyond just a network connection. The carrier is in total, ultimate control, but can focus on the things the carrier does best, and leave tower repairs, equipment delivery, asset management and day-to-day network monitoring to a vendor – employing much of the carrier’s original team – who does that best.

    Sprint used to be primarily known as a long distance company, and we saw the value proposition change in that business. We know very well how to retain value in our 3G and 4G businesses, and we’re always considering smart, creative decisions that to ensure that happens.

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  9. [...] may help them hold onto those margins in the short term, but as we’ve previously noted, the industry has to deal with innovations that are turning wireless and wired broadband providers into dumb pipes. It’s also faced with [...]

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  10. Stacy,

    There is a fourth alternative: sell additional services using the spare capacity in the last-mile connection.

    First, we need to recognize that broadband operators use physical media (e.g., DSL, PON) to connect their customers to the nearest network point of presence. Over that physical media they sell high-speed internet access, a layer-three connection between the subscriber gateway and the ISP’s edge router. The “speed” (it’s actually capacity) of that internet connection is always considerably less than the capacity of the media. This must be so in order to compensate for oversubscription factors that are required to deliver internet access services consumers can actually afford.

    Second, we need to recognize that virtually all “high value” video (e.g., television episodes and movies) isn’t delivered over the internet. Instead, Amazon, Apple, Hulu, Netflix and others pay content delivery networks (CDNs) to bypass the unruly, rough-and-tumble “best-effort” internet and deliver traffic directly to the broadband operator (by the way, regulators in Washington don’t seem to know this so let’s keep it between you and I).

    Given these two realities, why can’t broadband operators merely connect the CDN with a channel using spare capacity over the broadband pipe and deliver enhanced video services (or gaming, or telecommuting, or…) to their customers? The answer is that they can and they are and customers like it and will pay for it.

    Again, this isn’t a matter of promoting some internet traffic since none of it is internet traffic. The actual internet connection is unhindered and all traffic within that connection is treated in a like manner.

    Gee, broadband operators get the incremental revenue necessary to justify investment in expanding capacity. Customers get high value streaming video on their televisions. And proponents of internet regulation get unfettered, every-packet-is-the-same internet access.

    Sounds like a win-win-win to me.

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