SaaS and Web 2.0 companies demonstrate every day that there’s real money to be made providing a myriad of services over the Internet, and if history is any indication, the service providers are taking notice.
If there’s one thing that service providers denounce, it’s being classified as the plumbers and pipe fitters of the Internet, destined to move bits between co-location facilities. With the software-as-a-service (SaaS) and Web 2.0 revolutions in full swing, service providers are pounding the table, insisting that they have evolved beyond the mundane task of moving bits to become “service provider 2.0” companies. Truthfully, I have my doubts, but service providers do have one unique Facebook friend, and her name is Scale.
Looking back, it’s clear that arriving late to a market and then dominating it is par for the course for service providers. In the late 1990s, for example, service providers let start-ups provide DSL over their physical infrastructure.
When these start-ups monetized the service and tried to build it across multiple geographies, the service providers slowly moved into the market and eventually took it over by using their scale and marketing dollars to drive the start-ups out of business (e.g. anybody remember Northpoint or Rhythms?). We’re seeing the same thing occur today in the VoIP services space. Now that service providers offer VoIP services, start-ups find themselves unable to scale effectively, which in turn is forcing them into poor economic models and putting them on the ropes (see SunRocket and Vonage).
The reason that service providers can come to a market late and still play a significant role is their ability to effectively scale. They have been building and deploying the biggest networks on the planet since the era of rotary phones and switchboard operators.
That does not mean that service providers provide the best technology, the quickest time to market or the most efficient economics for the consumer, but it does mean they understand that scale can be enough to win a market. To put it in automotive terms, not everyone needs a Ferrari Testarossa or even a Toyota Prius, many are perfectly happy with a Honda Accord.
So the big question is this: Can service providers once again leverage their scale and truly move beyond being the plumbers and bit pushers of the Internet? SaaS and Web 2.0 companies demonstrate every day that there’s real money to be made providing a myriad of services over the Internet, and if history is any indication, the service providers are taking notice. There have been some modest moves into these spaces over the past few years, such as Level 3’s (LVLT) acquisition of a content distribution network from Savvis and Internap’s purchase of VitalStream, but nothing truly monumental or insightful.
Instead, the public markets have rewarded companies such as Limelight Networks (LLNW) for providing scalable video-streaming services over the service providers’ plumbing. To borrow a phrase from the mighty Led Zeppelin, the song remains the same.
For service providers to truly evolve and earn their “2.0” moniker, they will have to move into areas that are beyond their traditional core expertise. It’s time to leverage that friend Scale and move into something beyond bits. Piling onto the hot topic of the year, maybe it’s time for AT&T (T) or Verizon (VZ) to buy a real Web 2.0 property, like Facebook. That would clearly be monumental, and it would give them lots of friends. [digg=http://www.digg.com/tech_news/Service_Providers_2_0_It_s_All_About_Scale]
Allan Leinwand is a venture partner with Panorama Capital and founder of Vyatta. He was also the CTO of Digital Island.