Blog Post

Service Providers 2.0: It’s All About Scale

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.

By Allan Leinwand

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=]

Allan Leinwand is a venture partner with Panorama Capital and founder of Vyatta. He was also the CTO of Digital Island.

14 Responses to “Service Providers 2.0: It’s All About Scale”

  1. hey allan, i think you brought up a nice new perspective on power in the internet business, besides the often mentioned power of Google. ISPs have a lot more power than they realize, I always wonder why they don’t use it more, but maybe it’s better this way. From my point of view they will continue to rise, until the turning point comes when Telcos and Electric Power Companies will directly attack the ISPs throne on a large scale. I think only when the internet breaks up with its old hierarchic structure, it will be truly open. If your interested in that vision, maybe have a look at my blog-entry


  2. There is a point to scale overpowering the smaller opponents, but I think this time around the case will just not be as simple.

    First, the small companies have seen how larger opponents can kill, but they have also seen how to compete succesfully against them.

    Secondly, certain web services are able to build lock-in high enough, which is fairly hard to overpower even with scale.

  3. […]I believe the telecom providers have never moved beyond being the plumbers, though innovative plumbers that have figured out all kinds of ways to charge you for every turn of a faucet. Doubt me? Just look at the Web 1.0 world. Every single Internet access provider I have used has offered me a “home page” of their making, with supposedly advanced services for accessing mail, news, search and other key features of the early Internet. And in every case, I quickly replaced their tired page with either my My Yahoo page or Google. Not a single one was able to offer me anything innovative enough to see them as leading edge technology in the Web content space.[…]

  4. Allan Leinwand

    rob and Dave – Service Providers have moved up the stack and are offering value-added services far above the traditional network layer. Look at services such as hosted email/Exchange servers, online storage and backup, hosted databases and so forth. I’ll definitely agree with you that this is far outside of their classic service provider box but with their scale anything is possible.

    For example, stay tuned for service providers offering hosted Windows desktops and other more traditional desktop applications, perhaps as a reseller of Microsoft or Citrix services. Are you ready for AT&T to be running your desktop and Powerpoint in the cloud? If you think this is lunacy, look where Google is today…. :)

  5. Hey Allan,
    You’re right, it’s all about scale. Telcos can scale their networks very well, but they SUCK at scaling their services by moving up the stack. Instead, they wait until someone else does something interesting, then they buy it. That’s why the telcos waited for ISPs to use telco circuits, then the telcos bought the ISPs when they were sure it was a “real business.” Then the colocation facilities used ISP connections to form their business, and the telco/ISP became the telco/ISP/hoster. Then, the same thing happened with MSPs, and now we’re looking at the telco/ISP/hoster/MSP buying some SaaS apps…as witnessed by the resurgence of Jamcracker as a platform for telcos to deploy apps as a service.

    The telcos are simply following the Cisco acquisition model…let someone else build it, then buy it (hopefully after you exploit your position in the OSI layer to drive prices down like they did with DSL…)

  6. I agree with you to a certain extent – service providers must evolve or die…well, die is a bit dramatic but it sounds so much sexier then “further commoditized”.

    Where I don’t agree with you is that they don’t need to (and please dear god don’t let them!!!) move into the application space!! If they are to innovate, provide a service around that dumb-pipe that they already control.

    How about giving customers DDOS protection? What about doing deept packet inspection and being an anti-virus filter before those packets even reach customer prem? Services like MPLS, metro-ethernet and VLAN between facilities are moves in the right direction.

    These and other innovations can become SaaS – Service as a Service – things that should be able to be turned on at touch of a mouse.

    Become an extension of the customers IT department, willingly and ably,by not being lazy and stopping at the demarc and then I may give them the moniker of “2.0”….till then they will continue to be treated them like the commodity pusher they are.


  7. Allan, am not sure if I agree with you on this. If what you are saying is true, then AT&T would have provided email services on their own instead of doing it with Yahoo (at least that is what they started off with some 4 yrs back). Not sure if the Service providers understand apps well – their focus is more network centric. To be able to do apps well, they need to change their culture and I think that is too much of a change for them. VoIP, DSL were still communications products. And pl. do not underestimate the power of the service provider regulatory games, that is the main reason for the failure of the DSL providers.

  8. Service Providers (ILECs) suffer from Brand Dilution. It is difficult for them to make complex, synergistic value propositions and so their marketing dollars are focused on meat & potatoes advertising — sign up for broadband, get a free computer. The applications they do take to the market are almost always fully-bundled, so consumers don’t see the price.

    There’s really not much precedent for the incumbents (and their cable competitors) successfully marketing anything other than basic service bundles. Even VoiceMail is still dominated by the traditional answering machine for most families.

    This is probably the way it should be, since they can’t innovate. Their service development is now almost entirely outsourced to 3rd party companies like RadialPoint and IP Applications.