How ISPs Can Survive Becoming Dumb Pipes

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 (s TWC), AT&T (s T), PlusNet in the UK and most other UK broadband providers areĀ  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 (s VZ) and Cablevision (s CVC) 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 (s S) 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 (s CLWR), 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 (s INTC) 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.