Future Business Models for Fiber-to-Home?

It's pretty easy for those of us who do not have to operate broadband access businesses and networks to give "helpful" advice about new revenues and businesses that can be created around fiber access networks.

In general, we might agree with analysts at Yankee Group that enabling services, communications services, entertainment services and "communications-enabled applications" are fruitful avenues to explore.

The issue is that almost none of the advice anybody ever offers service providers fit into the category of a "killer app," and that is significant. The problem large companies have is that opportunities have to large to justify the investment of time to grow them.

When Cisco says it invests in opportunities, each of which can grow to be a $1 billion a year business, that illustrates the problem. What to do with fiber access networks is that sort of problem. It is hard to point to any discrete business opportunities that have that sort of potential, yet that is what is required to really move the needle in terms of service provider interest.

Yankee Group analyst Benoit Felton, in fact, does not consider "broadband in itself is not a service, since it has no intrinsic value to end-users. In a sense, one can agree with the notion that customer equipment, cables, power supplies, switches, routers and software needed to create networks are enablers of communication services.

Entertainment services will these days make sense to most service providers, since video entertainment is a substantial business with revenue that could easily amount to billions of dollars worth of annual revenue.

Applications that use communications might include home automation, health care or other forms of telemetry or monitoring. Development of such services almost necessarily involves working with other ecosystem partners.

The initiative recently announced by AT&T, Verizon Wireless and T-Mobile USA, working with Barclays and Discover Financial Services for mobile payments is one such example. That's the sort of new business that does have potential to generate "billions" worth of annual revenue, not a "millions."

That said, placing a huge big bets is inherently risky. The argument for placing lots of smaller bets is that the risk of failure is immensely reduced. Working actively with partners creating mobile apps is one way to sponsor lots of smaller initiatives, most of which will "fail to move the needle" in a direct revenue sense.

But that isn't the point. Hidden among those many experiments are a few that might someday become "$1 billion" sized applications and services.

Big, expensive bets, too far away from today's core, will be dangerous, as such moves have proven to be in the past. Carriers aren't terribly innovative, most will agree. Those who are stewards of those assets are right to be cautious, criticism notwithstanding.

But that doesn't mean nothing can be done. Lots of experimentation is possible in fostering the development of mobile-related apps, advertising and commerce. But there will be few such initiatives that can take the form of "big bets." Most will be small, "we can handle the failure" sort of ventures.

We still don't have evidence of large, substantial demand from consumers for many new communications-related apps that stray too far from basic access, voice, texting and video entertainment.

The problem is that many "killer apps" have difficult economics. Email was a killer app for dial-up Internet access, and has been an early killer app for mobile data. But email itself offers almost no significant revenue upside for an ISP. Lots of future opportunities might take that form.

The human needs and valued applications that drive use of communications might be difficult to monetize in a direct way. That won't be so important if indirect revenue models can be created. But its okay not to move too quickly or invest too much in lots of "futuristic" apps and services. The odds of failure are too great, the chances of success too slim.

When critics say ISPs mostly are "dumb pipes," there is some wisdom there. What ISPs can do to build on those pipes is the issue. But there are few "drop dead simple" answers, and stewards of service provider assets always are wise not to pay too much attention to the advice so liberally given them about what they "need" to do. In many cases, there is not much they really can, or should do.

That said, "doing nothing" makes no sense, either. The art of judo always uses an attacker's strength and power to advantage. It is hard to see how that will not be an important principle going forward: relative weakness in some ways can turn to strength by "going with the flow," rather than fighting it.

Partnerships with app providers that can make good use of communications, location, presence, billing relationships, promotion, branding, convenience, portability and stability will be fruitful in many cases.

"Dumb pipes" are a problem only if they are used in "low margin," limited revenue sorts of ways. A high-margin, high revenue pipe business is a great business. High-quality, application-aware and application-optimized pipes are a step in the right direction.

Yankee Group