Must ISPs be in the Apps Business?

There are many business analogies between video entertainment and Internet app ecosystems, with similar underlying ecosystem tensions.

In both ecosystems, distribution partners widely worry that they are being relegated to low profit margin “dumb pipe” status, while value is created, and revenue gained, by the app providers.

In the video ecosystem, that is why over the top streaming services such as Netflix are viewed ominously by linear video subscription providers.

In the Internet ecosystem, all apps are, by definition, provided over the top. Distributors might try and create managed services (carrier voice or linear video subscriptions are the best examples) they actually own and deliver, but all “Internet” apps are logically separated from the underlying access.

In the video subscription ecosystem, there long has been an argument about whether distribution or content “was king.” In times past, one or the other views has tended to reflect reality.

The Internet analogy is whether Internet service providers or Internet apps have power in the ecosystem. Most might agree that the app providers have the scarcity value and end user brand names that represent value.

The recommendation, in the video ecosystem, has been that distributors need to own content assets. So Comcast owns NBCUniversal. So far, ISPs have made smaller investments in Internet apps and firms, often through incubators or investment funds.

But it might be hard to point to a big success, so far, in the Internet ecosystem, for ISPs seeking to create valuable assets in the apps sphere.

On the other hand, some might point to Google Fiber as an example of an app entity going the other way and directly displacing incumbent ISPs altogether. It is reasonable to argue that displacing the whole ISP function would be horrifically expensive for even the biggest app providers.

It would be less implausible to argue that leading app or device suppliers might well displace much of the value of a mobile service provider, at less cost, using a wholesale access mechanism, in conjunction with Wi-Fi, for example.

In other words, app providers are in a better position to keep and extend value towards the access function, than access providers are to keep and extend value towards the app function.

For ISPs, the danger is dumb pipe status. But for some ISPs, that might prove quite sustainable as a business model.

At the moment, one would have to conclude that “apps are king.” If that remains the case, ISPs will want to participate, as equity owners, in apps. That might happen through the creation of managed services or simple ownership of app firms outright (Singapore Telecom might be the best example of this strategy).

The point is that, long term, the access function might remain margin challenged, when not directly gross revenue challenged (as when Google Fiber competes directly with other ISPs).

To the extent that the video ecosystem provides an analogy, ISPs might want to own more of the content moving through the pipes. Many app providers see this as a danger, for obvious reasons. But ISPs might have no choice, at all. Value might continue to reside in the apps, not the access.

If so, then ISPs have to be part of the apps business.
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