Will Amazon Become an ISP?

Ironically, as Amazon reportedly ponders becoming a retail Internet service provider in the United Kingdom or Germany, the broad implications of mandatory wholesale again come into perspective.

The attraction for Amazon of becoming an ISP: offering a bundle of Internet access and Prime video, essentially making Amazon a dual-play competitor to both telcos and cable companies.

The point arguably is to boost Prime uptake, more than the attractions of revenue earned by supplying Internet access.

Such a move, already taken by Google Fiber in the United States, has not been directly matched by Facebook, which is focusing more on backhaul platforms that work with mobile operator efforts. Google’s Project Loon presently contemplates a backhaul role, with mobile operators being the retail access providers.

The broader background issue is the role of wholesale access in the access business, which varies by country. On one hand, the robust wholesale regime allows many retailers to enter a market.

About 80 percent of retail U.K Internet access accounts are supplied using BT’s wholesale network. About 20 percent is supplied by Virgin Mobile, using its own network.

In Germany, perhaps 17 percent of total Internet access connections in early 2015 were supplied by cable networks.

In France, where most fixed network Internet access connections happen over the Orange network, using wholesale mechanisms, perhaps four percent are supplied on cable TV networks.

The point is that most retail ISPs, building their business on wholesale access, make a trade off. They gain the ability to supply access, without building their own expensive facilities, at the price of losing control of their access costs and features.

As a practical matter, that means every retail ISP using BT’s wholesale network is limited to the speeds and features available to every retail service provider using the network.

Talk Talk, which is building (in some instances) its own fiber to home access connections, offers service at 900 Mbps. Though not yet a widespread option, operating its own facilities allows Talk Talk to vastly outperform the typical U.K. access connection.

Though Virgin Media is upgrading, “average” speeds for most fiber-to-home connections runs about 42 Mbps, or 54 Mbps for cable connections.

A major disadvantage obviously is that no retail provider is able to distinguish itself on network features, and each supplier’s cost structure is bounded the cost of leasing the wholesale assets.

Virgin Mobile is able to offer a differentiated service because it runs over its own network, indeed using a different platform (hybrid fiber coax, not fiber to neighborhood or fiber to home).

There always are trade offs in the communications business. For many retail ISPs operating in the fixed networks business, the decision is between lower capex, without control; or high capex, but with ability to differentiate.

Amazon might well deem the ability to operate at lower capex the key value, as Amazon Prime video does not require excessive bandwidth.
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