Monday, April 23, 2018

Connectivity Not Necessarily a "Commodity?"

Some statements properly need to be qualified and understood in context, even if our typical phrasing lacks that nuance. We might agree there are a few instances where "connectivity is not a commodity." But that characterization hinges on our understanding of the term, in context, in all its range of connotations.

When observers say that connections to the internet (business or consumer) are a commodity, that typically is phrased as access or connectivity being a “dumb pipe”

The other implied terms span a range: low value, low price, slow-growing, low profit margin, declining growth, saturated market or any other modifier that suggests the connectivity is old, stagnant, saturated, hard to differentiate, lacking growth opportunity, is not innovative,  or some similar notion.

So when a telecom executive implies that “connectivity is not a commodity,” that claim also has to be parsed. Stefano Gastaut, CEO of Vodafone IoT, does not believe that connectivity will be a commodity for a long time.

There are many nuances here. The claim is not unqualified. Gastaut does not claim connectivity services will never be a commodity, only that it will take some time for that to happen.

Allso, note his own context. He is the head of a business unit that sells internet of things services that arguably “are not yet common or necessarily a commodity,” using the sense of “a market that is young and fast-growing.”

Gastaut noted that Vodafone now has 65 million IoT connections, including 14.4 million connected vehicles and five million medical devices. He said IoT is a “sizeable business growing very nicely.”

So Gastaut seems to imply an understanding of the term “dumb pipe” that includes the size of the IoT connectivity business opportunity and the growth rate. But it also is fair to note that IoT sensor connections often generate revenue of between 15 cents per month to $1.50 a month.

Irrespective of profit margin, that is not a lot of incremental revenue, even in high volume.   
He also suggests that connectivity services are not like other utility services (water, electricity) that cannot innovate.

Observers might agree with some of the possible characterizations, using the broadest possible range of connotations for what “dumb pipe” means, in a business sense.

Aside from the clear “technology” function of internet access (it is, in fact a dumb pipe allowing access to any lawful third party app using the public internet, or any lawful private app for which a specific user has access right), one might use an expansive understanding of the range of meanings around “dumb pipe.”

Some of us would use a narrower understanding. IoT connectivity might or might not yet be a commodity. It might not yet have slim profit margins, (though that is most likely). The number of connections clearly is expected to grow at high rates.

Moreover, the range of ecosystem roles IoT connectivity providers assume--in addition to connectivity--is not yet clear. So such providers might well operate apps, platforms and devices in addition to connectivity, and those roles will have varying revenue, growth and profit profiles. Not all will appear to be “commodity” driven in terms of business dynamics.

The point: perhaps some forms of connectivity (market segments, specific apps and geographies or routes) are not presently “commodities,” using a broad sense of what the term “dumb pipe” means.

Those specific instances are few. The word “commodity” can be understood as “a useful thing” or a product that can be bought or sold, or exchanged for other products, or, as its intended usage in telecommunications implies, commodity is a product with no “unique selling point.”

In other words, a ton of raw sugar can be priced and sourced from any number of suppliers, geographies and plant sources, at identical or similar prices. The sugar is chemically identical, irrespective of the source.

So, in context, connectivity services are not “completely” commodities. Network access in France is not a full commodity in the sense that access providers in North America can supply the demand. Capacity across the Atlantic is not fully interchangeable with capacity across the Pacific, or between North and South America.

There are geographic barriers, business model barriers, regulatory obstacles and also some differences in product packaging and tariffs, in any country with competition.

All that noted, in the internet era, the value of access is sharply affected by the shift of value to other parts of the ecosystem (devices, platforms, apps). And the universal trend is for retail prices per bit to decrease over time. That is what Moore’s Law is alll about.

Gastaut’s claim--with all possible modifiers and in the context of his own business unit--that connectivity is not a commodity is correct in some sense. Whether it also is “true” is perhaps another matter.

To my knowledge, no forecaster of internet of things revenue believes much of the revenue will be earned by connectivity suppliers, in that role.

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