Friday, January 24, 2020

Like it or Not, Dumb Pipe is the Fixed Network's Foundation

Perhaps you see the irony of cable TV executives saying their businesses, once founded on selling applications, now see the killer use case as internet access, a textbook example of “dumb pipe.” 

“We’ve made a pivot to a broadband-centric cable company,” said Comcast CEO Brian Roberts. That is another way of saying the strategic product for a multi-product company is a classic “dumb pipe” service that is the prerequisite for using all TCP/IP-based apps and services deliverable by the public internet. 

If you ask virtually any telecom executive selling services to consumers (business to business is a different matter), you are likely to hear executives say they are not just “dumb pipes,” in the sense of providing a low-value, commodity-priced product. Rather, you will hear any number of arguments that the full range of products provides higher value, differentiated products at a range of prices and profit margins, sometimes to more-attractive customer bases and geographies. 

What many cable TV executives now argue is that their network services are based precisely on dumb pipe internet access, and not the traditional video subscriptions that historically drove value, revenue and profits. 

That is but one example of how the internet, and the separation of applications from networks, has revolutionized the communications and computing businesses. 

Until the internet era, all consumer mass market services were “apps,” not “dumb pipe.” Consumers bought the app called “dial tone,” the ability to place a phone call, not directly the use of a wire enabling the use of dial tone. Customers bought cable TV not to use a coaxial cable or modulated radio frequency signals, but to watch video. People bought mobile phones and used mobile services to send and receive text messages, not to use a data channel. 

In the internet era, the “value” of fixed network voice, mobile voice, mobile messaging and linear TV subscriptions has dropped. The value of access to the internet (a dumb pipe service) has grown, in both mobile and fixed domains. 

So consumer preferences--and the revenue earned--has changed. Though the value of mobile communications “anywhere” remains, the value of some apps (voice, messaging, linear video) has declined. 

Or, put another way, dumb pipe has grown more important, while traditional apps have become less important and valuable. 

This can be seen clearly in the shifts of service provider revenue in the U.S. market from long distance--the former revenue and profit generator--to mobile service. What one sees is a 50-percent toll revenue drop over a decade, and its replacement by a new lead service, mobility. 

But the mobile network uses rival facilities. The fixed network business model now hinges on dumb pipe internet access. Other services and apps are important: how many service providers would willingly surrender their voice or video revenues? 

But new questions must be asked. To the extent the fixed network must rely increasingly on one service--internet access--how does the business model change, and how? Can the full value of capital investments be recouped solely or primarily from internet access?

If not, what can be done to find replacements for lost voice and video revenue? And how soon will most fixed network executives become comfortable saying their business models are built on dumb pipe? For how many service providers will this prove true?

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