Choice of TCP/IP Was Fateful

Choices have consequences. When the global connectivity industries decided that TCP/IP was the next-generation network, they also embraced other foundations. Functions now are layered. We use application programming interfaces to communicate between layers, but the layers themselves are disaggregated. 

That means monolithic value chains or vertically-integrated value chains are also disaggregated. One can own and operate an asset at one layer without owning and operating all the other layers. App ownership and creation is separated from delivery, for example. 

That is why “over the top” is essentially the way all apps now are created. Which entity “owns” an app can vary, but development is permissionless. 

In a similar and earlier way, the digitization of all media types has had key consequences. Digital media means digital delivery. And that also means delivery in a permissionless way over layered networks. Where content owners once had to create or own their own delivery networks, now any media type can be accessed by any user (so long as it is lawful in the eyes of a government) without a specific business relationship between content owner and distributor. 

That enables content streaming, which has created traffic imbalances between inbound and outbound data. Only kilobytes need be sent upstream to request delivery of a two-hour movie, whose delivery entails gigabytes. 

And though the magnitude of data transfer is less for other types of content and interactions, the same imbalance exists. It only takes kilobytes to request a page or an object. The delivered content, ranging from websites with auto-start video to streaming audio, requires much more data to be delivered and displayed. 

The public communications networks long have had a way of dealing with imbalances of this type. At the end of a year, carriers true up usage. If one network has landed more traffic than it has sent--and in principle “used” more resources--payments are made by the sending network. 

And that is the logic behind proposals to tax a few hyperscalers for landing traffic on ISP networks. 

Think about the impact on networks in making the switch from analog to digital; linear to on-demand delivery. Content delivery networks always are most efficient when using a broadcast or multicast model where essentially one copy is delivered at the same time to many thousands to millions of viewers or listeners. That allowed one-to-many networks to be built and operated by the content companies (radio stations, TV broadcast stations, cable TV). 

On-demand delivery requires a very different kind of network. Unicast delivery then must be supported. Any-to-any networks require overbuilding capacity, compared to a broadcast network. Where in a linear environment one copy is sent at the same time to many consumers, a unicast network requires sending one copy to one consumer, each requiring consumption of additional network resources. 

Of course, it is complicated. It is the ISP’s own customers who are invoking the remote data. If the product were electricity, water, natural gas, toll road access, landing rights, docking rights, lodging nights or most other retail products, buyers pay for usage. Business-to-business usage winds up--ultimately--paid by end user consumers, even if intermediate costs are borne by other business partners. 

Intermediate funding can come in various other ways. Advertisers or sponsors can defray some costs, those costs being recouped in sales of whatever products advertisers are hawking. 

Some participants can be taxed or subsidies can be applied. Taxes on a few hyperscalers illustrate the former; universal service subsidies represent the latter approach. 

The larger point is that choosing TCP/IP has had business model consequences. Permissionless app development means the financial interests of app owners and network owners can be disaggregated. And, as in any value chain, one participant’s revenue is another participant’s costs. 

Ultimately, all long-term value chain costs are reflected in retail end user prices. But costs and revenues within the value chain always are contentious to some degree. And any long-term increase in producer prices will be reflected in higher consumer prices, reduced output; lower producer profits or other changes in features. 

No matter what the resolution of debates over funding mechanisms, retail consumers will pay, in the form of higher connectivity fees; higher retail product costs or changes in feature sets. 

Producers could see pressure on profit margins if their own capital investment and operating cost parameters are not adjusted. 

But it all goes back to the fateful choice of TCP/IP as the next-generation network. Layered and disaggregated models have consequences.