Monday, July 3, 2023

The Death of Distance

There are many business implications of the connectivity provider decision to rely on connectionless internet protocols for data communications rather than the connection-oriented platforms telcos traditionally have preferred.


In some ways, cloud computing also has evolved charging mechanisms that are based on combinations of flat fee and usage mechanisms. “Distance” doesn't really matter. Usage does matter, as a rule, and most features are charged on a “volume used” basis. 


Principle

Charging methods

Distance

Not charged based on distance

Volume

Charged based on the volume of data transferred

Capacity

Charged based on the capacity of the cloud service

Quality

Not charged based on QoS

Bandwidth

Charged based on the bandwidth used

Storage

Charged based on the amount of storage used

Flat fee subscriptions

Used for some cloud services

Usage-based charging

Used for most cloud services


Consider pricing mechanisms in the connectivity business. Flat rate, usage-based and “quality” remain key charging methods. But “distance” has generally receded from cost principles. As virtual connections replace physical connections, and as packet networks are not deterministic in terms of routing, the distance any packets travel cannot be determined, much less the distance they travel.


Other mechanisms including flat-rate, usage-based and in some cases quality mechanisms are used differently on mobile and fixed networks. With the caveat that there are lots of nuances and lots of service providers will use different mixes of principles, distance, actual consumption and quality are the main areas of difference. 


Principle

Connection-oriented

Connectionless

Where used

Distance

Charged based on distance between sender and receiver

Not charged based on distance

Generally not key

Volume

Charged based on volume of data transferred

Charged based on volume of data transferred

Fixed and mobile networks

Capacity or bandwidth

Charged based on capacity or bandwidth used

Not charged based on capacity or bandwidth used

Fixed networks offer speed tiers

Flat fee subscriptions

Charged a flat fee for a monthly subscription

Charged a flat fee for a monthly subscription, in part

Fixed and mobile use, in part

Usage-based charging

Charged based on actual usage

Charges are for “ability to use” rather than consumption

Fixed networks less than mobile

Quality

Charged based on the quality of service (QoS)

Not charged based on QoS

Fixed and mobile networks


Public internet communications are “best effort,” without granular quality of service mechanisms, as a rule. Private IP networks can be engineered to provide QoS mechanisms. Also, customers pay for the ability to use a resource, not the intensity of usage, as a rule, using flat-rate mechanisms, often supplemented by heavy user charging based on actual consumption. 


But distance essentially ceases to be a defining driver of customer pricing. In fact, generally is no longer relevant to the cost of the service. “Tele,” recall, means “at a distance.” In the internet era that is not a defining issue when it comes to the value or cost of connectivity. 


That is reflected in a shift of pricing to interconnection mechanisms. Value is driven by “who” is connected, at what capacities, and less by actual metered or measured consumption. 


“Where” resources are located is not crucial. “What” gets connected, at what capacity, drives pricing. 


Industry

Cost Structures

Revenue Opportunities

Value Drivers

Revenue Sources

Connectivity businesses

Decreased costs for long-distance transmission

Increased demand for high-speed internet

Bandwidth

Subscription fees, advertising, data sales

Data centers

Decreased costs for physical infrastructure

Increased demand for cloud computing services

Scalability, reliability, security

Infrastructure as a service (IaaS), platform as a service (PaaS), software as a service (SaaS)

Software industries

Decreased costs for software development and distribution

Increased demand for cloud-based software

Innovation, agility, flexibility

Subscription fees, licensing fees, pay-per-use fees


Further, though usage often is a driver of customer cost, that also is not deterministic. The ability to connect is the basic principle, whether data is transferred or not. Mobile and home broadband subscriptions have a basic cost per month, irrespective of whether any voice calls are made, text messages sent or received or data consumed. 


Also, since distance does not matter, charging mechanisms shift to “what and who” are connected, not “where” they are connected. 


Does it matter whether a connection between domains, people or companies happens thousands of miles, a few hundred feet or a couple of meters away? When two people in the same room send text messages to each other, the messages might well travel hundreds to thousands of miles before hairpinning back to someone located a few feet away.


Likewise, two internet domains can connect over a few hundred feet inside a data center or across thousands of miles to other data centers. With the exception of some instances where latency is an issue,  distance does not matter.  


Increasingly, what matters is the ability to connect, not whether such a connection is physical or virtual. And the trend clearly is towards virtual connections. Virtual private networks, cloud routers, leased wavelengths or leased bandwidth of any type are essentially forms of “virtual networking. 


Virtual Function

Physical Device Replaced

Virtual private network (VPN)

Dedicated leased line

Microservices

Monolithic applications

Software-defined networking (SDN)

Hardware routers and switches

Software-defined wide area networking (SD-WAN)

Dedicated WAN links

Software-defined mobile cell sites

Physical cell sites

Software-defined interconnection (SD-I)

Physical interconnection facilities

Virtual routing and forwarding (VRF)

Multiple physical routing tables

Network functions virtualization (NFV)

Dedicated hardware appliances

Cloud computing

On-premises data centers

Content delivery networks (CDNs)

Physical servers

Managed security services (MSS)

On-premises security appliances

Managed IT services

On-premises IT staff

Unified communications (UC)

Stand-alone voice, video, and messaging systems


The important observation is that when communications functions are virtualized, “where” things are located means less than it used to. And if the core “connectivity” business model remains “connecting people, places and things,” value sources and charging principles have changed.

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