What Exactly is Web3?

Juan Benet, Founder & CEO of Protocol Labs, talks about Web3.

Do Network Effects Still Drive Connectivity Business Moats?

Theodore Vail and Bob Metcalfe are among the entrepreneurs whose thinking has implicitly or explicitly relied on the notion of network effect, the increase in value or utility that happens when more people use a product or service. 

source: Medium 

James Currier and NfX argue there are some clear different types of network effect, which they argue drive 70 percent of the value of technology companies. That is reason enough to understand the principle. 

Essentially, network effects create business moats; barriers to entry by rivals. But some may argue that “network effects” are overrated sources of advantage. 

Are network effects explainable some other way? Can “economies of scale” explain advantage? Are the supposed advantages of network effects explainable by something else?

Perhaps “platform” is a way of explaining the success of a business model otherwise considered to be anchored in network effects. “Even among the companies that have come to define the sector--Facebook, Amazon, Apple, Netflix and Google--only Facebook’s franchise was primarily built on network effects,” some argue. 

Might  “viral” status, “branding,” “switching costs,” critical mass or other advantages explain defensive moats? It might not be so clear.  

When the network itself--the number of people one can reach on a particular communications network, for example--drives value, that is an example of network effect, somewhat clearly.

As an example of a business moat, Theodore Vail, the chairman of AT&T, said in 1908 that “no one has use for two telephone connections if he can reach all with whom he desires connection through one. 

In the connectivity business in the internet era, one might actually question the network effect to a large extent, since, by definition, every customer or user can reach any other lawful user without regard to the particular details of access network supply. 

As important as network effect might have been for monopolist AT&T, it is unclear whether such advantage still is possible in the internet era. Scale arguably continues to matter. But network effects? Unclear. 

Is There Really an Enterprise "Middle Mile?"

Terminology changes in the connectivity business, over time. Consider the term “middle mile,” which has come into use over the past decade. The term refers to the part of the network segment between the core network backbone (the wide area network) and the local access network. 

Think of this as what we used to refer to as the trunking network, or perhaps the distribution network. If the core network terminates at a class 4 switch or a colocation facility, then the “middle mile” is the transport network connecting the colo to the local access network (a central office or headent, for example).

 

Some illustrations tend to distort the network architecture, even when subject matter experts correctly understand the concept. In this illustration, which shows the way an enterprise user might see matters, the entire WAN is considered “middle mile,” not simply the connections between a colo site and the WAN. 

source: Telegeography

That is understandable if we conceive of the network the way an enterprise might: that “everything not part of my own network” (“my local area network”) is “in the cloud,” an abstraction. 

Even viewed that way, the middle mile is an abstraction. It is part of the network “cloud,” in the sense network architects have depicted it: all the network that is not owned by the enterprise. 

The point is that there is a difference between network terms such as “middle mile” as a description of network facilities and the use of the term (perhaps even incorrectly) as a matter of networking architecture. 

“WAN transport” is not “middle mile,” in terms of network function. But everything other than the enterprise LAN is “cloud” or “not owned by me” in terms of data architecture. But in that sense the term middle mile is unnecessary.

 

How Do Network Effects Underpin Business Models?

How Big a Problem are "As Built" Maps?

If you know anything about outside plant operations, you know that lots of maps--especially “as built” maps--are not fully and accurately updated. They should be, but they perhaps are not. That can result in discrepancies between the way a service provider believes specific network locations are configured, and the way they actually exist. 

That is not to say malfeasance is never possible, but it is much more likely that maps are incorrect simply because, over time, not all the changes are reflected in official maps. To use a simple mobile analogy, coverage maps indicating data speeds will show one set of numbers in the winter, and a different set in the summer, where there are lots of deciduous trees. 

It also is possible fixed network data speeds will show one set of numbers at the hottest point of the summer and the coldest part of winter, or even different performance based on thermal effects across a day or a week.

Temperature affects both processor and cable performance, for example. 

Measurements for parts of the network that are newer might diverge from parts of the network that are older, even in the same neighborhoods. 

The point is that there are lots of reasons why end user data speeds are not as the maps suggest they should be operating.

Spain Connectivity Markets Remain Contestable

Spain’s communications regulator, the National Markets and Competition Commission, says consumer spending on bundled connectivity dipped slightly in the first two quarters of 2021. The report notes annualized 2.5 euro declines in quadruple-play and 2.8 euro declines in spending on quintuple-play packages. 

source: CNMC 

As always, any number of reasons could explain such trends. Economic weakness exacerbated by the Covid endemic could cause consumer spending to drop, though not directly explaining price declines for these packages. 

Competition might have led to price declines for existing products. Though three top firms have about 75 percent market share, the market structure does not seem to have the stable “rule of four” structure that inhibits price wars.

In fact, neither Spain’s fixed network broadband nor mobile markets have yet to reach the “rule of four” structure. That suggests the markets still remain unstable in terms of market share. Competitive share gains and losses  remain possible. 

source: CNMC, Financial Times 

Edge Computing Partnerships Reveal Strategic Choices

Partnership is a funny word in the computing and connectivity industries. It typically is spun as a source of competitive advantage, and that arguably is true when a firm tries to add features and functionality outside its historic core business that are complementary to its core. 

Partnerships are often said to be advantageous when a firm wants to move out of its core and into an adjacency where it does not already have domain competence. The strategy often is to build volume and domain expertise to the point where a firm can source product features internally, rather than relying on a partner. 

When a firm partners in any area related to its core business, that is probably an indication of weakness, often the result of  financial limitations that prevent a firm from developing its own resources. 

That arguably is the case for cable operators looking at edge computing. A survey of cable operators by Heavy Reading found 16 percent of respondents planned to build at least some of their own infrastructure. But most respondents indicated their present thinking was to partner with one or more hyperscale computing as a service suppliers to create edge computing businesses.  

source: Light Reading 

At this point, as is true for many telcos as well, edge computing as a service is largely viewed as the domain of the hyperscalers, with some exceptions in regions where hyperscaler presence is undeveloped. The reliance on partnerships seems a realistic recognition that the actual computing as a service is outside the connectivity domain, and that hyperscalers have too many advantages to beat. 

Instead, in most cases, edge computing is seen as a product that can leverage connectivity provider real estate and connectivity assets, providing incremental revenue growth. There seems little belief that edge computing offers hope of a new role for connectivity providers as branded suppliers of computing as a service.