Disintermediation Strikes Again, Threatens Disruption, Again

Almost no part of economic, social, work or educational life has remained untouched by the internet, and it turns out charities that might once have been beneficiaries now are being disintermediated. 

In some ways, social fundraising sites were a progenitor, allowing people or organizations to raise donations on social fundraising platforms. But one new development involves people making Airbnb reservations in Ukraine--with no intention to stay--as a form of direct aid that otherwise might have been delivered using a charitable donation process. 

source: Gofrugal.com 

That sort of giving is another form of disintermediation, the process of removing  “middle men” or distributors, steps or layers or retailers from a supply chain. 

Airbnb CEO Brian Chesky says 434,000 such transactions had been booked so far on the platform, equivalent to $15 million transferred to hosts within Ukraine. By way of contrast, that is as much as a quarter of the amount donated to the Canadian Red Cross as of March 10, 2022, excluding government-matched amounts.

What remains unknown is the relative effectiveness of direct transfers of this sort. As with other social fundraising, recipient fraud or waste is conceivable: the property owners might not live in Ukraine, for example. And cash transfers of this type assume the banking system is working. It might not be working effectively, if at all. 

Such donations might not target the most needy. But such methods are nearly 100 percent efficient--getting all the funds directly to the recipients--instead of subtracting distributor costs. 

It will be some time before we see any relatively-impartial studies and assessments of such direct giving mechanisms. But for cleverness it is hard to fault. When such transfers can be cleared nearly immediately, there is probably no faster way to inject donations into an area. 

Longer term, there might be issues around whether direct giving is advantageous in some ways for allowing recipients to determine the best use of the funds, rather than aid agencies deciding what is best for them. 

But accountability issues might still be of value for some donors. Higher confidence that donations were used for a specified purpose might be valuable enough to dissuade donors from direct giving methods. 

Still, using Airbnb to make donations is clearly a case of disintermediation at work.

Will Blockchain Propel a New Wave of Disintermediation?

Disintermediation is at the heart of the promise and period of a wide range of potentially-huge new enablers of business and economic life, including blockchain, cryptocurrencies, distributed finance and distributed autonomous organizations. 

Disintermediation is the process of removing  “middle men” or distributors, steps or layers or retailers from a supply chain. 

For that reason, disintermediation has been a key business issue for all retailers and distributors since the internet emerged, reducing the roles or value of distributors of all types and increasing the ability of suppliers to go straight to their customers for fulfillment of sales. 

Disintermediation also has affected the connectivity business. Consider only the role of applications in creating messaging apps that directly displace carrier text messaging and voice services. Email had a similar impact prior to the emergence of messaging. 

Now 5G private networks are being evaluated and deployed to replace some parts of the public mobile network. 

source: WallStreetMojo 

Blockchain is a distributed ledger (database) system where details of transactions are stored across a distributed network of servers with no centralized repository of those transactions. The chain of records are indelible: once created they cannot be changed, which is how the integrity  of the information on transactions is maintained. 

Blockchains store data in blocks that are then linked together in series, which is where the name comes from. For that reason a sort of time stamp is created, as the chains form sequentially. 

As new data comes in, it is recorded in part of a fresh block. Once the block is filled with data, it is chained onto the previous block.\

Decentralized finance (DeFi) is an emerging financial technology based on blockchain that allows parties to conduct transactions directly, without the use of an intermediary bank, broker or institution.

A distributed autonomous organization is an online-only group of people who have entered into a contract with one another to reach a coordinated goal. The contract is enforced by the use of blockchain, so that if any member who violates the terms of the contract, their access to owned tokens is revoked automatically by the blockchain itself. 

The promise for users and peril for incumbents is clear enough. As always, disintermediation flattens hierarchies; removes middlemen from a value chain; reduces costs and enables more-direct transactions between buyers and sellers; creators and users. 

What blockchain, DeFi or DAOs could affect, in the connectivity and computing business, is settlements, transaction clearing, ordering and fulfillment, the way sales are handled, bad debt protection and fraud prevention. 

And that should mean the potential for lower operating costs and higher potential margins, partly because sales effort is automated, partly because cost of sales could drop, partly because bad debt is avoided, partly because cash float is improved. 

Other possibilities seem less likely, in large part because vested government interests are involved. DAOs have been used to raise large pools of money to buy assets, for example. Would any regulator ever allow a perceived national connectivity asset to be purchased by a DAO?

Could “service providers” emerge that use DeFi to allow customers to purchase access to computing or connectivity capabilities without directly engaging a facilities-based provider on a longer-term basis? 

Organizations already buy compute cycles “as a service,” typically with a quota of cycles purchased upfront. Could DeFi allow purchasing on a full on-demand basis, with no “bucket of usage?”

Disintermediation is a powerful process that reshapes industries and creates winners and losers. It virtually always leads to lower prices and efficiencies in supply chains. 

We have already seen a first wave of disintermediation in the connectivity and computing businesses. Will we see additional waves as blockchain-based business processes arrive? Probably. But we will see the first impact in settlements, then in sales. 

The other possible changes will involve broader changes that involve additional stakeholders, so would take longer, if they happen at all.

Will 5G Private Networks Market be Akin to Unified Communications, SD-WAN?

New niche markets in the connectivity business often are dominated by specialist providers rather than the tier-one mobile or fixed network service providers in any market. The reason is simple: by definition, a niche market does not represent the sales volume a large organization requires to enter and lead a business.

We can point to enterprise telephone systems, unified communications, consumer devices and software-defined wide area networks. In its early days, even digital subscriber line for home broadband was led by specialist firms.

Private 5G networks and private 4G might well wind up being that sort of thing.

To be sure, some forecasts of private 4G and private 5G networks are robust. And there are firms that sell infrastructure, services or software supporting such networks for whom private networks will be a substantial revenue source.

Kaleigo Intelligence forecasts about $7 billion in non-public private networks using either 4G or 5G infrastructure by 2026. 

source: Kaleido Intelligence  

That market will be especially important for a segment of the networking infrastructure industry able to support the building and operating of such networks in a variety of settings where assured bandwidth and latency performance could improve on what is possible using Wi-Fi, for example. 

source: Kore Wireless 

That noted, private 5G networks might wind up being a niche that is quite important for specialists, but not so significant for some possible suppliers. A good chunk of that $7 billion will be spent on infrastructure to build the networks. Another good amount will be spent on system integration, consulting and other costs such as spectrum rights. 

In some cases revenue will flow to mobile service providers who build such networks on behalf of customers. But other system integrators might well emerge as more-important providers, especially since application support will matter and many large system integrators have existing practices that support customers in vertical industries. 

Ability to engineer and build the actual private network is important, but secondary to the task of ensuring the key applications work. And that tends to be a domain better suited for larger integrators with historic relationships with enterprise customers at the application level.

When "Data" Does Not Match "Perceived Reality" Perhaps the Data or Your Perceptions are "Wrong"

Trying to figure out what people really pay for home broadband is tricky. Prices differ by provider, location and the number of competitors in a market. Prices also vary by the level of government subsidies and take rates of such subsidies. 

One has to decide which plans to compare, and those choices shape the outcomes. The other issue is the inability to adjust the analysis for discounts and promotions that affect what customers actually pay. In other words, the retail tariffs we choose to compare  are not necessarily reflective of active consumer behavior. 

The most recent example of this is an analysis of home broadband costs by the Internatiomal Telecommunications Union, which reports that the “lowest-priced home broadband plan” offered by the largest U.S. supplier average more than $130 a month.

If you follow U.S. broadband prices, you know that is incorrect. Since the largest U.S. ISP is Comcast, the ITU must have looked at Comcast’s stated prices. And if you check, you can see that the stated retail price (after a promotional period) does jibe with the ITU figures. 

source: ITU 

 

The issue is that Comcast customers do not seem to be paying triple-digits for the “lowest-cost” home broadband plans. 

That seems wildly incorrect. Methodology is an issue. The lowest-cost budget plans typically are in the $10 to $15 a month range and support speeds around 50 Mbps (moving higher, as do speeds on all plans). 

Those are the plans ITU should have reviewed were it looking at the comparable “lowest-cost plans offering 5 Gbytes of usage and minimum speeds.” 

source: HighSpeedInternet.com. 

But those plans are rarely listed on websites showing available plans. You would have to hunt to find plans offered by all leading ISPs for low-income households. 

Instead, the ITU researchers seemingly looked at prices shown on the Comcast websites that do not represent the comparable lowest-cost plans. To be sure, Comcast, the largest U.S. ISP, shows charges of $30 a month for services operating at 100 Mbps. 

And, to be sure, Comcast also says those prices are good only for one year, with sharp price increases after 12 months. Comcast says its 100-Mbps plan will grow to $81 a month after 12 months. 

The issue is that it would be hard to find anybody who actually pays that amount for a 100-Mbps service, even after a 12-month period. 

The average U.S. home broadband service  costs about $64 a month. If the cost of the lowest-priced plan really were more than $100 a month, as the ITU analysis suggests, the “average” U.S. price could not be as low as $64. By definition, the average would have to be much higher. 

According to Openvault, only about 20 percent of U.S. households purchased services operating at 100 Mbps or less in the second quarter of 2021 and only 18 percent in the third quarter of 2021 and 17 percent by the fourth quarter of 2021. 

source: Openvault 

And that is why methodology is so important. Actual measurements of home broadband speed show only 17 percent of subscribers are provisioned for speeds less than 100 Mbps. Only nine percent are provisioned for speeds of 50 Mbps or slower. 

The point is that any analysis of home broadband focused on the lowest tier of service, in terms of speed or price, would not tell you very much, in any country. What is arguably much more useful is an analysis of the “typical” plans customers buy, and not the highest or lowest price plans; fastest or slowest speed options available. 

Unless one is clear about methodology, it is easy to make unclear or misleading statements, such as “X percent of customers do not have access to Y speeds.” Does that mean such customers cannot buy because the service is not available? Or does it mean they could buy, because the service is available, but they choose not to buy, preferring some other plan?

The answers matter. 

I may choose not to buy a Tesla. That does not mean I cannot buy a Tesla. Some will rightly argue that home broadband is a necessity, and a Tesla is not. Noted. But virtually all the global data shows that, over time, the cost of home broadband globally has declined, measured as a percentage of gross national income per person. 

To be sure, according to the ITU, fixed broadband prices (adjusted using the purchasing power parity method) have risen since 2015, after dropping since 2008, while mobile data costs have dropped steadily. 

But 2020 prices were still lower than in 2008, and that assumes we accept the data as accurate, which I do not. If the same methodological issue applies to other markets, then prices are overstated. 

Beyond all that, there are hedonic adjustments, referring to the change in a product’s performance over time. Beyond price, the performance of our smartphones, personal computers or home broadband are vastly different than they were 20 years ago. 

Is the $300-per month 756 kbps internet access connection I was buying about 1996 the same product as the gigabit connection I now buy that costs possibly $85 a month? Is that gigabit connection the same product as the 300-Mbps connection I was buying a year ago, even if that product “cost less” than the gigabit connection?

Methodology always matters when evaluating home broadband availability, quality and cost. In this case, the ITU analysis seems quite flawed.

Jensen Huang on AI, Edge, Graphics, High-Performance Computing

Nvidia CEO Jensen Huang on AI, data science, high performance computing, graphics, edge computing, networking, and autonomous machines.

In the Cloud Era, the WAN is Abstracted

If you have been in the connectivity business long enough, you know that terminology changes over time. Our definitions of “broadband” are a moving target. Functions are virtualized, so appliances no longer dictate operations. And networks are evaluated differently by infrastructure suppliers and customers of those networks. 

Consider the term middle mile. In traditional parlance, we did not use the term. Traditionally, the portion of the network between Class 4 switches was the wide area network. The part of the network connecting a Class 5 switch with customers was the local access network (local loop). That meant the network connecting Class 5 switches with Class 4 switches was the “distribution” network, which might have been viewed as the “middle mile” between the access and wide area networks. 

For internet access providers, “middle mile” means something altogether different, and has less to do with transport function or distance. For an internet service provider, the middle mile is that function moving traffic from an ISP’s own signal processing location (headend, central office, data center) to the nearest internet point of presence. 

source: TeleGeography 

It is a functional requirement and a cost element that assumes the cloud and wide area networks exist, but abstracts them. 

For an ISP or enterprise, “WAN” is an abstraction. Actual costs are determined by the cost of interconnecting at an internet point of presence. Transport is simply a function that is provided by the interconnection cost. 

In a retail commerce setting, looking at logistics, “middle mile” means the movement of goods from a supplier warehouse to a retailer location. And that is a fairly good analogy. 

From an ISP or enterprise perspective, WAN no longer is a direct cost element, as once was the case for T-1 or DS3 wide area connections. What matters is the cost of connecting the ISP access traffic to the nearest internet point of presence. 

As with “cloud” architecture, the WAN is abstracted. What matters is the cost of connecting at an internet point of presence.

When the Data is Wrong, So is the Analysis

Very few issues seemingly are more contentious than the issue of whether internet access prices are high or not; rising or not. Internet service providers do not wish to be accused of price gouging; policymakers do not wish to be accused of not doing enough; some policy advocates  must argue there is a problem to be solved, or there is no issue to debate. 

Nor is this an easy matter to quantify. If one points out that price inflation has occurred for most of modern history, then of course “prices” will be higher, not lower, over time.  

U.S. consumer prices in 2022 are 11.77 times higher than average prices since 1950, according to the Bureau of Labor Statistics consumer price index.

source: U.S. Bureau of Labor Statistics 

General U.S. price levels  since 1996, when many people started buying internet access, have increased almost fifty percent. So arguing that prices--any prices--have increased over the last decade, several decades or longer does not mean much. 

All prices have increased. 

source: OfficialData.org 

The only meaningful issue is whether prices for some products, such as home broadband, have increased more, the same or less than the average for all consumer prices. Nor is that an easy exercise. 

Methodology also matters. 

The International Telecommunications Union says that, in the U.S. market, the prices for the lowest-priced plans offering at least 5 Gbytes of usage have increased from less than $40 per month in 2008 to more than $100 a month in 2020. 

That seems wildly incorrect. That might be the case for gigabit services--which can approach $100 a month--but cannot be correct for the budget plans that are in the $30 a month level. The methodology is off, as Comcast, the largest U.S. ISP, only charges $30 a month for services operating at 100 Mbps. To be sure, Comcast also says those prices are good only for one year, with sharp price increases after 12 months. 

Comcast says its 100-Mbps plan will grow to $81 a month after 12 months. The issue is that it would be hard to find anybody who actually pays that amount for a 100-Mbps service, even after a 12-month period. 

The average U.S. home broadband service  costs about $64 a month. If the cost of the lowest-priced plan really were more than $100 a month, as the ITU analysis suggests, the “average” U.S. price could not be as low as $64. By definition, the average would have to be much higher. 

According to Openvault, only about 20 percent of U.S. households purchased services operating at 100 Mbps or less in the second quarter of 2021 and only 18 percent in the third quarter of 2021 and 17 percent by the fourth quarter of 2021. 

source: Openvault 

source: ITU 

Other issues must be confronted when comparing prices across countries. Adjusting for currency and living cost effects, the International Telecommunications Union, for example, says mobile prices (not adjusted for inflation) have dropped, while fixed network prices for the lowest tier of service have climbed a bit since 2015, but only after having dropped since 2008. 

Still, prices are lower than in 2008, all that noted. 

source: ITU 

Keep in mind that this analysis is only of the cheapest plans in each country offering at least 5 Gbytes of usage and a minimum speed of 256 kbps, supplied by the largest internet service provider in each market. 

The analysis is not of the service plans “most consumers buy.” The plans are based only on posted retail tariffs and do not include any discounts customers may have based on promotions or other criteria. Nor does the data take into account whether plans offered by all providers that are not the “biggest” in each market. Nor does the analysis include the prices paid by consumers on the most-popular plans, using any discounts or promotions. 

There are other important drivers at work, as well. Since 2008, ISPs in developed countries have been rapidly increasing “typical” speeds, while consumers have been gradually changing the service plans they buy, shifting from lower-speed plans to higher-speed plans that cost more. 

Beyond all that, the latest ITU data on U.S. home broadband plans seems wildly incorrect.