Revenue Cannibals in the Neutral Net

For network operators, there is a tunnel at the end of the lights. The tunnel looks just like the inside of a bitpipe, and it is surprisingly dark in there. Turning all products into bits eventually means selling bits to retail customers at a fraction above wholesale rates. For a sense of how the competition is going to get more and more intense, take a look at this article, plus comments, about Mobile IM. Once you sell cheap bits, clever customers, and the businesses looking to sell to them, will find ways to turn everything else sold over a network into cheap bits.

An alternative future for network operators may be possible. But it partly depends on how arguments about net neutrality are resolved. For those not familiar, it comes down to the idea whether certain kinds of traffic should be prioritised over other kinds. Read here for a great summary of the net neutrality debate. So far, the major obstacle to prioritising traffic is that no two networks have joined-up thinking on how to prioritise, thus completely defeating the point of the exercise for all traffic passed between them. But some operators like AT&T and BellSouth are getting restless and looking to set a precedent. Opponents of neutrality argue that you need to be able to prioritise certain kinds of traffic – like IPTV – if they are to be worthwhile. They also argue that the growth in popularity in P2P file sharing, on-line gaming, video streaming and the rest threatens to create more demand than supply. Because of dotcom mania, most of the western world has so far been in the lucky position of having more capacity than needed, but that cannot be taken for granted. Proponents of net neutrality suspect that something far more sinister is going on. In their minds, prioritisation has nothing to do with the type of traffic, and everything to do with who is paying for it and how much. So prioritisation will be a means for networks to get more money from ISPs, advertisers, customers and the rest. The argument goes on that a network which supplies content may even deliberately slow down content from anyone else.

I guess there will be businesses who will optimistically be looking for enhanced revenue opportunities. And to some extent they are right. Prioritisation does offer prospects for making more money. But they had better beware how they go about it. For a start, prioritisation is fairly meaningless unless the network is fairly near to full capacity. If there is plenty of slack, prioritisation is largely irrelevant as everything gets processed pretty much as quickly as it can. If there is no slack at all, prioritisation breaks down because not everyone can be highest priority – meaning some supposedly high-priority traffic will be delayed. So making money from prioritisation could be either pointless or dangerous if the investment in capacity is not closely aligned to demand. The risk is that greedy network operators may destroy the major selling points of the internet – that is open to all, that it works, that it allows choice – and thus turn people away from it. After all, any of those clever bandwidth-intensive services they will be looking to profit from could just be supplied by the existing, tried and tested, old-fashioned technology. Which would not profit the network operators at all. Putting new users off the internet may earn a few extra cents at the cost of greatly undermining the future growth of the whole market. So prioritisation may be a small bright spot in a bleak outlook of ever more cannibalisation of revenues. But for the network operators, better to be a cannibal than to eat the goose that laid the golden egg…

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.