Wednesday, 26 June 2013

Net neutrality II; implications for digital businesses

This is the second and last post on net neutrality.

Complying with net neutrality means status quo and since we know internet traffic is going through the roof, sometimes we sympathize with the ISPs.  We ask if they have a case.

Perhaps the question is not of explosive traffic growth per se but whether the telcos (together with their ISPs) are financially healthy.  It cannot be an issue of losing money otherwise their protests and actions would have been much louder.  Or are they unhappy with the reduced margins.  Or simply not used to it.  Once, in a restricted sector, the voice business had high margins.  As The Economist (1 Dec. 2012) said “High charges for international phone calls once helped funnel cash from the rich countries to state-owned networks in developing ones.  Much of that traffic is now on the internet, hitting national operators’ foreign-exchange reserves”.  The world has changed so if it is margins they are pining for, their case is weak.

We also know fibre and equipment costs in general have fallen and continue to.  International bandwidth, the major cost item affecting ISPs in Asia is a fraction of what they used to be and will go on dropping due to competition.  Technology has also mitigated the volume affect to a degree.  The number of subscribers has gone up and many have upgraded to costlier plans to improve access experience.  Scale reduces relative costs.  The popular websites boost bandwidth capacity in line with usage growth.  These increases are income to the ISPs to offset their higher costs.  With increased costs but at the same time, higher revenue, the question is, is the profit margin not good enough?  In general, the profitability of telcos today after more than 20 years since the introduction of ISPs, does not seem to be a major issue.  The trajectory is usually up. 

Perhaps the traditional telcos are struggling to adjust to a different environment.  “The future telco is the ISP” (see means they are operating in a changing culture.  The culture of the internet is inclusive, peer-oriented, collaborative, participative, democratic, that is, it has an open ethos (see previous post “internet business model Part 1.2 on 24 May 2013 for more on its culture).  An incumbent telco having its root first as a government entity, then as a sole commercial concern with government protection and even now years after liberalisation, operates with a guarded bureaucratic culture with a command-and-control demeanour.  Well, when you are a monopoly, your partners can’t argue much!  So maybe it is this lack of familiarity working as equal partner that is hampering them.  The traditional ISP assumes there are many more ISPs operating and while they compete, they also understand that they have to cooperate, not just within the industry but without.  The commons or eco-system of an ISP is large with different types of partners.  They understand that without the online presence of web companies, there is no such thing as an ISP sector, unlike the traditional telco industry where its commons is upon itself.  Without the content providers, why would anyone want to subscribe to an ISP in the first place?  They are all part of the eco-system in the internet economy.  And the better the quality of content provided by the content providers the more bandwidth the subscriber wants ie. the ISP revenue increases.  It is not exactly zero sum gain.  As the telcos become more like an internet company, its operating culture should inch towards one that is more partner-centric.

Before the internet, a telco provide the network and all end-services for a subscriber.  They control the entire eco-system and obtain revenue from all parts of the eco-system.  With the internet, this eco-system is forever changed.  Instead of controlling the eco-system they now have to work with other players as equal or near-equal partners.  And accept that they cannot expect revenue from all the commons.  Telcos need to adjust to this new environment.

Maybe it’s the fear of the unknown.  But telcos have gone through this before in their long history with tech changes, from the telegraph to voice and later with mobile voice.  They raise hell every time new technology came along.  If my memory serves, in the early days of sms, celcos even wondered if it will negatively impact their voice revenue.  It did and so the overall revenues and profits went up.

Telcos must also realise that technology has made the question of ‘who pays’ harder.  P2P services (remember Napster?  And now BitTorrent) generates a huge percentage of global traffic.  But because they are distributed through PCs without a central content provider, who then pays?  I prefer to look at it positively.  Content distribution through p2p is one reason we use the internet and why many upgraded their access plans.  And telcos should also bear in mind that usage which started with users mostly pulling content from websites is evolving toward users also pushing (uploading) content to websites as crowdsourcing increases.  The balance is thus starting to shift towards the ISP as they need more bandwidth to deliver these consumers ‘pushed’ content to websites.  One day, maybe, it’ll be the turn of the websites to complain!

My own opinion is that if the massive increase in usage is threatening their existence (or massive profit loss), we should listen and do something because they are a very significant cog in the ecosystem of the internet economy. But they have to do so in a manner consistent within the internet industry; cooperative, transparent, partner-centric in resolving problems.

With their history of unjustified fear over changes in their industry (but mostly ended up doing better) which is natural, we could judge better with data on their profitably over the last decade and the next.  And I know of small non-telco ISPs facing the same issue but they are continuing to do well.

My profile’s not completed here so a quick introduction.  The ph.D in the early 1980’s on LANs (UK) lead to a job operating probably the earliest campus network in this region which then lead to the internet.  Setting up a pioneering ISP in 1991 was an eye opener and you could see the massive changes it will wrought.  We all knew this but I couldn’t quite put my finger on why and how it will all work.  Since then I’ve been tracking, pondering, studying the developments but casually.  The last two years I decided to focus on that question.  I also set up an ISP for an incumbent after the first, giving me a perspective of the culture of a telco ISP and an independent ISP.  Before and after that stint, I had IT services companies to carry out internet projects.  While later it was mostly projects for data centres and ISPs, over the years it cut across B2C, B2B and the corporate sector. Being Chairman of APNIC (manages and allocates ip addresses within Asia Pacific) twice gave me the opportunity to observe internet developments across Asia.

©Chen Thet Ngian, (2012, 2013).  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Chen Thet Ngian and with appropriate and specific direction to the original content.