Just a short essay on one of the core principles of the Stupid Network.
Many of you will be familiar with the Paradox of the Best Network. In a nutshell, it states that the best network is a bit-moving commodity, since it has the highest option value to the user: yet it is the exact opposite of what a commercial network operator wants, since it inhibits the ability to do value-based price discrimination of network traffic.
This argument is incomplete, and here’s why.
Price discrimination in communications can range over five axes: what was said; how much was said; who said it (and to whom); where it was said; and when it was said.
Obviously, “stupid” networks only directly inhibit the first of these — the “what”.
So on mobile networks, you only lost one of five means of sorting out willingness to pay. Your five-legged table became a four-legged one. (I guess telecom is a round table…). The ability to price disciminate the “who” is accentuated via handset cross-subsidy — sophisticated users demanding smart handsets are shepherded to higher MRCs in return for larger subsidies. The “where” has powerful roaming and differential toll discriminators. The “when” of off-peak calling is standard accepted practice. The “how much” speaks for itself.
On fixed networks, the “where” is subject to physical constraints (it doesn’t change over time) and political ones (i.e. no redlining), rendering it very weak as a price discriminator. And the other factors are not well exploited. You don’t see metered broadband offerings that reward on-net use (i.e. ideal for P2P file transfer from nearby nodes); you don’t see peak and off-peak tariffs. Mobile networks remain communication-centric and real-time (most traffic is still voice; I just read that <1% of Vodafone’s network traffic is “data”, if we ignore voice=bits=data.). Fixed networks are dominated by file-transfer, which can be time-shifted around time pricing barriers. Stupid networks really took us from four to three factors, but two of the legs turned out to be short. It’s not a comfortable table to be sat at.
Thus we have seen a shift from fixed to mobile. The demand for mobility from users was matched with a viable supply-side economic model.
The Paradox of the Best Network tends to paint the situation as going from a one-legged table to a no-legged table. This is too extreme a vision; the industry wasn’t that wobbly.
A better framing might be The Temptation of the Worse Network. By imagining you can capture the bit value telcos get distracted from more pressing strategic concerns. Example would be expanding connectivity coverage, radically lowering cost (e.g. via wireless local loops), easing provisioning (think: today’s hopeless Wi-Fi roaming), opening up APIs to their data and business processes to participate in other forms of new value, and so on.
The Paradox turns out to be more of a Conundrum. A useful step to explaining industry dynamics, but insufficient on its own.
Posted by Martin Geddes at 02:35 PMTrackBack URL for this entry:
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Commodity markets are large markets from Communications
I'm running a bit behind, so I only today read Martin Geddes' contrary opinion, commenting (last week) on a famous paper on Internet economics, the Paradox of the Best Network.
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Temptation of a Worse Network? That'll be the IMS calling...
Posted by: at June 1, 2005 03:19 PM