Who Will Profit From Broadband Innovation?

1Executive Summary

Demand for broadband and the value of a broadband connection are both on the rise, even as the cost a service provider can charge for such connections drops. Figuring out a business model that benefits service providers and consumers — and that continues to drive innovation — was a key theme at “The New Broadband Buildout,” a GigaOM Bunker Session held last week in our San Francisco office. The event, which featured heated debate about the fate of broadband innovation, also tackled the thorny issue of finding a broadband business model for  future.

While many in the audience said that carriers need to get out of the way and accept their dumb pipe status, David Morken, CEO of Bandwidth.com, and Sergio Catanaziti, an R&D executive from Orange Labs, the research arm of France Telecom, refuted that idea. Morken’s company owns its own network, and although he accepts that bandwidth is a commodity,  he offers enterprise customers voice service and other products on top of that network in order to turn a profit. The strategy is paying off; the company is approaching $100 million a year in revenue without ever having taken external funding.

See full archive videos of the event here.

Catanaziti, who works for a much larger network provider, tried to explain how a service provider could improve its profitability by selling computing services and turning the network into not just transit, but a service for processing and storage (which sounds a lot like cloud computing). In order to to do this, he said there is a need for research into a different network architecture. That network would include open equipment that allows a carrier to access data plane information, giving a carrier more flexibility in how it delivers packets on its network. Audience members were initially excited about more open telecommunications gear, but several said they were skeptical that vendors such as Huawei, Cisco and Juniper would offer the level of openness they were looking for.

Today, a lack of openness (especially openness that goes further than Catanaziti suggested) has meant that it’s difficult for startups to access the network or even build better equipment without spending a lot of money. That’s stifling startups that might provide better, cheaper or innovations in telecom gear. GigaOM Network Founder Om Malik castigated the industry for its lack of innovation, noting that its last big technology breakthrough — Infinera’s optical transceivers — happened back in 2003. He pointed out that while other countries are deploying 1 Gbps fiber networks, the U.S. government and population is settling for 100 Mbps within the next 10 years. Om laid blame for slow U.S. adoption of gigabit speeds at carrier’s feet, saying they are unwilling to invest in the network. Without that investment, he said, startups have no reason to build new applications that depend on faster web speeds or the equipment to deliver it.

At its heart, the event exposed the fundamental problems associated with innovation: it can be expensive, it often comes from unknown players, and it changes the value associated with existing businesses. Today, service providers profit from providing broadband, but the value they provide (and eventually their profits) will shift to the content providers and businesses taking advantage of their broadband networks. Morken clearly has accepted that and is creating profitable content and services on top of his commodity network today. Orange Labs, on the other hand, is researching ways to enable existing network owners to also offer services on top of the network.

The computing, network and storage solution Orange has embraced sounds a lot like what current cloud providers like Amazon, Rackspace and even Savvis already offer, which would pit telcos as new competitors against existing cloud computing vendors. On the network infrastructure side, the business models that allow an ISP to sell a pipe at high margins are changing as broadband access is commodified, making carriers reluctant to invest in the infrastructure. Meanwhile, the innovation required to improvethat infrastructure has stalled, which means today’s exciting technologies — both for delivering better broadband and using broadband for new applications — are coming from outside the traditional telecommunications market.

Take the iPhone, for example. It has created an entire app store economy, where the value is accruing to developers and Apple rather than the pipe owner.  The experimental fiber network that Google plans to build is another example of innovation coming from outside the communications providers. A  startup that has a better way of moving bits around may not find existing ISPs to be all that interested, but that doesn’t mean the doorway for its new bit-moving tehcnology is closed. Now it can work with Google. This isn’t the first time a lack of carrier action has spurred other, user-centric innovations. Skype’s technology and the invention of peer-to-peer protocols, for example, were built as a way to deliver high-bandwidth services despite the lack of high-bandwidth broadband pipes. We’re likely to see similar innovation — from everyone from startups making protocols and applications to established companies building networks or devices — in the absence of carrier activity.

The disconnect between the value an ISP’s pipes provide and the money ISPs make is an problem, but it’s also a problem they appear to have brought on themselves through a lack of investment in their network architecture and an acceptance of the status quo.

See full archive videos of the event here.

Relevant analyst in business models
You must be logged in to post a comment.
11 Comments Subscribers to comment
  1. Richard Bennett Monday, March 1, 2010

    I saw the video, and wished I could have been there as the discussion didn’t totally suck. I like the Wikia guy’s succinct summary of the key points.

    Google is powerless to affect this dynamic.

  2. Richard Bennett Monday, March 1, 2010

    Whoa, my middle graf was censored.

    1. Hi Richard,

      We do not censor comments. We do, however, feature excerpts of comments in various places around the site— perhaps you were seeing a portion of your comment featured somewhere on the site?

Learn about our services or Contact us: Email / 800-906-8098