Friday, January 10, 2003

Clay Shirky (via Instapundit ) has an interesting piece discussing the circumstances in which communications companies become competitors to their own customers. Essentially, provide an open end to end network and the customers will build the network extensions themselves to provide high value services, and they and not the network operators will gain the most value from services offered over the network. Customers will not pay a premium for wireless service, when they can add this themselves for a hundred bucks for an 802.11 card. Even worse, as I have discussed before, with digital telephone networks the prices being charged for long distance and international phone calls are legacies of past technology and past regulation and bear little relation to the cost to the telco of providing the service today. The data network is the product, and ordinary voice telephone calls are the value added service. We have direct access to the data network for customers via broadband internet access, and the technology that allows customers to add the phone service themselves now appears just about mature. Allow for all these things, and the result will either be that people provide their own phone service using their broadband access, in concert with a group of small, very competitive companies who provide connections to the existing phone network, or the existing telephone companies keep a sunstantial market share, but their pricing comes to reflect the underlying cost of providing the service, not some weird legacy of the analogue days.

What is interesting is how the reverse of what played out with dialup internet service appears to be playing out for broadband. When internet service came along, telcos and ISPs intially attempted to charge by the minute for it, even though this did not refect their costs very well. However, it turned out that the hardest service to offer was actually the communications: the phone service. Typically you could only get this from your local telephone company (RBOC). Lots of ISPs sprung up, and while many of these tried by the minute charging too, it didn't last. Some provided unlimited service, and as this was what the customer wanted and this better reflected the ISP's costs anyway, this was soon the standard. (In countries with timed local phone calls, it has taken a lot longer to get to unlimited time, flat rate internet service). In many places the telcos are also large ISPs, but they have been forced into a flat rate pricing scheme they wouldn't have chosen for themselves.

Now, we have broadband, which is available generally at flat rates. Telephone networks are digital, and the marginal cost of providing a call is negligible. However, telephone call pricing still depends on a cost (and regulatory) structure that was forged in the elder days. The telephone companies are happy with this, as it allows them to provide what is now a value added product at a price way above cost. However, we now have the same situation again: the cost of the equipment to provide the value added service is low, so customers and a large number of small, competitive companies add hardware on the ends of the networks to undercut the telcos. Once again, the big telcos may or may not remain the largest providers of telephone service in future, but the pricing scheme will not be the one of their choosing.

In any event, time to sell your RBOC shares.

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