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Monetizing Older Networks: An Overreach?

March, 2015

Although one of the most thought-provoking panels at OFC 2015 will be on the monetization of optical networks, which will include seasoned experts who are vigorously involved in building new revenue models, it is not easy to imagine the kind of cultural metamorphosis that would be required for incumbent service providers to change their long-standing, bureaucratic behavior. In addition, while it is only commonsense to switch from a model that requires a lengthy period of time to install a circuit with a long-term commitment to more of a cloud-driven, network-on-demand paradigm, in which files can be loaded for say, a couple hours to be analyzed, we have discussed the very legitimate structural defects that would frighten executives away from moving in such a direction. Nevertheless, maintaining the status quo is also out of the question for these well-established carriers and seeking the advice of industry veterans, like Francis McInerney of North River Ventures, and Eric Lampland of Lookout Point Communications, could very well be a necessity in their ultimate survival.

Eric will point out that allegiance to riding down the bits-per-second peering cost curve is a recipe for disaster. In the early part of this century, the range was in the neighborhood of $10 to $30 per megabit. It is now around a half a dollar per meg and projected to decrease an additional 75% by 2020.

Francis will stress his ideas on the insufficient appreciation given to the transformational nature of cloud economics in which there will be ubiquitous access to unlimited computing power at a marginal cost of zero. Rapid inflation of the information space will mean that business models have to survive at the edge of the cloud and it is a risible idea that the original notion of a common carrier is compatible with such a game changer. (Our response is that somebody should tell the FCC, which in effect is converting all Internet Service Providers to a status of common carriage.)

An advantage to consulting with such experienced folks is that they remember the fundamental characteristics of building networks which includes taking power considerations into account first, such as to anticipate potential outage problems with a major storm, looking at Hurricane Katrina in the past as an example. Francis also talks about changing the fundamental economics of network ownership with the use of next-generation energy systems – adding to ARPU potential by creating energy arbitrage at every POP.

Of course, the greening of the transport networks always looks much easier on paper with the actual economics of achieving orders of magnitude in the reduction of power consumption much harder to achieve. One way in which Eric counters this argument is that in rural communities where a lot of large data centers are situated, there is a lot of land available for renewable energy including the ability to siphon off wind power.

Both experts also recognize the challenges associated with cyber-hacks preventing full utilization of the cloud. Eric states that a key motivator of SDN is with service chaining at a granular level, which means even maybe down to a pair of source destination addresses, an application ID, etc., security can be actually tailored much more tightly that encompasses processing traffic analytically attempting to go in a particular area. While Eric agrees with us that there is quite a bit of resistance at big carriers to move in an SDN direction, he believes that telephone companies can regain a lot of the Internet business they have lost to the cable TV companies with SDN -- in combination with related monetized services. (However, we have made known our view that companies like Verizon would prefer to concentrate on more lucrative opportunities in serving large enterprises.)

Moreover, the two gentlemen provide lots of useful suggestions that could be easily adopted by entrenched carriers, such as gaining a better understanding of ecosystems, becoming more customer-centric, increasing the stickiness of their brands, learning how to value innovation, putting together small product teams that are not isolated from the rest of the firm, and getting rid of extensive RFPs. On the other hand, it is quite possible that companies which have an infrastructure along with a mindset that is over 100 years old are incapable of transitioning to Francis’ delaminating old veiled networks into individual cash flows or to a REIT financial structure, which is very well suited toward a simpler type of business, like running data centers. In fairness to Francis, he acknowledges that there can be range of possible answers enabled with the inflated cloud.

In fact, both Francis and Eric are part of a small minority of individuals in the trade willing to be involved in the long and arduous processes associated with convincing corporations to take on a new mission that can lead to a much better financial outcome. They have been immersed in countless field trials and pilot projects. They have to overcome the natural inclinations of human beings to protect their turfs – and to convince them that in doing so, they may be left with nothing.

[written by Mark Lutkowitz]

(For our latest outlook on Verizon and metro 100G, please click here.)  

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