The economic health of
the value chain
David Clark
MIT CFP
November, 2012
A more specific question:
• What is the incentive for ISPs to continue to
invest in upgrading their service offerings?
• Is there a chance that the cycle of expansion
and innovation might stall?
• A hot and very contentious topic
– Look at the discussion of my last blog.
– Divergence of views at the basic level.
What is the problem?
• (Assuming that there is one…)
• Those who use the Internet (either as app
developers or end-users) have benefitted from a
continuous improvement in capacity, peak rate,
and penetration of access over the last 10 years.
• There is a strong consensus that these sorts of
improvements should continue.
• What is the motivation that will drive
investment?
Is there anything we agree on?
• ISPs make money.
– Both wireline and wireless.
• Loads on the Internet are increasing, largely due
to video content.
• Wireline access networks work pretty well
today, wireless is less satisfactory
– At least in the U.S. Wireless works better elsewhere.
• U.S. regulatory policy is in disarray.
– Highly variable situation across the globe.
Next? More dangerous…
• Justification for capital upgrades are hard to
make to investors.
– Insert hand-wave argument that ROI is about
zero, at least for wireline.
• Market in many parts of the world is starting
to saturate.
– Harder to justify investment than when one
motivation was supporting new customers.
Where there is deep disagreement
• What is the cost of usage?
– Do upgrades actually represent a material cost, or
should we expect that ISPs will naturally upgrade as
part of normal cost-reduction?
• Obvious answer is that it depends on the rate of upgrades.
• For wireless, are we managing spectrum well?
– Are we using spectrum in ways that are:
• Efficient?
• Pro-innovation or pro-incumbent?
– Is there a spectrum scarcity?
Going forward
• What is the business model for an ISP?
– Triple play? But if everything is over the top?
– Agent for license revenues?
– Seller of enhanced (managed) services?
– Seller of commodity, cost-reduced Internet
access?
• Are wireline and wireless the same?
– Same business?
– Same constraints?
My “follow the money” approach
• What are the sources of revenues that could
flow into ISPs?
– The consumer (who pays an average of
$45/month today in the US.)
• What will these look like in the future?
– Government subsidies and incentives.
– Payments from the “other side”:
• The sites with which the consumer interacts.
• Content, e-commerce, “browsing the web”.
– P2P, etc. does not fit this model.
Who pays for the “other side”?
• The consumer.
– Payment for content: NetFlix, NYT, iTunes, etc.
• Some content is purchased cross-channel.
– E-commerce.
• About $202B in 2011, or $240/month /household
• Advertisers
– Online: about $17.4B in 2H 2012
• $38.60/month/household
– TV: $75B in 2011.
Conclusions: adverts
• All the “free content” on the Internet is
produced and hosted for less than we pay for
access.
– Or did I miss another source of funds?
• If ISPs tried to tap into this “other side”
money, there is not much there.
Conclusions: consumer-pays
• Sellers in high margin businesses might be
willing to pay for better QoS.
– Example: priority traffic on wireless networks.
• 1% of gross wold be $2.40/month /household
• Providers of high-value content might willing
to pay for better delivery.
– Example: zero-rating (exempt from monthly
quotas)
What is the difference?
• Between direct payment by the consumer and
indirect payment via the “other side”?
– In some cases, indirect payment may be easier for
consumer to understand.
– Indirect payment forces an ISP to set a price point
for enhanced service.
• Hypothesis: high variation in value in different
circumstances.
– If consumer pays, will pay for enhancement of what
is of highest value to specific consumer.
• Analog to bundling of content
Engage the consumer
• Sell enhancement to high-value applications.
– Selling QoS
• Charge for usage?
– Discuss tomorrow.
• What else?
• Have I missed other sources of funds?
More generally
• Moving on from my “follow the money”
games.
• Do we agree what the problem is?
• Do we agree that there is a problem?
• Can we describe possible business models
for ISPs?
• What constraints will regulators impose?
More tomorrow
• Two talks and a discussion about a research
agenda.