The Dumb Pipe Paradox ― How open access networks build shareholder value

On more than one occasion, "natural monopoly" arguments have been used to obtain, and/or hold onto, a government granted monopoly,  This is definitely true of access networks where the physical right-of-way to any specific real estate parcel is a limited resource, but the economics of what you put in it have changed over time.  At one time it made sense to consider telephone service a natural monopoly.  And for most of the twentieth century, telephone service was operated that way (think Bell System in the US and government run PTTs in most of the rest of the world).  In the latter 20th century, cable TV became a second such monopoly.  Today, it's increasingly clear that telephony and television are higher layer services, not inherently tied to the access network.  Yet our laws and regulation have barely evolved ― each access network is still regulated as a different vertically integrated monopoly.  And, managers in each business focus on preserving their historic monopoly even as market forces or government regulations force them to also offer Internet access.

So it's interesting to see solid economic analysis showing that access network shareholders would make more money if management was willing to open up their access networks, i.e. become "dumb pipes."

The first such argument I encountered was by Craig Moffett and Amelia Wong of Bernstein Research who wrote an interesting paper The Dumb Pipe Paradox, early in 2006.  The original paper is not on line but I have some quotes here and there are some other comments here.  Craig and Amelia were looking at Cable TV's hybrid fiber-coax networks and concluded that cable companies could make more return on investment if they were in the pure dumb pipes business.

More recently, I reported on a speech given by Benoît Felten of Yankee Group and Fiberevolution in which he argued that new fiber to the home (FTTH) investments could be paid back more rapidly if the FTTH network were open, i.e. offered to competitors at attractive wholesale rates.

Now Benoît has written a detailed report describing his findings.  Although the report is for Yankee Group subscribers only, Benoît is also giving a webinar on the subject next Tuesday and that's open to all.  Register here.

I particularly liked the polite suggestion near the end of Benoît's report:

Recommendations for Incumbents
• Re-examine your economic fundamentals in light of the FTTH business model. It’s irrational to cling to antiquated business practices if new approaches, no matter how disruptive, deliver better shareholder value.

Comments

[Jeff Jones]

Very interesting. I’ll be reading more of your topics and recommending our customers.

Jeff Jones

ThinkBright.net - VOIP Internet Business Phone Systems

[Sam Schneider]

Great insight that really got me thinking!

The dumb pipe strategy became even more relevant with the advent of Hulu, and to some extent, the growing popularity of consumer VoIP. At this point, the advantages of a "triple play" bundle are slipping away rapidly. Pretty much all that's left is convenience and some premium programming, but how long before HBO/Starz goes the way of Hulu?

Even though it seems Comcast, Verizon, et al are too married to their precious triple play bundles to see the necessity of re-tasking their model to dumb pipes, I wouldn't be surprised if market pressure forced them in that direction kicking and screaming. TV Everywhere is more a move of desperation than a real answer to the shift toward premium content on the web. The writing truly is on the wall when TV manufacturers are integrating YouTube and other online video into their TVs like Panasonic's VIERA.