Communications service providers dislike the phrase “dumb pipe” for obvious reasons, since it implies–often falsely–that a telecom supplier is “just” a provider of low-value, commodity access services. The notion is partly accurate, but has nothing to do with profit margin on “dumb pipe” services.
What, after all, is “best effort” Internet access but a “dumb pipe” service? The access is one thing, while nearly all the content and services are provided by third party suppliers. But profit margins on U.S. high-speed access are in the 40-percent range, hardly a low-margin, commodity service.
There are threats, but those threats are potential future threats, such as ever-increasing amounts of supplied bandwidth, for the same, or less, revenue. But service providers already are moving to tie consumption to revenue in a more-logical fashion, so the potential danger is unlikely to surface as a present danger.
Also, very few service providers are “just” Internet access providers. Video, voice, security, business services and managed services are applications with lucrative revenue streams that use the access network.
The debate about service provider strategy has lead to talk about three basic potential strategies, such as an “efficient pipe” (best effort Internet access), a “smart pipe” enhanced services strategy, or a “telco 2.0” strategy that would have telcos becoming application providers in some way similar to Google, Apple, Facebook or Amazon.
The strategies are not mutually exclusive. All access providers will be in the best effort Internet access business, and that is “dumb pipe.” Most access providers will continue to provide voice, video and many types of business services as well, which makes them “smart pipe” providers.
In some cases, though perhaps not on a scale equivalent to dumb pipe or smart pipe, service providers will create or operate applications. Carrier VoIP or over the top messaging provide logical examples.
The “smart pipe” strategy might include leveraging core network features such as billing, customer location or messaging and voice features, typically exposing such features to third parties. Services for business verticals or even some forms of machine to machine services would qualify as “smart pipe” services.
The issue remains which of the strategies will product highly-significant revenues for providers in various markets, assuming many service providers will embrace some portions of al three strategies.
In all likelihood, dumb pipe and smart pipe always will provide the bulk of service provider revenues. In other words, service providers “always” will make much more money from selling broadband access, voice, messaging, entertainment video, specialized commercial services for business customers and other core “communications” services than they will from all other “applications.”
Telcos or cable companies could provide mobile video entertainment services, over the top voice and messaging services, music streaming or other apps and services. The issue is simply whether such apps and services can drive 10 percent to 50 percent of revenue at any firm that does so. In most cases, the answer will be “no.”
By Gary Kim
Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology, Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight — follow him on Twitter @garykim.