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The economic health of the value chain

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?

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The economic health of the value chain

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  1. The economic health of the value chain David Clark MIT CFP November, 2012

  2. 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.

  3. 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?

  4. 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.

  5. 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.

  6. 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?

  7. 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?

  8. 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.

  9. 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.

  10. 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.

  11. 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)

  12. 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

  13. 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?

  14. 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?

  15. More tomorrow • Two talks and a discussion about a research agenda.

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