The Paradox of the Perfect Network

1. The Paradox of the Perfect Network “The Best Network Is The Hardest One to Make Money Running” Roxane Googin High Tech Observer

2. The Best Network for Users is the Worst for Suppliers • The Best Network is perfectly plain • High-Tech Economics • -What happens to pricing when there is no scarcity? • - You get the perfect capital repellent

3. Network Intelligence:Total Complexity is Preserved • Any transaction contains a fixed amount of info • A simple transaction requires a complex network • A complex transaction requires simple network • Network “intelligence” impedes complex tasks • “Deliver the bits, stupid” – David Isenberg • The Best Network is perfectly plain

4. Value in Conventional Networks Value No Value

5. Value in IP Networks No Value Value

6. High-Tech Economics • High-Tech Improves Productivity By Removing Constraints • Leading To Massive Scalability • With High Entry Cost • How Do You Price A Product That Is Not Scarce?

7. Conventional Economics:The Science of Scarcity • Adam Smith published “The Wealth of Nations” in 1776 • Production was dominated by craftsmen • Set-up costs were low • Unit costs were high • Unit prices effected volumes

8. Unit Cost Conventional Economics $ Entry Cost

9. Conventional Economics:Demand Curve $ Volume

10. High-Tech Economics • Productivity gains reduce unit costs • -As well as constraints to scale • But “set-up” costs grow • -$3B fabs • -$2B networks • -Software development vs. distribution

11. Unit Cost High-Tech Economics $ Volume Entry Cost

12. High Tech Economics:Demand Curve $ Volume

13. High-Tech Economics:Something New Under The Sun • High entry cost and low unit cost • Profit is determined by recovering entry cost • Subsequent revenues are unpredictable • The share leader has the lowest unit cost • - 50% + plus share is checkmate • Leads to industry concentration • Leads to financial brinksmanship to gain the dominant position

14. High-Tech Economics • Brinksmanship leads to chronic over capacity • -They have nothing to lose & everything to gain • Airlines – 0 retained earning after 40 years • DRAM • Fiber Optics • Network Capacity

15. Conventional Network Economics • Consistent volumes, prices, revenues • You had a blip on Mother’s Day • Consistent (high) costs • An artifact of asset-based rate of return regulation • 99.999% reliability on top of needless complexity • Consistent 40% EBITDA margins

16. Cost Conventional Network Economics ^ ^ ^ $ Time Revenues

17. IP Attacker Economics: Phase One • Build the network they want • Build it at 1/10 the cost • Live under the Incumbent Price Umbrella • Rake in the dough • Billions of dollars in bonds were raised

18. IP Attacker Economics: Phase One ^ ^ ^ $ Time Revenues Incumbent Costs Attacker Costs

19. IP Attacker Economics: Phase Two • Low switching costs for identical services • New capacity cannot be absorbed • Revenue targets are missed • Bond Holders get nervous • Attackers drop price to gain share • Everybody hopes prices remain above incumbent costs

20. IP Attacker Economics: Phase Two ^ $ Time Revenues Incumbent Costs Attacker Costs

21. IP Attacker Economics: Phase Three • New capacity still cannot be absorbed • Debt is coming due • Attackers drop price towards cost to gain share • Marginal price falls below Incumbents cost

22. IP Attacker Economics: Phase Three ^ $ Time Revenues Incumbent Costs Attacker Costs

23. IP Attacker Economics: Phase Four • Lower prices still do not increase demand enough to fill the networks • Debt is getting renegotiated • Prices fall from total cost to marginal cost • Total cost is a total guess anyway

24. IP Attacker Economics: Phase Four ^ $ Time Revenues Incumbent Costs Attacker Costs

25. IP Attacker Economics: Phase Five • Attacker goes bankrupt • Vulture Capitalists buy assets for a song • VCs plan to really under-price everyone now • This lasts until the cash goes again - GLBCE • There IS no bottom • The “Chinese Restaurant” syndrome

26. Bundling is Not the Answer • Bundling does not solve the problem • Adding value in bundles may slow the curve • But competitors will only meet features • Then drop price to gain share • A $100 disk drive has gone from 40MB to 100,000MB in 15 years, a 68% CAGR • The competitive dynamics remain the same • Eliminating competition is the only cure

27. The Perfect Network isthe “Perfect Capital Repellant” • The Perfect network is perfectly plain • So users can do exactly what they want • It is infinitely extensible • So no one has to wait • It has high entry costs and low unit costs • Generating aggressive price wars • It guarantees losses – name a counter example

28. The Paradox of the Perfect Network Roxane Googin High Tech Observer