Telecom’s Business Model Change

David Isenberg is the architect of the Stupid Network theory, writes in his SMART Letter, that the telecom crisis was caused by three factors:
1) Overcapacity
2) Bad debt, directly driven by technological advances
3) A wholesale change of business models more profound than the shift from horse and buggy to the jet age

About the business model change, he says:

The telephone company business model used to be based on vertical integration. The network was a voice network. The wires were voice wires. The switches were voice switches. You can say the same for cable TV. The cable system was specialized for broadcasting video entertainment. These were special-purpose networks.

The Internet, in sharp contrast, is a general-purpose network. It will carry anything. The Internet does not care whether it is carrying voice or video or financial data or email or pictures.

The Internet pushes the decision “What to carry,” to its edges. It pushes the decision “How to use the network,” right into the lap of the end user. This is a direct consequence of the Internet’s architecture.

The Internet’s job is internetworking. That is, the Internet is a network of networks — the Internet Protocol is designed to span the various component networks and to ignore the network specific details. The Internet Protocol ignores even those network-specific details that add value to a given component network.

So if the owner of a component network that forms a piece of the Internet tries to add value to his or her particular network, that value may be useful for a network-specific application — such as telephony or TV — but it is irrelevant for Internet-level connectivity. The only place you can add value in an Internet world is at the edges.

This means that in an Internet world, a network owner has no special advantage in adding value to their network, say, over somebody who owns a few servers at the edge and buys connectivity.

This single fact makes the telephone-company business model obsolete. It also makes the Internet the huge success, the integral part of our lives that it is today.

Think about all the killer applications of the last decade — email, instant messaging, web browsing, streaming audio, ecommerce, Internet telephony — you don’t have to be a network owner to host these apps. Indeed not a single one was brought to market by a telephone company or a cable company.

The Internet became the success it is today — and the threat that it is to existing telcos — because it is a Stupid Network, an end-to-end network.

To subscribe to Isenberg’s newsletter, click here. Recommended.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.