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Thin-bit pricing threatens broadband service advantages

To fix declining revenue per bit for network providers worldwide, the industry needs to differentiate "thin bits" from "fat bits" and adopt a telecom settlement model that rewards all service-delivery contributors.

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Network operators worldwide are facing a huge problem -- their revenue per bit has been declining at 50% or more per year. Commoditized bit prices create a major problem because many applications don't exhibit much price-demand elasticity, so there's no reason to think that more users or more use will make up for the slipping unit price. Voice is a good example, in that call-minute usage, whether mobile or wireline shows little effect of price changes. Bits are getting thinner, as they say.

The whole purpose of going to fat bits was to improve profit margins.
Tom Nolle
PresidentCIMI Corp.

Thin or fat bits are a hard concept to grasp, but the idea means that some bits are just undifferentiated transport/connection ("thin"), while others are placed in a more feature-rich context and can be differentiated by something other than price ("fat"). The classic solution to the problem of thinning bits is to fatten them up by adding premium services on top of basic connection and transport. That has proved difficult for operators for two reasons: Regulations and the Internet.

On the regulatory side, most countries adopted a set of controls to protect their telecom markets from monopolistic practices at the time they deregulated or "privatized" their national carriers. The problem has been that not all regulatory authorities have recognized the difference between a network operator's role as a transport/connection incumbent provider, as well as a value-added service provider. In some jurisdictions (the U.S., for example) regulators have ruled that "information services" are not subject to unbundling/wholesaling to competitors. In others (Australia), there appears to be little or no distinction. And in virtually every country in the world, someone believes that incumbents need to wholesale everything.

For an incumbent operator, a wholesale requirement for value-added services means making a new investment in a competitive market, then sharing the fruits of that investment with others. That lowers the expected rate of return, sometimes to the point where the investment may no longer make sense. The whole purpose of going to fat bits was to improve profit margins, and being required to wholesale the results of your investment to competitors doesn't seem like a logical way of achieving that.

Internet faces similar "net neutrality" issue

The Internet has created a similar problem. Broadband Internet services are almost ubiquitous in industrial economies, and the Internet has proved to be a feasible way to deliver a lot of services that were once considered "premium," including video conferencing, television, radio and private data networks.

The explosion in consumer broadband has been the greatest single factor in thinning out the bits, so to speak. Consumer broadband has the lowest price per bit of any network service. The "net neutrality" debate is a reflection of the fact that operators would like to get incremental revenue for high-quality bandwidth for things like video delivery, and the over-the-top companies like Google don't want to pay those charges. The Internet, in effect, creates a kind of "thin ceiling," putting over-the-net applications in competition with any premium fat-bit applications the same network operator might want to deliver.

The purpose of settlements

Voice and enterprise data services worldwide have always been based on the notion that the fee paid for a service would be shared among those who participated in delivering that service, which is called settlement. This is a concept charged with the emotion of net neutrality, but the issue is a lot more complex. Without settlement, any service that has to span business boundaries is at risk because one party or another doesn't get the revenue to justify their investment or participation.

Some of the resistance to settlement is likely due to the fact that nobody really wants to pay for anything if they can get it for free, and the Internet has never had usage or bandwidth charges levied on content.

But even 10 years ago, ISPs themselves were admitting that the lack of settlement for Internet services was slowing the availability of premium traffic handling, advanced services, and more. Experts feared the development of a parallel premium infrastructure, just as some fear the development of independent content networks for IPTV today. Boardwatch, an ISP publication in the 1980s, said, "…if competition and a single 'Internet' are the missions, I do not at this time see any feasible way to insure those missions short of an FCC-moderated peering and exchange policy.'" The debate is the same; we've just moved from ISP or horizontal peering to content or vertical peering.

Introducing "experience management"

The willingness of content providers to pay isn't the only issue. The focus to date has been on the question of "premium access," but that's not enough. Service is more than access; it's a whole community of potential players from the content source to the point of consumption. If Google were to pay AT&T or BT or Telstra for premium access handling, the user might not see any difference in their experience at all, because other operators in the path between user and content might not get any of the money, and thus might not sustain a high quality of service. We can't just pay one party in the value chain and then expect all the parties to play along. Settlement, the money chain, has to follow the whole service chain.

What we need to see in the market is the notion of experience management as a cooperative process supported by all the players in the service value chain. Each player contributes an assurance of performance, for which they obtain a payment. The IPsphere Forum, an international body made up primarily of network operators and equipment vendors, is already working on a worldwide test of this kind of service relationship, and there is hope that their efforts will bring about a realistic model for experience control, settlement and "fat bits" that everyone will be willing, if not eager, to adopt. With a global system to manage experiences end to end and settle effectively for participation, investment in a bandwidth- and service-rich future can be assured. Without it, thin bits threaten everything we think that broadband services will bring us.

About the Author: Tom Nolle is president of CIMI Corporation, a strategic consulting firm specializing in telecommunications and data communications since 1982. He is a member of the IEEE, ACM, Telemanagement Forum, and the IPsphere Forum, and the publisher of Netwatcher, a journal in advanced telecommunications strategy issues. Tom is actively involved in LAN, MAN and WAN issues for both enterprises and service providers and also provides technical consultation to equipment vendors on standards, markets and emerging technologies. Check out his complete networking blog.
 

This was last published in October 2007

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