How dumb is your pipe? - TechCentral

How dumb is your pipe?

[By Alistair Fairweather]

If you ask a 20-year-old in 2020 to spot the odd one out of this list — TV, radio, mobile phone, Internet — they may not be able to. We’re accustomed to think about these mediums as separate entities, and in terms of production they still are. But in terms of transmission they are rapidly, and inexorably converging.

Whether you’re watching DStv, listening to the radio, surfing Facebook or talking to your mom on the phone, you’re using the same underlying resource: data. In those examples the data is transmitted using very different mechanisms, but there is one medium that can handle all these flavours of data — the Internet.

Since the Internet can deliver the same data more cheaply (at least in countries other than ours), and more reliably, you might think this is a dream come true for the owners of older mediums. Unfortunately, for many of them their business plan is baked into their transmission mechanism.

Case in point: the big cable TV networks in the US lost over half a million customers between July and September of this year. These are not people moving across to cheaper satellite offerings by the same companies (which has been happening for years), these are people who have stopped paying for television completely.

Given that the market has been growing steadily for two decades, and that nearly 90% of US households pay for TV in one form or another, this must be terrifying for the premium networks. It’s not the losses in themselves that are scary, but the reason for them. These people are not ditching pay TV because of economic reasons, but because they have a viable alternative: the Internet.

Quick, cheap and easy — for consumers
Quite apart from rampant piracy and file sharing, the Internet now offers plenty of high-quality legal viewing. Hulu, a joint venture between several TV networks, draws tens of millions of viewers a month — with fewer ads and for free. And for just a few dollars people can now rent the latest TV shows from the likes of Apple and Netflix. A new generation of cheap set-top boxes and free software makes connecting your TV to the Internet quick and idiot proof.

What’s even more uncomfortable for the cable TV networks is that most of them also provide broadband Internet access via the same copper lines. They used to throw this in for free, but now many of them are having to charge separately.

Even then they can’t make anywhere near the same profit margins on just the data. And as the pricey cable TV data is replaced by the vanilla Internet data, they end up doing all the same heavy lifting for less and less money.

This isn’t an isolated case either. In 2009 US cellphone networks saw a momentous shift — the amount of voice data on their networks was overtaken by Internet data. The demand for “minutes” had been stagnant for years while the demand for generic Internet data was skyrocketing.

This prompted one CEO, Dan Hesse of Sprint Nextel, to speculate that soon networks would only charge for data — lumping voice calls in with the rest of the generic data. He seemed quite cheerful about the prospect — probably because mobile data is so much pricier in the US than it is here — but this evolution can only be bad for profit margins in the long run.

Why? Because all service industries thrive on differentiation. If you have generic resource X, you have two options: sell as much of it as you can, as cheaply as you can, or find a way to differentiate it and sell it at a premium. This is why bottled water can cost you between 50c and R50.

The problem with the “stack ’em high, sell ’em cheap” model is that the margins are thin and the work is hard. To companies used to living high on the hog of premium customer bases, all that heavy lifting seems very unpalatable. And, unlike the bottled water industry, the data game changes monthly and requires regular and expensive investments in new equipment and infrastructure.

However uncomfortable or even unfair this evolution is, the bare fact remains: all these mediums are under imminent threat of becoming “dumb pipes” when they used to be “smart nodes”.

Executives in these industries are well aware of the threat, and that’s why we’re seeing a whole range of unusual hybrids and experiments emerging. It explains why mobile phone networks are running content portals, Internet service providers are experimenting with pay-per-view TV and television companies are trying out video on demand for mobile phones.

And while there will be many losers in this new race, there will be one clear winner: the ordinary consumer. All this fear is driving two things: lower prices and more innovation. The Internet’s pipes may be dumb, but they sure are friendly.

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