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TeleChoice Analysis: TeleChoice has published numerous books and white papers that focus on the information needs of service providers, and new categories of technologies and solutions. Additionally, several TeleChoice executives contribute articles in leading business and industry publications.

TeleChoice - TeleSparks

On occasion, we will share with our friends throughout the industry our views on major events and issues in the telecom industry.
We will use TeleSparks as the primary vehicle for sharing these (usually highly opinionated) views and we welcome your feedback.

TeleSparks is authored by Danny Briere, TeleChoice Chief ExecutiveOfficer, with input from others throughout the TeleChoice organization.

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TeleSparks Archive

TeleChoice TeleSparks: Profitable IP Services?

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The News
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Recently, a tremendous amount of focus has been on rescuing 
the telecom industry and the economy as a whole by incenting 
massive deployment of broadband services through regulatory 
and legislative relief.

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The TeleChoice Take
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Driving massive deployment and adoption of broadband 
services without addressing the fundamental pricing flaws in the 
IP services that those broadband services primarily feed is likely 
to represent a "fatal cure" for the most "successful" IP carriers.

The primary driver for the adoption of broadband access services is 
the additional bandwidth available for IP applications. In other 
words, broadband access represents a faster "on-ramp" for IP 
services; however, IP services are generally not profitable. We 
believe this lack of profitability is not an issue of economies of scale 
but fundamental flaws in how IP services are priced and packaged 
to consumer and business customers.

Current Situation

Although IP services have been a high-growth area for most 
service providers, IP service businesses are almost universally 
operated at a loss. The problem has been compounded with 
increasing broadband adoption, with broadband users 
representing exponential increases in IP traffic load without 
representing corresponding increases in revenue. 

The broadband value proposition to customers has been compelling, 
but the business model for providers has proven shaky at 
best. Consumer and small business customers have been lured 
to upgrade from 56k dialup at $20/month to 512k DSL at 
$50/month -- nearly 10x the bandwidth for 2.5x the cost. Mid-sized 
to large business customers have more recently been lured to 
upgrade from 1.5Mbps T1 connections at $500/month to 
100Mbps Ethernet connections at $1,000/month -- 67x the bandwidth 
for 2x the cost. Although the technology-driven cost advantages to 
DSL compared to dialup and Ethernet compared to T1, combined 
with economies of scale can and, in some cases, have made 
the broadband access business profitable, the IP service 
businesses being fed by those broadband pipes are 
increasingly financially challenged. 

The real issue is that the entire IP services pricing structure was 
defined at a time and by players that were not well positioned to 
create a sustainable business model. Over time, continued 
competitive intensity has only amplified an initially flawed 
strategy.

Very simply, the problem with IP services is in network 
utilization. Although peak-utilization will be 100%, at least for a 
fraction of a second, average utilization on IP networks is much 
lower, typically 10% to 30%.

IP applications tend to be very bursty -- the faster the access speed, 
the more bursty the traffic. Virtually all significant IP applications 
adhere to a file-transfer model (email, the web, even P2P 
Napster-like applications), meaning the traffic pattern is one of a 
burst of traffic (as the file is transferred) followed by an extended 
period of relative inactivity. Faster connections simply translate 
to shorter bursts (at full line rate) and a greater ratio of 
idle-to-burst time. Although aggregation of multiple 
customer connections results in some level of statistical multiplexing, 
IP traffic at any point in the network remains bursty and 
relatively unpredictable. 

Since a userís perception of network performance is driven by 
his experiences at the peak ("Iím paying for a high-speed line, why 
isnít this file downloading faster?"), networks must be designed 
to perform reasonably well at that peak instant. The net result is 
that service providers must design their networks with 
enough resources (switch/router capacity, network capacity) to 
handle the peak load reasonably well. Of course, as we all 
know, providers donít build their networks with enough capacity 
to handle all the peak load, so some packets get dropped resulting 
in the "best-effort" quality of service for which IP is notorious.

So What? The real impact is a double whammy on the IP 
services business model. On one hand, the providers must spend 
way too much money (CapEx and OpEx) building and operating 
a network big enough to operate "OK" during peak instants, but end 
up with a network that doesnít operate well enough to 
carry performance-critical traffic (at premium price 
points).

No Single New Technology Solution Fixing this problem doesnít require 
a newfangled technology solution. In fact, a handful of 
different available technologies are already available, some of 
which have been around nearly a decade that provide the 
technical ability to address this problem. Frame Relay, ATM, IP 
Diffserv, and MPLS are the most well known standards-
based approaches to smoothing out traffic flows. Each 
technology provides mechanisms for prioritizing packets (or frames 
or cells) and identifying which ones must get through with 
high performance and which can afford to be buffered for a short 
period of time until the peak instant in the network passes and 
capacity is available. The result is a lower traffic peak, requiring 
less network capacity.

The real problem isnít a technology problem; itís a 
service definition/pricing problem. Although the technology 
capability has been available for a long time, we are not aware of 
any service provider effectively using it to define its customer offer 
to incent the kinds of behavior necessary for profitable services.

Think about it. Voice traffic is much more predictable and much 
less bursty than IP traffic. Yet long ago, voice carriers learned it 
made business sense to incent customers to move some traffic to 
off-peak times. Remember the days when a daytime call cost 25 
cents, but a call after 10pm only cost a dime? The net result had at 
least two positive impacts on the service business model. Some 
traffic that used to happen during the day was moved off-peak, 
allowing carriers to build less capacity into their networks. 
Additionally, new traffic (and new revenues) actually happened late 
at night that wouldnít happen at the daytime rates. Since these 
off-peak calls could use capacity that otherwise would be sitting 
idle, much of that incremental revenue flowed directly to the bottom 
line.

Data services and, specifically, IP have failed to adopt 
similar approaches. One challenge is that IP traffic will shift from 
peak to off-peak very rapidly, so defining standard peak and 
off-peak times of the day doesnít really make sense. However, 
by prioritizing packets in the network, the same effect can be 
achieved on a much shorter cycle. 

If service providers offer a meaningful discount for each packet 
marked low priority, they can reduce their network costs and 
perhaps even gain some new price-sensitive traffic. However, 
perhaps more importantly, by truly providing a premium quality 
of service, providers stand a chance of gaining customer confidence 
in carrying premium traffic at a premium price. We have done 
some initial calculations of the impact under different scenarios and 
the financial impact on IP service profitability can be dramatic 
(see the "Super Broadband Deployment Initiatives" whitepaper, 
linked below).

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What's Next?
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We believe IP services are headed for a crisis situation. Solving 
this crisis will be critical for the survival of todayís IP carriers.

Most equipment in the IP service networks already supports 
traffic prioritization, so this problem may be solvable with little or 
no additional investment in the network. However, 
significant implications around existing customer agreements 
and software systems changes need to be addressed. 

What Can You Do?

We strongly encourage you to stop and consider the implications of 
this situation on your business. Specifically, consider these key issues:

- If youíre a service provider, assess what it would take for you 
to restructure your IP offers along the lines identified here. Feel free 
to call us if youíd like to better understand what we have in mind. 
Start talking to your customers about their desire for/openness to 
tiered pricing on a packet-by-packet basis. Will customers increase 
low-priority traffic if discounts are available? Will they use your 
IP service for performance-demanding applications if premium 
services are available? Are they willing to restructure their 
current service agreements to accommodate these changes?

- If youíre an IP equipment vendor, understand how this 
redefined service offer would be implemented by your customers. 
Can you provide assistance to existing and new customers in 
making this transition? How can you simplify the implementation 
of features that exist in equipment already installed in your 
customersí networks? Can you help your customers to model 
the economic benefits of this change using your equipment? 
Remember the greater the financial success your customers achieve 
in operating services using your equipment, the greater their 
appetite will be for additional gear in the future.

- For software vendors, what role can you play in fixing this 
critical problem? Does your product represent part of the solution? 
By making an incremental software investment, can service 
providers unlock latent profitability in the huge investments 
theyíve already made building out their networks?

Through challenging times such as these, strategic focus is 
critical. Making wise product/service decisions and 
effectively communicating the value of these changes to your 
customers will be critical to your success. Let us know if we can 
help.

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For Further Reading
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If this topic interests you, we recommend you download the 
following white paper for free from the TeleChoice Website
 ( http://www.telechoice.com/inprint_whitepapers.htm ):

TC Perspectives: Super Broadband Deployment Initiatives
( http://www.telechoice.com/inprint_RegMailer3.htm )

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Need Some Help?
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TeleChoice helps companies everyday better position their firms 
and products for success, whether re-examining fundamental 
business strategy or clearly communicating unique position and value 
in todayís tough marketplace. Contact us at info@telechoice.com.


 

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