Big Fat Pipes Don’t Make Money

Articles by Brad Choate, Tim Bray, and Doc Searls and David Weinberger talk about wanting a big, fat bit-pipe with no additional services.

I agree with the sentiment; I want to be able to buy a cheap, reasonable bandwidth, always-on, completely unfiltered and unlimited connection to the Internet. Sadly, I also believe that’s a pipe dream (pun intended).

Simply put, there’s no profit in bit-pipes. No sensible business person starts a new project knowing that they’re going to be competing on price from day one. It’s hard to make money supplying pipes, whether they’re carrying electricity, natural gas, water, or bits; the people making money are the ones selling the content of those pipes (electricity, natural gas, or bits :-). So anyone with an Internet project these days wants to be in the content-for-sale business, not the business of delivering that content.

In the pipe market, one of two things usually happens. The first is a regulated monopoly; this is typical of electricity, natural gas, cable TV, and other commodities where physical constraints mean that a shared infrastructure makes sense. The second is fierce competition; in this case, basic service gets sold at a net loss, and the providers are forced to balance the books by trying to sell low-cost, add-on services with a larger profit margin. That certainly explains the current cell-phone marketplace, and describes current broadband internet providers perfectly.

The easiest way to sell “add-on” services is to introduce artificial restrictions, such as time-of-day blackouts, or bandwidth restrictions, or monthly usage caps. Then a provider can sell the same service without one or more restrictions at an artificially higher price. Cable and DSL providers here in Toronto are already offering three tiers of service; -Lite (usually bandwidth restricted to 128Kbps in both directions), -Normal (typical high-speed with uplink caps, monthly caps, and the “no servers” AUP, and -SOHO or -Business, which typically give static IP addresses, allow servers, and have slightly higher bandwidth limits. (I’m not talking about true Business DSL here, that’s still a separate beast, and often provided by a different division of the corporation). -Lite is artificially restricted and priced to compete with telephone Internet providers, and -Normal is artificially restricted purely to justify a higher-cost service tier.

To make things worse, the tragedy of the commons applies. To make any communications service cost effective, resources have to be shared, and as soon as that happens, somone shows up to abuse the shared resource at the expense of everyone else. There’s always some guy who downloads every new game demo, or runs a music sharing service or a warez site; and that guy is congesting the network that I want to use for e-mail and web-browsing. So even if we could get rid of financially motivated artificial barriers, we’d end up with an under-provisioned network that wouldn’t function well.

I think there’s a market for fast, always on connections, but I think we’re going to have to accept the artificial restrictions put in by providers in order to differentiate themselves. Uplink bandwidth restrictions, or monthly bandwidth caps, or restricted access to HTTP or SMTP will continue to be unavoidable, in my opinion…

posted at 1:55 pm on Tuesday, March 18, 2003 in Random Thoughts | Comments Off on Big Fat Pipes Don’t Make Money

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