Transatlantic telecom capacity

You might find this item from GigaOm interesting. If this projection is correct, we will almost certainly be paying more for transatlantic capacity.

iPhone and network capacity

This article, which describes how the iPhone is putting strains on AT&T's wireless network is interesting. It further illustrates the close relationship between carriers, content and network devices that I blogged about here. As the article shows, reducing handset prices increases network capacity (and revenues) and also increases the use of social networking applications. It seems likely that there is some revenue sharing going on to facilitate this ...

Wireless carriers and applications

This article from GigaOm is interesting. Basically, the article explains that carriers are benefiting from consumer interest in social networking, which has migrated to wireless platforms. Interestingly, this was not an application carriers had in mind when they made investments in 3G infrastructure. How will carriers justify their upcoming investments in 4G?

The nature of telecommunications is that large investments must be made before revenues can be realized. The telecom network has to be largely built out before it becomes valuable to consumers. As a result, investments have traditionally been conservative and tied to applications. The telephone network was tied to voice communications and associated services, etc. A significant exception was the Internet, which was built with no particular application in mind, but then it was also built with government funding. It wasn't privatized until a commercially interesting application set emerged (email and the web).

The phenomenon that this article describes indicates that unexpected applications (social networking) are a significant new revenue source for carriers. Will this change their investment model? The other thing that is addressed, though not explicitly, is that these applications require collective action from independent entities whose interests are partly common and partly at odds. Applications need broadband and want it to be cheap. Social networking works better with smart phones, which are more costly than "regular" ones. So manufacturers need joint marketing agreements with carriers, yet they want the ability for users to control applications and configuration.

If high-revenue end user applications can no longer be predicted or managed by telecom carriers, how will their investments be justified? It seems that carriers need a strategy and a set of tools for managing investment risk. Physical commodities have futures markets for this purpose.

One of the reasons why I am interested in markets for capacity (most recently spectrum) is that derivatives (such as futures) are possible, which allow for industry restructuring. In the absence of explicit risk management, carriers will integrate applications with carriage, which leads to "network neutrality" concerns.

Asia-Pacific Gateway fiber cable

Following my interest in collecting information on undersea fiber cables, here is the latest installment, the Asia-Pacific Gateway. According to the article,

Targeted to be ready for service in 2011, the 8,000 kilometer network with a minimum design capacity of four terabits per-second ... the proposed fiber optic network will offer alternative communication routes and nodes. In the event of accidents or subsea earthquakes, it will minimize the impact of a breakdown in services provided by existing regional fiber optic network ...

The APG network will connect Japan, Korea, mainland China, Taiwan, Philippines, Hong Kong, Vietnam, Thailand, Malaysia and Singapore. The signatories to the agreement for the development of the gateway are China Telecom, China Unicom, Chunghwa Telecom, NTT Communication (Japan), Vietnam Post and Telecommunications (VNPT), Korea Telecom (KT), Philippines Long Distance Telephone (PLDT) and Telekom Malaysia. The telcos will jointly finance and own the APG network.

Phone line shrinkage at AT&T

I have blogged before about the decrease in access lines (see this, for example). While it is not surprising given the increase in wireless only households, this article over at GigaOm shows that the decline has been in the 6% per year range for AT&T, not the 3% range.

As the article correctly points out, this is one of the reasons that the large ILECs have been aggressive in rolling out their broadband infrastructures. Since consumers are increasingly opting for wireless for voice, the only way that the ILECs have to continue receiving a share of the consumer's communications expenditures is to build out broadband, which enables them to compete with cablecos for television and internet access expenditures.

If they don't they have to depreciate their infrastructure at a faster rate than consumers are leaving it, else investors (the company owners) will be left holding the bag. Of course, this is an end-game that they would only play if they decided to cede the marketplace to other access providers. There is no sign that ILECs are interested in that strategy!

Net Neutrality in the UK

I found this article over at Ars Technica interesting and worth reading. The article describes an ongoing "discussion" between the carrier BT and the content provider BBC. BT is using tier-based categories to implement a price discrimination. While this is normal in telecom (and arguably necessary since these industries have marginal costs below average costs), the challenge is that the consequence of this (bandwidth limitation, in this case) affects the business of content providers (in this case BBC).

What is interesting about this is that there is a problem of joint action by parties with competing interests. BT has to make substantial investments to enable access to broadband content, so it is hard to argue against their right to earn a reasonable return on this investment. At the same time, BT needs content providers (like the BBC) to develop compelling programming so that users will find it worthwhile to pay for the investment. The BBC wants to have its programming available to as many viewers as possible (to maximize their returns) at the highest quality level possible.

So, BT wants broadband prices on the higher side to maximize its benefits whereas BBC wants them on the lower side to maximize theirs. It appears that BT has set its lowest tier such that viewers can see the BBC content at its basic level of quality. Higher quality levels (which require more bandwidth) require a higher monthly fee

While I am not an economist, this seems to be a bargaining problem of the kind discussed by Oliver Williamson (and Ronald Coase, for that matter). Thus, either we see an allocation of rights and costs that is socially efficent (Coase, in the absence of transaction costs) or we see vertical integration (Williamson, in the presence of high transaction costs) or government intervention (to reduce transaction costs).