Horizontal Layering

I been thinking about something Joi told me over lunch last week: “Power company is making tons of money off data center”.

Power is something we take for granted. We assumed it is there whenever we need it. We don’t even factor it in our network design. Yet, in a discussion of Internet business model, here, the most boring of all business is making money from the Internet!

Now, many smart people has already said how Internet is going to be like power, about how Internet is going to be ubitquous, always on and anywhere. No doubt about the trend, but that’s not what’s interest me.

I been thinking about vertical integration vs horizontal layering and what’s that means for businesses and consumers. I am also thinking about the effect of such fundamental changes. And most important of all, I been thinking what the telecommunication industry can learn from the power industry.The telecommunication industry is one of the oldest technology industry we have and to claim they should learnt from someone else sound kind of silly. But been oldest doesn’t means they are wisest.

A traditional telco designed their infrastructure using one technology to deliver one service (voice) for their customer. And they do it extremely well, due to their smart network design. Other services, like data is an afterthought and not taken very seriously for a long time. “Customers are dumb so the network must be smart” mentalities are very common.

But in the last 20 years, the “stupid network” Internet design is getting popular. With the smart devices, users finds they are able to do much more and they love it. Suddenly, consumers aren’t as dumb as the telco thinks.

In other words, vertical integration is out of favour and horizontal layering is in. Vertical integration is where you build your network for one services whereas horizontal layering is one where you build a (dumb) network but able to deliver multiple services over it and you separate them via layers.

What are the layers? The first layer is the infrastructure, the pipes to move the bits. The second layer is the Internet, the service provider who route your IP packets. The third layer is the rich variety of content and service (including voice). (Joi’s comment is that there is a layer zero, ie. “power” but lets leave that out for now)

How would an incumbent reacts to such fundamental shift in business paradigm, one that would ultimately threaten their existence? Well, you can expect them to deny the trend, downplay the effect and brush it aside claiming it is no threat at all. They would slow it down further by spreading fears, uncertainities and doubts (FUDs).

But when all fails, they will fight back. And they fight backin the only way they know: Control

1. Control the end-device

Since the new design is a dumb network, they will control it by controlling the device. They will set “standards” and mandate designs of devices before they allowed it to be connected to their network.

2. Leverage their network to control the higher layer

To keep themselves relevant and “sexy” to their investors, they will move up the chain. They will provide not only their infrastructure services but also Internet access and even new service and content. And don’t expect them to give right-of-way to other Internet Access Providers, or Service and Content Providers given a choice.

3. Control by Regulation

They will seek set barrier on entries by lobbying for regulation on new services (such as VoIP). With the army of lawyers and experience in regulation, it is a battlefield they are familiar with and have confidences in.

These tactics have been used before and they are using it now. Some of these will be successful but some will not.

Controlling the end-device is a stop-gap measure because after the market saturated, equipment manufactures can only competes on features not standards. They will and seek to break the restriction. And they already have more control then the telcos; They just didn’t realize their power in controlling the end-devices.

Moving to control the upper layers by leverging their infrastructure is a stronger hold. We see this in action when FCC frees broadband providers from the right-of-way requirements. Unfortunately, they are going to learn the hard way they are infrastructure (or access) provider, not content or service company. Moving up the upper layer is equivalent of a power company decide to go into factories or data center business and restrict power supply to their competitors. If we are lucky, they (and the regulator) will learn their mistake and correct this but most likely, this will end up cripple the industry.

This brought me back to Joi’s comment: Power is making tons of money off data center.

Yes, the infrastructure or internet access is going to be ‘invisible’ but it is okay. Stick to what you do best (within your layer) and you will still make your money, in ways you never expect to be in future.

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