I have been spending some time thinking about disruptive business models and how they surpise monopolies and how monopolies then respond to the disruptive threat. We can see this is a wide variety situations but lately I have been seeing it in the telecom sector (naturally), cable television (naturally) and satellite television (wait really how do they have a monopoly? I'll go into that in a moment) how monopolies handles innovation that might be threatening their traditional business model.
Before I get too far in this post a few things need to be defined. Most of the monopolies are not national monopolies but rather regional monopolies. For some reason people seem to think that if a competitor somewhere in the country exists for a product , that it's not really a monopoly. They have the strange idea that a monopoly means a 100% market share. Where they get this idea I don't know but I suspect it's the complete lack economic education in our society (at least judging by the huge pile HELOC funded credit card debt the average American has).
Monopolies are quite often regional. For example cities were giving out monopolies to cable companies as an incentive to wire the city. As a result most cable companies are local monopolies and this has lead to a serious case of monopoly think. One of the basic rules of a monoply is that innovation is to be feared at all costs. It's far too disruptive to your current business model. In VC terms this is often called "knifing the baby." It should be more properly called killing the golden goose, as all the revenue flows from this goose. This leads to a risk aversion that is quite stunning in it's scope. It entirely blinds management, leading them to think "inside the box" as it were. Let's take a look at the recent moves by AT&T with their Project Lightspeed as it highlights this sort of thinking.
A recent Salon article hightlighted AT&T attempts at Lightspeed to turn the Internet into cable TV. (Good luck with that guys). And in traditional monopolist fashion Edward Whitacre, AT&T's CEO declared,"What they would like to do is use my pipes free, but I ain't going to let them do that because we have spent this capital and we have to have a return on it," he said of Google and Microsoft. "Why should they be allowed to use my pipes? The Internet can't be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo or Vonage or anybody to expect to use these pipes [for] free is nuts!"
Well Edward you built those pipes for your customers and so you can sell them access to someone else's content. I haven't noticed that AT&T has suddenly bought a movie studio's back catalog in the last few years, so you really don't realize that you are the tail on the dog. The Internet isn't free but it is largely paid for on both ends of the connection.
Of course the attempt to add this intelligence layer to the Internet to prioritize traffic isn't new, it's something that a non engineer, management type thinks is a good idea. It actually is a vary bad idea. First off a network with too much overhead like the overhead generated by an traffic manager proposed by AT&T would make for a very brittle network. User network usage is difficult to predict on such a network, but you can be certain that users are going to use more bandwidth than you expect them too and are going to use their connection in new and interesting ways. Let's call the Brian's 1st law of network usage - Users will routinely consume 200% of your available bandwidth.
Additionally the overhead of managing these packets doesn't really get you anywhere - it doesn't improve the user experience and strangely it doesn't improve overall network performance. From the Salon article,
"Gary Bachula, vice president for external affairs of Internet2, a nonprofit project by universities and corporations to build an extremely fast and large network, argues that managing online traffic just doesn't work very well. At the February Senate hearing, he testified that when Internet2 began setting up its large network, called Abilene, "our engineers started with the assumption that we should find technical ways of prioritizing certain kinds of bits, such as streaming video, or video conferencing, in order to assure that they arrive without delay. As it developed, though, all of our research and practical experience supported the conclusion that it was far more cost effective to simply provide more bandwidth. With enough bandwidth in the network, there is no congestion and video bits do not need preferential treatment."
That's the strange thing. People assumed that the priotizing the traffic would result in an performance improvement. It didn't.
AT&T wants Lightspeed to become more like a on demand television with phone traffic. While that's certainly an interesting project goal - I am not certain how much consumers are actually demanding movies on-demand. With the advent of the DVD, most consumers have an on-demand library. I had StarZ On Demand in Pasadena and I used it once. But movies on demand has been a goal of the cable industry for decades now. I just suspect that technology in the DVD fill the market effectively enough that demand for these services will be slack at best.
What AT&T highlights about these monopolies is the immediate tendency to control what you fear. In satellite television, Dish Network charges $5.98 per month for a DVR if you have a DVR connected to the system. Imagine for a second a VCR fee and how silly that sounds. Yet repeatedly I have been told by customer service that the DVR fee "allows me to pause live television and record shows," which of course it doesn't. DVR is a new technology so Dish simply made up a fee to monetize something they really don't have any business charging for since they provide NO services for it. (Incidently this fee recently went from $4.98 to $5.98. It's kinda of funny, I am used to prices dropping over time, not rising. That's another thing that monopolies like to do - rise prices. It's why MS Office is $499.)
For example there is NO mention in the Lightspeed project about P2P networks and BitTorrent which are the largest portion of traffic on the Internet now. AT&T wants to reign in the chaos created by users and replace it with a regular monthly billing schedule they can understand. The reason that AT&T wants Lightspeed to look like a new cable service is that is the business model they understand. It allows them to keep prices artificially high and monetize every single usage of their network and degrade the service of their competitors. It's abad idea for consumers everywhere.
