What does your business look like if the key constraint is removed? It is a question so challenging–and often so seemingly impossible–that most of us never ask it. Most connectivity service providers, though, have had to grapple with the business implications of nearly-free bandwidth and free voice and messaging alternatives for decades. And most application providers now assume connectivity is no longer a barrier for reaching most of their potential audiences and users.
But young Bill Gates, before Microsoft was a household name–in fact when the company name actually was Micro-Soft, and was based in Albuquerque, N.M.– did ask the question. So did Reed Hastings, founder of Netflix. And therein lies perhaps the greatest strategic challenge of all for mobile and fixed network connectivity providers.
If you are a user of computing or communications, what is your behavior if both are nearly free?
If you are a supplier of computing or communications, what are the implications for your business? What business are you in, and what business should you be in?
“The original insight for Microsoft was this: What if computing was free? ” Bill Gates, former Microsoft CEO and chairman, once said. He has said similar things several times, more recently about price trends in communications.
And though communications service providers bristled at the statement, Gates said in 1994 that “the big insight of the next ten years is this: “What if digital communications were free.” Of course, there is good reason for connectivity providers to worry.
In 2004, then Microsoft Chairman Bill Gates argued that “ten years out, in terms of actual hardware costs, you can almost think of hardware as being free–I’m not saying it will be absolutely free–but in terms of the power of the servers, the power of the network will not be a limiting factor,” Gates said.
About a decade before, in 1994, Gates mused that “we’ll have infinite bandwidth in a decade’s time.” In 1995, Gates said “And for this new era, communications is what’s becoming cheap. So you get to thinking, well, what if communications was free, what could people do?”
My own analysis is that Gates believed in Moore’s Law and its impact. That analysis would lead you to believe that computing costs would in fact decline substantially, every 18 months, upending assumptions about the use of computing.
Reed Hastings was very clear about the application of Moore’s Law to the foundation of Netflix. At a time when dial-up modems were running at 56 kbps, Hastings extrapolated from Moore’s Law to understand where bandwidth would be in the future, not where it was “right now.”
“We took out our spreadsheets and we figured we’d get 14 megabits per second to the home by 2012, which turns out is about what we will get,” Reed Hastings, Netflix CEO, said. “If you drag it out to 2021, we will all have a gigabit to the home.” So far, internet access speeds have increased at just about those rates.
So as crazy as it might seem, what Moore’s Law has enabled, in computing, communications, applications, hardware and business opportunities, is precisely a clear understanding of what is possible if the key constraint in any business is removed.
Near zero pricing is the term I use to describe the larger framework of connectivity provider pressures towards ever-lower prices. Others might prefer to emphasize marginal cost pricing. The point is that there is a reason the phrase dumb pipe exists. What we need to remember is that dumb pipe now is the foundation of the whole connectivity business.
A caveat is that what people usually mean by “dumb pipe” is that a product is sold at low prices and generates low profit margins. But think about it: industry revenue growth now is lead by broadband services (internet access), which is, by definition, a dumb pipe service. It is a way to get access to applications, not an actual application itself.
You might call that trend another example of the impact of Moore’s Law on business and economics. And near zero pricing is a big industry issue. It might be the single-biggest issue.
In a recent survey by Telecoms.com, the number-one threat to long-term business success was “increased pressure to lower prices” and “lower profit margins,” for example.
Agility or “speed” was also a major concern. Third on the list was competition from webscale firms including Google, Amazon or Microsoft.
But there are good reasons why “lower prices” and “lower profit margins” are the top issues. Simply, they are the most-important result of other industry threats causing the price compression and lower profit margins: competition, the shift to internet protocol as the next-generation platform and the embedding of the whole connectivity function within the larger internet ecosystem.
Aside from deregulation of the telecom industry, which lead to competition and price competition, technology is among the root causes of price pressures. Near zero pricing is a scary thought for a connectivity provider, but it is reality.