Tech, Telecom, and Commoditization

August 7th, 2008 by · 4 Comments

Today’s rant stems from an insightful reader’s comment on my earlier post Bandwidth Intensive Applications and IP Transit which prompted me to put something into words.  Here is the comment by Graeb:

So why won’t CDN, voip, et al go the same way with each line of business being reduced to a commodity? If the biggest, pure IP network does not provide a competitive advantage in IP transport, what is the competitive advantage in any other line of business?

My answer:  Nothing! Nothing stops CDN or VoIP from becoming a commodity any more than IP transit or SONET or dialup.  Tech products have lifecycles, Wikipedia classifies it like this :

  • Bleeding edge  (e.g. Cloud Computing)
  • Leading Edge  (e.g. Carrier Ethernet)
  • State of the Art (e.g. IPVPN, IP Transit, VoIP)
  • Dated (e.g. SONET, TDM)
  • Obsolescence. (e.g. Dialup)

It is critical to recognize the lifecycle and likely lifespan of the products on which a business depends.  The point is not to avoid commoditization, it is to have a competitive advantage despite commoditization throughout the last three stages when the actual money is made.   You can’t avoid commoditization, you must embrace it even as you move on to the next product.  It’s just that some products are more fruitful than others, and there is far less money in raw IP transit than was expected by most.

Telecom these days is bipolar.  Some aspects are short-cycle, and some are very long term.  Understanding which is which is a distinction that our nearsighted media has substantial trouble with, the short-cycle stuff is just much more exciting to write about.  Companies built solely on tech products with short lifespan survive at the mercy of those lifecycles, hopping across the river one rock at a time hoping the next one isn’t too slippery.  Just ask Earthlink.  Companies built on infrastructure have deeper foundations and are hard to take down – just ask the RBOCs.

In telecom the various tech products come and go, but the fiber they run on changes much less frequently.  That is what Dave Rusin of AFS, Dan Caruso of Zayo, and a few others understand and are putting into practice right now.  It is why Verizon is pursuing FTTH despite how long it will take to pay for itself.  Copper’s lifetime has turned out to be on the order of a century.  Fiber and conduit are just getting started.

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Categories: CLEC · Content Distribution · Information · VoIP

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4 Comments So Far

  • Dan Caruso says:

    oil is a commodity. oil companies make an obscene about of money. consider your answer in the context of oil (and saying oil just has a life span of 100+ years is not an acceptable answer)

  • Rob Powell says:

    Oil is an exceptional commodity to do business in, of course by its nature it has little to do with the same kind of life cycles I was talking about. I think you misunderstood my aim – commoditization is not the problem, in the case of wholesale IP transit the problem is that it just hasn’t turned out to be a very good commodity to be doing business in. Other telecom products are or will be, and owning the infrastructure allow the sort of long term competitive advantage one needs to make those dollars off commoditized products whose data flows over that infrastructure.

    Ack, I know I’m not saying it well yet, oh well. Perhaps I’ll try again later.

  • Parkite says:

    Oil is a finite resource and is the lifeblood of the world. It is also a business with extremely high barriers that is controlled by few (an oligopoly).

    Alas, telecom (bandwidth) is surely not. It is an industry with tremendous pricing pressure as a result of excessive supply.

    What would you rather be selling? Oil or bandwidth?

  • ProfPlum says:

    Oil is an exceptionally profitable commodity NOW. Where were the comments about the incredible profitability of oil in 1998 when everyone wanted to be in the telecom sector? Answer, nat gas was below $2 and oil was $10 so it wasn’t very profitable. Or in the mid-1980s when the oil and gas space had record bankruptcies that almost took down Texas and was the primary driver of the S&L failures and the Resolution Trust Corp? Don’t remember that?

    Answer: Everything moves in cycles. Telecom is in the post-bust phase and will be until capital stops flowing into the sector. I’m guessing that is sooner rather than later.

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