Sunday, October 12, 2008

Coping with Data Demand created by Web 2.0

So, how is the telecom industry reacting to the exponential growth in bandwidth demand, what are some of their strategies to remain relevant and succeed in this New World?

Firstly, telcos are doing what they like best - building infrastructure.

There is a significant activity globally, in new submarine cables and lighting up more capacity on existing cables... as one would expect, a large part of this activity is 'centred' around the emerging markets regions of Asia, Middle East and Africa. At last count, over $5 Billion was being sunk in the water, to build these cables.

While this does bring back the scare of the excesses of ten years ago, there are three big differences this time around: one, bandwidth demand growth is now for real and not based on some projected dot com boom; two, most of the investments are directed towards emerging markets which have traditionally been under-supplied with international infrastructure, and three, a large number of the projects are being driven by experienced telcos that have strong organic traffic to support these investments. 

But it is not sufficient to just strengthen backbone networks; the biggest challenge is at the Access level.

There is huge mismatch between existing access networks and the networks that are required in this new world. Broadband networks in developed markets were built for the first wave of Web, assuming low contention ratios. In a text environment, you would download a page and read it for a few minutes before the next hit. Those calculations go completely wrong when large numbers are watching a live broadcast - say, of a cricket match on the net.

It is estimated that $500 Billion to $1 Trillion would be required to build out the fiber and IP networks reqiured to support the emerging demand. Many countries like Hong Kong, Singapore and the US are working towards 100Mb networks to the home.

Of course, in the Indian context, that would be a pipe-dream. Over the next 5 years, most of us should be thrilled if we got a reliable 1Mbps to our homes. Wireless technologies like Wimax will play an important role in most of the emerging markets' broadband enablement.

From a telco perspective, even this is not sufficient. As the content and applications dominate the consumer experience, telcos are slowly losing their relevance from a customer ownership perspective. The Web 2.0 companies would love to relegate the telcos to being dumb pipe providers.

Many of the telcos are therefore moving to a bundling model, with IP services riding on top of the access. It is not clear whether this model will work - the telcos' earlier walled garden models have mostly failed. The telco challenge is that most of them are not prepared -- genetically --
to shift to a services mindset. Some of them have even tried the blocking tactic, trying to discriminate some sites against the others - choking speeds when users access specific sites and freeing it up, for their own content, for example. This is the heart of the Net Neutrality debate in the US. The content companies have won the initial rounds in this battle.

Infrastructure versus Innovation... it is tough to predict who will win.

A similar, but less bloody battle is also emerging between the telcos and IT companies. Most Telcos are moving to an "ICT" strategy, where they are combining services with network, particularly managed services like hosting, security and collaboration. The IT companies have also been moving towards these services from their traditional IT maintenance and outsorucing models.

It is likely that telcos will have an upper hand in services that are network or cloud based - Telepresence, CDN and security, for instance. They are also, in many cases, seeking to collaborate with the IT companies in addressing end to end demands of business customers.

Finally, a word about the economic implications of these developments. We are seeing a virtuous cycle where availability of new applications drives demand for more bandwidth and attracts new subscribers. The resulting growth in revenues is ploughed back into network and capacity enhancement, which in turn encourages new, higher-end applications.

We have seen this happen in the mobile space in India and other emerging markets, and are begining to see the initial signs for the broadband market. It is interesting to note that the developed markets have a slightly different challenge. Web 2.0 is creating the demand for bandwidth, but not many new users, since the markets are getting saturated. Since, most of the existing users are on fixed unlimted packages, they are consuming more bandwidth without any growth in revenues. The fall-out is lower investments and possible future shortage in capacity - already several broadband companies in the US are putting download caps for their users to overcome this challenge.

In conclusion, 300 million broadband homes and most businesses are increasigly using Web 2.0, as part of their daily lives, creating a huge demand for bandwidth. Telcos will need to invest more than $500 Billion in network and capacity enhancements, and more importantly, they will have to radically change their business models to succeed in this New World.

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