Commoditization: Sometimes Less Really Is Less

Networking is pervasive today because cost per bit has plummeted. According to the FCC, a household with 16 times the bandwidth of a "fast" data trunk just 20 years ago doesn't even qualify as being a "broadband" customer today. Times have changed, and what has changed them is commoditization.

It's a good thing, right? As a buyer, I would say it certainly is -- but price commoditization that's not compensated by lower network costs can threaten broadband services, and maybe sooner than we think (see related post, How 2 M&A Drivers Shape Networking Overall).

Price commoditization started with packet switching. Old data services gave customers fixed, constant, bandwidth. A T1 line was 1.544 Mbps, all the time. Back in the '60s Rand Corp. did a study that proved that data traffic was inherently bursty, and so you could fill in the valleys of one stream with the peaks from another to get two or more flows to share the same capacity. IP is a packet protocol, and the Internet a packet network, and most of our cost-per-bit revolution was based on the packet.

Then we had fiber. There's a limit to how much data you can punch across copper wire, particularly if you want to connect across any distance. Fiber optics promises tens, hundreds, and thousands of miles of transport, and with wavelength multiplexing we can put multiple transport paths on the same strands of glass. Fiber transport reduced the cost of transmission significantly, and it provided the second wave of cost advantages that kept operator cost per bit falling at pace with retail price declines.

Scrounging Around for Savings
Packets and fiber built our broadband services. What we call "over the top" (OTT) services like streaming video are all products of commoditization. If consumer cost per bit were higher, then these services wouldn't be as attractive. OTTs have taken advantage of commoditization, leaving most operators feeling like they've been taken advantage of along the way. The only remedy for operators is further cost reduction, and the big question has been where to find it.

Operators are using network functions virtualization (NFV) and software-defined networking(SDN) to attack vendors on their high switching/routing equipment prices, but most will acknowledge that this approach doesn't offer much hope of enduring savings. Competition among vendors, particularly because of Huawei, has given operators leverage in negotiating those prices, and operators think that capital equipment savings won't have enough impact to sustain profit margins. For more savings they have to look at operational expenses.

Read the rest of the article on No Jitter.