Soon after the Whatsup recent monumental acquisition for $19 billion, the newly acquired company announced that it will offer VoiP as part of its new service offerings. In order to get there, the company would have to rely on the wireless and wireline telecommunications backbone to provide that service. And this new development adds more fuel to the controversies and battles between those companies that provide infrastructure – the carriers — and those that ride for free on or even abuse the telecommunication networks – the software applications. There we will witness the battle of the elephants.
Software applications cost a fraction of what it takes to build a telecommunications network. When Whatsup was acquired for $19 billion, it only employed about 45 persons. Its software code operated on the WAP protocols, or essentially, on the wireless platform. With 45 personnel, you had programmers, a few computers and desks. Contrast this scenario for telecommunication carriers — Verizon has over 195,400 employees as of 2013 with a market cap of $167 billion. Then one must consider the costs to deploy fiber optic networks terrestrially and submarine-wise. In Paris, it costs $1 million a mile to dig up the street and replace every brick for a terrestrial network construction in an urban area. To lay a transatlantic fiber optic submarine cable across the Atlantic Ocean costs about $600 million. As part of transatlantic submarine cable deployment, a company must lease a Fiber Optic (F.O.) specific ship at $50,000 a day in order to drop fiber optic cable under the ocean. I doubt that Whatsup furniture and office computers cost more than $50,000. As anyone can easily glean from these examples, the contrast between infrastructure and software development economic costs is staggering.
And companies such as Whatsup (focused on wireless) and Netflix (content delivery) saturate the Internet backbone. Interestingly, the public is perplexed why network capacity cannot expand or be improved. One editorial even lamented the fact that the merger between Comcast and Time-Warner will delay the development of fast Internet networks, since the author concluded, wrongly so, the lack of competition will not create the incentive to build new networks. Actually, the merger is the result of competition from companies such as Verizon and AT&T which also distribute content that competes against the legacy cable companies. And the way to buttress against the telecom and satellite companies is to consolidate. The merger is not the principal reason why Fiber to the Home (FTTH) is not being deployed nationwide. The strongest disincentive for infrastructure deployments comes from Internet based companies offering OTT and VoiP that cuts into the revenues and the high costs for fiber optic infrastructure development.
A recent WSJ editorial commented that every American should be entitled to high speed Internet using a small town in Kansas as an example recently constructed by Google. Obviously the author has no clue what it takes to deploy FTTH nationwide. Indeed, Verizon attempted on a trial basis to install FTTH in one town in central Virginia. Between town and street excavations, fiber optic equipment, the costs skyrocketed to several thousand dollars per home. Under the rules of economic elasticity, Verizon could only charge so much per household for each potential consumer had alternative providers for telecommunications and entertainment – satellite and wireless phones. In other words, it would take years before Verizon would be cash positive for each household, and many more years before the network would generate a decent ROI. Conclusion: Verizon, being bottom line oriented and publicly traded, abandoned that FTTH program. Instead it only focused wireless networks which had considerable fatter, margins. Hence FTTH deployment requires substantial capital with a long ROI window. And these software apps don’t help.
The same author extoled Google’s deployment for a small town. But can Google deploy such a network to over 95% of the U.S. populations without expending considerable capital and personnel? Can Google handle the myriad licensing and regulatory procedures to install a FO network? Can it excavate streets and roads in urban areas? I doubt it. If Verizon with a well known telecommunications engineering staff fully capable of deploying FTTH cost effectively abandoned such enterprise, then one can only conclude that no other company else can. Any company wishing to deploy FTTH must find additional revenues to invest in the improved infrastructure. Only telecom carriers are capable of such deployments having the necessary experience and personnel. But to get there, they need to generate more revenues. And those revenues are being sucked up by Internet companies like Whatsup and Netflix.
Internet companies are the principal reasons why the telecom infrastructure cannot upgrade their networks. Let us look at Whatsup, whose most important feature is to text message on smart phones through IP, while avoiding the carrier’s text message charges. There is no question that the app has reduced the carriers’ revenues by over 20% in those countries where text message charges generated considerable revenues. Now Whatsup will introduce VoIP, which is another substitute for voice minutes — the principal revenues for carriers. For every marginal minute Whatsup uses, that represents another marginal billable minute lost to the carrier. In other words, the public wins, but the carrier loses.
Meanwhile, Netflix’s content saturates network with content and, under the net neutrality umbrella, the company pays for the content as any ordinary household. Carriers already are clamoring for a model that allows them to charge based on incremental usage. Net neutrality handcuffs carriers from charging Internet users for adding traffic above ordinary usage. And yet the carriers need additional revenues to finance the construction of new capacity. (Even Netflix has recently agreed to pay more for its content distribution to the carriers, knowing well that the additional revenues will help finance a better network.)
The public clamors for more F.O. capacity. The software industry has thrived in an era which allows the customers to access additional information, watch content, send text messages without paying additional costs beyond a token recurring monthly fees. That free party has to give in to a new world where consumers pay their fair share of exploiting the infrastructure. The Internet cannot exist without telecommunications networks. And the companies that own the roads usually win, in this case, the carriers. In the near future, we will witness a new Internet pricing model where consumers will share in the costs. They need to pay so that the network can be enhanced.