Why Is Telecommunications in Chaos?

If you are an investor in or user of telephony, you might be interested in this web page describing how the Internet is undermining the established providers of telecommunication services. An excerpt is included below (warning — it requires some knowledge of technology).

The Paradox of the Best Network comes about because as a network gets stupider, connectivity becomes a commodity. Those who own and operate the network have less to charge for. After all, they’re just moving bits. The high-value services, the ones that command premium prices, reside at the edge of the best network. Because the best network is simple, it is low-cost to operate. In a competitive market, this means it is low priced. Low price also lowers barriers to innovation at the edges of the best network.

The telephone companies are impaled on the horns of this dilemma. Historically, their high-margin services have been built into the middle of their network, which has been optimized for a single application — voice. Their business is based on this special-purpose network. They know that implementing the new commodity network threatens the very basis of their business.

In contrast, the Internet is not optimized for any specific application. Its strength is its generality. It’s designed simply to move bits across all kinds of wired and wireless infrastructures. As a result of this simplicity, the Internet has proven to be the most scalable, most robust communications infrastructure humans have ever built. It has proven itself effective at encouraging innovation: of all the winning networked applications of the last decade — email, web browsing, instant messaging, chat, music sharing, streaming audio, ecommerce, etc. — every one appeared on the Internet. Not one was invented by a telephone company. And not one needed any special mechanism within the network itself

This fact frightens the telephone companies. It should. The Internet’s bits-are-bits simplicity even threatens to turn their cash cow — voice telephony — into something anyone can do just by installing simple software onto an everyday PC. Hook a PC to a high-bandwidth, always-on connection and anyone can make high-quality Internet phone calls without telephone company involvement. Further, innovations like document sharing, collaborative whiteboarding, and add-on video conferencing, which are difficult on the old telephone network, are relatively easy additions to an Internet telephony program. Because the Internet is a commodity network, Internet telephony is cheaper. Because it’s a stupid network, innovation is easier. Further, the value is added at the edge of the network, outside of telephone company purview.

But, the real threat to the incumbent telephone companies isn’t the Internet. It’s the Paradox of the Best Network. The paradox means that companies that run the old, closed, special-purpose telephone network have an unfit business model for running the new network. No amount of technological upgrading will fix this. To survive, the incumbents must become different businesses. But there’s no guarantee that they’ll be the best companies to run the best network.

Link The Paradox of the Best Network