November 07, 2005

Memo to Mr. Whitacre

Dear Mr. Whitacre:

You are probably surprised to see the memo pass through your filters and land on your desk. I am sure you will be more surprised when you find out that it is related to your bravado comments about owning the pipes and that those who profit from using these pipes should share some of their revenue with you. I am sure you are aware that your comments have been vociferously decried by the same service providers and also in the blogosphere. My aim in this memo is to suggest what should your position be that is reasonable and more importantly, be consistent to the technology.

In the Business Week interview, you have said that others can not use your expensive pipes for free and that you need to be compensated for using those pipes. You seem to have in mind companies like Google who probably may be benefiting economically. It is not clear what your disposition is if a non-commercial entity or a government agency is the one who is using your pipes. Logic suggests that you will demand financial compensation from them as well; but the context suggests that you are not concerned about them. It is not clear how one can justify this dichotomy. In the telephony world, you do not charge differently based on the “importance” of a call. A call is a call is call. So how do you justify a different model in the Internet?

Predictably, the affected service providers were quick to express their objections. Vonage’s Citron concludes that you are either going to block his traffic or are going to charge him for carrying his traffic. Skype’s spokesman remarks as do many in the blogosphere that the customers are paying for the access and that should cover for all the uses. Amazon spokesperson is more charitable. He recognizes the need for SBC et al. for their own existence. But, he adds, it is an exercise of market power if they extort fees from internet companies. We all know that Internet is really a concatenation of many networks (after all the original name was “Catanet”) and that free exchange of traffic between these sub-networks is an axiom. As Internet was commercialized, a natural order arose and some rules were established. Occasionally these peering arrangements disputed as evidenced by the recent fracas between Level 3 and Cogent. But as Tom Evslin points out there are mechanisms in place. But it is worth pointing out that none of them take into consideration the criticality of the application or the source of the application.

At this point you might think Skype/eBay talks about pay-per-call (presumably higher than par-per-click) and wonder why application independence does not apply to them. You may also wonder the deafening silence from the pundits on this matter. Sometimes I wonder too. But I have concluded that if they truly believe in this, then they are going to be sorely disappointed.

Let me also tell you that I can not totally dismiss your desire for a return on your investment. It is a legitimate one. But it has to be done in a manner consistent to the technology. The business you have chosen is that of providing access. This means, as far as you are concerned, your users are consuming resources at the network layer. You are free to charge for the resources consumed at that layer and no more. You can levy fees based on the amount of bandwidth consumed. If you provide QoS, then you should be able to charge based on the bandwidth consumed according to the level of QoS. For example, in many countries, ISPs place a cap on the amount of downloaded bandwidth per month. In Hong Kong, an ultra high-speed access provider places different limits on bandwidth consumption for domestic and international end points. On this matter you will find friends in unusual places (Geddes, Robertson).

But unfortunately, in US such limits have not been placed. It looks like you want to change this. Then you said state this explicitly. I should warn though that it is very likely that the market may not go along, especially if there is at least one alternative service providers who has a different revenue model.

Also don’t try to spin your way out of this mess by suggesting that this is applicable only to the new network that you are deploying. This will get you in more trouble. You know in Cricket, spinners are effective in getting the batsmen out. But this assumes that your team is good at tight fielding positions. Even then, a batsman in good form can score high runs. The Internet is full of batsmen in good form and trying to spin your way out will not be effective. So you need to bring in the pace bowlers and deal straight. My concluding advice is that you should pray at the alter of Layering Principle, keep cost based tariffs and hope that the Invisible Hand favors you.

By the way, you will benefit from reading what other bloggers (Saunders [a], Saunders [b], Stastny [a], Stastny [b], Pulver [a], Pulver [b] and references therein) have written on this topic.

Regards
Aswath

PS: After I drafted this note, I read your interview with Newsweek. It looks like you are backing away from your previous claim. By the way, it is nice you enjoy iPod. But I am surprised that you use VoIP. Why? What did you like/dislike? Have you thought of porting the things you like to the PSTN world?

Posted by aswath at November 7, 2005 05:22 PM
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