Bits Don’t Rule and We Don’t Rule Them

FCC has filed a response to two provider lawsuits on net neutrality (one by Verizon), saying that because the order has not yet been published in the Federal Registry it’s not technically in effect and cannot yet be challenged in court.  That seems a rather lame move, but as I noted last week the current filings are in the DC Court of Appeals, which the operators believe would be likely to find in their favor given their ruling in the Comcast case.  That’s why they filed early to start with, and why the FCC is now hoping to slow things down.  If cases can be filed in multiple appeals courts there could be a lottery to decide which will hear the matter, and that might favor the FCC.

Internationally, we’re seeing some hardening of provider attitudes on neutrality and related issues.  In Canada they’re heading for usage pricing and much lower thresholds for incremental costs.  Telenor in Norway has indicated that the practice of having OTT content like YouTube simply pull capacity out at no charge must “stop”.  I think all of this is related to the same factor that caused Wall Street to downgrade Ciena today, and to Huawei’s record $28 billion earnings (it’s closing in on Ericsson’s top spot).  Return on bandwidth is plummeting still, and that means that operators are at risk for not being profitable at the transport/connection level.  If you’re a price leader, this is a good situation to be in, and Huawei is while Ciena is not.  Operators can’t rely on cost reduction alone, though.  They’ve got to somehow stem that process of commoditization, and that’s possible only if they can improve revenue per bit with some mechanism of per-bit pricing.

Neutrality rules, at least as some would write them, might foreclose the option that would actually be best for users; let the OTT players pay for delivery.  The other option, which is where Canada is tentatively headed, is to establish incremental pricing and usage tiers.  The “let’s go on as usual” choice doesn’t seem likely, or at least it isn’t likely to create a good outcome.  Network investment in infrastructure would likely start to decline sharply as early as 2012 without any relief, and no regulator can order operators to run an unprofitable business if those operators are public corporations.  Already, Eurozone carriers are looking to developing markets to invest because the ROI is higher than it is at home.

It’s higher outside connection/transport too.  Verizon bought Terramark, a leading enterprise-targeted cloud computing provider, and this shows that network operators in general and Verizon in particular are aware of the cloud computing opportunity.  It’s not that the cloud is the lowest apple or the biggest in financial terms, but that cloud infrastructure has so many possible revenue missions that it makes sense to get involved quickly, and effectively.  Terramark has a good customer base and reputation, and its VMware-virtualization slant on the cloud is quite harmonious with the enterprise interest in hybrid cloud computing rather than pure public services.  Network operators are also much more credible providers of backup and overflow-targeted cloud services than anyone except prime IT vendors, which makes this particular space a hot opportunity.

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