Future Tense — IPzation

The con­cept of IPza­tion, in my view, is that every­thing elec­tronic inter­ac­tion is mov­ing to a level where the com­mu­ni­ca­tion will hap­pen over an Inter­net Pro­to­col layer.

We are already start­ing to see the begin­ning of that phe­nom­e­non with Voice Over IP, which moves the tra­di­tional phone com­mu­ni­ca­tions over to the Inter­net. Sim­i­larly, tele­vi­sion sta­tions are start­ing to exper­i­ment with dis­tri­b­u­tion over the Inter­net, mov­ing what was once run­ning on a dif­fer­ent net­work to the Internet.

IPza­tion rep­re­sents a threat to a num­ber of exist­ing busi­ness mod­els because it rep­re­sents a shift from tra­di­tional inef­fi­cien­cies that were taken advan­tage of by large providers to the Internet.

Assum­ing users won’t catch up

Tele­phone com­pa­nies were safe in the knowl­edge that, as long as they had con­trol of the tele­phone infra­struc­ture, they were assured a near-monopoly over that type of busi­ness. They have man­aged to par­lay some of their ini­tial advan­tage into a posi­tion where they are offer­ing a way to access the Inter­net (via DSL, for exam­ple) but are start­ing to see com­pe­ti­tion from other enti­ties with access to the home, like cable com­pa­nies, for exam­ple, which have man­aged to use their access to household’s TV screens to cre­ate another way to access the Inter­net. Because the com­mu­ni­ca­tion layer is hap­pen­ing over IP, the appli­ca­tions can run on either net­work with­out any prob­lem, cre­at­ing a more com­pet­i­tive market.

How­ever, built into the busi­ness model around pro­vid­ing DSL or cable access to the Inter­net were large sub­si­dies to the tele­com providers. For exam­ple, a DSL line cur­rently only takes a cou­ple of dol­lars to pro­vi­sion and main­tain. The same eco­nom­ics are true of the cable indus­try. The rea­son for that low a cost is that the assump­tion, based on pre­vi­ously estab­lished Inter­net usage pat­terns was that users were not going to use the full ser­vice they were pro­vided all the time. As such, pro­vid­ing what looked like large pipes to the Inter­net was pred­i­cated on a model that assumed that users would use those pipes in a spo­radic man­ner (fetch­ing email or down­load­ing a web page) which could bal­ance access to the larger pipes and dis­trib­ute it across users.

As more bandwidth-heavy appli­ca­tions are arriv­ing, the tele­com providers are start­ing to com­plain that they can­not sup­port users fol­low­ing that model. Basi­cally, what is hap­pen­ing here is that they have sold a good they can­not deliver at a price point they can­not offer. Because they have over­promised, they are now start­ing to worry that users will actu­ally use what the telecom­mu­ni­ca­tions com­pa­nies claimed to offer.

The inef­fi­ciency they had assumed was wiped out by Inter­net Pro­to­cols because such pro­to­col allowed for offer­ing ser­vices like the tele­phone or video over the net­work, some­thing that telecom­mu­ni­ca­tion providers had assumed would not hap­pen. Because tele­phony and video went through an IPza­tion process, the tel­cos need to rethink their busi­ness model.

Assum­ing a geo­graphic hedge

Tele­vi­sion com­pa­nies used the geo­graphic bound­aries in terms of dis­tri­b­u­tion of con­tent from a TV sta­tion to cre­ate affil­i­ate net­works of TV sta­tions that each had their own busi­ness pro­tected in terms of their local area. As such, one could not find two sta­tions offer­ing the same show at the same time in the same geo­graphic region.

There are a num­ber of assump­tions here: assump­tion about phys­i­cal space, assump­tion about time, and assump­tion about monop­o­lies. The eco­nom­ics of tele­vi­sion are now faced with chal­lenges as IPza­tion takes place because those assump­tions are no longer valid. Dig­i­tal Video Recorders have bro­ken through the notion of time-slots and new devices like the Sling­Box are break­ing through the notion of space. The TV net­works are try­ing to fight back by start­ing to offer some of their prod­ucts over the Internet.

How­ever, in order to fully under­stand the long term impact of IPza­tion on the TV busi­ness model, one needs to take a step back and start think­ing about what busi­ness TV sta­tions are in and that busi­ness is one that is based on another set of inef­fi­cien­cies. I am talk­ing here about the adver­tis­ing busi­ness which, when it comes to tele­vi­sion, relies on deliv­er­ing an audi­ence to adver­tis­ers and charge a pre­mium for it. John Wana­maker, the father of the depart­ment store and the father of mod­ern adver­tis­ing was known for say­ing “Half the money I spend on adver­tis­ing is wasted; the trou­ble is, I don’t know which half.” TV adver­tis­ing mod­els were largely based on that old model. The came Google and adver­tis­ers started demand­ing more infor­ma­tion about what it was they were get­ting from those audi­ences. As Inter­net adver­tis­ing has become more preva­lent, the notion of of mea­sur­able results has gained main­stream accep­tance among adver­tis­ers and they are now demand­ing sim­i­lar types of met­rics from other busi­ness and TV sta­tion find them­selves in the cross-hair.

This is another effect of IPza­tion. As more and more busi­nesses get trans­acted over the Inter­net, the com­mon stan­dards cre­ated around IP tech­nol­ogy force the com­pa­nies to rethink their approach. IPza­tion is ruth­less in its dis­sec­tion of core busi­ness prac­tice because it is tech­nol­ogy and, ulti­mately, tech­nol­ogy does not care about peo­ple because it is not sentient.

This is the third arti­cle in a 6 part series. You can read the fol­low­ing parts here:

• Part 1: Intro
• Part 2: Always on
• Part 3: IPzation
• Part 4: Sensors
• Part 5: Par­tic­i­pa­tory Applications
• Part 6: Conclusion