Commenting on my post last week about the Keymile PON vs EP2P white paper, Frank raises a very good point about who I was talking about when I used the term Option Value. It's a really insightful comment and I encourage you to read it. Some of the points raised I wanted to address here.
First of all, I should confess that I've sheepingly used the term "option value" without exactly knowing what it means from a serious economic standpoint. I have now consulted the wikipedia entry, and I know for sure that I don't understand what it means from an economic standpoint!
So what I meant when I used the term was really to imply that the value of an infrastructure designed to last 50 years cannot be assessed with a traditional 5 year P&L calculation, which is what the infrastructure debate has been focused on ever since I've followed it. In that sense, it's more of a Lifetime Value in the same way that banks calculate customers' Lifetime Values (and this I understand!)
But more importantly, to Frank's point, who am I talking about when I mention the Lifetime Value of the infrastructure? As he points out, the classic paradigm is to frame the stakeholders along the lines of:
- end user
- service provider
- governance bodies
The implication here (and I'm sure Frank will correct me if I got it wrong) is that when I mention this Lifetime Value, I'm really thinking of the end-user, of the "collective good" rather than the service provider whose best interest is to establish an infrastructure it has full control over and can extract monopoly rates from.
Well, I won't argue that the confusion might have been there to some extent, and in that sense I need to thank Frank for helping me clarify the confusion and think along slightly different lines. However, I still believe that it might not be in the service provider's best interest not to consider the long-term implications.
In other words, the conundrum shifts from being short term savings vs long term sustainability to being short term control vs long term sustainability. But the conundrum is still there.
If you listen to service providers, the main issue they are facing today and would be facing even more sharply in a world of abundant bandwidth is how to extract value from what happens on the layers above their network, ie. on the internet. There are essentially three schools of thought here:
- kill net neutrality to derive revenues: this is probably the wet dream of some incumbents at least; in other words, let's go back to a walled garden world where I decide what the customer can do and what it costs him.
- service providers are screwed: this is the other end of the spectrum and the deep fear of many SPs, especially incumbents; framed differently, since service providers are crap at innovating, customers will go find their nifty services on the internet and the only thing that will generate revenue to SPs will be the network.
- the role of service providers needs to change: this is the middle ground view, and one which I espouse fully; the idea here is that the service provider needs to become an aggregator of services, the player who providers the trust and accountability for these "cloud" services that customers don't (and can't) have any direct relationship with.
Assuming for a minute that the political cost of scenario #1 would be too high for voters ever to accept, that leaves us with two scenarios where the essential asset of the service provider will be the network, either because it will be the sole revenue generating asset or because the network will establish the direct connection and trust to the end-customer which itself will form the basis of the service aggregation revenue.
In the "nightmare" scenario where the service provider becomes a utility, the Lifetime Value of the infrastructure is clearly a very important component to consider since any necessity to revisit the passive network endangers future business models. In the "aggregator" scenario the key argument in choosing the infrastructure is no longer how much you can control it but how open and flexible it is to third party service delivery.
Ultimately then, I think the Lifetime Value line of thinking might not be as misaligned between service providers and end-users as Frank seems to imply. The question is, "will service providers accept the changes that are coming and be able to shift the corporate culture to a model that allows for future growth on that basis?"
And that's where you may freely be allowed to be pessimistic, and where governance bodies may be required to deploy novel thinking in everyone's best interest...
