- Dumb Pipe, Smart Pipe and Walled Gardens
- Who fits what profile?
- Apple, Foxtel and other examples
Underneath the shiny commercials boasting ever faster wireless 4G speeds and Unlimited Naked DSL with no line rental and what have you, there is a philosophical war going on in internet-land that every end user should have at least some idea about. It’s an ongoing tussle between some who see the internet as a new marketplace to impose old business models, and others who understand that the internet is maybe something a bit different, and that some of the old ways won’t work anymore. This debate directly relates to how prices are being set for internet access, and how certain ISPs respond to changing standards.
Ok, let’s take a step back here.
iiNet, a major Australian ISP (and parent company of Internode, Australia’s top-rated ISP for customer service) has been locked in a battle with a group representing several major Hollywood studios. The battle goes back to a case in which AFACT (the group representing Village Roadshow, Universal Pictures, Warner Bros Entertainment, Paramount Pictures, Sony Pictures Entertainment, Twentieth Century Fox Film Corporation, Disney Enterprises and the Seven Network) accused iiNet of encouraging customers to download illegal content by offering high data allowances. iiNet eventually won in a High Court hearing, but until recently have still participated in talks with content providers to find a workaround, even as providers like TPG (who were the first to offer Unlimited data) stay out of the fray. This week, iiNet finally said ‘to hell with it’ and backed out of talks, insisting that they’re not being asked to co-operate so much as being bullied to comply with conditions the High Court has already said are unlawful (ie. forcing iiNet to police customers and disconnect users caught using services like BitTorrents).
iiNet’s move has plenty of extraneous factors, but the most pressing are probably that iiNet doesn’t have to do anything, and co-operating with AFACT was costing them time and money, better spent doing what they say they love to do – connect customers to the internet. And fair enough- one presumes that most internet service providers are in business to do exactly that.
The real deal
iiNet and TPG have one big thing in common – in one way or another, they’ve demonstrated a desire to be Dumb Pipes. In internet market parlance, this roughly means that they want to provide the means for people to connect, transferring data from one place to another, and otherwise not have any input into what data their users are transferring. In business terms, this makes them pretty unexciting. There aren’t huge avenues for growth once you’ve connected everyone up. Prices settle into a pattern and then there’s some horse-trading on resources and occassionaly drives to poach customers from one another, but otherwise there’s little room for big, exciting profits. On the other hand, it’s very safe; provide a service, charge a bit more than it costs you to provide it, invest back a little bit in your underlying infrastructure and continue doing business for several hundred years.
You could argue that this is what we expect from what are essentially Utility providers. But for whatever reason, telecommunications has become over time an attractive target for speculative investors who want white-hot profits. That can spur on some widely useful innovations, but also some really bad ones (like extremely high excess usage charges for mobile access). Yes- high fees are an innovation in a business sense. Anything that drives in revenue can be classed in such a way, regardless of how little it corresponds to reality or fairness.
Telecommunications is a pretty unsexy business for the above reasons, but it’s also unglamorous in what it really is: stringing a wire between one place and another. So in order to tszuj it up a little, many telecom providers have entered into partnerships (or outright mergers) with content providers to try locking customers into a ‘Walled Garden’ of service+utility. This helps out the bottom line by providing exclusive (key word) access to a set of content that can’t otherwise be accessed. Because the telecom provider is also the owner of the content, there’s no cost in procuring that content. The flip side is that other content is also kept out of that Walled Garden.
The most relevant example in Australia is Foxtel. Foxtel is owned in part by the company that owns the actual physical network of cables and satellites (Telstra) and the owner of the content (News Ltd.). So you see, Fox and Tel is FOX Broadcasting and TELstra (there are others involved these days, including Optus and Channel 9).
Anyway- Foxtel is technically a monopoly, in that other content providers can’t get into the infrastructure, and other infrastructure (such as the internet) can’t deliver Foxtel content. But things have opened up – Foxtel can be gotten over a broadband connection, using an XBOX 360 as the set top unit – but Telstra BigPond specifically doesn’t count the data transferred as part of your quota. This incentivizes Foxtel fans to use Telstra as their ISP, because their quota would be eaten up by all that Pay TV if they’re with iiNet or the like (similarly, Optus offers unmetered Foxtel-over-IP). Of course, customers with TPG, Dodo or Club Telco could just get Unlimited access plans and not care how much data is being used.
In the US this is far more common, as Cable TV networks provide much broadband infrastructure as well, and even as some telecom operators are owned by parent companies that also own television networks. So there are all sorts of little tricks and techniques that telecom providers use to avoid becoming a dumb pipe and keep their customers inside a Walled Garden (the term is used to conjure a prison that isn’t exactly unpleasant, but still a prison nonetheless). And the walls of the garden also serve to keep other providers out.
Of course, the most widely known use of the term Walled Garden is in relation to Apple and their mobile operating system for iPhone, iPod and iPad, iOS. All applications on iOS are funnelled through Apple, with a complete restriction on what can be installed; likewise, iOS can only be installed on Apple hardware.
iOS has been left alone by regulators because even though it’s a monopoly, it’s in a field in which competition is easy to create (and to some extent, Apple has used this tight control to deliver actual value, by concentrating on usability and quality control). By contrast many walled gardens in the telecommunications field do little to deliver quality control and simply deliver greater profit to the organization owning the monopoly- and more importantly, involve real physical infrastructure on a large scale that’s extremely hard to duplicate (like a telephone network of 12 million lines).
The middle ground for all of this is Smart Pipe, a relatively loose term to refer to when infrastructure owners deliver a handful of services tailored to their network, but without restricting access to alternatives. A good example of this is seen in the Android mobile phone ecosystem. Android, a Google product, powers smartphones from Samsung, LG, HTC and others, and has its own native store for buying apps and content. But those manufacturers can operate their own stores for compatible apps, as can third parties like Facebook.
But a better example as it relates to telecommunications are services like BigPond News and OptusZOO. These are web portals run by the big ISPs that deliver unmetered content like news, movies, songs, games and more, but without hindering access to alternatives (except by metering the data spent on those alternatives).
In reality, Smart Pipe business models make little or no money, and don't necessarily improve the brand that much either. Which is why you often don’t see much effort put into things like IPTV and the like.
What are the advantages of Dumb Pipe?
For users, the advantage of an ISP who acts like a dumb pipe is that their entire business model is dependent on you getting connected. This means that they’ll tend to put plenty of their own money into ensuring the quality of their network, meaning better connection quality for you. And when you call with a problem, their incentive is to fix it, not to try to sell you some other product or service.
The disadvantages are that profit margins are slim, so it’s harder for these sorts of providers to offer free connections, free hardware, special bonuses and things like that. They only have one revenue stream (connecting you), and there’s not much wriggle room there. There’s also less hand-holding for users who are less tech-savvy: if you want a service, you’ll have to go out and find one, rather than your ISP offering a ready-made solution.
Examples: TPG, Internode, MyNetFone
What are the advantages of Smart Pipe/Walled Garden?
With any type of service with several potential revenue streams, there’s wider scope to make special offers and introduce loss leaders- like offering a free connection in exchange for a long contract, or a free XBOX when you take their most expensive plan. There’s also several options for bundling different services together to make a simple, overall package. And as per Apple’s example, there’s some scope for quality control.
Unfortunately, quality control is rarely what you get. What you usually get are bloated packages with high prices but lots of things to put in a product description to make it look impressive. ‘Unmetered access to millions of songs, movies and games’ means very little when those songs, movies and games are much more expensive than alternatives like iTunes or Amazon. And ‘unmetered’ is only impressive when other providers aren’t providing much more data at a lower price.
More to the point, the underlying philosophy of a Walled Garden for many practitioners seems to rely on the bet that customers want benefits over features, which underlies many sales models. So this means concentrating on delivering vague tangibles like 'all your services under one bill!' over something that has been refined to work consistently. But for the record, there is a middle ground where some firms still invest in the nuts and bolts of their business while pushing the happy, brightly advertised benefits. But it's a fine line.
Examples: Telstra, Optus, Dodo
The internet has within it the potential to overturn entire industries, and that’s no hyperbole – it has completely changed music and publishing, and is starting to change the movie distribution industry. Of course, it’s also making a huge impact on less frivolous industries, such as medical and scientific research and project funding.
But it’s in digital entertainment content that the owners of the pipes that transport ‘the internet’ are trying their best to bend to their will. Alas, that doesn’t seem to be how many people want it to be, and eventually the Dumb Pipe model may prove to be the natural business model. Until someone comes along and proves that a tailored, blinkered approach to digital media would work better (and cheaper) for the end user, it’ll be an uphill climb with no real refuge except for court cases. Increasingly, the law is not interested in hearing from companies trying to hold back the future.