The carrier commodity conundrum

We all know that these days, bandwidth is "free." Specifically, it's a commodity service whose cost is so low that it's no longer a significant component of telecom costs.

Unfortunately, that's only half-true. Yes, bandwidth is free — except when it's not. Although the cost of long-haul bandwidth is so low it's almost impossible to measure, the cost of access bandwidth continues to be fairly high. As Sanford Bernstein analyst Craig Moffett pointed out in testimony to the U.S. Senate Subcommittee on Communications a few years back, providing residential broadband connectivity costs as much as $80 per month.

Bandwidth, in other words, is a commodity rather like air or water — it's free in some places, extremely expensive in others. If you're standing right beside a mountain spring, water truly is free — but how much does it cost to bring that water to the Sahara? Or consider the cost of shipping a few liters of that pure mountain air to outer space.

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We all know that these days, bandwidth is "free." Specifically, it's a commodity service whose cost is so low that it's no longer a significant component of telecom costs.

Unfortunately, that's only half-true. Yes, bandwidth is free — except when it's not. Although the cost of long-haul bandwidth is so low it's almost impossible to measure, the cost of access bandwidth continues to be fairly high. As Sanford Bernstein analyst Craig Moffett pointed out in testimony to the U.S. Senate Subcommittee on Communications a few years back, providing residential broadband connectivity costs as much as $80 per month.

Bandwidth, in other words, is a commodity rather like air or water — it's free in some places, extremely expensive in others. If you're standing right beside a mountain spring, water truly is free — but how much does it cost to bring that water to the Sahara? Or consider the cost of shipping a few liters of that pure mountain air to outer space.

The challenge facing carriers, then, is to subsidize expensive access costs by charging more for cheap long-haul than it's actually worth. In other words, operating a purely long-haul network isn't a viable business (that's why SBC purchased AT&T rather than the other way around). Therefore, to survive, carriers have to operate both the access branches and the core.

But that's not all. Carriers have to constantly remember not to confuse their raw materials (bandwidth) with what they're actually selling (communications services). To understand the difference, think about bottled water: have you ever taken a swig from a water bottle while standing right next to a faucet? Why did you pay $2 and up for that bottled water, instead of drinking the free stuff?

The answer is less obvious than it appears. Some people will say the answer is safety — they believe the bottled water is purer and safer than their local tap water. (Depending on where they live, that may or may not be true — in New York City, where I live, you're better off drinking the stuff from the tap.) Another answer is consistency: Regardless of safety, people know how a bottle of, say, Evian will taste. But the most compelling answer is convenience: You can throw that bottle of water in your car or briefcase, and have it with you right at your easy chair or desk. So in essence, what Evian is selling isn't water: It's purity, consistency and convenience.

The challenge for carriers is to come up with the equivalent value propositions for their services. AT&T's Chief Security Officer, Ed Amoroso, is on the right track when he talks about "clean pipes" — offering reliable, virus-free bandwidth. And carriers across the board are stressing managed services—their version of "convenience." But these are really baby steps — to get out of the bandwidth biz, carriers need to make the case far more compelling.

Read more about lans & wans in Network World's LANs & WANs section.