Juha Saarinen: Era of ‘dumb pipes’ is over

OPINION

There is no indication that our appetite for data transfer capacity or bandwidth will diminish any time soon. Anything that can be done or be provided over a network will migrate online, a shift accelerated by the Covid-19 pandemic, requiring ever increasing amounts of bandwidth.

With booming demand, why then are big network companies being sold left, right and centre? Yesterday, the Hawaiki data cable system, conceived in 2012, was sold for an undisclosed amount to energy transport and infrastructure giant BW Group that traces its origins to Hong Kong shipping legend Sir Y K Pao.

In March, Vocus, which owns broadband retailers Orcon and Slingshot and which is also a big national and regional bandwidth wholesaler, went to Macquarie Infrastructure and Real Assets, and the Aware Super pension fund, in a $3.7 billion deal.

Sweden’s debt-ridden Telia completed the sale of its international Telia Carrier operation last month to a pension fund for approximately $1.57b; you could probably add Vodafone New Zealand to the above group of telcos and network providers changing ownership.

Billion dollar deals like the above seem massive to mere mortals, but you only need to look at Slack being sold for almost $40b for a perspective that suggests that on the internet, the money is in services and content provision. Internet infrastructure on the other hand, not so much.

The chief scientist of the Asia-Pacific Network Information Centre, the regional body in Brisbane that allocates internet protocol addresses to wholesale and retail broadband providers among other things, Geoff Huston, provides some good insights into what’s going on currently.

Telcos and internet providers have traditionally operated on a shared infrastructure basis, in which they try to pack as many subscribers on to their networks as possible, without service quality degrading noticeably.

As Huston observes, that business model is not attracting the demand it used to. Demand is instead being funnelled towards new infrastructure that is built with large content delivery networks (CDNs) that are close to users and giant global service providers.

When you get your Netflix fix, have a rant on social media or read the news, the content in your web browser or mobile app in most cases comes from a server farm nearby (relatively so for New Zealand, as we end up connecting to Australian CDNs often).

Those CDNs and service provision clouds increasingly use their own, dedicated network connections. Google, Facebook, Amazon and CDN providers have laid tens of thousands of kilometres of cable connecting their edge networks that you and I connect to. That’s where all the content is, and the growth in traffic demand it generates.

Traffic between CDN facilities doesn’t have to go over the internet. What’s more, the global giants that built the dedicated networks don’t care about wholesaling capacity to internet providers. They could, but for now at least, why would they when they already host money-spinning services and content themselves that bring in revenue far in excess of what “dumb pipe” telcos with costly to operate and complex shared infrastructure that’s internet-connected to trade with?

The corollary of that is that the “free” stuff on the internet we’re hooked on will inexorably move to everything-as-a-service. On the consumer side, you get a taste of that happening with for example Apple’s new service offerings, which give you badly-needed enhanced privacy features provided you sign up for an iCloud subscription.

Businesses providing everything-as-a-service will be hosted on infinitely scalable cloud platforms, because the economics of operating your own infrastructure just aren’t there.

Competition watchdogs around the world should start thinking about the ramifications of this, if they haven’t already.

For broadband customers small and large, that kind of development probably won’t be a net positive. Sure, we won’t ever go back to slow and congested networks like we had not that many years ago because that’s a bad customer experience and service and content providers won’t want that.

Enjoy what’s left of Ye Olde Internet while it’s there in other words. It’ll be gone soon enough.

The above doesn’t mean that investment in network infrastructure and subsea cables will peter out, quite the opposite. It’ll just be built by some faceless global tech giant and you might not even use the internet to connect to it.

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