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TinotopiaLog → Why Are So Many Businesses Run By People Who Don’t Understand Them? ( 1 Dec 2005)
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Thursday 01 December 2005

Why Are So Many Businesses Run By People Who Don’t Understand Them?

This kind of thing seems to be popping up about once a week now:

A senior telecommunications executive said yesterday that Internet service providers should be allowed to strike deals to give certain Web sites or services priority in reaching computer users, a controversial system that would significantly change how the Internet operates.

William L. Smith, chief technology officer for Atlanta-based BellSouth Corp., told reporters and analysts that an Internet service provider such as his firm should be able, for example, to charge Yahoo Inc. for the opportunity to have its search site load faster than that of Google Inc.

I have a story of a similar wheeze.

A few years ago, I was working for a Large Internet Company that operated a global transit network and a few web hosting facilities. One of the customers in our facility was a clothing merchant I’ll call The Chasm. In addition to their flagship brand, they operated two other stores, ‘Papaya Monarchy’ and ‘Middle-Aged Seaborne Warfare Organization’. I certainly do hope that I’m not letting the cat out of the bag.

Anyway, these people also paid a lot of money for placement on the welcome screen of the world’s largest walled-garden online service, which I’ll call ZOL. One of ZOL’s big network facilities was about a mile away from us, and because The Chasm was paying handsomely to put their name in front of ZOL’s scores of millions of users, they wanted to make sure that those people got the best response possible from their websites.

So The Chasm paid to have an OC-3 run between our facility and ZOL. I’ve got no idea what this cost them, but it can’t have been cheap, except relative to what they were paying for their ZOL ads.

Was The Chasm paying to speed its access to ZOL’s customers? Of course they were. Was this something that, say, Tino’s Pocket-Tee and Khaki Emporium could do? Effectively, no. Was there anything wrong with this? No, there wasn’t, any more than there’s anything wrong with a shopping mall paying to build a freeway off-ramp that leads right into its parking lot in order to spare its customers waiting in traffic on the feeder roads.

Now, it’s possible that the CTO of BellSouth is talking about something like this: pay for your own private network access into our cloud, and because you have greater capacity into our network your data will get better distribution to our customers. There’s nothing sinister or underhanded about that: Akamai, in fact, has built its whole business on facilitating this kind of thing.

But it doesn’t sound like that’s what he means. It sounds much more like BellSouth would like to create some artificial scarcity in order to get people to pay more to not have their traffic held up. Presumably BellSouth doesn’t think that, under any circumstances, they would make more money from companies buying into this protection racket than they do from the millions of people and companies who are their direct customers. Has it not occurred to them that their customers who didn’t exclusively deal with companies that were paying the vig would quickly switch to some ISP that offers them better service? Do they not understand that, whether or not it actually caused any problems at all, their scheme would get blamed for any and all of the inevitable network problems that happen every day?

But Smith was quick to say that Internet service providers should not be able to block or discriminate against Web content or services by degrading their performance.

Rather, he said, a pay-for-performance marketplace should be allowed to develop on top of a baseline service level that all content providers would enjoy.

Has it occurred to them that unless there’s actually a noticeable difference in performance, nobody’s going to be willing to pay for preferential treatment? How is that not ‘degrading’ the performance of non-payers?

“If I go to the airport, I can buy a coach standby ticket or a first-class ticket,” Smith said. “In the shipping business, I can get two-day air or six-day ground.”

That’s true. But in each of those cases, he is the customer. He’s paying the airline or the shipping company for a service. He gets to pick the level of service that he wants and is willing to pay for.

Google and Yahoo are not customers of BellSouth, except to the extent that they have any offices or data centers served by them. BellSouth’s customers are the people and businesses who have DSL lines and DS-1s and so forth run into their homes and offices. You will notice that William L. Smith does not, at any point, say anything about what these people — these people who currently send checks to BellSouth every month — might want. He doesn’t care, apparently.

As long as there is any competition at all for these services — and in most even moderately-densely populated places there is — I’m not too worried about these jackasses actually doing anything like this, or at least about them doing anything like this for very long.

What I’m worried about is the more general problem that, particularly in the telecommunications industry, so much capital is in the hands of people who don’t seem to have the first clue what they’re doing.

Posted by tino at 22:05 1.12.05
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“That’s some nice traffic you’ve got there. It’d be a shame if anything happened to it.”

I think it’s not so much that the people running these businesses don’t understand them as it is that they see themselves as middlemen who stand to make a profit on both sides of a transaction. One could argue that they misunderstand their position relative to the end user; conversely one could argue that they understand that (monopoly) position all too well. In a way, BellSouth represents a monopsony purchaser of content in areas where it is the strongly-dominant provider of network services to end users, and as such it might want to use that power to exact what it sees as better terms from a high-bandwidth content source.

Currently BellSouth (as an example for any company that provides connections to end-users) has only two ways to recover its network costs: it can bill the end users at a rate that accounts for their end-to-end use of the network and not just the local circuit costs (presumably this is what they do already); it can also bill transit customers for their use of dedicated circuits. But what of a bandwidth-intensive site that buys its transit from another provider who happens to have a settlement-free peering agreement with BellSouth? Such a site currently doesn’t provide BellSouth with any sort of revenue stream, and short of extorting their peer for money they don’t have any way to recover the associated costs.

Frankly I think this isn’t so much a proposal for an actual new business model as it is a way to try to shape the debate in Congress. All the big telcos want a regulatory framework that lets them get away with murder while handicapping the cable companies, and vice versa. If they really do end up with the power to mark a class of service on somebody else’s packets (and charge them for the privilege), so much the better.

I agree with you that this is wrong direction for a bandwidth provider to go (since this problem should already be solved with peering and transit agreements), but I disagree with your premise that the executives in question don’t understand how their businesses work. I’m not sure I blame them for trying. This is a business model that depends as much on the regulatory environment as it does on actual customer relationships (if not more so).

Posted by: fedward at December 3, 2005 03:20 PM