The New Service Provider

Not too long ago, if I asked you to think of service providers, names like AT&T, British Telecom, Deutsche Telecom, would have come easily to mind. Today, your response would not be so predictable. In the last few years, we have witnessed not only explosive growth in the amount of traffic on the Internet, but also in the types of applications running over it. This has created an opportunity for emerging companies that are changing our conception of what service providers are or should be. In the past, those companies mentioned earlier have traditionally focused on connectivity services, but that has all changed. Today, service providers are all about applications and network connectivity is a given.

In an earlier blog, I mentioned that the recent economic woes would not hinder growth of Internet traffic, and we now have significant indications that this prediction was accurate. TeleGeography recently reported that Internet traffic growth accelerated to 79 percent in 2009, up from 61 percent in 2008 and that in 2009, network operators added 9.4Tbps of new capacity – exceeding the 8.7Tbps in existence just two years earlier. This capacity was added not just by the traditional telecom companies, but also by some of the new and emerging players. For example, the San Jose Mercury News reported that in October 2009, the FCC approved a new trans-pacific optical cable to carry data between the United States and Asia. This cable project received significant funding from Google, which is an excellent example of the rapidly changing definition of services providers and what they do. In addition to their traditional search engine, Google now also provides video content delivery, Internet telephone calls, and even wireless Internet access in some places – all services that were previously “owned” by traditional communications services providers. Google is becoming such a prominent player in some of these traditional service provider markets that AT&T has complained to the FCC about what they say is Google’s inappropriate blocking of certain calls and its disregard for free and open use of the Internet.

While IP networks are now carrying traditional voice applications, niche service providers are creating new markets. These new service providers take advantage of the fact that they don’t need to own the physical network infrastructure to offer their services, giving them a new and unique business opportunity. A company called Cinedigm, which launched a network to provide digital cinema delivery in 2005, is a good example. With its service, film makers can deliver movies to theaters over a network, rather than through the now old-fashioned method of sending reels of film. Another example of new services enabled by the Internet is the social gaming market. LinkedIn, MySpace and Facebook are prime examples of the growth potential of social networking, and now gaming is a new adjacent market spun off from these popular social networks. Companies like Zynga, Playdom and Playfish are benefitting from the growth of this market; a recent news report on a CBS affiliate in Louisiana reported that the social gaming industry was worth $98 billion in 2008.

This has big implications for traditional service providers. First, we have to assume that market forces will continue to drive down basic bandwidth and connectivity pricing – at least through the next five years, forcing service providers to lower network costs substantially. The premise is simple – basic network connectivity must be delivered at very low cost per bit to be a profitable service.

The second implication is about service revenue and speaks to the relevance of the network. To be relevant in today’s market, service providers need to go beyond the basic bandwidth offering (which was so successfully commoditized) and start focusing on value-added experiences for the customer.

There is a symbiotic but unhappy relationship between content providers with compelling applications (which drive customers to the network), and the network service providers whose infrastructure actually delivers this content.

In essence, traditional service providers need to intersect a new operational cost model with a new services revenue model to create a very different outcome for their customers. We call this “The New Network” and I will discuss this in my next blog.

Luc Ceuppens is vice president of product marketing, High-End Systems Business unit at Juniper Networks (JNPR).