Future Tense — IPzation

The concept of IPzation, in my view, is that everything electronic interaction is moving to a level where the communication will happen over an Internet Protocol layer.

We are already starting to see the beginning of that phenomenon with Voice Over IP, which moves the traditional phone communications over to the Internet. Similarly, television stations are starting to experiment with distribution over the Internet, moving what was once running on a different network to the Internet.

IPzation represents a threat to a number of existing business models because it represents a shift from traditional inefficiencies that were taken advantage of by large providers to the Internet.

Assuming users won’t catch up

Telephone companies were safe in the knowledge that, as long as they had control of the telephone infrastructure, they were assured a near-monopoly over that type of business. They have managed to parlay some of their initial advantage into a position where they are offering a way to access the Internet (via DSL, for example) but are starting to see competition from other entities with access to the home, like cable companies, for example, which have managed to use their access to household’s TV screens to create another way to access the Internet. Because the communication layer is happening over IP, the applications can run on either network without any problem, creating a more competitive market.

However, built into the business model around providing DSL or cable access to the Internet were large subsidies to the telecom providers. For example, a DSL line currently only takes a couple of dollars to provision and maintain. The same economics are true of the cable industry. The reason for that low a cost is that the assumption, based on previously established Internet usage patterns was that users were not going to use the full service they were provided all the time. As such, providing what looked like large pipes to the Internet was predicated on a model that assumed that users would use those pipes in a sporadic manner (fetching email or downloading a web page) which could balance access to the larger pipes and distribute it across users.

As more bandwidth-heavy applications are arriving, the telecom providers are starting to complain that they cannot support users following that model. Basically, what is happening here is that they have sold a good they cannot deliver at a price point they cannot offer. Because they have overpromised, they are now starting to worry that users will actually use what the telecommunications companies claimed to offer.

The inefficiency they had assumed was wiped out by Internet Protocols because such protocol allowed for offering services like the telephone or video over the network, something that telecommunication providers had assumed would not happen. Because telephony and video went through an IPzation process, the telcos need to rethink their business model.

Assuming a geographic hedge

Television companies used the geographic boundaries in terms of distribution of content from a TV station to create affiliate networks of TV stations that each had their own business protected in terms of their local area. As such, one could not find two stations offering the same show at the same time in the same geographic region.

There are a number of assumptions here: assumption about physical space, assumption about time, and assumption about monopolies. The economics of television are now faced with challenges as IPzation takes place because those assumptions are no longer valid. Digital Video Recorders have broken through the notion of time-slots and new devices like the SlingBox are breaking through the notion of space. The TV networks are trying to fight back by starting to offer some of their products over the Internet.

However, in order to fully understand the long term impact of IPzation on the TV business model, one needs to take a step back and start thinking about what business TV stations are in and that business is one that is based on another set of inefficiencies. I am talking here about the advertising business which, when it comes to television, relies on delivering an audience to advertisers and charge a premium for it. John Wanamaker, the father of the department store and the father of modern advertising was known for saying “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” TV advertising models were largely based on that old model. The came Google and advertisers started demanding more information about what it was they were getting from those audiences. As Internet advertising has become more prevalent, the notion of of measurable results has gained mainstream acceptance among advertisers and they are now demanding similar types of metrics from other business and TV station find themselves in the cross-hair.

This is another effect of IPzation. As more and more businesses get transacted over the Internet, the common standards created around IP technology force the companies to rethink their approach. IPzation is ruthless in its dissection of core business practice because it is technology and, ultimately, technology does not care about people because it is not sentient.

This is the third article in a 6 part series. You can read the following parts here:

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