"Dumb Pipes" for Australia?

What sometimes is lost in industry discussions about future service provider roles in the communications and content ecosystem is that “dumb pipe” actually can be a viable strategy for some companies, under some conditions, though it might not be the most-favored solution for most executives at incumbent firms.

 

Perhaps the better way to describe the strategy is not “dumb pipes” but wholesale access or transport, using networks with greater or lesser degrees of intelligence. The issue is not so much about the features of the network as the structure of business relationships.

 

What generally is feared is a reduction of service provider role to that of “IP transport provider,” with little role in the revenue-generating applications business. More precisely, the danger is a restriction to the wholesale role, not wholesale as such, even though many, if not most service provider executives believe they do better as owners of their own infrastructure.

 

“Dumb pipe” or “wholesale access” actually is among the best of scenarios for competitors, of course, as it allows them to get volume quickly, without the need to build duplicative access infrastructure. That comes with a limitation as well: less freedom to set prices and a floor on operating costs and potential profit margin.

 

Where incumbents have agreed to separate retail from wholesale network functions, it generally has been because of a push-pull political backdrop. Sometimes a firm wants regulatory freedom and can purchase it at the price of creating an open wholesale access regime.

 

In other cases, determined government pressure can force a decision. The Australian government, for example, is applying pressure to Telstra (News - Alert) to create a national wholesale company providing optical access to all contenders. Up to this point Telstra has refused.

 

But with Telstra CEO Sol Trujillo stepping down as Telstra’s CEO this summer, Telstra probably is signaling that its long opposition to creating a national, open-access fiber to the home network is ending.

 

That doesn’t mean Telstra will abandon life as a retail provider. But it does mean a separated entity will sell wholesale access to all comers, including the retail arm of Telstra.

 

Telstra might be thinking it has to move voluntarily or risk a forced divestiture of the wholesale networks function to a truly-separated new entity. Telstra hasn’t favored separation. But there are different flavors. “Structural” separation creates a new and separate network services company.

 

“Functional” separation allows Telstra to own the networks company, even if it must operate as a wholesale provider. In some real sense, this is going to create a new “dumb pipe” or wholesale entity.

 

So it is not simply technology changes that keep raising the “dumb pipe” issue. Governments around the world are looking at it as a favored regulatory environment.