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What drives the economics of networks? — 1 Comment

  1. Richard,

    Competitive digital networks over the past 30 years have proven that we need to rethink our approach to pricing to clear supply and demand.

    Value based pricing has nothing to do with maximizing the price of a given unit of capacity. Rather value based pricing finds the highest value usage of that capacity. This might mean, paradoxically, the lowest unit cost.

    We are taught early on that networks suffer from high upfront fixed costs. What we’ve seen on the other hand is exactly the opposite. Today’s wireless network 5yr TCO is 13% capex and 87% opex.

    So we need to focus on marginal cost of networks at every layer and boundary point ex ante to arrive at optimal pricing which clears supply and demand, rather than average cost driven pricing models that attempt to clear supply and demand ex post.

    We need to flip around our perspective of networks from a supply to a demand oriented model. It’s not build it and they will come, rather build it to where we know the demand will be. That’s the single biggest differentiator between the silo-ed, edge, access providers (ISPs) and the core, horizontal, relatively open, content and application providers (OTT).

    Michael

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