Simon Hendery writes that more network traffic won't mean more income for major phone providers.
Talking business with the head of a major telecommunications company these days can be a sobering, if not down-right depressing experience.
For the likes of Paul Reynolds (Telecom), Russell Stanners (Vodafone) and Allan Freeth (TelstraClear), turning a decent profit is pretty tricky in the telco sector.
They feel they're battling
against diminishing returns from increasingly expensive infrastructure thanks to the galloping pace of changing technology.
The happy era of making a guaranteed return from a trusty copper-line telephone network is long gone. Even cellular networks are a tricky business these days - customers once satisfied if they could talk and text over their mobiles are now stressing the cellular networks with their demands for broadband speed data connections.
At the same time a haze of strategic uncertainty hangs over the telcos as they await the Government's decision on how, and with whom, it is going to spent a $1.5 billion honey pot, its promised investment in a fast fibre-optic broadband network intended to reach three-quarters of the population within the next decade.
The Government's so-called ultra-fast broadband scheme is certainly a big deal for the industry, particularly Telecom. Reynolds has said the project is potentially more game-changing than the Government's 1990 privatisation of the company he heads.
Telecom is desperate to be part of the ultra-fast broadband (UFB) scheme, to the extent that it has offered to split into two separate companies (a retail business and a network business) in order to pick up the work.
The self-proposed "de-merger" of one of the country's largest companies signals that these are interesting times.
To a large extent, however, the big telcos are the pulverised meat in a much healthier-looking sandwich.
Whilst they struggle to determine their futures, the companies that have sprung up offering services that rely on their networks - think Trade Me and Google - are doing quite nicely. So too are the technology providers who sell the telcos the equipment they use to run their networks.
An example of an upbeat equipment provider is Juniper Networks which builds complex switching equipment to sit in the heart of telco networks.
The problem for telcos, says Juniper vice-president Spencer Greene, is that while "the network" delivering the internet has become an indispensable part of life, their ability to generate a return on the investment in that network flattens out as bandwidth demand increases.
Greene was in Sydney last month selling Juniper's strategy for overcoming this issue, which boils down to building more sophisticated and adaptable networks to handle the burgeoning volumes of digital traffic they need to carry.
Bandwidth demand has leapt as the internet has become a means of delivering video but Greene says the surge in traffic seen over the past couple of years will be modest compared to the growth rates ahead.
The problem for telcos, he says, is that if traffic volumes across their networks double, they are unable to double what they charge because customers are not prepared to pay.
"Charging for traffic, a price per megabyte, is not the way customers think about things," he says.
A downloaded movie is simply a movie to the person who watches it, rather than a gigabyte of data sent across the network.
It is a valid point, and one that leads on to an even wider discussion about the economics around technology infrastructure.
There is a healthy and robust debate going on over whether the Government should be investing $1.5 billion on its ultra-fast broadband initiative. Is the network a good form of public investment? Will there be a decent return from that investment?
Greene admits to not being familiar with the specifics of the New Zealand UFB but - perhaps not surprisingly for a technology company executive - is supportive of the concept of ubiquitous broadband infrastructure.
He says it has delivered a boost to productivity and general economic well-being in countries where it has already been adopted.
In response to those who doubt the value of making such a large investment with only a nebulous business case behind it, he says the situation is similar to the development of railway networks or intercity highways, both of which probably wouldn't have stacked up as viable investments in their early days.
"You put in these very fundamental kinds of infrastructures and they're always justified based on some particular thing you're trying to do but the follow-on benefits often end up surprising people," he says.
"Many of these basic infrastructure investments that society's done in the past have really surprising benefits that weren't predicted."
It's the kind of comment that draws approval from supporters of this type of investment and howls of outrage from critics demanding hard numbers to back up the claim.
If you're in the critical camp and boil with frustration when you hear this type of comment, then relax. Things could be worse. You could be the CEO of a teleco.
simon@ictmarket.co.nz
Simon Hendery travelled to Sydney as a guest of Juniper Networks.
