Nothing bothers telecom or Internet access provider executives more than the fear of becoming a “dumb pipe” provider. The fear is that value, revenue and margin will migrate elsewhere in the value chain. So the big fear is the unstated set of assumptions that go with “dumb pipe,” more than the actual phrase.

What tends to be left unsaid in all discussions of “dumb pipe” are implied adjectives such as “low margin, commodity status, low value, low revenue or low price.” In other words, it is not “dumb pipe” in principle, but low value, low revenue, low margin, low price “dumb pipe” that drives the concern.

It's a complicated issue, for a couple of reasons. 

Service providers are well aware of what has happened, and is happening to the implied value of voice services that historically have provided the bulk of industry revenues. In fact, ”low margin, low revenue or low price” are proper characterizations of the retail pricing trends for voice services, though some segments have fared better than others. Many extrapolate from that experience as they look forward. 

Broadband access and transport services are the other area where executives look at historic pricing trends and see danger. Over time, the price per bit seems inexorably to drop. 

The other unnerving issue is that the architecture of software and applications does relegate transport services to a certain part of the protocol stack. The reference seven-layer Open Systems (News - Alert) Interconnect model, which basically describes the way all software is written these days, assigns the network to layers one and two, for the most part, with applications sitting at layer seven. 

The basic framework, in other words, compartmentalizes the “how bits get moved” parts of software from the “what users see” part of the process. The hardware analogy is that devices are what consumers actually see and work with, while protocols are buried, literally inside the devices. 

So another important and unstated assumption people make when talking about “dumb pipe” is that value gets driven by the application layer, by the devices, by the the things end users actually work with, not by the transport mechanism, the middleware and other “invisible” protocol elements. 

But things are complicated. Cable, satellite, telco and other “transport and access providers” also sell layer-seven applications such as voice and entertainment video. Undersea capacity providers, of course, represent the closest thing to a “pure play” capacity provider, and have different challenges than retail service providers, since nearly the entire business is “transport” rather than layer-seven applications. 

Even there, the model is mixed, though. Hosting services, cloud computing services and data center services are clear examples of “retail” applications that even capacity providers now sell. 

In fact, if you look at a standard triple play or quadruple play service, one of the foundation services essentially is a “dumb pipe” service, namely “broadband access.” It is, as its name implies, “access” to applications that reside on the Internet someplace. But the other services are applications. 

There is, in other words, a co-mingling of functions. Some foundational elements are layers one and two; but most of the revenue is earned from applications. Telcos and cable companies are in several businesses, in other words, one of which is “dumb pipe,” or simple access to the Internet. In fact, that dumb pipe is among the unique roles played by transport and access providers in the application ecosystem.

Carriers and network services providers cannot avoid playing the key role, in fact, the essential roles, in access and transport, or they wouldn't be telcos or cable operators. But they aren't “just” transport and access enablers. Cable, telco and satellite providers also are application providers.

And it is far from certain that the near -term revenue opportunities do not grow, almost entirely, from current competencies in running networks and applications. 

About half of telco revenue growth over the next three years will come from new lines of business, telco executives believe. But most of that opportunity still consists of “product line extensions” built on current capabilities. The other half will come from growth of existing services of all types. 

Existing core services might provide upside up to about nine percent, STL Partners reports. Vertical industry services have potential to provide as much as 10 percent of revenue growth. See Half of Telco Revenue Growth Next 3 Years From New Lines of Business - Thoughts on Carrier Evolution - Carrier Evolution.

Infrastructure services (wholesale services, essentially) might provide eight percent of growth. Allowing third parties to embed communications features into their apps might drive 10 percent of growth. Providing other services to third party app providers could represent as much as 12 percent of revenue growth over the next three years.

Telcos providing their own “over the top” apps might provide five percent of revenue growth.The takeaway is not so much that half of potential new revenue will come from new lines of business, but more that each opportunity builds logically from what service providers already provide.

The point is not to get too hung up on the “dumb pipe” or “access” function. That is a necessary and foundational part of any telco or cable operator's business, going forward. In fact, it is reasonable to say that all the rest of the business assumes and is built on the broadband access and transport functions. 

As a general rule, the “declining price per bit” trend will remain in the background. There is a legitimate concern about lower profit margins per delivered bit, even if volume grows. But now all “dumb pipe” services are necessarily “low margin.” In fact, operators report blended profit margins that range from 20 percent to 40 percent. 

Some operators might even internally agree that stand-alone profit margins for access services can reach that level, in some cases (much depends on allocations of corporate overhead, or volume discounts triple play packages represent, where it is hard to attribute revenue and cost).  It is hard to separate out what components have higher or lower margin in a triple play or quadruple play service. 

Telcos might merchandise broadband to maintain voice revenues, while cable operators might merchandise voice to maintain video entertainment revenues. In large part this is an accounting exercise. 

The point is that one might plausibly argue that under any given set of accounting assumptions, the one “dumb pipe” service--Internet access--is not a “low margin” service, though it might not be the highest margin service offered. For a telco, video services are likely to be the lowest margin service. Dumb pipe actually carries a higher profit margin.

Dumb pipe--broadband access--is both a foundational, strategic and permanent part of the value and revenue potential for any ISP. Saying “we don't want to be a dumb pipe provider” is fundamentally non-sensible. What would a company that does not offer network “access” be? Whatever it might be, it would not be a telco, cable, mobile or satellite provider. 

But service providers sell applications. And, in fact, the largest near-term growth opportunities likely are products that build on access and features service providers already sell directly, or can be packaged in new ways, to new customers, as applications. 

“Not wanting to be a dumb pipe” is a legitimate concern if that implies becoming “only a provider of low margin, low revenue access services.” The point is that service providers already sell a mix of products, ranging from relative commodity “access” to full applications. 

But there is no escaping the “access” function, which is assigned to ISPs as a very fundamental part of the application model and as a foundational requirement for tomorrow's business. On the other hand, access is not the only key product now sold, nor will it be the only key product in the future. 

Still, the almost-constant worry about “dumb pipe” is misplaced, to a real extent. The role cannot be escaped. Dumb pipe – access to the Internet and web – is foundational. It isn't, nor will it be in the future, the exclusive role. Network service providers will always be in the dumb pipe business, as well as applications.