How will the end of Net Neutrality impact pricing for B2B SaaS and the Industrial Internet of Things?
By Steven Forth
Update: On December 14, 2017 the US FCC, as expected, voted to remove the protection for Net Neutrality. Do not expect any sudden changes, it will take some time for the carriers to implement the systems they need and to work out their business strategies, but now is the time to prepare.
The US FCC is likely to repeal Net Neutrality requirements and free ISP's to implose differential charges for packet transport. There has been a lot of political noise on this, and a great deal of misinformation, but the principle of Net Neutrality is quite simple and was one of the founding design principles of the Internet.
"Net neutrality is the principle that Internet service providers must treat all data on the Internet the same, and not discriminate or charge differently by user, content, website, platform, application, type of attached equipment, or method of communication. For instance, under these principles, internet service providers are unable to intentionally block, slow down or charge money for specific websites and online content."
Regardless of the politics of this, we need to begin to prepare for some of the different scenarios that may play out here. The intention of FCC's action is to shift power from application and content providers to the carriers (the Internet Service Providers or ISPs). The claim is that this will lead to more innovation and investment in infrastructure, and that connectivity and bandwidth will improve. Perhaps. What this really means though is that there will be differential pricing for different types of data and for data from different companies. You may find that data from smaller companies, that cannot afford to pay ISP surcharges, is slower or even less reliable, with more dropped packets. There may even be cases where one is given the option of paying for additional privacy or security.
How could this play out? There are two dimensions to consider.
What will be priced?
Who will be charged?
What will be priced?
The most common assumption is that carriers will charge for speed: you want your sites to load quickly, then you need to pay for performance. You want your streaming media to stream, you can pay for that too. There are other things that could get priced. The most obvious is reliability. You want a guarantee that some percent of packages you requested actually get to you? Pay up please, or get used to lousy transmission. How about security? The carriers could charge to inspect packages for malware. Then, there is privacy. Some clever team of engineers in a lab somewhere are probably working on ways to better secure packages from prying data sniffers. Of course, given that carriers are beholden to the Federal government for their new business advantage, they will likely agree to let the government in not matter what promises they make around security and privacy.
Who will be charged?
The most common assumption is that the end user will be charged, and it is true that at the end of the day it is the end user that will pay, whether directly or indirectly. There will be packages that you, as a subscriber, can pay for in order to get higher performance for the applications that are most important to you. Businesses will do the same for business accounts, and this is likely to drive a lot of differentiation between consumer accounts and business accounts. Today, many people use one plan for consumer and business purposes in today's BYOD (Bring Your Own Device) world. That will change if there is meaningful differentiation between consumer and business accounts. Will your company pay so that you can get better access to Netflix? How much more do you want to pay for more secure access to your CRM?
This will lead to application providers to cut deals with the carriers to favor their own applications. The major application vendors will pay the carriers to make sure that their data is delivered quickly, securely and with no transmission loss. These application providers will then pass this cost onto their subscribers. They may even price out different service level offerings. This was not necessary under Net Neutrality, but it may become an important differentiator in the new world.
The ability of large application providers to negotiate such arrangements with carriers will be a major competitive advantage for incumbents over start-ups. Most start-ups will lack the leverage or funds to negotiate these agreements, and will find their applications running slower and perhaps being less secure. Over the past five years, we have seen many companies enter into the CRM space to complete with Salesforce. Without Net Neutrality, competitive advantage will shift to larger vendors like Microsoft, Oracle, SAP and IBM. Major cloud hosting providers, like Amazon, may use their clout to negotiate on behalf of the thousands of innovative young companies that they host.
How to prepare
Application providers should use scenario planning to prepare for world in which packets of different types are handled in different ways in regards to speed of transmission, reliability of transmission, security and even privacy guarantees. Each company should do this for itself, focussing on the critical uncertainties that will impact its own business model. Look at the following:
How will the relative power of organizations in the value chain change without net neutrality? (Carriers will become more powerful. Who else in your value chain?)
Where will profit pool? (Profit will pool with the links in the value chain that have the most pricing power.)
What new ways of creating value will be created for you? For your competitors?
Can any of your existing value drivers be enhanced?
Will any of your existing value drivers decay?
What new value drivers can you create?
What will your competitors do? (They will also be looking for ways to enhance existing value drivers and to add new ones. Remember, your negative value drivers are someone else's positive value drivers.)
What new competitors will enter the market?
What new pricing options can you introduce that will better position your offer? (Do you want to work with carriers to price speed, reliability, security or privacy?)
The critical uncertainties you need to imagine future possible scenarios will come out of your answers to these questions. More accurately, the critical uncertainties will emerge from the questions you find it most difficult to answer.
A short description of Scenario Planning
Scenario planning is a well established approach to exploring possible futures. There are many good resources for this on line. Those with a serious interest may want to begin with the Peter Schwartz book The Art of the Long View.
Scenario planning follows a series of steps.
Define an issue and set a timeline
Identify what is known will change over that timeline (technology trends and demographics are a good place to start)
Look at how these known changes might interact in unexpected ways
Define a set of unknown outcomes (these are the critical uncertainties, I generally try to generate 5 to 7 such axes)
Combine the axes two at a time to generate 2x2 matrices of possible scenarios, explore the meanings of these for your organization (it is possible to use 3 axes but in most cases this is confusing and makes story telling more difficult)
Choose the combination of critical uncertainties that creates distinct futures where you would make different strategic choices
Develop compelling stories and images for each of these possible futures so that you can imagine them more deeply and communicate them
Develop strategic options for each of the senarios
Identify the early indicators that will suggest which scenario is actually emerging (if you can you should also have early indicators for the other axes of uncertainty, just in case you picked the wrong scenarios)
Make sure people in the field and in your wider network understand the scenarios and early indicators so that you can draw feedback from as many people as possible
"The future is here, it is just not evenly distributed."
William Gibson
