Market Measured in Bandwidth

The channels connecting us to the world are too narow, and the Isreli market is structured in a manner that will make it difficult to improve the situation even in the future. This is a huge problem, considering that growth in e-commerce occurs only in places with plenty of cheap bandwidth. What do we do?

Is economic growth the chicken, and cheap bandwidth the egg, or is it the other way around? Israelis are so used to cursing their roads, their government and neighbors that they hardly have enough breath left for the poor Internet Service Provider, whom they (usually wrongly) blame for the pitiful speed and relatively high cost of their Internet connection.

Most of us don’t know that these poor connections could make us miss the full benefits of the biggest change in retailing since the invention of the mall, if not the supermarket. At the moment the fact that that countries with enough cheap bandwidth do tend to be more prosperous is a chicken and egg issue.

We all know that more, cheaper bandwidth can help Israel’s high tech companies because they will be able to interact far more efficiently with customers, partners or stockholders abroad. But these are benefits that are hard to measure, since in any case companies tend to find difficult and expensive ways to overcome the problem.

Electronic Commerce, on the other hand, is bandwidth with a bottom line. It’s the exact point where the ability to communicate interactively with rich media stops being an intangible benefit. Business will flow to those places that have an abundance of cheap bandwidth, and in these places the real revolution will take place: the creation of a new class of economic intermediaries who will rapidly establish a global presence.

People talk so much about because they sense it is one of these new intermediaries. They are many more of these new intermediaries on the way, and they will nearly all come from places where people like the present writer do not have to curse, get up and make a cup of coffee while doing the necessary research on a story like this. The new intermediaries will have the first slices of a really fat cake and in the process will spawn dozens of new technologies and marketing models that will grow best in countries with the same kind of infrastructure: cheap abundant bandwidth.

First a few facts to which we are indebted to Hank Nussbacher, an Internet consultant who knows Israeli networks from the inside out. The most starling fact for the ordinary Israeli surfer is that the ISPs are not really to blame for our terrible connections. According to his calculations a medium sized Israeli ISP pays $180,000 a month for three E1 connections to New York. The equivalent American ISP pays $9,000 for the same kind of connection. Some local costs are cheaper, but the net result is that Israeli ISPs have to pack more than double the amount of modems on this connection, which makes for poorer connections, and to charge nearly double the price of their American counterparts just to break even, which most of them are not.

Israel has two ways of connecting to the world: Fiber optic cables that run under the Mediterranean to Europe, and satellite connections. The satellites bounce signals back and forth from space, which means they are slower and hence better for one-way bandwidth like broadcasting, or for data that does not require intuitive interaction like two-way voice or video.

At the moment Israel is served by two main cables, the government controlled EMOS and CYOS. Together they offer a total of 900 megabits, and are used to the hilt. The situation will change dramatically, probably this fall, with the introduction of the Med1 cable with a capacity of 10 gigabytes, owned by a private consortium (including Globes’ parent company, Monitin), which is expected to bring about a reduction of up to 20 percent in data communication costs.

The problem is, however not only in the capacity, but also in the structure of Israel’s communications links with the world. Mark Gavid, the Netvision VP in charge of networking, says that one of the main problems is that ISPs or other interested parties cannot buy bandwidth directly from suppliers. They buy the capacity from one of the three companies that handle Israel’s international phone calls, Bezek, Barak and Golden Lines. These in turn deal with Med1, EMOS and CYOS.

And all of this goes back to the tender that deregulated the international phone business, with Barak and Golden Lines getting their licenses to sell much cheaper phone calls. As everybody in the business knows, the tender structure was an awful mistake, because such heavy weighting was given to reducing the costs of telephone calls, and no weighting was given to the costs of data communications. This means that the telephone companies have to sell voice capacity cheap and try to make up for their losses by charging more for data communications.

According to Nussbacher, voice traffic is increasing by a respectable 12 percent a year but data traffic is increasing by 90 percent a year. In Japan, he says, there already is more data than voice on the network.

One of the major factors that will give America an even stronger lead in e-commerce is that that its voice and data networks are going through a simultaneous technological and business tremendous revolution at the same time. Companies like WorldCom, Qwest and others are upsetting all of the comfortable old arrangements of the telephone companies by creating new alliances and destroying the competitive ability of traditional middlemen. At the same time technology is digitizing far more information, to the extent that many experts predict that telephone networks and the Internet will be indistinguishable in a few years. The main lesson from the US now is that technology, business and deregulation are so closely intermeshed that one can’t talk about bandwidth without considering all three issues.

The point about bandwidth is that it’s not about getting information or having fun, even though these are very important for people, their wellbeing and their economy. It can change the way people think. The point about the Mirabilis deal is not that a few software geniuses managed to sell incredibly smart software at a vast price. They made such an incredible amount of money because they realized that the market, the enormous, inexhaustible market of people all around the world, was theirs to take with cheap tools and a completely different way of looking at things, even if they come from a tiny country far removed from their market.

E-commerce will surprise us in the same way Mirabilis surprised many Internet veterans. The common denominator among many successful future e-commerce operations will probably be that they will compete on prices, information and entirely new ways of engaging the customer.

We will probably see extremely lean, technology heavy companies with a structure in which the cost of bandwidth will play a proportionately far more important role. This again puts Israelis in a disadvantageous situation. The Internet eliminated many of the distance factors that put Israelis at a disadvantage. But once the cost of communications plays an even larger role in the competitive ability of businesses, we are back at the bottom end of a slippery pole.

Gavid from Netvision agrees that bandwidth is a real obstacle for e-commerce applications. Buying, he says, is the kind of emotional act that can be easily switched off by a low speed connection. Being in this business he has, of course, no doubts about the direct correlation between cheap abundant bandwidth and economic growth.

The solution is not only in the availability of bandwidth, but in the structure of the market. He would like to be in a position in which Netvision shops for bandwidth, and promises at the same time, that if his company could buy cheaper bandwidth it will pass these benefits onto the consumer because it is in his interest to make the market grow.

Part of the problem will be solved with the introduction of the Med1 line. Another major line of this kind is needed considering the exponential growth of all of the bandwidth hungry applications coming onto the market. Gavid agrees that the cheapest and best solution could be a connection to the FLAG network, which has a major junction in Alexandria.

Another issue is the market for bandwidth, which has to be far more flexible. People in New York are talking seriously now about creating a futures market for bandwidth. A more efficient, commoditized market for bandwidth will drive down prices even more and increase capacity. Laying down cables is essential, but creating an efficient market for bandwidth could be just as important for economic growth.

Published by Israel's Business Arena June 17, 1998

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