True innovation arises at the active layer

My daughter was out horseback riding over the Easter weekend. Her teacher is new to the village where we have our country home and the business model deployed is really interesting.

The teacher rents space from an old farmer, who decided to take it a little easier. He was never into horses; his business was both milk and growing corn and wheat. Now, all he has left is a bunch of pigs. In other words MoF (milk over farm), PoF, CoF and WoF, but no HoF. He is still in control of the farm (the passive network of meadows, water, fences, etc.) but the young woman who co-locates at the farm, brought her own horses (active equipment, so to speak). She also does the teaching (the retail services) and the whole thing really works well. Right now, she is the only person co-locating, but I suppose the farm is big enough to be able to host a few more animal (horse, donkey, whatever) keepers. Or a service provider who knows how to teach the pigs a few tricks and sell the service.

So here is what is going on:

• Complete separation of passive and active elements.
• Vertical integration of active elements and services.
• No cannibalisation of legacy income streams. All interests are perfectly aligned.
• It remains to be seen what will happen once the farmer decides to allow another (horse) keeper to co-locate at his farm. There doesn't seem to be a reason for the farmer to keep the newcomer at a disadvantage, so it looks like this will lead to some competition.

Catching up on some old newspapers, a story about the Dutch railway system caught my eye. There has been structural separation between the passive elements (tracks, safety system, etc.), which are controlled by state-owned ProRail, and the active elements (stations, other real estate), owned by NS. However, there is still integration of the active level and a service provider (NS). Also, NS provides wholesale services to competitors.

Generally, the model seems to be working fine, but recently, new service providers have started to complain. They have a hard time competing with NS because the latter controls the active layer and provides wholesale services. Newcomers, that typically run services over regional lines, are at a disadvantage viz-a-viz NS as a service provider when it comes to renting office space at stations, the use of stations for consumers (competing trains are often at the far end of the platform, sometimes hundreds of meters away) and infomation to travellers.

A committee has proposed to take away wholesale service provision from NS and create a new company for that purpose or ask ProRail, the network owner, to perform this service.

To summarize:

• Complete separation of passive and active elements.
• Vertical integration of active elements and services.
• Full cannibalisation because there is just a single service: travel. The 'pie' most likely isn't growing very much, unless service levels at competitors are higher, which may draw travelers away from their automobiles. Right now, this doesn't seem to be happening, as witnessed by competitor complaints. To be sure: the pie is growing somewhat because competition has urged NS to raise its level of service.
• Vertical integration of the active elements operator and the dominant service provider seems to be an inhibitor for the system to really work. (Art Price would say: You can't compete with your customers.)
• Adding wholesale service to ProRail would effectively collapse the passive and active layers into a single network layer. It doesn't seem to be a bad idea, because there doesn't seem to be room for a competing active operator anyway.

Transporting these events to the world of telcos, my conclusions would be:

• Meaningful innovation arises at the active level (HoF is new to the farm). Innovation at the service level probably has more to do with service levels (railways are about taking people from A to B - no more, no less).
• Newcomers co-locating compares to xDF access (MDF, SDF, ODF).
• Newcomers not in control of active elements, are sold wholesale broadband access (WBA) by the operator.

If co-locating horses is like buying xDF access from the farmer (owner), and if providing travel services is like buying WBA from NS (operator), then what would it be to ...:

• ... buy WBA access from the horse keeper (operator)? A newcomer wouldn't bring his own horses. Service levels may rise, but innovation is questionable. If a new service provider wants to sell new services, it is dependent on the horse keeper to teach the animals new tricks. But then the new tricks could become available to all service providers.
• ... buy xDF access from ProRail (owner): A newcomer would bring along his own stations. It could be possible in theory, because many stations are too small anyway and serve as bottlenecks, degrading service levels. How about this for a stimulus plan?

Final conclusion:

If there is scope for true innovation, xDF access must be available (wholesale service provided by the owner); if innovation is merely about raising service levels, WBA is sufficient (wholeale service provided by the operator).

That's the question!