Smart cities and Tech Evolution - XXIII Service Infrastructure

Services are becoming sustained by more and more complex infrastructures. Credit: Gartner

Services are offered by a provider and “consumed” by a customer. The link is made possible by one (or more) connectivity infrastructure. In general the service provider uses the required connectivity infrastructure but does not own it (nor operate it). It was not so in the past when in many cases the owner of the connectivity infrastructure was also the provider of all services using it. You owned mills, you provided the grinding service, you owned the stagecoaches and you run the postal and people transport service and so on with the new infrastructures like railways and telecommunications offering transport of goods/people and transport of signals and bits.

This meant that offering a service was a capital intensive biz since you needed to build the physical infrastructure. No longer so. You can run a telecommunication service as a Virtual Operator (and there are hundreds of them active today, 1,017 as of June 2015 according to GSMA). You can run an airline without having planes, you can offer rooms accommodation without having any room (Airbnb).

The idea of having a service infrastructure has taken roots in the last decades, both in telecommunications and in other areas.  Some of the functionality needed to offer services that were “embedded” in the physical infrastructure structure/operation have now become an integral part of the services creating a “service infrastructure”. At the same time services has become more complex  and clustering some of the functionalities making up a service and sharing them with other services started to make sense, as shown in the cartoon designed by Gartner. Aspects like authentication, security and several others can be more efficiently become part of a service infrastructure usable by many services.
 Besides, you still need “to connect” to the service user at a “service level”.  In general, this service infrastructure requires different skills to design, manage and operate than those needed for a physical infrastructure. They are also “cheaper” to set up and therefore they have lower entry barrier (in terms of capital investment) and many more players can afford to play the game. The complexity of service offering is leading to the creation of service infrastructures that decouple the complexity of service provisioning and delivery from the service as such. 

The low entry barriers and the usually low transaction cost associated to the operation of services result in low margins in a competitive environment. The better, more efficient, the service infrastructure the truer this is. Thus it becomes important to leverage on volumes and in turns this leads to “the winner takes it all”, also known as the network effect. Often who manages to get there first win the market. This, however, applies most to those offering the services not to those offering the services infrastructure if this is separate from the services supported.

The economics of services is different from the one of physical infrastructures. Services have (in general) a shorter life cycle, hence it is important to keep the capital investment as low as possible. On the other hand, the running cost of services is matched by the service adoption, hence by revenues generated. This is different for many physical infrastructures (telecommunications is an example) where the investment can be amortised over several years (twenty years, and more, in telecommunications) but whose operation cost is usually independent from its usage (hence from the revenue generated) and has to be kept as low as possible. As a rule of thumb:

 

  • Service:  keep the CAPEX low, OPEX not crucial
  • Service Infrastructure: CAPEX investment focussed on nodes, not on links, OPEX kept to minimum by sharing cost, few control points, open as much as possible
  • Physical Infrastructure: keep the OPEX low, CAPEX not crucial

In the context of a Smart City this is very interesting since more players can become service providers, including the Municipality. Whilst, as I have indicated, a Municipality can engage in a PPP (Private Public Partnership) in the deployment of physical infrastructure, in the case of service infrastructures it can become a player and/or it can foster the development of service providers.

 

More than that. A Municipality can develop a basic services infrastructure and open it to service providers. Notice the wording: Services infrastructure (meaning that a single infrastructure support the delivery of several services) vs Service Infrastructures meaning that a service can be offered leveraging on several infrastructures.

Author - Roberto Saracco

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