Case Study: Lessons from the Shipping industry
We've quite frequently referred to shipping containers and containerisation on this blog as a useful parallel to trends in the telco industry, especially the importance of big-scale IT, personalised and integrated logistics services, the relative weakness of systems based on deep packet inspection, and the vital importance of standards. If you're a recent reader, you might not know why we care so much; so below is a case study originally published in our Future Broadband Business Models report.
In 1956, the first all-container ship, Ideal-X, sailed from Newark to Houston. In 1956, containers weren't actually new technology; in fact they made a distinctly slow start. In the 1920s, the London, Midland, and Scottish Railway already had thousands of containers, as did SNCF, the New York Central, and several other major railways. There was even an international trade association, the Container Bureau, trying to promote their use. And the US Army was shipping soldiers' personal effects and equipment around the world in small Conex boxes. But take-off had to wait for Sea-Land and the pioneering voyage of the Ideal-XThe reasons for slow take-up were:
- Liquidity/critical mass. Without enough container shippers, it was easy to have out-of-balance traffic. There was no money in moving empty containers and there was also a Metcalfe's Law issue showing that increasing returns to scale themselves require scale.
- A failure to grasp the significance of containers. There were some benefits in handling a few containers, but the real change required a fundamentally different view of transport as a system and a business.
- Standardisation. There was a huge difference between containers that worked within one company and those that could be exchanged between any form of transport and any company.
- Containerisation is comparable with IP. Containers made transport horizontal by being exchangeable between all modes. They also packetised transport, making it largely irrelevant what route each box in a given shipment takes to a common destination.
The impact of the new business model was both huge and swift. Ocean freight rates and shipping line profit margins crashed. Transport was commoditised and the combination of low margins, large capital requirements and increasing network returns to scale meant the shipping industry rapidly consolidated. Network topology became less diverse, ships went where the traffic was and a new breed of super-ports was created. These were strategically located in terms of sea and railway traffic, but divorced from industry and dominated by scale, so-called load centres.
There was a major difference between ports and shipping lines. Ports were sticky and first-mover advantage was strong. London did not change quickly enough and the port's work moved to Felixstowe and Rotterdam, never to come back. New York City tried to defend the existing business model and failed, although in Newark, on the other side of the harbour, they built the first container port of all. Rotterdam, Singapore and Dubai built massive all-container ports and became the kings of the business.
On the contrary, the world's biggest shipping line, AP Möller-Maersk, did not own a single containership until 1973. Now it owns Sea-Land, the very first container line. The telecoms analogy can be seen in the large number of new entrants in backbone networking, leading to the dark fibre boom. Of course, there were also exits, but some unusual players stuck around and are now profiting. These include the Indian firms that bought into WASC-SAW3-SAFE and FLAG, Reliance and VSNL. Similarly, Soviet Far East Lines was the first container line to break the North Pacific cartel.
However, there are few new entrants in fixed-line access networking due to the huge capital requirements. Is the local loop the 'port'? Or are internet exchanges the Singapore or Dubai of internetworking? Not destinations in themselves, but trans-shipment centres that attract ships, or peers, because that is where the traffic is. Indeed, we would argue that the key 'ports' in telecoms are the vast hosting centres of Google and Amazon (for consumers) and players like VMWare and Salesforce.com. Their peering and transit arrangements will largely dictate the economics of all downstream players. Customer industries, such as PC manufacturing in Singapore, were attracted to the load centres as shipping costs fell. Similarly, e-commerce sites, search engines, ASPs, CDNs, hosting, content producers and software firms move to be near LINX or Ashburn Equinix, creating clusters of telecoms and internet businesses near these highly connected nodes.
On the other hand, containerisation had the inverse effect on the transport industry's customers. While it commoditised shipping lines, it individualised shipping and made it possible to ship single loads to individual customers at bulk cargo prices with one single payment and one waybill. The net effect was a reduction in the barriers to entry for international trade. In 1998, it was estimated that 60% of the containers transiting the Port of Los Angeles contained intermediate goods on their way to other businesses. If containerisation is an analogy to telecoms, the types of companies we can expect to see will have big bit pipes and processing centres, or will be logistics firms that provide individualised services.
The old ports did not do nothing. Recall the example of New York City. Mayor Wagner had huge new breakbulk terminals built for US Lines and Holland-Amerika in downtown Manhattan. They had all the latest equipment, and were obsolete before they were finished. This looks similar to the way many telcos are replacing circuit voice networks with IP equivalents, but without introducing a new business model.
Further, to take off, containerisation required a change in pricing. Previously, shipping lines charged different rates for different goods. They tried to maintain this with containers, but with freight sealed in a container it was impossible to discover the nature of the goods without opening and searching through the container. Telco companies call this deep packet inspection.
The shipping lines were organised in so-called conferences that fixed prices and terms on individual routes. These cartels tried to enforce container stripping and stuffing, but new entrants undercut them and their own members eventually cheated. On the docks, nobody has stripped and stuffed containers in the past 30 years. If there is a lesson to be learnt here it is that price discrimination among traffic types does not work.
You may also be interested in this presentation from the November 2007 Executive Brainstorm, this post on Amazon.com and transactions, this post on Google, and this one on platforms.