Webster defines a commodity as “A good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors other than price” and “One that is subject to ready exchange or exploitation within a market“.  Wikipedia offers more of a plain-English definition, stating that  ”a commodity is anything for which there is demand, but which is supplied without … differentiation across a market.”  Basically, when you identify that something has such widespread availability that paying for it is a ‘given’, you’ve got yourself a commodity.

Looking back, the commoditization of computing equipment has been inevitable since Moore’s law was first stated in 1965.  Following a massive consolidation of the industry, computers are everywhere and the healthy competition between vendors generally translates into minor differentiation between products of the major manufacturers.  In fact, the differences are so minor that large computer companies such as Dell (NASDAQ:DELL), and Hewlett-Packard (NYSE:HPQ) are all beginning to adapt their business lines by focusing on the services behind their products, which generally to bring in higher margins and provide more distinct differences between options that consumers choose.

What few people know about is that there is a law that applies to bandwidth, just as Moore’s law applies to general computing power.  The bandwidth law is known as Butter’s Law of Photonics.  Gerald Butters, former president of Lucent’s Optical Networking Group, states that the volume of data we can push down an optical fiber is doubling every nine months.  Thus, the cost of transmitting a bit through an optical network is halved every nine months.

Just as computers have become commodities we use in our everyday lives (whether on our desk, watch, cars, planes, or fridge), so will bandwidth.  Along with that major shift, the customer will benefit from the market change that results – competitors will differentiate their service by factors other than price, because the unit price will be so low as to be indistinguishable.

The supply for bandwidth has two components.  The first is the volume of data that can be passed over a fiber optic cable – where Butter’s law comes in.  The second is the material that the fiber itself is made of.  Fiber, just as any other material, is becoming cheaper and cheaper to manufacture.  Beyond this, there is a tremendous amount of unused fiber, or “dark fiber,” that is buried in the ground – a nice byproduct of over-enthusiasm during the dot com bubble.  (Try to think of this the next time you look at your late-90’s stock portfolio…)

So, between Butter’s law and the decreasing cost to manufacture fiber, “bandwidth” will almost certainly decrease in cost over time.  Since the quality is generally the same across providers, bandwidth becomes a commodity.  (You don’t get “better” web pages or e-mail using one provider versus another.)  Still, there is one other major indicator that bandwidth is approaching true commodity status.

Most traditional commodities are traded on the open market.  Generally when you read that “corn prices are up,” it doesn’t mean that your weekend cookout will spike in price, but that investors are betting that corn will cost more in the future than it does now.  The same goes for many, many other consumer items including wheat, oil, and even wine.  In a recent article, the New York Post reported that a United Nations agency, the International Telecommunications Union (ITU) foresees trading Internet Capacity on the same worldwide commodity markets.  This possibility, championed by Hamadoun Touré, the secretary general of the ITU, shows that the concept is mature and that broadband access is ripe for commoditization on an international scale.

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