The US has lacked a telecom network visionary for nearly 2 decades. There have certainly been strong and capable leaders, such as John Malone who not only predicted but brought about the 500 channel LinearTV model. But there hasn’t been someone like Bill McGowan who broke up AT&T or Craig McCaw who first had the vision to build a national, seamless wireless network, countering decades of provincial, balkanized thinking. Both of them fundamentally changed the thinking around public service provider networks.
But with a strong message to the markets in Washington DC on March 11 from Masayoshi Son, Sprint’s Chairman, the 20 year wait may finally be over. Son did what few have been capable of doing over the past 15-20 years since McGowan exited stage left and McCaw sold out to MaBell: telling it like it is. The fact is that today’s bandwidth prices are 20-150x higher than they should be with current technology.
This is no one’s fault in particular and in fact to most people (even informed ones) all measures of performance-to-price compared to 10 or 20 years ago look great. But, as Son illustrated, things could be much, much better. And he’s willing to make a bet on getting the US, the most advanced and heterogeneous society, back to a leadership role with respect to the ubiquity and cost of bandwidth. To get there he needs more scale and one avenue is to merge with T-Mobile.
There have been a lot of naysayers as to the possibility of a Sprint-T-Mo hookup, including leaders at the FCC. But don’t count me as one; it needs to happen. Initially skeptical when the rumors first surfaced in December, I quickly reasoned that a merger would be the best outcome for the incentive auctions. A merger would eliminate spectrum caps as a deterrent to active bidding and maximize total proceeds. It would also have a better chance of developing a credible third competitor with equal geographic reach. Then in January the FCC and DoJ came out in opposition to the merger.
In February, though, Comcast announced the much rumored merger with TW and Son jumped on the opportunity to take his case for merging to a broader stage. He did so in front of a packed room of 300 communications pundits, press and politicos at the US Chamber of Commerce’s prestigious Hall of Flags; a poignant backdrop for his own rags to riches story. Son’s frank honesty about the state of broadband for the American public vs the rest of the world, as well as Sprint’s own miserable current performance were impressive. It’s a story that resonates with my America’s Bandwidth Deficit presentation.
Here are some reasons the merger will likely pass:
The FCC can’t approve one horizontal merger (Comcast/TW) that brings much greater media concentration and control over content distribution, while disallowing a merger of two small players (really irritants as far as AT&T and Verizon are concerned).
Son has a solid track record of disruption and doing what he says.
The technology and economics are in his favor.
The vertically integrated service provider model will get disrupted faster and sooner as Sprint will have to think outside the box, partner, and develop ecosystems that few in the telecom industry have thought about before; or if they have, they’ve been constrained by institutional inertia and hidebound by legacy regulatory and industry siloes.
Here are some reasons why it might not go through:
The system is fundamentally corrupt. But the new FCC Chairman is cast from a different mold than his predecessors and is looking to make his mark on history.
The FCC shoots itself in the foot over the auctions. Given all the issues and sensitivities around incentive auctions the FCC wants this first one to succeed as it will serve as a model for all future spectrum refarming issues.
The FCC and/or DoJ find in the public interest that the merger reduces competition. But any analyst can see that T-Mo and Sprint do not have sustainable models at present on their own; especially when all the talk recently in Barcelona was already about 5G.
Personally I want Son’s vision to succeed because it’s the vision I had in 1997 when I originally brought the 2.5-2.6 (MMDS) spectrum to Sprint and later in 2001 and 2005 when I introduced Telcordia’s 8x8 MIMO solutions to their engineers. Unfortunately, past management regimes at Sprint were incapable of understanding the strategies and future vision that went along with those investment and technology pitches. Son has a different perspective (see in particular minute 10 of this interview with Walt Mossberg) with his enormous range of investments and clear understanding of price elasticity and the marginal cost of minutes and bits.
To be successful Sprint’s strategy will need to be focused, but at the same time open and sharing in order to simultaneously scale solutions across the three major layers of the informational stack (aka the InfoStack):
upper (application and content)
lower (access and transport)
This is the challenge for any company that attempts to disrupt the vertically integrated telecom or LinearTV markets; the antiquated and overpriced ones Son says he is going after in his presentation. But the US market is much larger and more robust than the rest of the world, not just geographically, but also from a 360 degree competitive perspective where supply and demand are constantly changing and shifting.
Ultimate success may well rest in the control layer, where Apple and Google have already built up formidable operating systems which control vastly profitably settlement systems across multiple networks. What few realize is that the current IP stack does not provide price signals and settlement systems that clear supply and demand between upper and lower layers (north-south) or between networks (east-west) in the newly converged “informational” stack of 1 and 2-way content and communications.
If Sprint’s Chairman realizes this and succeeds in disrupting those two markets with his strategy then he certainly will be seen as a visionary on par with McGowan and McCaw.
The current debate over the state of America's broadband services and over the future of the internet is like a 3-ring circus or 3 different monarchists debating democracy. In other words an ironic and tragically humorous debate between monopolists, be they ultra-conservative capitalists, free-market libertarians, or statist liberals. Their conclusions do not provide a cogent path to solving the single biggest socio-political-economic issue of our time due to pre-existing biases, incorrect information, or incomplete/wanting analysis. Last week I wrote about Google's conflicts and paradoxes on this issue. Over the next few weeks I'll expand on this perspective, but today I'd like to respond to a Q&A, Debunking Broadband's Biggest Myths, posted on Commercial Observer, a NYC publication that deals with real estate issues mostly and has recently begun a section called Wired City, dealing with a wide array of issues confronting "a city's" #1 infrastructure challenge. Here's my debunking of the debunker.
To put this exchange into context, the US led the digitization revolutions of voice (long-distance, touchtone, 800, etc..), data (the internet, frame-relay, ATM, etc...) and wireless (10 cents, digital messaging, etc...) because of pro-competitive, open access policies in long-distance, data over dial-up, and wireless interconnect/roaming. If Roslyn Layton (pictured below) did not conveniently forget these facts or does not understand both the relative and absolute impacts on price and infrastructure investment then she would answer the following questions differently:
Real Reason/Answer: our bandwidth is 20-150x overpriced on a per bit basis because we disconnected from moore's and metcalfe's laws 10 years ago, due to the Telecom Act, then special access "de"regulation, then Brand-X or shutting down equal access for broadband. This rate differential is shown in the discrepancy between rates we pay in NYC and what Google charges in KC, as well as the difference in performance/price of 4G and wifi. It is great Roslyn can pay $3-5 a day for Starbucks. Most people can't (and shouldn't have to) just for a cup a Joe that you can make at home for 10-30 cents.
Real Reason/Answer: Because of their vertical business models, carriers are not well positioned to generate high ROI on rapidly depreciating technology and inefficient operating expense at every layer of the "stack" across geographically or market segment constrained demand. This is the real legacy of inefficient monopoly regulation. Doing away with regulation, or deregulating the vertical monopoly, doesn’t work. Both the policy and the business model need to be approached differently. Blueprints exist from the 80s-90s that can help us restructure our inefficient service providers. Basically, any carrier that is granted a public ROW (right of way) or frequency should be held to an open access standard in layer 1. The quid pro quo is that end-points/end-users should also have equal or unhindered access to that network within (economic and aesthetic) reason. This simple regulatory fix solves 80% of the problem as network investments scale very rapidly, become pervasive, and can be depreciated quickly.
Real Reason/Answer: Quasi monopolies exist in video for the cable companies and in coverage/standards in frequencies for the wireless companies. These scale economies derived from pre-existing monopolies or duopolies granted by and maintained to a great degree by the government. The only open or equal access we have left from the 1980s-90s (the drivers that got us here) is wifi (802.11) which is a shared and reusable medium with the lowest cost/bit of any technology on the planet as a result. But other generative and scalabeable standards developed in the US or with US companies at the same time, just like the internet protocol stacks, including mobile OSs, 4G LTE (based on CDMA/OFDM technology), OpenStack/Flow that now rule the world. It's very important to distinguish which of these are truly open or not.
Real Reason/Answer: The 3rd of the population who don't have/use broadband is as much because of context and usability, whether community/ethnicity, age or income levels, as cost and awareness. If we had balanced settlements in the middle layers based on transaction fees and pricing which reflect competitive marginal cost, we could have corporate and centralized buyers subsidizing the access and making it freely available everywhere for everyone. Putting aside the ineffective debate between bill and keep and 2-sided pricing models and instead implementing balanced settlement exchange models will solve the problem of universal HD tele-work, education, health, government, etc… We learned in the 1980s-90s from 800 and internet advertising that competition can lead to free, universal access to digital "economies". This is the other 20% solution to the regulatory problem.
Real Reason/Answer: The real issue here is that America led the digital information revolution prior to 1913 because it was a relatively open and competitive democracy, then took the world into 70 years of monopoly dark ages, finally breaking the shackles of monopoly in 1983, and then leading the modern information revolution through the 80s-90s. The US has now fallen behind in relative and absolute terms in the lower layers due to consolidation and remonopolization. Only the vestiges of pure competition from the 80s-90s, the horizontally scaled "data" and "content" companies like Apple, Google, Twitter and Netflix (and many, many more) are pulling us along. The vertical monopolies stifle innovation and the generative economic activity we saw in those 2 decades. The economic growth numbers and fiscal deficit do not lie.
Back in 1998 I wrote, “if you want to break up the Microsoft software monopoly then break up the Baby Bell last-mile access monopoly.” Market driven broadband competition and higher-capacity digital wireless networks gave rise to the iOS and Android operating systems over the following decade which undid the Windows monopoly. The 2013 redux to that perspective is, once again, “if you want to break up the Google search monopoly then break up the cable/telco last mile monopolies.”
Google is an amazing company, promoting the digital pricing and horizontal service provider spirit more than anyone. But Google is motivated by profit and will seek to grow that profit as best it can, even if contrary to founding principles and market conditions that fueled its success (aka net neutrality or equal access). Now that Google is getting into the lower layers in the last mile they are running into paradoxes and conflicts over net neutrality/equal access and in danger of becoming just another vertical monopoly. (Milo Medin provides an explanation in the 50th minute in this video, but it is self-serving, disingenuous and avoids confronting the critical issue for networks going forward.)
Contrary to many people’s beliefs, the upper and lower layers have always been inextricably interdependent and nowhere was this more evident than with the birth of the internet out of the flat-rate dial-up networks of the mid to late 1980s (a result of dial-1 equal access). The nascent ISPs that scaled in the 1980s on layer 1-2 data bypass networks were likewise protected by Computers II-III (aka net neutrality) and benefited from competitive (WAN) transport markets.
Few realize or accept the genesis of Web 1.0 (W1.0) was the break-up of AT&T in 1983. Officially birthed in 1990 it was an open, 1-way store and forward database lookup platform on which 3 major applications/ecosystems scaled beginning in late 1994 with the advent of the browser: communications (email and messaging), commerce, and text and visual content. Even though everything was narrowband, W1.0 began the inexorable computing collapse back to the core, aka the cloud (4 posts on the computing cycle and relationship to networks). The fact that it was narrowband didn't prevent folks like Mark Cuban and Jeff Bezos from envisioning and selling a broadband future 10 years hence. Regardless, W1.0 started collapsing in 1999 as it ran smack into an analog dial-up brick wall. Google hit the bigtime that year and scaled into the early 2000s by following KISS and freemium business model principles. Ironically, Google’s chief virtue was taking advantage of W1.0’s primary weakness.
Web 2.0 grew out of the ashes of W1.0 in 2002-2003. W2.0 both resulted from and fueled the broadband (BB) wars starting in the late 1990s between the cable (offensive) and telephone (defensive) companies. BB penetration reached 40% in 2005, a critical tipping point for the network effect, exactly when YouTube burst on the scene. Importantly, BB (which doesn't have equal access, under the guise of "deregulation") wouldn’t have occurred without W1.0 and the above two forms of equal access in voice and data during the 1980s-90s. W2.0 and BB were mutually dependent, much like the hardware/software Wintel model. BB enabled the web to become rich-media and mostly 2-way and interactive. Rich-media driven blogging, commenting, user generated content and social media started during the W1.0 collapse and began to scale after 2005.
“The Cloud” also first entered people’s lingo during this transition. Google simultaneously acquired YouTube in the upper layers to scale its upper and lower layer presence and traffic and vertically integrated and consolidated the ad exchange market in the middle layers during 2006-2008. Prior to that, and perhaps anticipating lack of competitive markets due to "deregulation" of special access, or perhaps sensing its own potential WAN-side scale, the company secured low-cost fiber rights nationwide in the early 2000s following the CLEC/IXC bust and continued throughout the decade as it built its own layer 2-3 transport, storage, switching and processing platform. Note, the 2000s was THE decade of both vertical integration and horizontal consolidation across the board aided by these “deregulatory” political forces. (Second note, "deregulatory" should be interpreted in the most sarcastic and insidious manner.)
Web 3.0 began officially with the iPhone in 2007. The smartphone enabled 7x24 and real-time access and content generation, but it would not have scaled without wifi’s speed, as 3G wireless networks were at best late 1990s era BB speeds and didn’t become geographically ubiquitous until the late 2000s. The combination of wifi (high speeds when stationary) and 3G (connectivity when mobile) was enough though to offset any degradation to user experience. Again, few appreciate or realize that W3.0 resulted from two additional forms of equal access, namely cellular A/B interconnect from the early 1980s (extended to new digital PCS entrants in the mid 1990s) and wifi’s shared spectrum. One can argue that Steve Jobs single-handedly resurrected equal access with his AT&T agreement ensuring agnostic access for applications. Surprisingly, this latter point was not highlighted in Isaacson's excellent biography. Importantly, we would not have had the smartphone revolution were it not for Jobs' equal access efforts.
W3.0 proved that real-time, all the time "semi-narrowband" (given the contexts and constraints around the smartphone interface) trumped store and forward "broadband" on the fixed PC for 80% of people’s “web” experience (connectivity and interaction was more important than speed), as PC makers only realized by the late 2000s. Hence the death of the Wintel monopoly, not by government decree, but by market forces 10 years after the first anti-trust attempts. Simultaneously, the cloud became the accepted processing model, coming full circle back to the centralized mainframe model circa 1980 before the PC and slow-speed telephone network led to its relative demise. This circularity further underscores not only the interplay between upper and lower layers but between edge and core in the InfoStack. Importantly, Google acquired Android in 2005, well before W3.0 began as they correctly foresaw that small-screens and mobile data networks would foster the development of applications and attendant ecosystems would intrude on browser usage and its advertising (near) monopoly.
Web 4.0 is developing as we speak and no one is driving it and attempting to influence it more with its WAN-side scale than Google. W4.0 will be a full-duplex, 2-way, all-the time, high-definition application driven platform that knows no geographic or market segment boundaries. It will be engaging and interactive on every sensory front; not just those in our immediate presence, but everywhere (aka the internet of things). With Glass, Google is already well on its way to developing and dominating this future ecosystem. With KC Fiber Google is illustrating how it should be priced and what speeds will be necessary. As W4.0 develops the cloud will extend to the edge. Processing will be both centralized and distributed depending on the application and the context. There will be a constant state of flux between layers 1 and 3 (transport and switching), between upper and lower layers, between software and hardware at every boundary point, and between core and edge processing and storage. It will dramatically empower the end-user and change our society more fundamentally than what we’ve witnessed over the past 30 years. Unfortunately, regulators have no gameplan on how to model or develop policy around W4.0.
The missing pieces for W4.0 are fiber based and super-high capacity wireless access networks in the lower layers, settlement exchanges in the middle layers, and cross-silo ecosystems in the upper layers. Many of these elements are developing in the market naturally: big data, hetnets, SDN, openflow, open OS' like Android and Mozilla, etc… Google’s strategy appears consistent and well-coordinated to tackle these issues; if not far ahead of others. But its vertically integrated service provider model and stance on net neutrality in KC is in conflict with the principles that so far have led to its success.
Google is buying into the vertical monopoly mindset to preserve its profit base instead of teaching regulators and the markets about the virtues of open or equal access across every layer and boundary point (something clearly missing from Tim Wu's and Bob Atkinson's definitions of net neutrality). In the process it is impeding the development of W4.0. Governments could solve this problem by simply conditioning any service provider with access to a public right of way or frequency to equal access in layers 1 and 2; along with a quid pro quo that every user has a right to access unhindered by landlords and local governments within economic and aesthetic reason. (The latter is a bone we can toss all the lawyers who will be looking for new work in the process of simpler regulations.) Google and the entire market will benefit tremendously by this approach. Who will get there first? The market (Google or MSFT/AAPL if the latter are truly hungry, visionary and/or desperate) or the FCC? Originally hopeful, I’ve become less sure of the former over the past 12 months. So we may be reliant on the latter.
Intermodal competition is defined as: “provision of the same service by different technologies (i.e., a cable television company competing with a telephone company in the provision of video services).”
Intramodal competition is defined as: “competition among identical technologies in the provision of the same service (e.g., a cable television company competing with another cable television company in the offering of video services).”
Focus on 4 words: same, different, identical, same. Same is repeated twice.
Saying wireless represents intermodal competition to wired (fiber/coax) is like saying that books compete with magazines or radio competes with TV. Sure, the former both deliver the printed word. And the latter both pass for entertainment broadcast to us. Right?
Yet these are fundamentally different applications and business models even if they may share common network layers and components, or in English, similarities exist between production and distribution and consumption. But their business models are all different.
Wireless Is Just Access to Wireline
So are wireless and wired really the SAME? For voice they certainly aren’t. Wireless is still best efforts. It has the advantage of being mobile and with us all the time, which is a value-added, while wired offers much, much better quality. For data the differences are more subtle. With wireless I can only consume stuff in bite sizes (email, twitter, peruse content, etc..) because of throughput and device limitations (screen, processor, memory). I certainly can’t multi-task and produce content the way I can on a PC linked to a high-speed broadband connection.
That said, increasingly people are using their smartphones as hotspots or repeaters to which they connect their notebooks and tablets and can then multi-task. I do this a fair bit and it is good while I'm on the road and mobile, but certainly no substitute for a fixed wired connection/hotspot in terms of speed and latency. Furthermore, wireless carriers by virtue of their inefficient vertically integrated, siloed business models and the fact that wireless is both shared and reused, have implemented onerous price caps that limit total (stock) consumption even as the increase speed (flow). The latter creates a crowding out effect and throughput is degraded as more people access the same radio, which I run into a lot. I know this because my speed decreases or the 4G bars mysteriously disappear on my handset and indicate 3G instead.
Lastly, one thing I can do with the phone that I can’t do with the PC is take pictures and video. So they really ARE different. And when it comes to video, there is as much comparison between the two as a tractor trailer and a motorcycle. Both will get us there, but really everything else is different.
At the end of the day, where the two are similar or related is when I say wireless is just a preferred access modality and extension of wired (both fixed and mobile) leading to the law of wireless gravity: a wireless bit will seek out fiber as quickly and cheaply as possible. And this will happen once we move to horizontal business models and service providers are incented to figure out the cheapest way to get a bit anywhere and everywhere.
Lack of Understanding Drives Bad Policy
By saying that intermodal competition exists between wireless and wired, FSF is selectively taking aspects of the production, distribution and consumption of content, information and communications and conjuring up similarities that exist. But they are really separate pieces of the of the bigger picture puzzle. I can almost cobble together a solution that is similar vis a vis the other, but it is still NOT the SAME for final demand!
This claiming to be one thing while being another has led to product bundling and on-net pricing--huge issues that policymakers and academics have ignored--that have promoted monopolies and limited competition. In the process of both, consumers have been left with overpriced, over-stuffed, unwieldy and poorly performing solutions.
In the words of Blevins, FSF is once again providing a “vague, conflicting, and even incoherent definition of intermodal competition.” 10 years ago the US seriously jumped off the competitive bandwagon after believing in the nonsense that FSF continues to espouse. As a result, bandwidth pricing in the middle and last mile disconnected from moore’s and metcalfe’s laws and is now overpriced 20-150x impeding generative ecosystems and overall economic growth.
Is IP Growing UP? Is TCPOSIP the New Protocol Stack? Will Sessions Pay For Networks?
Oracle’s purchase of leading SBC vendor (session border controller Acme Packets), is a tiny seismic event in the technology and communications (ICT) landscape. Few notice the potential for much broader upheaval ahead.
SBCs, which have been around since 2000, facilitate traffic flow between different networks; IP to PSTN to IP and IP to IP. Historically traffic has been mostly voice, where minutes and costs count because that world has been mostly rate-based. Increasingly they are being used to manage and facilitate any type of traffic “sessions” across an array of public and private networks, be it voice, data, or video. The reasons are many-fold, including, security, quality of service, cost, and new service creation; all things TCP-IP don't account for.
Session control is layer 5 to TCP-IP’s 4 layer stack. A couple of weeks ago I pointed out that most internet wonks and bigots deride the OSI framework and feel that the 4 layer TCP-IP protocol stack won the “war”. But here is proof that as with all wars the victors typically subsume the best elements and qualities of the vanquished.
The single biggest hole in the internet and IP world view is bill and keep. Bill and keep’s origins derive from the fact that most of the overhead in data networks was fixed in the 1970s and 1980s. The component costs were relatively cheap compared with the mainframe costs that were being shared and the recurring transport/network costs were being arbitraged and shared by those protocols. All the players, or nodes, were known and users connected via their mainframes. The PC and ethernet (a private networking/transmission protocol) came along and scaled much later. So why bother with expensive and unnecessary QoS, billing, mediation and security in layers 5 and 6?
Then along came the break-up of AT&T and due to dial-1 equal access, the Baby Bells responded with flat-rate, expanded area (LATA) pricing plans to build a bigger moat around their Class 5 monopoly castles (just like AT&T had built 50 mile interconnect exclusion zones in the 1913 Kingsbury Commitment due to the threat of wireless bypass even back then, and just like the battles OTT providers like Netflix are having with incumbent broadband monopolies today) in the mid to late 1980s. The nascent commercial ISPs took advantage of these flat-rate zones, invested in channel banks, got local DIDs and the rest as they say is history. Staying connected all day on a single flat-rate back then was perceived of as "free". So the "internet" scaled from this pricing loophole (even as the ISPs received much needed shelter from vertical integration by the monopoly Bells in Computers 2/3) and further benefited from WAN competition and commoditization of transport to connect all the distributed router networks into seamless regional and national layer 1-2 low-cost footprints even before www and http/html and the browser hit in the early to mid 1990s. The marginal cost of "interconnecting" these layer 1-2 networks was infinitesimal at best and therefore bill and keep, or settlement-free peering, made a lot of sense.
But Bill and Keep (B&K) has three problems:
It supports incumbents and precludes new entrants
It stifles new service creation
It precludes centralized procurement and subsidization
With Acme, Oracle can provide solutions to problems two and three; with the smartphone driving the process. Oracle has java on 3 billion phones around the globe. Now imagine a session controller client on each device that can help with application and access management and preferential routing and billing etc, along with guaranteed QoS and real-time performance metrics and auditing; regardless of what network the device is currently on. The same holds in reverse in terms of managing "session state" across multiple devices/screens across wired and wireless networks.
The alternative to B&K is what I refer to as balanced settlements. In traditional telecom parlance, instead of just being calling party pays, they can be both called and calling party pays and are far from the regulated monopoly origination/termination tariffs. Their pricing (transaction fees) will reflect marginal costs and therefore stimulate and serve marginal demand. As a result, balanced settlements provide a way for rapid, coordinated roleout of new services and infrastructure investment across all layers and boundary points. They provide the price signals that IP does not.
Balanced settlements clear supply and demand north-south between upper (application) and lower (switching,transport and access) layers, as well as east-west from one network or application or service provider to another. Major technological shifts in the network layers like open flow, software defined networks (SDN) and network function virtualization (NFV) can develop rapidly. Balanced settlements will reside in competitive exchanges evolving out of today's telecom tandem networks, confederation of service provider APIs, and the IP world's peering fabric, driven by big data analytical engines and advertising exchanges.
Perhaps most importantly, balanced settlements enable subsidization or procurement of edge access from the core. Large companies and institutions can centrally drive and pay for high definition telework, telemedicine, tele-education, etc... solutions across a variety of access networks (fixed and wireless). The telcos refer to this as guaranteed quality of service leading to "internet fast lanes." Enterprises will do this to further digitize and economize their own operations and distribution reach (HD collaboration and the internet of things), just like 800, prepaid calling cards, VPNs and the internet itself did in the 1980s-90s. I call this process marrying the communications event to the commercial/economic transaction and it results in more revenue per line or subscriber than today's edge subscription model. As well, as more companies and institutions increasingly rely on the networks, they will demand backups, insurance and redundancy ensuring that there will be continous investment in multiple layer 1 access networks.
Along with open or shared access in layer 1 (something we should have agreed to in principal back in 1913 and again in 1934 as governments provide service providers a public right of way or frequency), balanced settlements can also be an answer to inefficient universal service subsidies. Three trends will drive this. Efficient loading of networks and demand for ubiquitous high-definition services by mobile users will require inexpensive uniform access everywhere with concurrent investment in high-capacity fiber and wireless end-points. Urban demand will naturally pay for rural demand in the process due to societal mobilty and finally the high volume low marginal cost user (enterprise or institution) will amortize and pay for the low-volume high marginal cost user to be part of their "economic ecosystem" thereby reducing the digital divide.
Last summer I attended a Bingham event at the Discovery Theatre in NYC’s Time Square to celebrate the Terracotta Warriors of China’s first emperor, Qin Shi Huang.What struck me was how far our Asian ancestors had advanced technically, socially and intellectually beyond our western forefathers by 200 BC. Huang's reign, which included the building of major transportation and information networks was followed by a period of nearly 1,500 years of relative peace (and stagnation) in China.It would take another 1,000 years for the westerners to catch up during periods of war, plague and socio-political upheaval.But once they passed their Asian brethren by the 15th and 16th centuries they never looked back. Having just finishedArt of War, by Sun Tsu, I asked myself, is war and strife necessary for mankind to advance?
This question was reinforced over the holidays upon visiting the Loire Valley in France, which most people associate with beautiful Louis XIV chateaus, a rich fairy-tale medieval history, and good wines. What most people don’t realize is that the Loire was a war-torn area for the better part of 400 years as the French (Counts of Blois) and English (Counts of Anjou; precursors to the Plantagenet dynasty of England) vied for domination of a then emerging Europe. The parallels between China and France 1,000 years later couldn’t have been more poignant.
After the French finally kicked the English out in the 1400s this once war-torn region became the center of the European renaissance and later the birthplace of the age of enlightenment. Francois 1st brought Leonardo from Italy for the last 3 years of his life and the French seized upon his way of thinking; to be followed a few centuries later by Voltaire and Rousseau. The French aristocracy, without wars to fight, invited them to stay in their Chateaus, built on the fortifications of the medieval castles, and develop their enduring principles of liberty, equality and fraternity. These in turn would become the foundations upon which America broadly based its constitution and structure of government; all of which in theory supports and leads to competitive markets and network neutrality; the basis of the internet.
And before I left on my trip, I bought a kindle version of Sex, Bombs and Burgers by Peter Nowak on the recommendation of an acquaintance at Bloomberg. Nowak’s premise is to base much of America’s advancement and success over the past 50 years on our warrior instincts and need to procreate and sustain life. I liked the book and recommend it to anyone, especially as I used to quip, “Web 1.0 of the 1990s was scaled by the 4 (application) horsemen: Content, Commerce, Communication and hard/soft-Core porn.” But the book also provides great insights beyond the growth of porn on the internet into our food industry and where our current military investments might be taking us physically and biologically.
While the book meanders on occasion, my take-away and answer to my above question is that war (and the struggle to survive by procreating and eating) increases the rate of technological innovations, which often then result in new products; themselves often mistakes or unintended commercial consequences from their original military intent. War increases the pace of innovation out of necessity, intensity and focus. After all, our state of fear is unnaturally heightened when someone is trying to kill us, underscoring the notion that fear and greed are man’s primary psychological and commercial motivators; not love and happiness.
Most people generally believe the internet is an example of a technological innovation hatched from the militarily driven space race; which is the premise for another book I am just starting Where Wizards Stay Up Late, by Hafner and Lyon. What most people fail to realize, including Nowak, is that the internet was an unintended consequence of the breakup of AT&T in 1983; another type of conflict or economic war that had been waged in the 1950s-1970s. In that war we had General William McGowan of MCI (microwave, the M in MCI, was a technology principally scaled during WW II) battling MaBell along with his ally the DOJ. At the same time, a group of civilian scientists in the Pentagon had been developing the ARPAnet, a weapon/tool developed to get around MaBell’s monopoly long-distance fortifications to enable low cost computer communications across the US and globally.
The two conflicts aligned in the late 1980s as the remnants of MaBell, the Baby Bells, sought regulatory relief through state and federal regulators from a viciously competitive WAN/long-distance sector to preserve two arcane, piggishly profitable monopoly revenue streams; namely intrastate tolls and terminating access. The regulatory relief provided was to expand local calling areas (LATAs) and go to flat rate (all you can eat) pricing models. By then modems and routers, outgrowths of ARPA related initiatives, had gotten cheap enough that the earliest ISPs could cost effectively build and market their own layer 1-2 nationwide "data bypass" networks across 5,000 local calling areas.
These networks allowed people to dial up a free or low cost local number and stay connected with a computer or database or server anywhere all day long. The notions of “free” and “cheap” and the collapse of distance were born. The internet started and scaled in the US because of partially competitive communications networks, whom no one else had in 1990. It would be 10 years before the ROW had an unlimited flat-rate access topology like the US.
Only after these foundational (pricing and infrastructure) elements were in place, did the government allow commercial nets to interconnect via the ARPAnet in 1988. This was followed by Tim B Lee's WWW in 1989 (a layer 3 address simplification standard) and http and html in subsequent years providing the basis for a simple to use, mass-market browser, mosaic, the precursor to Netscape, in 1993. The result was the Internet or Web 1.0, which was a 4 or 5 layer asynchronous communications stack mostly used as a store and forward database lookup tool.
The internet was the result of two wars being fought against the monopolies of the Soviet communists and American bellheads; both of which, ironically, share(d) common principles. Participants and commentators in the current network neutrality, access/USF reform and ITU debates, including Nowak, should be aware of these conflict-driven beginnings of the internet, in particular the power and impact of price, as it would modify their positions significantly with respect to these debates. Issues like horizontal scaling, vertical disintermediation and completeness, balanced settlement systems and open/equal access need to be better analyzed and addressed. What we find in almost every instance on the part of every participant in these debates is hypocritical and paradoxical positions, since people do not fully appreciate history and how they arrived at their relative and absolute positions.
I met the Godfather of New York Venture capital a few weeks ago and I was talking about an arbitrage opportunity of a lifetime in the communications sector. I started talking about the lack of competition and resulting high prices (which I highlighted last week) brought about by bandwidth being 20-150x overpriced. He just looked at me and said, “bandwidth issue? What bandwidth issue!” It just so happens that his current prize investment is an IPTV application. I just rolled my eyes thinking, “if he only knew!”, remembering what happened to all the web 1.0 companies that ran into the broadband brick wall in 2000.
This statement is symptomatic of the complacency amongst the venture community; those investing billions in the upper layers of the stack. Yet people on Main Street, as evidenced by the Kansas City Fiber video on the Fiber To The Home Council website indicating that 1,000 communities had responded to the contest with over 200,000 people directly involved, know otherwise.
The numbers tell a worse story. Because of the CLEC boom-bust 10-15 years ago, rescission of equal access, failure of muni-WiFi and Wimax and BTOP crowding-out Telecom spending has disconnected from other venture spending over the past decade. Based on overall VC spending telecom spending should be 2-3x greater than it is. Instead it stands 70% below where it was from 1995-2005. It took a while for competition to die, but now it is official!
Venture spending today for the sector, which used to average 15-20% of total VC spending is now down below 5% over the past 3 years. All the other TMT sectors have held nearly constant with overall VC spending.
Everyone should look at these numbers with alarm and reach out to policy makers, academics, trade folks, the venture community and capital markets to make them aware of the dearth of investment as a result of the lack of competition. Now, more than ever contrarian investors should look at the monopoly pricing and realize there is significant profits to be made at all layers of the stack.
Thursday December 19, 2013 will commemorate the 100 year anniversary of the Kingsbury Commitment. There are 528 days remaining. Let's plan something special to observe this tragic moment.
In return for universal service, AT&T was granted a "natural monopoly". The democratic government in the US, one of the few at the time, recognized the virtue of open communications for all and foolishly agreed to Ted Vail's deceptions. Arguably, this one day changed the course of mankind for 50-70 years. Who knows what might have been if we had fostered low-cost communications in the first half of the century?
Anyway, when universal service didn't happen (no sh-t sherlock) the government stepped in to ensure universal service in 1934. So on top of an overpriced monopoly the American public was taxed to ensure 100% of the population got the benefit of being connected. Today, that tax amounts to $15 billion annually to support overpriced service to less than 5% of the population. (Competitive networks have shown how this number gets driven to zero!)
Finally in the early 1980s, after nearly 30 years (the final case started in 1974 and took nearly 9 years) of trying the Department of Justice got a Judge to break up the monopoly into smaller monopolies and provide "equal access" to competitors across the long-distance piece starting and ending at the Class 5 (local switch and calling) boundary. The AT&T monopoly was dead; long live the Baby Bell monopolies! But the divestiture began a competitive long-distance (WAN) digitization "wave" in the 1980s that resulted in, amongst other things:
99% drop in pricing over 10 years
90% touchtone penetration by 1990 vs 20% ROW
Return of large volume corporate traffic via VPN services and growth of switched data intranets
Explosion of free, 800 access (nearly 50% of traffic by 1996)
Over 4 (upwards of 7 in some regions/routes) WAN fiber buildouts
Bell regulatory relief on intralata tolls via expanding calling areas (LATAs)
Introduction of flat-rate local pricing by the Bells
The latter begat the Internet, the second wave of digitization in the early 1990s. The scaling of Wintel driven by the Internet paved the way for low-cost digital cellphones, the third wave of digitization in the late 1990s. (Note, both the data and wireless waves were supported by forms of equal access). By 1999 our economy had come back to the forefront on the global scene and our budget was balanced and we were in a position to pay down our national debt. I expected the 4th and Final Wave of last mile (broadband) digitization to start sometime in the mid to late 2000s. It never came. In fact the opposite happened because of 3 discrete regulatory actions:
1996 Telecom Act
2002 Special Access Deregulation
2004 Rescision of Equal Access and Bell entry into Long Distance (WAN)
Look at the following 6 charts and try not to blink or cry. In all cases, there is no reason why the prices in the US are not 50-70% lower; if not more. We have the scale. We have the usage. We have the industries. We have the technology. We started all the 3 prior waves and should have oriented our vertically integrated service providers horizontally a la the data processing industry to effectively deal with rapid technological change. Finally, we have Moore's and Metcalfe's laws, which argue for a near 60% reduction in bandwidth pricing and/or improved performance annually!
But the government abetted a remonopolization of the sector over the past 15 years.
It's almost a tragedy to be American on this July 4 week. The FCC and the government killed competition brought about by Bill McGowan. But in 2007 Steve Jobs resurrected equal access and competition. So I guess it's great to be American after all! Many thanks to Wall and the Canadian government for these stats.
Since I began covering the sector in 1990, I’ve been waiting for Big Bang II.An adult flick?No, the sequel to Big Bang (aka the breakup of MaBell and the introduction of equal access) was supposed to be the breakup of the local monopoly.Well thanks to the Telecom Act of 1996 and the well-intentioned farce that it was, that didn’t happen and equal access officially died (equal access RIP) in 2005 with the Supreme Court's Brand-X decision vs the FCC. If it died, then we saw a resurrection that few noticed.
I am announcing that Equal Access is alive and well, albeit in a totally unexpected way.Thanks to Steve Jobs’ epochal demands put on AT&T to counter its terrible 2/3G network coverage and throughput, every smartphone has an 802.11 (WiFi) backdoor built-in.Together with the Apple and Google operating systems being firmly out of carriers’ hands and scaling across other devices (tablets, etc…) a large ecosystem of over-the-top (OTT), unified communications and traffic offloading applications is developing to attack the wireless hegemony.
First, a little history. Around the time of AT&T's breakup the government implemented 2 forms of equal access. Dial-1 in long-distance made marketing and application driven voice resellers out of the long-distance competitors. The FCC also mandated A/B cellular interconnect to ensure nationwide buildout of both cellular networks. This was extended to nascent PCS providers in the early to mid 1990s leading to dramatic price declines and enormous demand elasticities. Earlier, the competitive WAN/IXC markets of the 1980s led to rapid price reductions and to monopoly (Baby Bell or ILEC) pricing responses that created the economic foundations of the internet in layers 1 and 2; aka flat-rate or "unlimited" local dial-up. The FCC protected the nascent ISP's by preventing the Bells from interfering at layer 2 or above. Of course this distinction of MAN/LAN "net-neutrality" went away with the advent of broadband, and today it is really just about WAN/MAN fights between the new (converged) ISPs or broadband service providers like Comcast, Verizon, etc... and the OTT or content providers like Google, Facebook, Netflix, etc...
(Incidentally, the FCC ironically refers to edge access providers, who have subsumed the term ISPs or "internet service providers", as "core" providers, while the over-the-top (OTT) messaging, communications, e-commerce and video streaming providers, who reside at the real core or WAN, are referred to as "edge" providers. There are way, way too many inconsistencies for truly intelligent people to a) come up with and b) continue to promulgate!)
But a third form of equal access, this one totally unintentioned, happened with 802.11 (WiFi) in the mid 1990s. The latter became "nano-cellular" in that power output was regulated limiting hot-spot or cell-size to ~300 feet. This had the impact of making the frequency band nearly infinitely divisible. The combination was electric and the market, unencumbered by monopoly standards and scaling along with related horizontal layer 2 data technologies (ethernet), quickly seeded itself. It really took off when Intel built WiFi capability directly into it's Centrino chips in the early 2000s. Before then computers could only access WiFi with usb dongles or cables tethered to 2G phones
Cisco just forecast that 50% of all internet traffic will be generated from 802.11 (WiFi) connected devices.Given that 802.11’s costs are 1/10th those of 4G something HAS to give for the communications carrier.We’ve talked about them needing to address the pricing paradox of voice and data better, as well as the potential for real obviation at the hands of the application and control layer worlds.While they might think they have a near monopoly on the lower layers, Steve Job’s ghost may well come back to haunt them if alternative access networks/topologies get developed that take advantage of this equal access. For these networks to happen they will need to think digital, understand, project and foster vertically complete systems and be able to turn the "lightswitch on" for their addressable markets.
Counter-intuitive thinking often leads to success.That’s why we practice and practice so that at a critical moment we are not governed by intuition (chance) or emotion (fear).No better example of this than in skiing; an apt metaphor this time of year.Few self-locomoted sports provide for such high risk-reward requiring mental, physical and emotional control.To master skiing one has to master a) the fear of staying square (looking/pointing) downhill, b) keeping one’s center over (or keeping forward on) the skis, and c) keeping a majority of pressure on the downhill (or danger zone) ski/edge.Master these 3 things and you will become a marvelous skier.Unfortunately, all 3 run counter to our intuitions driven by fear and safety of the woods at the side of the trail, leaning back and climbing back up hill. Overcoming any one is tough.
What got me thinking about all this was a Vint Cerf (one of the godfathers of the Internet) Op-Ed in the NYT this morning which a) references major internet access policy reports and decisions, b) mildly supports the notion of the Internet as a civil not human right, and c) trumpets the need for engineers to put in place controls that protect people’s civil (information) rights.He is talking about policy and regulation from two perspectives, business/regulatory and technology/engineering, which is confusing.In the process he weighs in, at a high level, on current debates over net neutrality, SOPA, universal service and access reform, from his positions at Google and IEEE and addresses the rights and governance from an emotional and intuitive sense.
Just as with skiing, let’s look at the issues critically, unemotionally and counter-intuitively.We can’t do it all in this piece, so I will establish an outline and framework (just like the 3 main ways to master skiing) and we’ll use that as a basis in future pieces to expound on the above debates and understand corporate investment and strategy as 2012 unfolds.
First, everyone should agree that the value of networks goes up geometrically with each new participant.It’s called Metcalfe’s law, or Metcalfe’s virtue.Unfortunately people tend to focus on scale economies and cost of networks; rarely the value.It is hard to quantify that value because most have a hard time understanding elasticity and projecting unknown demand.Further few rarely distinguish marginal from average cost.The intuitive thing for most to focus on is supply, because people fear the unknown (demand).
Second, everyone needs to realize that there is a fundamental problem with policy making in that (social) democrats tend to support and be supported by free market competitors, just as (conservative) republicans have a similar relationship with socialist monopolies.Call it the telecom regulatory paradox.This policy paradox is a function of small business vs big business, not either sides’ political dogma; so counter-intuitive and likely to remain that way.
Third, the internet was never open and free.Web 1.0 resulted principally from a judicial action and a series of regulatory access frameworks/decisions in the mid to late 1980s that resulted in significant unintended consequences in terms of people's pricing perception.Markets and technology adapted to and worked around inefficient regulations.Policy makers did not create or herald the internet, wireless and broadband explosions of the past 25 years.But in trying to adjust or adapt past regulation they are creating more, not less, inefficiency, no matter how well intentioned their precepts.Accept it as the law of unintended consequences.People feel more comfortable explaining results from intended actions than something unintended or unexplainable.
So, just like skiing, we’ve identified 3 principles of telecoms and information networks that are counter-intuitive or run contrary to accepted notions and beliefs.When we discuss policy debates, such as net neutrality or SOPA, and corporate activity such as AT&T’s aborted merger with T-Mobile or Verizon’s spectrum and programming agreement with the cable companies, we will approach and explain them in the context of Metcalfe’s Virtue (demand vs supply), the Regulatory Paradox (vertical vs horizontal orientation; not big vs small), and the law of unintended consequences (particularly what payment systems stimulate network investment).Hopefully the various parties involved can utilize this approach to better understand all sides of the issue and come to more informed, balanced and productive decisions.
Vint supports the notion of a civil right (akin to universal service) for internet access.This is misguided and unachievable via regulatory edict/taxation.He also argues that there should be greater control over the network.This is disingenuous in that he wants to throttle the open-ness that resulted in his godchild’s growth. But consider his positions at Google and IEEE. A “counter-intuitive” combination of competition, horizontal orientation and balanced payments is the best approach for an enjoyable and rewarding experience on the slopes of the internet and, who knows, ultimately and counterintuitively offering free access to all.The regulators should be like the ski patrol to ensure the safety of all. Ski school is now open.
67 million Americans live in rural areas. The FCC says the benchmark broadband speed is at least 4 Mbps downstream and 1 Mbps upstream. Based on that definition 65% of Americans actually have broadband, but only 50% who live in rural markets do; or 35 million. The 50% is due largely because 19 million Americans (28%) who live in rural markets do not even have access to these speeds. Another way of looking at the numbers shows that 97% of non-rural Americans have access to these speeds versus 72% living in rural areas. Rural Americans are at a significant disadvantage to other Americans when it comes to working from home, e-commerce or distance