Unshackling telecom innovation

Unshackling telecom innovation

Summary: David Berlind's "The double-edge of the FCC's DSL ruling" brings up some very interesting points. Whether you agree or disagree with David depends a great deal on how you feel about government regulation in general.

TOPICS: Networking

David Berlind's "The double-edge of the FCC's DSL ruling" brings up some very interesting points. Whether you agree or disagree with David depends a great deal on how you feel about government regulation in general.

All we have to do is look at the last 20 years (that's a lifetime -- and ancient history -- for many of you) to get some idea of what I am talking about. Prior to 1984, there was one BIG telephone network -- wholly owned and operated by AT&T. Sure, there were a few small operators of local exchanges, but they were mere mosquitoes on the arm of AT&T.

By virtue of the Telecommunications Act of 1956, AT&T was a federally regulated monopoly. While the various states regulated charges for local service, the federal government chose to regulate AT&Ts profits when it came to long-distance. The end result was that AT&T was encouraged to build-out the last mile. Why? Because only through re-investment of their profits could they increase their revenues, and thus increase their profits. As volume went up, so did profits, while rates continued to drop. The end result was a very high-quality ubiquitous service -- available to every household in America. Those that could only afford local service paid very little for unlimited local service while those that could afford to pay outrageous rates for long distance did so. This was a socialist's dream -- the haves were subsidizing the have-nots.

The downside? Often referred to a POTS (plain old telephone service), the underlying technology remained virtually unchanged for over 100 years. Sure the service was reliable -- and it is still more reliable than any other telecommunications service available today. The problem is that there was absolutely no innovation. As a result there is no comparable access to data services faster than dial-up -- which itself is limited by POTS technology.

Twenty years later -- where are we? Although they still own most of the wired infrastructure in America, AT&T is a mere shadow of its former self -- soon to be gobbled up by one of its own Baby Bells. All of the long-distance carriers are living on the margins of a commodity industry. (Once free from the saddle of subsidizing local service, these giants started a price war like none we have ever seen before.)

Where is the innovation today? Well, it is still not found in the regulated landline telephone industry. This industry is still ubiquitous but it is no longer the bargain it once was. Unlike every other segment of IT, the cost of unlimited local landline service has at least tripled in most markets. Ironically, the cost of adding unlimited long-distance to that service has become small by comparison.

David's article targets the de-regulation of DSL service -- one of those "value-added services" that should be making the Baby Bells money but isn't. Why not? Because the Baby Bells have been unwilling to build-out the necessary infrastructure to make it a ubiquitous service. Perhaps this decision by the FCC to deregulate DSL service will motivate the Baby Bells to provide DSL out to the last mile, but I doubt it.

So where is the innovation taking place? It is taking place in unregulated markets. Why would a Baby Bell invest anything in regulated landline infrastructure when they can pour those same investment dollars into the unregulated cellular network? The simple answer is that they wouldn't and they won't.

Twenty years ago, cellular telephone service was a luxury only a few could afford. It was usually justified by one's profession -- usually one in which communications was time-critical. Today, pay-as-you-go cellular service, while still not ubiquitous, is available at your local Wal-Mart for as little as 10 cents per minute and value-added services such as free long-distance, free nights/weekends and unlimited in-network calling is available to subscribers. The once ubiquitous payphone is quickly becoming a relic of the past -- almost impossible to find -- and the question of whether to even pay for landline service into the home is being raised across America.

The wireless data network is still in its infancy but dial-up-like speeds on an always-connected basis are available in most markets and DSL-like speeds are now available in many markets and will continue to expand over the next few years. Is it ubiquitous? No. Will it ever be ubiquitous? Probably not. The bottom line is that, as a society, America will have to come to grips with whether we value ubiquitous access for all more than we value innovation.

David is correct. Those who are at a disadvantage as a result of the FCC decision to deregulate DSL service will complain about it, but in the end deregulation will bring about innovative ways to provide services across that last mile. POTS and cable-TV are just two ways to access that last mile. Cellular data networks are another. The most remote customers can even subscribe to satellite-based access. Power-line broadband is another which may soon be available to all. (In reality, more homes have access to electric service than to land-line telephone service.) Wi-Max is another. Tomorrow, someone will come up with something even more cost-effective. Will any of these services be available to all? No -- but as any technology matures, the availability of that technology becomes more widespread.

Topic: Networking

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  • Don't forget about Fiber

    You make a lot of good points, but you forget to mention that the baby bells, Verizon in particular are building out Fiber to the home networks to compete with the cable companies. Providing very high speed data access, and Voice and soon video at a lower cost than cable companies charge for comparable services.
    • Not all the Baby Bells ...

      Perhaps Verizon is the exception but the promise of "fiber to the curb" has slowly been abandoned by any Baby Bell unfortunate enough to have been acquired by SBC. (And let's not forget about poor QWest -- they've been left in the dust!) SBC is looking to provide TV services via satellite and they have, for years now, been unwilling to expand their residential DSL service (at least in Indiana) because of fear of competition. Without that competition, there is no innovation.

      You cannot use the argument that you don't have enough business to justify the cost of upgrades if the upgrades are required to generate the business.

      The result is that my cable TV provider -- which was once my least favorite public utility is now my favorite ISP -- and they sold me on upgrading to digital TV! Because they chose to spare no expense to provide me the services that I wanted, they got me to buy services I didn't think I wanted.

      In the mean time, my landline telephone provider is on the bubble. Because they were not willing to innovate, they not only lost my DSL business (which they apparently didn't want) they also lost my long-distance business -- to a phone card which costs one-third what they wanted.

      Further, I am beginning to seriously question the value of landline service at all now that the people I call most are more easily accessible via cell phone. Free nationwide in-network calling, free long-distance, free nights-weekends, are all the result of competition and innovation. None of these services are available to me from SBC.
      M Wagner
  • Who owns the cell phone companies?

    Companies have long known that the last mile is the key to profits. Cable became profitable when it replicated the telephone company.

    Cell phones are a minor threat because they are limited in extent. The telephone companies have that covered because of the possible effect on landlines, and because any new technology has to be watched.

    The only chance for a third competitor is power lines. Last mile.

    Wi-Fi takes investment, and unless an outside company wants to compete with telephone and cable companies block by block for the chance to be the third or fourth alternative, the existing companies will stay in control. Cheap and easy Wi-Fi will not be a priority.

    I had hoped for satellites to eliminate the last mile dominance, but apparently that's not going to happen.

    Because this business is about making money and lots of it, technology doesn't control. Instead of innovation, think inconvenience.

    The phone companies and cable companies, one each for any given block, will split up the market conveniently and profitably. The situation will settle down until the telephone/cable mergers are allowed to begin.

    Some day, Ma Bell will live again, one vast utility with price controls.

    Farewell, AT&T. Now I guess all the widows and orphans have moved on to Microsoft, where they're safe.
    Anton Philidor
    • Telephone/cable mergers? Not a chance!

      AT&T tried to merge with the cable companies -- the goal was to 'bypass' the Baby Bells -- and it was a dismal failure. One regulated industry merging with another regulated industry to reduce the number of choices the end-user has will not succeed.

      The fact that the Baby Bells own the bulk of the cellular infrastructure means that they will not invest in the last mile of landline service because the profit margins are so small compared to the money to be made selling cellular service -- as evidenced by the fact that the Baby Bells have put almost nothing into building out their wire plant over the last five years while cellular data services are now available to over 250 million Americans at rates comparable to the cost of broadband.

      In the end, the customer wants choice and those vendors that find a way to provide that choice will succeed.
      M Wagner
      • More sanguine than I.

        Using SBC as my favorite example, here's a quote on the effects of their competition with Comcast:

        Aided by rapid technological advances, the telecom giants are racing to become "triple threats," offering television, high-speed Internet access and phone services. In the process, they are blurring boundaries.

        SBC is working on fiber. And cell phones as well:

        Still, SBC remains confident. Its hopes hinge on a network upgrade called Project Lightspeed, a continuing $4 billion effort to expand its fiber cable network further into residential neighborhoods, creating additional capacity to carry much more data.

        Officials say that when it becomes operational, consumers will receive a seamless melding of television, phone and Internet service. And with its 60 percent share of Cingular Wireless, SBC hopes one day to offer a "quadruple play" under one bill.

        And I'm not the only one thinking that phone companies and cable companies will own the market:

        Consumer advocates are alarmed at the potential for a duopoly and the possibility the two giants might push up prices once they've established their market positions and back off from head-to-head competition. Both companies insist that won't be the case.

        Yeah. Who, us take advantage of a duopoly position? Never.


        As far as the merger is concerned, what happens with the companies owning the market for years? Stagnant profits. If prices get too high, regulation will be legislated and enforced.

        How to build profits then? Merge and eliminate "duplication". You've seen that before.

        Because the services will be so similar, the only effective difference being which connection to the house is being used, a merger can make sense to regulators. So long as consumer prices are not driven up.

        On Wi-Fi, by the way, as you know SBC is selling Wi-Fi to some homeowners, priced almost as a toss-in. Doesn't hurt, adds revenues, assures no competitor can gain enough profit to make getting into the business worthwhile.


        The consumer doesn't want choice as a good in itself. The consumer wants the services for which he's willing to pay at a price he can accept. And, I think, that's all.
        Anton Philidor
  • Must have missed David's blog

    ...blame it on my Corba programming / Linux server managing activities of last week (wait a sec...I thought I worked for Microsoft).

    I completely agree with both you and David (and have said something similar in past articles). It's bad enough that America built a protected telecommunications monopoly. What makes things worse, though is to "solve" the problem through more regulation designed to "create" competition.

    Japan and South Korea didn't do that. They just stopped protecting their monopolies, and their respective telcos promptly gave up 50-70% shares of the new markets they built using all the capital built up from monopoly status. Those new markets (broadband, wireless) now lead the world in telecommunications innovation.

    Markets do manage to work themselves out. The solution to state-created monopolies is to stop protecting them, or to be more specific, stop regulating them.
    John Carroll
    • The US builds hardier monopolies.

      The telcos in South Korea and Japan may have given up 50-70% of their markets, but in the US the well funded telephone and cable geographic monopolists are made of sterner stuff.

      To beat them is going to take a lot of money and political influence. That means another big, established company. And which of those is going to want to come into a new market as a distant third against long established competitors. Who own the last mile.

      I'm not completely certain that even if electric lines can carry internet traffic, for instance, that any corporation is going to be interested. Maybe some local outfits. And some telephone or cable companies who want to reduce maintenance costs.

      Seems you're recommending that government stand aside and watch the major players smash any upstarts. That will be impressive, but it won't take long.

      Then what?
      Anton Philidor
  • Future competition

    Don't forget that ending Analog broadcasting (which is supposed to happen at the end of 2006, pushing everyone to HDTV) opens up a whole bunch of long-range broadcasting spectrum...spectrum, consequently, which could be used to create a citywide wireless network over bandwidths previously dedicated to analog television.

    It just goes to show, you never know where new competition will come from. The job of government is to stand out of the way and make sure the system doesn't tilt towards any one competitor.
    John Carroll
    • What the f?

      [It just goes to show, you never know where new competition will come from. The job of government is to stand out of the way and make sure the system doesn't tilt towards any one competitor.]

      SO which is more important 1) government is to stand out of the way or 2) make sure the system doesn't tilt towards any one competitor? I've heard MANY TIMES that #1 applies to M$, but #2 DOES NOT. You M$hills can't have it both ways.
      Roger Ramjet
  • Memory Lane

    This column is out of focus - because it is trying to talk about an economic subject from a technology innovation standpoint.

    The reason that AT&T chose to be in the long distance business (when it was broken up into AT&T + Baby Bells) is because, when they owned the whole shebang, they could see that most of the costs were in the last mile (the stretch from the last exchange - a.k.a. Central Office - to the home or business), while all the margins were in payments for long distance calls.

    This was entirely the product of price-fixed monopoly service provision - and did not reflect the reality of how assets were funded and managed, and did not in any way support what customers wanted or needed.

    This is how we got into the position of having to regulate our way out of a mess.

    The problems we have today are, also, economic and not technical.

    It is not widely understood that telecommunications infrastructure costs a lot of money to buy, install, and operate. I have, personally, worked on some technology scaling issues that made IT companys wince. Even as recently as the 1990s it was quite common for telcos to test IT industry solutions for the comms industry and see how they scale - and to break the IT 'solution' with ease.

    The Net, being a naturally federated series of technologies (mostly) side-steps these issues - but broadband cannot.

    Broadband requires old-fashioned investment in big weighty chunks of hard cash and, once spent, the equipment is distributed over a very wide area and in a way that puts it, typically, beyond redeployment by any other industry. The only way to get your money back is to sell comms services.

    With that in mind it is, surely, of little surprise that Telcos, and their investors, have constantly lobbied the regulators to try and ensure that whatever model is chosen a return can be made - and it is clear that this is behind the latest FCC moves.

    The question we need to answer is: Is this the right way to ensure that we get investment in the last mile? Because, without that investment, investors will be quite happy getting a return from the existing comms services. In the end, it doesn't matter how many new technologies come along - they will remain in the labs until investors see a reason to pay, and big, for their deployment.

    I worked for a telecoms supplier in the Mid-West in the early 1990s. Some of their technology, available then (like fiber to the kerb), is still not being deployed because the Bellcos (the result of many mergers between Baby-Bells, and hardly 'babies' any more) can't see a return on them.

    However, on this evidence, many people conclude that the Bellcos continue to need protection as the monopoly utility of wires over the last mile is a 'natural' monopoly (I never really understood what a 'natural monopoly' is, but, hey, that's what people say!).

    This is, of course, complete hogwash! It may be that, viewed in the macro-economic sense, the government sees little need to invest tens of billions (hundreds of billions?) of greenbacks building a competing wire utility (they haven't done it for electricity either). But that does not mean they should be complacent about ensuring the maximum competition over the existing wires.

    I'm only a part-time economist, but even I can see that what the FCC is doing is exactly that - being complacent. By re-classsifying ISP services they have removed the need for Bellcos to compete. So they won't. Many are already under pressure to pay back loans and buy back stock used to raise funds in the late 90s. They and their investors have no reason to welcome the next wave of investment in competing, new wave, services.

    We deserve better from the FCC. The public supported a monopoly (AT&T) and continues (in many, many, cities and states) to support local monpolies (Bellcos) in order to prop up these badly run companies. We pay big prices, and we wait (and wait) for new innovative services to arrive. In the meantime we put up with indifferent service, and little choice.

    The long term trend is for person-to-person communication to move to wireless, and big broadcast-style content to move from radio transmission to wired transmission. The Net is also tying these two world's together in interactivity. By supporting the Bellco's current low-competition business model the FCC can only ensure that less innovative technology comes to market - thus slowing down these trends. As John Carrol points out, other countries do not have this problem. They are being tough on the monopolists and breaking open access to the wires - citing long-term tax, and other economic, benefits enjoyed by the monopolists in the past - and this creates a layer of service providers who lobby (investors and governments) to keep the investment channels open - and SERVICE INNOVATION WORKS FASTER. John chracterized this as a zero-touch regulatory approach. This ignores the huge pressure that the telcos in those countries are under - due to the hidden nature of of much of their deal-making. Any country with a more open, transparent, business ethic needs to lay out the rules. In addition, it is a littl;e disingenuous to say zero-regulation. Whjat they have is very simple, but very effective.

    The most effective regulation, all over the World, has been to force Bellco equivelants to open up access to their wires on equal terms.

    Without this regulation, I believe that the FCC is paying too high a price.
    Stephen Wheeler