[antidote] The end of telecom
- From: "Daniel Berninger" <dan@xxxxxxxxxxxxxxxxxxx>
- To: <antidote@xxxxxxxxxxxxx>
- Date: Mon, 13 Sep 2004 10:43:32 -0400
The End of Telecom
By Daniel Berninger
The most recent FCC Trend Report (May 2004, Table 14.2) shows a 50% decline
in the amount of usage of each residential telephone line since 1997. The
same report shows the arrival of significant Internet use in 1997 (Chart
16.1) along with rapid expansion of cell phones (Chart 11.1). The data shows
what we all know from day to day experience - the information technology
industry is annexing communication as an application - email, IM, VoIP,
e-commerce, etc. We have fewer and fewer reasons to use
plain-old-telephone-service. The numbers reflect a world where RBOC's focus
their energies on battles allowing them to raise prices and the information
technology industry delivers even more powerful communication platforms and
applications of the Internet. The trend represents the final outcome of
forces set in motion in 1968 with the FCC's MCI/Carterfone decisions and the
founding of Intel. In the regulatory parlance of telecom, innovative
information services are increasingly displacing the ever more expensive
telecom services.
(See FCC report at
http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/trend50
4.pdf)
Every supplier dreams of the ability to raise prices without improving
value. This nightmare for customers represents the status quo in local
telephone service as dominated by Verizon, SBC, and BellSouth. The employees
and economic growth suffer as profit growth comes from cost cutting rather
than improvements in the value proposition that grow demand. The long
running nightmare is coming to an end according to FCC data. Charging more
for less value drove people toward the Internet and low cost cellular plans.
Ignorance of time and distance give communication applications of the
Internet a structural competitive advantage over services depending on the
Public Switch Telephone Network (PSTN). The model of setting price based on
time and distance only works with a captive customer base. The volume of
traffic on the PSTN peaked in 1997 when it was largely the only
communication option. Verizon and the other kings of copper have lost 40% of
their value since 1999.
The telephone incumbents find themselves in a bind not unlike the railroads
with the arrival of the automobile or the mainframe with the arrival of
minicomputers/PC's. Reliability and ubiquitous market presence does not
defeat more nimble insurgents offering a better and improving value
proposition. Conventional wisdom already recognizes the difficulties faced
by companies explicitly dependent on usage based charges like AT&T, MCI, and
Sprint, but falling usage also undermines the grip of the local exchange
companies.
Price discrimination business models succeed only where there exists market
control. The Verrazano Narrows Bridge successfully charges $7.00 for
crossing only because there exist no viable alternatives. Price
discrimination business models work by defeating competition not
continuously improving the value proposition. The obstacles to bridge
building and expensive telephone networks make for compelling barriers to
entry, but the inexorable price increases of greedy bridge owners and
telephone companies increase the incentive for bypass. The arrival of low
cost Internet and wireless connectivity put a hole in the monopoly over
communication options enjoyed by the Bell System through 1997. The cost of a
cellular telephone call dropped below the cost of wireline for a significant
number of customers by 2000.
Absent a bullet proof monopoly, the challenge of winning moves from
controlling supply to creating demand. In the good old days, Verizon's
control of copper meant it benefited from the innovation of others as with
the fax machines and later dialup Internet. AT&T's profit for a given
quarter got significant boosts from natural disasters like the San Francisco
earthquake in 1989. Starting in 1997, all new communication applications
benefit the Internet. It seems likely we have barely dented the potential of
useful new communication applications. Consider the range of communication
options anchored on one end by the telegraph and at the other by
face-to-face encounters. The traditional telephone call serves as the basis
a trillion dollar business around the globe addresses a very narrow slice of
this communication spectrum. The cost of service and underachieving value
mean over 80% of people on earth have no regular access to communication.
The much noted convergence of data and voice networks really amounts to a
hostile takeover of communication by the information technology sector. The
Internet did not get invented to displace the PSTN, but continuous
improvement makes this outcome inevitable. The info tech czars like Bill
Gates and Andy Grove are loathe to explicitly challenge the telecom
incumbents, but the information technology solutions will replace not
converge with the traditional telephone networks. The business models of the
telephone incumbents work only to the extent the regulated biosphere does
not get infiltrated by unregulated infoservices. The telecom service versus
info service dichotomy dissolved with the arrival of VoIP. Game over. The
PSTN remains invulnerable to innovation while the platforms leveraged by the
info tech industry get faster and cheaper. The next wave is already underway
with the computing power of PC's incorporated into consumer electronics of
various form factors. Consider the emerging battle between Microsoft, Sony,
and Nintendo's voice enabled multiplayer games.
The landscape changes are not lost on Verizon and other incumbents, but no
one can serve more than one master. Skype, Free World Dialup, and many
others continue to add value while the telephone incumbents continue their
hunt for ways to raise prices. Standard Oil and most other monopolies over
commodities did not survive the 1920's, but even the geniuses keeping the
Bell System intact through the breakup of AT&T have run out of ideas. The
success of incumbents in defeating the 1996 Telecom Act created Competitive
Local Exchange Companies (CLEC's) receives lots of press coverage, but the
largest CLEC never grew more than a matchbox toy car (1:64) in relative size
to the incumbents. The regulatory victories mean little as the Bells long
ago found ways to escape compliance. The battles to get state PSC's in
Florida, New York, New Jersey, Virginia, Washington, and just about
everywhere else to raise prices merely gives the communicating public more
reason to seek alternatives. The telephone companies delayed deploying DSL
to avoid cannibalizing high profit data circuits, but this conceded
connectivity to the cable companies. The practice of forcing DSL users to
maintain traditional telephone service is under assault in state PSC's.
Qwest increasingly breaks ranks with the Bell cartel as they did with their
"nake DSL" product.
The incumbents still enjoy an advantage in reliability and ubiquity, but the
insurgents continue to whittle away. The collective reliability of several
best effort services starts to match the reliability of plain old telephone
service. The Internet exists as a solution to the fragility of the telephone
network. The direct peering of VoIP end points gets around the need to use
the PSTN for all terminations. For example, the University of San Diego
installed equipment that terminates VoIP calls directly to the campus PBX.
This one day upgrade made at the behest of Michael Robertson and SIPPhone
took 20,000 people off dependence on the PSTN. The awareness of
communication alternatives continues to grow and the outcome no longer seems
uncertain. The fixed nature of expenses turn the revenues lost to line
losses directly into profit losses. Access to capital is threatened by the
obsolescence of assets serving as collateral for debt. The sale of
supposedly profitable supposedly non-strategic wireline and directory assets
amounts to little more than burning the furniture to keep warm.
The victory of communication insurgents will generate a renaissance just as
the demise of IBM's dominance over computing served to unleash an enormous
expansion of the information technology sector. Communication serves as an
input for the entire economy in a manner not unlike oil, so the defeat of
the Bell Cartel represents great news for economic growth. The Bell System
not only did not expand employment over the last twenty years, it served as
a job destruction machine. The Bells not only failed to grow employment they
destroyed the ambitions of competitors that wanted to create jobs.
Converting the communication landscape to one of competition means a value
and demand driven industry. It means annual 30% growth associated with the
information tech industry replacing the 3% growth rates of traditional
telecom. Over a period to 10 years this means growth of jobs and a tax base
associated with an industry that grows ten fold rather than one that grows
30%.
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