[antidote] Re: The end of telecom
- From: "Grover, Vik" <VGrover@xxxxxxxxxxxxx>
- To: antidote@xxxxxxxxxxxxx
- Date: Mon, 13 Sep 2004 12:22:51 -0400
Can I include this as an appendix to an initiation I am doing this week,
cant tell you the name [yet] but you would be proud. =20
-----Original Message-----
=46rom: antidote-bounce@xxxxxxxxxxxxx
[mailto:antidote-bounce@xxxxxxxxxxxxx] On Behalf Of Daniel Berninger
Sent: Monday, September 13, 2004 10:44 AM
To: antidote@xxxxxxxxxxxxx
Subject: [antidote] The end of telecom
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
=66ocus 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
=46CC'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/tre
nd50
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
=66or 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
=46rancisco 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
=66ragility 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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