SMART Letter #74
Crisis and Revolution in Telecom
July 23, 2002
To: isen@isen.com
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SMART Letter #74 -- July 23, 2002
Copyright 2002 by David S. Isenberg
isen.com -- "danger and opportunity"
isen@isen.com -- http://isen.com/ -- 1-888-isen-com
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CONTENTS
> Quote of Note: Jeff Bezos on two kinds of retailers
> Crisis and Revolution in Telecom by David S. Isenberg
> Quotes of Note:
> Gordon Moore on missing the PC
> Steve Ballmer on how "Linux changed our game"
> Peter Seebach on usability and video games
Sir Arthur C. Clarke on the environment
> Conferences on my Calendar
> Copyright Notice, Administrivia
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QUOTE OF NOTE: Jeff Bezos
"There are two types of retailers: those that work hard
to raise prices and those that work hard to lower
prices."
Jeff Bezos, CEO Amazon.com, quoted in Financial Times, July
22, 2002, p. 1.
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CRISIS AND REVOLUTION IN TELECOM
by David S. Isenberg
[This is adapted from my Communications Keynote at the
World Technology Network Summit, New York, July 21, 2002.]
There's an "utter crisis" in telecommunications, says
Michael Powell, Chairman of the U.S. Federal Communications
Commission. WorldCom, Qwest, Global Crossing, Adelphia,
Enron, Deutsche Telecom, France Telecom; yesterday's Wall
Street winners seem to be leading the entire economy into
the abyss.
Let's try to see the current crisis in perspective; it is
but one phase of the Communications Revolution itself. It
has been said that a revolution is not a dinner party.
There are crises. Outcomes are ambiguous. The powerful
struggle to hold onto power. The forces precipitating the
revolution struggle to advance. There are losers. It is
not pretty. The final result is not knowable.
The drivers of the Communications Revolution overlap, but
are not identical to the drivers of the current crisis.
The drivers of the current crisis are:
1) Overcapacity,
2) Bad debt, directly driven by technological advances,
3) A wholesale change of business models more profound
than the shift from horse and buggy to the jet age.
I am tempted to add incompetence, greed and criminal
behavior, but these are constants that are neither unique
to the Communications Revolution nor the current crisis.
With the benefit of hindsight (and hindsight is important
if we are to learn from history), we can appreciate the
power of the twin factors of overcapacity and bad debt. I
saw the third factor in 1997, the coming shift in business
models, and I wrote about it in a paper called "The Rise of
the Stupid Network". This shift is still not a broadly
acknowledged factor in the current collapse, but I think
that it will prove to be the biggest factor.
Let's look at each factor individually to see how it
relates to the current crisis and to the larger
Communications Revolution.
Overcapacity.
Let's not call the current overcapacity situation a
"bandwidth glut." Gluttony is one of the seven deadly
sins. The scarcity folks -- the telephone companies (and
others) whose business is based on the fact that
communications capacity is scarce, therefore expensive --
are controlling this "glut" dialog. Nobody talks about a
glut of clean air or a glut of traffic-jam-free roads. No
-- to an end user it is great to have a lot of cheap
network capacity.
I would say, "Glut is good," but slogans like this seem to
convey the wrong message in the longer term. So let's just
talk about overcapacity.
There's a supply side and a demand side to the overcapacity
situation.
On the demand side, telecom growth used to be predictable,
at about 5% a year. The Internet toppled this assumption.
Then for several years people thought that Internet demand
was doubling every 100 days. This finding was based on
early data -- it turned out to be an over-estimate. Today
people estimate that the Internet is growing at around 100%
per year.
One hundred percent per year is still an outrageous growth
rate. If you start with one megabyte at year zero, 100%
for ten years would yield 1000 megabytes at year ten. But
in contrast, 100% every 100 days, the former supposed growth
rate, would yield 68 billion megabytes by Year Ten. So we
overestimated the growth of the Internet by a mere factor
of 68 million.
The effects of this over-estimate on capacity build-outs
and revenues were amplified by telecom competition. In the
late 1990s the United States, and then the World Trade
Organization, passed laws and made agreements to help new
entrants break into established telecom markets. The new
entrants saw one trillion dollars of annual worldwide
telecom revenue, and they assumed that traffic was doubling
every 100 days. They wanted a piece of this pie -- a pie
that they thought soon would be larger than the entire
global economic product.
Again, with the benefit of hindsight, there might have
been some things that would have increased traffic enough
to create a viable market that would support multiple
competitors.
For example, traffic might have grown faster than it
actually did if the recording industry had not put the
legal kibosh on Napster. Some say that if it were legal to
trade video files a la Napster, it would be so popular that
we wouldn't have any overcapacity. In fact, we'd have to
install new long-haul capacity. If this is right, the most
effective short-term fix to the overcapacity situation
would be to reform intellectual property laws to be more
consistent with how people want to use the Internet.
Also traffic might have grown fast enough to keep pace with
installed capacity if AT&T, instead of throwing $120
billion down the cable TV hole as they did in 1998, had
used that money instead to build fiber to their customers'
homes. Such an initiative would have had enduring,
intrinsic value. And it would have laid the groundwork for
continued United States leadership in communications.
Everybody believes that fiber to the home is the end game
of the Communications Revolution. It is not expensive,
about US$600 to $3000 per home with today's technology (and
less in the future, and less with economies of massive
scale). But just as Qwest's 1997 transcontinental fiber
build-out fatally maimed domestic long-distance (including
Qwest itself), fiber to the home would kill the Incumbent
Local Exchange Companies.
Therefore, fiber to the home is not coming until the
Incumbent Local Exchange Companies become considerably
weaker. Fiber to the home, in the context of the Internet,
puts too much bandwidth and too much control into the hands
of the end user for a Local Exchange Company to profit
under any of the current scarcity-based business models.
But some day it is inevitable that we'll have fiber to the
home.
Anyhow, the new competitors and the older incumbent
telephone companies miscalculated how fast demand for their
capacity was growing. More importantly, they missed the
fact that telecom prices -- and profit margins -- were
collapsing.
On the supply side, the rush of many new competitors into
the marketplace, all of whom wanted to attract customers
with ever lower prices and many of whom built their own
networks, helped cause this collapse, but there were even
more fundamental factors afoot.
Moore's Law, the doubling of computer power every eighteen
months or so, suddenly made it possible to run the most
sophisticated communications protocols on very tiny
devices. Today we can put a router on a chip that is more
powerful than AT&T's big international switches that
require an entire city-block-sized room in a skyscraper in
downtown New York. Plus, our ability to jam bits down
glass fibers or copper wires or through the air grew faster
than Moore's Law. Suddenly, telecom infrastructure wasn't
expensive any more.
Bad Debt.
This brings us to the subject of bad debt. The debt
picture is tightly intertwined with the rapidity of
technological change.
Here is an analogy: We've all had the experience of going
into a computer store and saying, "I could buy last year's
computer for US$500 or I could buy the whizziest new box
for $2000." The problem is that in both cases, our
purchase would rapidly become obsolete -- next year's
machine will blow this year's machine away. We know this,
but we can't buy next year's machine -- we have to decide
on last year's computer, this year's computer, or no
computer.
Telecommunications executives are faced with the same
problem, except that the time intervals are around 30
years, capital expenditures are in the billions of dollars,
and the core telecom business is at stake. The telcos must
build and upgrade their networks, but once they put their
money on new technology, they're stuck with it for ten or
twenty or thirty years.
The telcos finance the new technology with thirty-year
bonds. But the technology becomes obsolete much faster
than that.
Let me give you two examples -- ATM (Asynchronous Transfer
Mode) and SONET. ATM was the greatest new technology in
the early 1990s, but now, less than ten years after the big
telcos installed it, some of them are taking ATM out of
their network. SONET and SDH were the bleeding edge in the
mid-1990s. SONET was very cool; you could cut the line and
the network would self-restore in a few milliseconds. But
it isn't anymore. For both ATM and SONET/SDH, the
administrative overhead was too high (leading to high
operating expenses compared to newer, simpler technology)
and the protocols were not appropriate for Internet
traffic.
The bondholders that financed ATM and SONET now are finding
that an obsolete asset secures their debt. They're holding
junk bonds that pay interest rates appropriate for asset-
backed securities.
ATM and SONET are not the only technologies that are
becoming obsolete even as they're being deployed. There's
DSL and MMDS and 3G and WAP and a whole lot more.
Technology marches on. And it is not as if Telecom
executives made the wrong decisions -- mostly they made the
best decisions they could at the time.
The debt movie is playing at the Global Crossing theatre
and the WorldCom playhouse -- but soon it will be playing
at a telephone company near you. Verizon and SBC and
BellSouth will not be immune. The accounting tricks they
used to use don't work so well all of a sudden, so they're
likely to try some legal and regulatory tricks -- or even
get new laws passed -- to fend off their day of reckoning.
But watch out. Even supposedly strong Incumbent Local
Exchange Companies are at financial risk, because they're
caught behind the very same 8-ball of rapid technological
change.
But the biggest thing happening to Telecommunications is
not overcapacity, it is not about debt or technological
change. The biggest thing is that the entire telecom
business model -- or maybe we should call it the operating
model -- is about to undergo wholesale change. We're
leaving the Horse-and-Buggy era of telecom and entering the
Jet Age.
Goodbye blacksmith. Goodbye livery stable.
Hello . . . to what? We don't know yet.
The telephone company business model used to be based on
vertical integration. The network was a voice network.
The wires were voice wires. The switches were voice
switches. You can say the same for cable TV. The cable
system was specialized for broadcasting video
entertainment. These were special-purpose networks.
The Internet, in sharp contrast, is a general-purpose
network. It will carry anything. The Internet does not
care whether it is carrying voice or video or financial
data or email or pictures.
The Internet pushes the decision "What to carry," to its
edges. It pushes the decision "How to use the network,"
right into the lap of the end user. This is a direct
consequence of the Internet's architecture.
The Internet's job is internetworking. That is, the
Internet is a network of networks -- the Internet Protocol
is designed to span the various component networks and to
ignore the network specific details. The Internet Protocol
ignores even those network-specific details that add value
to a given component network.
So if the owner of a component network that forms a piece
of the Internet tries to add value to his or her particular
network, that value may be useful for a network-specific
application -- such as telephony or TV -- but it is
irrelevant for Internet-level connectivity. The only place
you can add value in an Internet world is at the edges.
This means that in an Internet world, a network owner has
no special advantage in adding value to their network, say,
over somebody who owns a few servers at the edge and buys
connectivity.
This single fact makes the telephone-company business model
obsolete. It also makes the Internet the huge success, the
integral part of our lives that it is today.
Think about all the killer applications of the last decade
-- email, instant messaging, web browsing, streaming audio,
ecommerce, Internet telephony -- you don't have to be a
network owner to host these apps. Indeed not a single one
was brought to market by a telephone company or a cable
company.
A lot of new telephone companies entered the marketplace
with the old business model. Most of them went bankrupt
trying to be little Bell Systems or little AT&Ts. The
vertical integration thing doesn't work these days. I
suspect that we will see the remaining big guys dying from
the same disease, if financial problems don't kill them
first.
A word of caution. Today everybody from George Bush to
Mike Powell to the wise executives of Silicon Valley are
talking about broadband, broadband, broadband. But
broadband without real internetworking, without the pure,
stupid, end-to-end Internet, will be as useful as a
television that can order pizza. I'd rather have the
Internet over a plain-old dial-up connection than broadband
with some form of pseudo-internetworking.
So if you hear that somebody is going to "enhance" the
Internet -- to make it more efficient, to Pay the
Musicians, to Protect the Children, to thwart hackers, to
enhance Homeland Security, to find Osama, or whatever --
this is almost certainly propaganda from the powerful
businesses that are threatened by the Internet. Remember
that the Internet became the success it is today -- and the
threat that it is to existing telcos -- because it is a
Stupid Network, an end-to-end network.
So that's what's driving the current crisis in the
Communications Revolution; overcapacity, debt, and a
wholesale switch of business models.
The Communications Revolution is not over. In fact, we're
still at the early beginning.
What's the next phase? I don't know. But people will need
to communicate, and the technology keeps getting better, so
there is no doubt that the future is bright.
If I had the new model for telecom figured out, I'd be
implementing it, not writing about it. Back in the 1980s,
people first realized that Moore's Law would make
transistors so plentiful that it would commoditize hardware
-- and that software would be king. They scratched their
heads and asked themselves, "How do you make money from
software?" One guy figured it out.
We're faced with the same kind of problem. Who will be the
Bill Gates of the new telecom? So far, the front-runner
looks to me like . . . Bill Gates (due to Microsoft Windows
Messenger). But maybe it is somebody reading this piece,
or somebody we've never heard of.
That's likely to precipitate yet another crisis in the
Communications Revolution.
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QUOTE OF NOTE: Gordon Moore
"If you asked me in 1980, I would have missed the PC. I
didn't see much future for it . . . I thought
automobiles would be a bigger market (for
microprocessors). But the IBM PC kind of hit it off with
the public."
Gordon Moore quoted in ZDNet News, July 10, 2002
http://zdnet.com.com/2100-1103-942688.html
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QUOTE OF NOTE: Steve Ballmer
"We [at Microsoft] have prided ourselves on always being
the cheapest guy on the block--we were going to be
higher volume and lower priced than anybody else out
there, whether it was Novell, Lotus or anybody else
. . . One issue we have now, a unique competitor, is
Linux. We haven't figured out how to be lower priced
than Linux. For us as a company, we're going through a
whole new world of thinking."
Ballmer: Linux Changed Our Game, by Rich Cirillo in
VARBusiness, July 15, 2002
http://www.varbusiness.com/file/36355.html
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QUOTE OF NOTE: Peter Seebach
"Video games demonstrate several important lessons about
streamlining repetitive tasks. One of the first is the
use of rational defaults. Video games try very hard to
get the defaults right. In many turn-based war games, a
unit can either attack or rest at the end of its turn.
What's the default? To attack if there's an enemy unit
nearby -- otherwise, it will rest. The default is almost
always right. Many games simply favor a most-recently
used strategy for guessing at defaults. This simple
strategy is often a gigantic improvement over the user
interfaces of productivity software.
. . .
"A lot of productivity software is nowhere near the level
of reliability that you'll find with video games.
Productivity software manuals are full of warnings to
save your work frequently, because crashes can destroy
your work in progress. Video games offer saving as a
convenience to the user, who may want to go do something
else for a while. Crashes are considered unacceptable in
a video game; for some reason, though, with most
productivity software, they're simply a part of the
experience.
. . .
"Many video games are designed so that the user doesn't
need to be taught how to play; the designers assume that
the user will never read the manual.
. . .
"Most games allow at least some level of user control
over the interface. Most productivity software doesn't."
Everything I need to know about usability, I learned at the
arcade, by Peter Seebach, on the ibm.com website, June
2002, http://makeashorterlink.com/?K55F34551
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QUOTE OF NOTE: Sir Arthur C. Clarke
"I hope we can clean up our environment."
Sir Arthur C. Clarke, in response to a question about the
quality of life over the next 100 years at the World
Technology Network Summit, July 22, 2002.
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CONFERENCE ON MY CALENDAR
September 17 or 18, 2002, Washington DC. American
Association for the Advancement of Science. I'll be
speaking to the AAAS interns and the larger Washington
telecom policy community. Tentative at this time -- write
to me (isen@isen.com) to see if this is actually going to
happen.
October 8-10, 2002, Atlanta GA. Fall VON. I'll be giving
an Industry Perspective talk at 10:45 AM on Thursday,
October 10, 2002. See http://www.von.com/
October 15-17, 2002, New Orleans LA. Fiber to the Home
Council Annual Conference. I'll be giving a keynote (on why
neither telco nor cable TV co will bring us fiber to the
home). Nothing on the website yet, but keep checking
http://www.ftthcouncil.org for information.
October 22, 2002, Boulder CO. University of Colorado at
Boulder. I'll be speaking to Dale Hatfield's graduate
telecom seminar and guests, 4:00 to 5:20 PM. Contact
CourtneyCowgill@Earthlink.net for details.
November 7, 2002, New York. Marconi Foundation Award
Conference. Tim Berners-Lee will get the Marconi Award.
I'll be speaking about the infrastructure that makes the
World Wide Web possible. More details soon.
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COPYRIGHT NOTICE: Redistribution of this document, or any
part of it, is permitted for non-commercial purposes,
provided that the two lines below are reproduced with it:
Copyright 2002 by David S. Isenberg
isen@isen.com -- http://isen.com/ -- 1-888-isen-com
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