SMART Letter #85
How to Monopolize the New Network
March 4, 2003

            SMART Letter #85 -- March 4, 2003
           Copyright 2003 by David S. Isenberg
          - "turkey" -- -- 1-888-isen-com


>  How to Monopolize the New Network
>  Quotes of Note
  + Dick Cheney on "Noise in the System"
  + Tom Ridge on "Noise in the System"
  + Paul Wolfowitz on "Noise in the System"
>  If it's Funny, it Must Be True, by Scatt Oddams
>  Conferences on my Calendar
>  Copyright Notice, Administrivia

How to Monopolize the New Network
   by David S. Isenberg

What's the business context that brings the New Network?  
Competition?  Sorry, we can't get there from here, and even 
if we could, we'd be up against Googin's Paradox (that the 
best network is the hardest one to make money building and 
running, see  Is 
regulation the best route to realizing our networked 
potential?  Nah.  Stuck in the past, Byzantine, for 
insiders only, not responsive to innovation in these times 
of great change.  So, maybe, hypothetically, pure hands-off 
no-holds-barred unregulated monopoly, despite its ugliness, 
will bring the most connectivity soonest.

The wise old marketplace has seen trouble -- exuberance, 
oversupply and bust -- many times before.  1865, for 
example, was a euphoric year in Oil Creek, Pennsylvania.  
It had been six years since Edwin Drake triggered an 
instant oil boom by showing the world that oil wells could 
be drilled and oil could be pumped to the surface.  By 
1865, "the wild drive to produce created in the Oil Regions 
[of Pennsylvania] a chaotic scene of heaving populations, 
of shacks and quick-built wooden buildings . . . of 
derricks and storage tanks, with everyone energized by hope 
and rumor and the acrid scent of oil"  [_The Prize: The 
Epic Quest for Oil, Money & Power_ by Daniel Yergin, Simon 
& Schuster, New York, 1991, p. 32-33.].

At the time, oil had one big application -- kerosene for 
lighting.  Kerosene gave better light than candles.  It was 
a lot cheaper than whale oil.  In the twelve months after 
Drake drilled the world's first oil well, some 15 
refineries sprang up in Western Pennsylvania.  "Kerosene of 
widely varying quality was sold.  If the kerosene contained 
too much flammable gasoline or naptha, as sometimes 
happened, the purchaser's attempt to light it could be his 
last act on this earth" [ibid, p. 40].

The market for kerosene did not develop apace production.  
"Toward the end of the 1860s, as overproduction caused 
prices to plummet . . . the new industry went into a 
depression.  The reason was simple -- too many wells and 
too much oil . . . between 1865 and 1870 the retail price 
of kerosene fell by more than half . . . refining capacity 
was three times greater than the market's needs . . . The 
1870s were to be marked by ever-rising production.  
Producers repeatedly tried to restrict production, but to 
no avail.  Storage tanks overflowed, covering the land in 
black scum.  The gluts became so large and prices fell so 
low that crude oil was run out into streams and onto farms 
because there was nowhere else to put it.  At one point, 
the price [which had been as high as $13.75 in the mid-
1860s] dropped to forty-eight cents a barrel." [ibid, p. 39-

Standard Oil was so named because it brought standards to 
the production of kerosene; Standard's kerosene would not 
explode.  Guided by the business vision of John D. 
Rockefeller, Standard Oil created insider deals with 
railroads to get rebates on its oil transportation costs.  
Unbelievably, Standard Oil also negotiated "drawbacks," 
which the railroads paid to Standard Oil for oil transport 
by non-Standard refineries.  The control of oil transport 
costs gave Rockefeller's Standard Oil an insurmountable 

Rockefeller wanted to end glut-and-bust.  His aim was to 
eliminate competition, "that cut-throat policy of making no 
profits," and control production to "make the oil business 
safe and profitable" [John D. Rockefeller's own words, 
ibid, p. 42].  It took him a mere 14 years.  By 1879, 
Standard Oil controlled 90% of the refineries, and it 
dominated oil production, railroads, pipelines, the supply 
of oil barrels, and (some said) the legislatures of 
Pennsylvania and New York.  

The public was not delighted that Rockefeller's monopoly
sold safe kerosene and brought an end to the glut and-bust
era -- the Sherman Anti-Trust Act of 1890 was written in 
direct response to Standard's "powerful, devious, cruel, 
entrenched, all-pervasive and yet mysterious" monopoly 
muscling [ibid, p. 96]; Standard itself was convicted under 
Sherman in 1909 and broken up.  

However, it cannot be denied that monopoly has an upside; a 
robust and orderly oil business developed under the 
Standard banner.  Nor can it be argued that monopoly is 
always against the interests of its customers; the first 60 
years of the Bell System gave the United States the best 
telephone system in the world.  Nor can it be argued that a 
marketplace with multiple competitors is free of criminally 
anti-customer behavior. 

If John D. Rockefeller were alive today, he would be 
building fiber to the home (FTTH).  Fiber has so much 
capacity that once FTTH were built, there would never be a 
need for a second fiber.  The builder of the fiber could 
tell the telephone company, "Hey, why bother to maintain 
that expensive copper-based distribution network?  I'll 
carry those telephone signals to your customers for less 
than it costs you to maintain that copper wire."  Then the 
owner of the fiber could tell the cablecos the same thing; 
"Why bother with that coaxial cable?  Just use my fiber."  
Then the owner of the fiber could offer the same 
proposition to Internet Service Providers, record labels, 
movie studios and anybody else with traffic that a home 
user might pay for.  

If the first fiber builder worked single-mindedly to 
aggregate all traffic, the way John D. Rockefeller worked 
to consolidate his hold on oil production, oil refineries, 
and oil transport, that fiber could form the basis for an 
insurmountable monopoly. 

The first builder of FTTH would have incredible market 
power, even if its fiber only covered a neighborhood or a  
few small towns.  If a second fiber builder threatened, the 
first builder could simply lower prices to ensure that 
neither providers of downstream traffic nor end-user 
customers would switch.  When John D. Rockefeller did this, 
he said he was giving nascent competition "a good sweating" 
[ibid, p. 42].  A more recent monopolist referred to such 
tactics as "cutting off [the competition's] air supply."  
The builder of the first FTTH could offer end-user 
connectivity that would not only be cheaper than a second 
fiber, but would also be cheaper, more reliable and more 
capacious than connectivity via twisted pair, coaxial 
cable, or radio waves.  But to do that, the builder of the 
first fiber would need to be single-minded about co-opting 
other networks and carrying all available traffic.

Like John D. Rockefeller, the owner of that first fiber 
would have to pay strict attention to costs.  The Internet 
lowers costs because it is designed for reliable service 
over unreliable media.  As a result, fiber allows simpler, 
lighter-weight protocols than telcos use.  Fiber to the 
home can be built and lit today for between $600 and $3000 
per customer.  Maintenance is another cost factor; in the 
mid-1990s former Bell Atlantic CEO Ray Smith declared that 
fiber was so reliable that it beat copper on truck rolls 
alone, independently of any new business it might bring.  
Scale is a third factor; once right-of-way is acquired, 
ditches dug, et cetera, pulling 1000 fibers costs only a 
few percent more than pulling two.  Once a fiber builder 
makes the decision to build at scale, there are solid 
reasons to believe that costs could drop well below $600 a 

Given the FCC's February 20, 2003 order (written to update 
FCC regulations enforcing the 1996 Telecom Act) that the 
ILECs need not unbundle nor share their FTTH with 
competitors, you might think that the telcos would rush to 
build FTTH.  You might think they'd rush to co-opt 
complementary networks and carry additional traffic such as 
TV signals.  You'd think they'd rush to lock in future 
monopoly access to the home.  But they won't.  

I've seen telco culture up close.  The telcos are no 
Standard Oil.  The people running them are no John D. 
Rockefeller.  If some future John D. Rockefeller got a job 
at a telco, he'd quit (or be fired).  There's no room for 
vision or visionaries in patrimonial telco culture.  

No, unfortunately the telcos will not rush to lock in a 
future monopoly.  Unlike John D. Rockefeller, the CEOs of 
telcoland are neither believers in, nor builders of the 
future of their business.  They want to see fiber optic 
success first, before they build.  Further, they'll never 
expand laterally.  They were not promoted for their 
business acumen; they don't have the strategic ability to 
co-opt competitors or neighboring businesses.  And finally, 
they'll want to build the old fashioned way, incrementally, 
with constraints on capacity, with complex (so-called) 
reliability mechanisms that will add to their costs.  

In addition, the telcos are too worried about the present 
to pay adequate attention to the future.  Long-distance has 
been in precipitous decline for years.  Cellular service 
revenues in the developed countries are maxing out.  Now 
the number of local loops is declining and local service 
revenues are beginning to shrink as new ways to communicate 
encroach on telephony-classic.  Even ILEC data revenues are 
hurting, despite the Internet-driven need for more DSL, T-1 
and DS-3; according to Phil Jacobson and Farooq Hussain of 
Network Conceptions, LLC ( each of 
the ILECs recorded shrinking data revenues in at least one 
quarter of 2002.  This is not cyclicity, it is the 
beginning the end of the vertical telephone company 
business model.  

It's even worse than that.  The February 20, 2003 FCC order 
perpetuates high-cost telco incrementalism.  The FCC says 
that it "elects not to unbundle bandwidth for the provision 
of broadband services for loops where incumbent LECs deploy 
fiber further into the neighborhood but short of the 
customer's home (hybrid loops) . . ."  Telecom analyst and 
Former FCC staff member Kevin Werbach says that this 
incents the ILECs to install "Potemkin fiber" -- a single 
silly millimeter of fiber in the loop would protect the 
ILEC from unbundling.  

Telcos get this message; Scott Moritz at 
reports that Verizon CEO Ivan Seidenberg says that 
Verizon's capital spending, which declined 30% in 2002 "may 
contract" further in the wake of the February 20 order.  
Instead of spurring a great new wave of telco investment, 
the FCC's February 20 order will spur ever more steeply 
declining telco revenues, a new wave of rear-guard 
litigation and lobbying, and a growing gap between what the 
technology makes possible and what the telcos actually 

There are several plausible incremental, non-monopolistic 
scenarios for how the market for Internet connectivity 
might evolve.

For example, my former AT&T boss, Greg Blonder, advances a 
theorem in a provocative article in Barron's (Nov. 11, 
2002, to explain why today's 
telcos are not rushing to embrace FTTH.  He observes that, 
"If new technologies promise improvements by a factor of 
more than four, they tend not to get funded because they 
are seen as too risky.  And if they promise less than a 
factor of two, they tend not to get funded because they 
offer too little economic benefit."  Fiber would have 30 
million times the capacity of dial-up data when lit at the 
highest speeds allowed by today's commercially available 
technology.  FTTH, lit at practical speeds, affordable for 
a few tens or hundreds or thousands of dollars, would offer 
100 to 10,000 times dial-up speed.  No wonder the telcos 
are not rushing to install FTTH.

Blonder observes that the hybrid fiber-coax network of the 
cablecos provides a moderately fat pipe that is amenable to 
a series of 2x to 4x improvements.  He projects that within 
a decade the current broadcast-based business model will 
disappear because all video will be video-over-Internet.  
From this, he reasons that cablecos are positioned to 
migrate from a broadcast model to a connectivity model.  
Supplementally, Blonder adds, cablecos could lay down a 
substantial footprint of aggregated wireless ((e.g., 
802.11) hotspots.  It is a plausible scenario, but I'm 
skeptical that cablecos (or *any* company) can successfully 
switch to a very different business model, especially when 
the new business model is perceived by current management 
as a threat to the old one.  

There's another plausible scenario for the incremental 
arrival of the next network -- primary radio connectivity.  
Several people, most notably David P. Reed, have observed 
that wireless networks can be architected so that their 
capacity can grow with the number of customers.  Economics  
of such networks are quite attractive -- they require very 
little advance capital expenditure.  Put up a base station, 
and after that you only need to spend build-money as 
customers are added.  Because capex is tied directly to 
revenue growth, the network builder avoids the risky up-
front capex that Blonder's theorem takes as given.  If 
customers are willing to buy their own network 
infrastructure, today's fixed-wireless technology can offer 
up to 1000 times dial-up speeds.  

Reed also addresses the scalability of wireless networks.  
He proposes that the throughput and redundancy of a network 
grows without obvious limit when network nodes can relay 
packets that are addressed to other nodes.  That is, every 
additional customer brings more additional network 
infrastructure than they themselves need.  As Duncan 
Davidson, co-founder of relay-network equipment builder 
SkyPilot observes, "As a mesh gets dense, the links get 
shorter, speeds increase, power drops, reliability 
increases, line of sight goes away as an issue, and the 
radios get simpler and cheaper."  It reminds me of the 
physical properties that drive Moore's Law.  Reed calls it, 
"Cooperation gain" [].

In theory, wireless relay networks could be completely 
user-owned; a service provider could be as free to add a 
competing gateway to such a network as any other 
participant (I dare not say customer).  Networked nirvana 
is at hand!  

However, such concepts are still in research stages.  Reed 
notes that Claude Shannon's seminal work on information 
theory was based on a single user, and that there is not 
yet a complete multi-station information theory. First work 
in that direction yields surprising and counter-intuitive 
results; Reed points out that relay-hopping is not the only 
thing that increases the capacity of a network.  Multi-path 
transmission and motion increase capacity too.

We are just beginning to explore packet relay systems.  
There are many real-world unknowns.  The first such multi-
hop network product, by Nokia Rooftop Networks, has not yet 
taken the world by storm.  Nor have we yet observed how 
actual traffic behaves on such networks -- does it scale in 
well-behaved ways or are there emergent, unpredictable 
negative effects?  In addition, we know that each station 
requires non-trivial antennas, transmitters, signal 
processing and computational logic that add to costs in 
ways that fiber does not.

Even if these other scenarios were to become reality, an 
FTTH monopoly could disrupt and subsume them.  Surely, 
somewhere on Earth, some budding monopolist, somebody who 
is not immunized by interests vested in current networked 
business models, could be attracted by the disruptive 
potential of FTTH -- tens of thousands of times dial-up 
capacity, or more, and growing.  Once attracted, building a 
business would still be a difficult, non-obvious 
proposition.  Getting the tactics right would be harder 
still.  Actually doing it would require even more 
extraordinary business acumen, perhaps ruthlessly 
discriminatory pricing, or collusion with existing 
providers, or even willful disregard of the End-to-End 

It is likely that an FTTH monopoly would not be pretty. 
It could lead to decades of criminally culpable networked 
collusion.  But t'ain't necessarily so.  It might also be 
the fastest way for humanity to benefit from the technology 
we now have at hand.  

Back in the early 1980s at Mattel, we didn't understand 
Moore's Law and suffered the consequences -- Mattel's home 
computer, eighteen months in the making, was priced twice 
as high as it should have been.  Then, as my colleagues and 
I began to understand Moore's Law, we'd project the cost 
curve towards $0.00 and say, "All the value's going to be 
in software -- but how do you make money from software?"  

It was not an easy question.  Arguably, only one guy 
figured it out.  He realized that his big chance hung on 
the fact that the first piece of software costs 100% of 
R&D, while copies 2 through N are virtually free.  Today 
the biggest opportunity in information technology hangs on 
the fact that the capacity of FTTH is virtually unlimited.  
Who will be the Bill Gates, the Theodore Vail, the John D. 
Rockefeller of communications networks?  The opportunity is 
there for the taking.

Now we return you to our regularly scheduled program of 
aiding and abetting competition, deriding large clueless 
entities, and open-mouthed amazement at the wonders of 
today's communications technologies.

Quote of Note: Dick Cheney

  "There is a reason to believe that the threat level has 
   increased somewhat. We see more noise in the system, 
   more reporting that leads us to be cautious here."

United States Vice-President Richard Cheney, May 22, 2002, 

Quote of Note: Tom Ridge

  "I think we can anticipate more noise in the system, more 
   threats, because of a potential invasion." 

Tom Ridge, Director of the U.S. Office of Homeland 
Security, in the New York Times, March 4, 2003,

Quote of Note: Paul Wolfowitz

  "We have aggressive efforts underway to find new ways to 
   discern terrorist 'signals' from the background 'noise' 
   of society, but we must also recognize that enemies will 
   deliberately create 'noise' in the system in order to 
   conceal the real signals."

U.S. Deputy Secretary of Defense Paul Wolfowitz, testifying 
before the U.S. Congress, September 19, 2002

If it's Funny, it Must be True
   by Scatt Oddams

Here's one from the right -- I mean from the 'toonists down 
at the CIA:  This one's only funny 
if it's *not* true.

And here's a bunch from the left -- I mean from those fine 
folks who take the pledge seriously to preserve, protect 
and defend the U.S. Constitution:

Gotta go, Dave!


March 31 through April 3, 2003, San Jose CA.  VON.  I am 
organizing a panel on April 1 (5:00 to 6:15 PM) with Tim 
Horan of CIBC, Roxane "smarter-than-your-average-bear" 
Googin, and Anders Comstedt, the fellow who built the 
profitable, profitable, profitable, profitable, profitable, 
dark fiber network in Stockholm.  April 1 is one of my 
favorite holidays.  You will believe EVERYTHING my panel 
presents --

April 22-25, 2003, Santa Clara CA.  O'Reilly Emerging 
Technology Conference.  My presentation will be called 
Operating Models for Stupid Networks, Friday, April 25 at 
2:00 PM --

June 11-14, 2002, Philadelphia PA.  TedMed3.  Come if you 
possibly can.

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Copyright 2003 by David S. Isenberg -- -- 1-888-isen-com 

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David S. Isenberg            , inc.                         888-isen-com                       203-661-4798 
     -- The brains behind the Stupid Network --