A Practical Navigator for the Internet Economy

Understanding Economics of the Internet vs. the PSTN While Unravelling the Dynamics of Successful FTTH Overbuilds of the Incumbents in The Netherlands

 

How to purchase this issue. $300 or $900 group. The Novcember December 2006 issue offers a a discussion of internet versus telco economics in the light of complexity economic theory and two interviews of fiber to the home networks in Holland.

October 30, 2006 Ewing, NJ --

Executive Summary

Introduction

The November December issue begins with a short essay that puts into focus the confusions of the on going technology and economic transition. We are in the midst of a hierarchically-oriented, large corporate, siloed, command and control organization that characterizes both telecommunications and our economy. Struggling to emerge is an edge-based web of relations where users of ICT and the Internet are as likely to create their own content as to consume it. The essay offers a hypothesis that value (what people want and will pay for) will be derived from not from the old fashioned vertical hierarchy but rather from the decentralized web of relations between users at the edge of the network.

Beinhocker’s Origins of Wealth

We are still trying to see the future from the midst of a technology upheaval that fundamentally overturns many of our ideas about where and how wealth profits are being created.
In two parts (pp. 5 -13 and pp 14-23) I undertake an extensive essay that is a review and summary discussion of the chain of arguments in Beinhocker’ s very informative book. I find that, when he explains the difference between what he calls traditional economics and the newly emerging field of complexity economics, the first reflects circuit switched telephony very well. The relatively static equilibrium point of view of how the world works fits well with non innovative state of the PSTN.
He points out that social scientists who followed the development of complexity theory began to wonder whether economies too might be a type of complex, adaptive system. If economies do unfold as part of a complex adaptive system rather than a static one that tends toward equilibrium states, “we have a new set of tools for working out an understanding of what is happening. [This] means that wealth is a product of evolutionary processes.“ [. . .] and finally “history shows that each time there has been a major shift in the paradigm of economic theory the tremors have been felt far beyond the academic worlds.”

I speculate that managers who have grown up with phone companies have a genetic code that is predisposed to the static point of view of the world as a series of vertical silos where their business model is controlling and all inclusive of what their “customers” can do. Meanwhile the Internet, having quickly grown to global scope, certainly reminds one of a complex adoptive system.

He asserts that “wealth creation is the product of a simple, but profoundly powerful formula – differentiate, select, and amplify – the formula of evolution. The same process that has driven the growing order and complexity of the biosphere has driven the growing order and complexity of the ‘econosphere.’” He continues: “In short, evolution’s simple recipe of "differentiate, select and amplify" is a type of computer program – a program for creating novelty, knowledge and growth. Because evolution is a form of information processing, it can do its order creating work in realms ranging from computer software to the mind, to human culture and to the economy.” He sees markets as the playing fields on which business plans compete and evolve.

Finally he makes a very important point that there is an important role for government – namely to see that the playing filed of the market is level and not tilted in favor of certain business plans whose backers have been able to buy special favors. These are old ideas that unfortunately among many governments of the last twenty years or so have gone out of favor.

Beinhocker finds that companies don’t innovate - markets do. If one looks at the largest and most successful corporations from thirty, fifty and 100 years ago one will find few of today’s successful companies in those listings. He invites us to consider “a brutal truth about most companies. Markets are highly dynamic, but the vast majority of companies are not.”

Beinhocker doesn’t pretend to write about or to even understand the complexity of the internet. Nevertheless, the Internet is an ecosystem that that seems well at home in the dynamic and rapidly changing complexity markets that Beinhocker describes.

From my point of view as one with out any economics background but one who is determined to understand this evolving technology as a complex system that is still in search of a viable business model, what Beinhocker writes about fills a sizable void.

Fiber in Holland

While the Amsterdam fiber build has now actually begun, there are many innovative fiber builds going on over the entire country. In two interviews I take an illuminating look at the economics and players in the Dutch market. The first Interview is with Hendrick Rood who writing a doctoral dissertation at Delft and works as a consultant for Stratix. Hendrik describes a rich variety of fiber business models in the Netherlands.

He finds some green field builds, and then some municipal builds like Amsterdam. Then he talks about housing corporations and finally cooperative builds like Neunen. He describes the varied characteristics of each.

Having done this. however. he goes on to outline the complex emergence of private building efforts by Dik Wessels and Martien Koster. These are quite convoluted and equally fascinating. The major news is that they have managed in 2006 to do profitable purely commercial overbuilds of Neunen and Heilligom, two small towns.

Wessels is the emerging telecom, fiber and construction magnate who directs a fiber laying company that does a very cost effective job and that ,after six years of shrewd maneuvering around KPN the national carrier, has put together a phalanx of fiber companies and bank holding and finance companies that can handle all aspects of fiber builds.

Rood explains how with subsidiary companies and a huge profit on a major sale of the peak day of the Nasdaq in March of 2000 Wessels is in the enviable position of having the resources and talent to finance and engineer purely commercial fiber overbuilds of the incumbent carrier and cable system operators. With a cost effective technique and outstanding marketing he is getting an outstanding take rate of 73 to 80 % and better though out the first small systems he has built. The whole episode has a very intriguing social dynamic where KPN the incumbent has suddenly opened requests to lay its own fiber along sides the projects served by Wessels. The take rate is so spectacular that the incumbents don’t have a large enough group of customers left in the towns to survive on their own.

The second interview is directly in the Wessels camp.

Marco Westenberg is the engineer, now Business Development Manager - who guided Dik Wessels from the building of basic infrastructure trenches for things like  gas and sewer into fiber and telecom. Marco is an astute observer of complicated processes. He said that he concluded: If you have an open trench why not stick fiber in it? Marco explains how he figured out how to build better and cheaper than the competition and, in doing this, how he helped lead Dik Wessels into telecom and fiber to the home.
 
The discussion then summarizes the shrewd moves that the two men made. First with Bredband and then with KPN we see how Wessels used the money he made on bringing his IISP public and selling at the top of the market to learn KPN’s infrastructure business better than KPN itself knew it.  He then was able to show KPN how, when in 2002-2003 it needed to continue to build, but had no funds, he,  Volker Wessels, could lease-build for KPN. All the time Marco was learning both the technology markets and economics behind what people wanted..
 
The interview also covers the Neunen build, the operation and the lessons learned.  It closes by explaining the developments with Martien Kosters and his Lijbrandt  Telecom which Wessels bought and which the two men are now operating in an ongoing partnership that is doing profitable commercial fiber overbuilds in small Dutch towns leaving the incumbent telcos and MSOs with few customers.
 

This is an inside look at the most innovative strategy yet seen in the FTTH market. It says that in planning, marketing, and execution, financial success is likely to be achieved only by leadership that encompasses thorough technical and business process knowledge all the way from physical network construction through to customer expectations.

These two interviews contain much detail about an intriguing new business model currently unfolding in a critical and highly wired European country.

British Telecom- A Leader at the Global Level for Telco 2.0 Transformation?

Matt Bross CTO BT Group said this summer: “IT has moved from being an internal support system to becoming a strategic business driver at our company.” British Telecom is clearly redesigning itself. In 2004 he brought the former CIO of DRKW Al Noor Ramji in as CIO. And now on October 1, 2006 the current CIO who replaced Al Noor at Dresdner JP Rangaswami has moved to BT as CIO of BT’s Global Services Division – BT’s new flagship all IP 21st century network. Ramji was quoted in June as seeing Google as BT’s biggest competitor. He gets it totally – no doubt there. These two men see more clearly than just a handful of others how the incumbent phone company must evolve. Judging by BT’s move it is fully attuned to the critical need to find and enable talent.

My commentary examines the thinking of the men involved and concludes that for the first time a major incumbent has adopted the views of its critics and is using them to redesign itself in keeping with the values of open source and the internet.

Is Robert Kjelberg Building what Bob Frankston Wants?

Robert Kjelberg of Malarenergie and Bob Frankston compare notes on fiber as infrastructure in Sweden and extrapolate to the rest of the world. I had told Bob that what Robert had built in Vasteras Sweden seemed the closest thing I had ever seen to the basic connectivity between towns and cities that Bob had been saying he is looking for.

The two men have a very clear meeting of the minds that the network must be an infrastructure system of glass highways where property owners pay a one time fee for connection to their regional infrastructure and then cities build out connections to each other.

Bob writes: “To shift your model a little --- you’ve gotten people to extend their driveways far enough so they connect to each other and you can now tell them they’ve built a road system. The next step locally is to make shift the funding model to a common funding model that, in effect, creates a lot more capacity. In particular it means there is no reason not to provide complete wireless coverage for all – that includes those passing through the town just like road users. The cities themselves can start to presume that everyone and everything is connected. This means that they can use it for basic services and communications.” [Editor – as Fort Wayne is doing.]
Robert replies: “All that you say is true and has been our guiding light for six years now. We told the ISPs then what would happen and explained that their services would become commodities because we would first build a common network for the city and then start connecting the cities into one bigger network and so on.”

The Symposium Discussions from mid August to mid October

Readers should scan the Table of Contents for what is here that they will value. They will find primarily two things. The first will be “news briefs covering such things as fiber in Europe, new internet architecture, wi-fi troubles in San Francisco, a discussion of peering and so on. The second will be some philosophically oriented discussions of economics (including Beinhocker) and the questions of where and how wealth and value is created in the midst of this chaotic global communications revolution.

For the rest of the issue you will have to subscribe.

Contents

Defining the Economic Value of the Internet

A Look at How the Definition of Value and its Means of Creation are Rapidly Changing

Thinking About a Meta-web p. 1
Pick your Metaphor p. 2
The Missing Entity p. 2
Value is the Creation and Transmission of Content p. 3

Presenting a Strategic and Economic
Basis for a Long Term
Telecommunications Investment Strategy

Needed Tools: an Understanding of the Origin of Wealth, Complexity Economics and Appropriate Use of Capital

A Commentary on Eric Beinhocker’s The Origin of Wealth p. 5
What is Wealth and How is it Created? p. 6
Why the DNA of the Telcos is Incompatible with
that of the Internet p. 7
Traditional Economics versus the Economy
Seen as a Complex Adaptive System p. 8
A Few Staging Points from Economic History p. 9
The Neoclassical Synthesis – Simplifying Our Way to Heaven p. 10
Innovation p. 12

Beinhocker Part II

Can a Complexity Economics View of the
Internet Aid Us in Deriving Value and Wealth from This Technology?

A Survey of Beinhocker’s Search for a Political Economy of Evolutionary Markets in the Context of the Internet p. 14

What Bob Frankston’s Been Saying p. 15
Beinhocker’s Question: What are the Origins of Wealth? p. 16
Choosing the Prisoner’s Dilemma Overlaid on a Game of Life
Playing Board as a Way of Modeling Evolutionary Strategies p. 17
An Ambitious Model of Economic Evolution p. 18
Markets Are an Evolutionary Search Mechanism p. 19
Strategy as a Portfolio of Experiments -- With the Internet, the
Problem of Lost Opportunity p. 19
An Opportunity to Overturn the Left
versus Right Dichotomy of Political Expression p, 20
Human Nature and Strong Reciprocity p. 21
The Power of a More Nuanced View p. 22
Conclusion p.23

Broadband Infrastructure Builds

A Conversation with Hendrick Rood

Editor’s Introduction p. 24
Greenfield, Housing Corporation and Municipality Builds All Taking Place p. 24
Bredband and Housing Corporations Worked Together p. 25
Cooperative Networks as a Fourth Approach p. 26
Dik Wessels and His Relationship with KPN in 2002-2003 p. 28
Martien Koster of Lijbrandt Telecom ­ A Second Entrepreneur p. 29
A Koster - Wessels Commercial Overbuild Business Model p. 31
The Wessels Business Model p. 32
KPN’s Changing Marketplace Position p. 32
Making KPN Afraid p. 33
KPN Strategy p. 34
Would a KPN Lijbrandt Duopoly Really Compete? p. 37
What Does Cable Do? p. 40

Marco Westenberg Describes his Decade Long Role at Volker Wessels Telecom

Evaluating Business Opportunities in Building Fiber Infrastructure Demands Understanding of Complex Matrix of Business Process Variables

Building Infrastructure and Looking Very Carefully at a Complex Process p. 42
From Realizing that Empty Ducts Are Not Telecom Networks To Innovating Our Own Designs p. 43
Wessels Gets Banks to Insure Basic FTTH Model and Establishes KPN Local Loop Partnership p. 44
Municipal Cable and Neunen in 2004 p. 46
The Portaal Housing Corporation Deal p. 47
Wessels Expands His Fiber Holdings as the Neunen Operation Is Revised p. 48
Wanted: a New Network Business Model p. 48
Martien Koster and Lijbrandt p. 49
Turning Customers into Salespeople p. 51

British Telecom - A Leading Candidate for Telco 2.0 Transformation at the Global Level?

IT Has Moved from an Internal Support System to a Strategic Business Driver at BT

Some Insights into BT’s Transformation p. 52
IT As a Strategic Business Driver ­ Why BT is Well Armed p. 54
The Next Competitive Edge ­ Can a Telco Ever become an Open information Carrying Grid? p. 55
How Do You Connect People? p. 55

Is Robert Kjelberg Implementing Frankstonian Connectivity in Sweden?

A Need for Services p. 59
Moving from an Old to New Access Model p. 59

Symposium August 17 - October 17, 2006

PUD Broadband in Northern Washington State

NoaNet p. 62
Fiber In Holland and in Cologne Germany Deutsche Telecom Told to Unbundle p. 65
European Commission Orders Deutsche Telecom to Unbundle its VDSL Network p. 66
What is Meant by Facilities-Based? p. 67
Interlocking Ownership of Municipal Fiber in Cologne p. 68

On the Difficulty of Reaching Common Analytical Understanding Hedgehog versus Fox or Specialist versus Generalist

Naming and Metaphor p. 70
Peering in 2006 p. 72
We Can’t Fix Their System p. 77
Nobody owns; Everybody can use; Anybody can improve p. 77

In Search of Value Some New Economic Points of View p. 78

San Francisco WiFi Network Problems p.85

Design Issues Impacting the Current Internet CABO (Concurrent Architectures Are Better than One) p. 87

China Builds a Better Internet? p. 88
Beinhocker Again: Is Economics Evolutionary? p. 90
What Are the Intrinsic Costs of Phone Service? p. 92
Asia Gets the Broadband Bug p. 93
Fiber in Germany p. 94

Comment on “Was the Internet Ever Neutral?”
by Craig McTaggart p. 95

Exiting the Matrix, by Doc Searls p. 96
Public Ownership and Maintenance of Physical Transmission Capability p 98
The Federal Trade Commission Report on Muni Networks p. 99
Amsterdam Fiber Build Begins p.100
George Gilder on Petabyte and Teraflop Compiuting p.101

Cell Phones and Wealth Creation p.102

Book Rview

Stephen Johnson on Digital Photography p.105

Executive Summary p. 108
Contents p. 112

Contributors p. 67

Symposium & Interview Contributors to this Issue

Affiliation given for purposes of identification - views expressed are those of the contributors alone

Steven Bauer, doctoral candidate in the Computer Science and Artificial Intelligence Lab (CSAIL) at MIT.
Mike Bookey, author America at the Internet Crossroads, Principal Pachen Light Consulting
Erik Cecil, Experienced Telecom Regulatory Counsel Roland Cole, Director of Technology Policy for the Sagamore Institute for Policy Research
Frank Coluccio, President DTI Consulting Inc., New York City
Susan Crawford, Associate Professor Cardozzo Law School
Robert Cromwell, Senior Assistant City Attorney in Seattle specializing in telecom regulation
Vincent Dekker, telecom reporter for the Dutch daily paper Trouw
Harold Feld, Media Access Project, Senior Vice President
Jim Forster, Distinguished Engineer, Cisco
Bob Frankston developed Visicalc and Lotus and later home networking at Microsoft
Fred Goldstein Principal of Ionary Consulting, author of The Great Telecom Meltdown
Robert Kjelberg, Managing Director of MalarEnergi Stadsnat in Vasteras, Sweden
Tom Hertz, CTO Fiber Utilities
Kevin Marks Technorati Engineer, Coauthor Micro Formats, Quick Time Developer
Sascha Meinrath, Executive Director CUWIN and community wireless expert
David Meyer, Director, Internet Technologies, Cisco Member, Internet Architecture Board
Andrew Odlyzko, Director Digital Technology Center, University of Minnesota
Sean Park, until mid October Director Digital Markets Dresdner Kleinwort Wassertein
JP Rangaswami, CIO British Telecom Global Services Division
David Reed, Internet pioneer, spectrum policy expert, currently with Media Lab & HP
Jere Retzer, Network Analyst Oregon Health Sciences University Portland, Or.
Henrdrik Rood, Principal Stratix Consulting, Delft The Netherlands
Chris Savage, Attorney CRB, Washington, DC
Doc Searls, Editor Linux Journal and Doc’s IT Garage blog, ClueTrain Co-author
Bill St Arnaud, Director Ca*Net4, Canada’s high speed research network
Tom Vest, Senior Analyst, Internet Economics & Policy CAIDA
Dirk Van der Woude, Civil Servant Amsterdam and fiber expert
Kevin Werbach, Assistant Professor of Legal Studies and Business Ethics, Wharton School
Marco Westenberg Business Development Manager, Volker Wessels Telecom Group, Holland