MegaLEC Consolidation Creates Local Infrastructure Opportunity

While LEC Acquisition of MCI & ATT Promise Economies of Scale, Since Local Needs Go Unanswered, Municipalities Must Take Control of Their Own Future

The July-August 2005 issue examines LEC IXC consolidation and shows how to begin to think about building local infrastructure.

What is the Future “Phone Company”?

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June 3, 2005 Ewing, NJ --This July August issue of the COOK Report examines the changing industry perspectives that derive from falling voice revenues for the telcos and increased interest in local infrastructure building on the part of those who feel they are not being well served. It also looks at the industry consolidation that will give us mega LECs made up of SBC and AT&T and of Verizon and MCI. Trailing in their price setting wake of the mega companies will be Qwest and Bell South.

We ask how the acquisitions will benefit the acquiring local companies? Our interviewees, with the exception of Farooq Hussain, see little benefit. Since consolidation seems unlikely to solve problems, we search for solutions in what seems to be the only alternative – that of defining, and sometimes building, one’s own infrastructure.

Understanding the Changing Value Equation

Telecom is a necessary part of the economy. No one doubts that. It has great value. The question becomes where do you find it and how do you put it to work? For more than a century the public telephone networks of the world have been designed with special hardware that has one major purpose: carriage of analogue voice. The maturation of the Internet has changed all that. Voice has become data and the revenues it generates have shrunk to the point where they can no longer support independent Inter-eXchange Carriers like Sprint, MCI and AT&T. However, since the very largest local phone companies have a large embedded base of customers, SBC and Verizon have enough stable and recurring revenue to acquire the IXCs. But when voice is no longer profitable, one has to ask why these LECS would pay additional billions to acquire companies whose major line of business was long distance voice. Farooq offers the hypothesis that the Verizon and SBC believe that there are economies of scale to be found in cutting expenses by combining networks and scaling back equipment and staff.

He then adds “The ILECs have to be asking themselves what they have to offer their customers that no one else does. Ultimately, they have only one thing in their favor. They offer their customers a network connection.” “Considering that the network is really the only asset they have, it is likely reasonable for them to want to protect this asset in the most aggressive manner possible. Whether it is regarded as fair or unfair, the rationalization they are making is easy enough to perceive.” We present several points of view that question what benefits this pursuit of economy of scale in a declining industry will bring about.

Whatever the outcome, so much infrastructure is out there that we can be assured that the MegaLECs won’t go away anytime soon. The most critical question likely is how will they morph? What will the “phone company” of the future look like?

In Search of a Replacement for Voice Revenue

The amount of revenue that a given telco service like voice can bring in is falling. The Question becomes how can the telco generate new revenue? They have always seen themselves as content carriers. First of voice and, it looks like in the future, as carriers of video. As they continue to pursue the selling of content, we suspect that in clinging to this well ingrained business model, the decision makers at the LECs are failing to grasp how changes in technology capability and prices are changing their customer's environment.

Namely that the increases in the capability of digital processing, storage, and transport means that ownership of the formerly expensive physical equipment that the telco’s once required to run their networks is increasingly within the reach not only of enterprises but also of small businesses and individual households. There is a shift beginning where more and more people will be interested for varied reasons in simply building infrastructure for themselves or for their communities.

This issue started out with an examination of the rationale behind the LEC acquisition of AT&T and MCI. It finds that the chances are that the industry consolidation entailed by these moves will solve serious problems is small. Why? Because the consolidation does not address the underpinning changes in the technology. These changes are pushing enhanced productivity into networks that are geared primarily as highways to transport bits whereas their users decide what vehicles they will use for transporting the bits. The telcos and MSOs don’t want to allow the users to choose. For users at the edge the greatest benefits to be obtained will be their ability to use basic network transport in ways that benefit them rather than having top play by the telco’s rules.

The move from central control will be bumpy. There are still centralized infrastructures like national numbering plans and long distance lit fiber and undersea cables that will demand maintenance and eventual replacement.

Meanwhile the best laid plans of everyone remain in limbo. Telcos are looking at the world from a point of view where their rational for existence is not going to disappear anytime soon. They are planning video and triple play bundles to replace bleeding voice revenues. As I point out a few paragraphs farther down, whether they can attain their newrole is uncertain.

The telcos are looking at Video based on IP platforms using Microsoft’s IPTV software. While they have all announced plans to invest in video platforms, they are opening themselves to competition from the MSOs and to end users who can use the web as a video source not to mention such p2p platforms as bit torrent.

Wireless has been profitable for the telcos – so far but future profitability is uncertain for reasons of cannibalization of wireline services. But one might ask: What if high speed wireless becomes so good users begin to disconnect their landlines?

How will the telco handle clients like Skype that reside on the user’s machine and in the enterprise where enterprise based servers or end user machines can perform functions that in the past would have generated revenues for the telco? If new upper layer services are sourced to entities other than telcos, this will continue to suck revenues out of what they need for general operation.

Is the following scenario portrayed in the words of Frank Coluccio inevitable? “What we’re going to see happening here over time (or continue to happen, if you’ve been observing up until now), in my opinion, will be a form of default layering taking place, where even in the absence of regulatory actions or mandates, enterprises, like users in the consumer and SMB spaces, will elect to roll their own applications (such as many of them already have), relegating the traditional landline carriers to transport services, only. And in order to make up for the lost application revenues the landline carriers will be pressured into raising their pricing of transport services as a matter of survival.”

Considering the LEC Point of View on Municipal Networks

In parallel with these events the realization that you can build your own, or at least hold major decision-making powers over one’s own infrastructure, is gaining strength. In what started out as an interview, Frank Coluccio begins to explain the technological and internal organizational parameters that municipalities face as they consider building or expanding their own networks. I believe that readers will find Frank’s article on pages 39-49 of this issue to be the most important piece that I have published in some time. It is Part 1 of a two-part “handbook”. Herewith are a few of the ideas presented. But first let me offer some scene setting context.

Observing the vigor and pervasiveness of the LEC’s attacks on the muni-network movement, it is sometimes difficult to be charitable. But if we are to try to educate, charitable we should be. No one can be certain what the LEC or the Cable Operator is ‘thinking’ – likely not even they fully understand, themselves. The men and women that run them are navigating in forests of unprecedented complexity in the context of very rapid change. Consequently it may not be surprising that they are most at home in perpetuating a service set and infrastructure that is accepted by most of their customers who are unaware that other alternatives exist. Those of us who understand the alternative possibilities should resist the temptation to club them over the head for ‘obstructionism.’ Instead I’d like to offer the following point of view.

The LECs have inherited a way of looking at the world that becomes almost an inherited part of their basic DNA. This is what the Nethead - Bellhead polemics were all about. The latter monikers of Nethead and Bellhead served as labels to divide into camps where the assumption that was one of them was not interested in learning from the other. Was this assumption true? Who knows? It could also be argued as – who cares? The drivers of the corporate path of behavior are many and complex from the perceived mandates of showing profits every quarter to pleasing ones boss to sheer survival. As an executive of BellSouth confided to me at Supercom a year ago when she said their President told them not to worry – they would do whatever it took to survive.

The layers of complexity as they push forward are sufficient that it may be argued that even their CEOs and their top circles may not fully understand the ramifications of what they are doing. Certainly in working with Frank Coluccio over the past month and traveling the road from interview to final draft I have with fascination watched him navigate the layers of complexity and like a master mason build an edifice that is unlike anything I have ever seen crafted before.

Therefore let’s step back and argue things differently. Let’s say that whether the LEC is to blame is likely not even the right question to use. Rather let’s say that the objective for all of us must be to understand this complexity well enough to know what we want to build and why. And then let’s just go out and do it. What Frank is contributing is a level of understanding that should permit municipalities and other entrants in the first mile access space to make properly informed choices and move forward. When that is done, assigning blame to the incumbent service providers looses most of its attractiveness.

A Framework for Municipal Networks

Here are some of Frank’s key conclusions:

1. Municipalities –have looked at the architectures of the LEC and the MSO and “tend to emulate the networks of the incumbent providers that previously, or currently, serve them. These are the very same networks that many municipalities strive to compete with or wish to replace.” Increasingly, municipals and others have been seeking to deploy designs that escape this approach, which is the direction that Frank takes us on.

2. Those investigating local infrastructure must also understand the range of possible buildout opportunities that are possible. These range from I-nets for local government to larger Muninets, to MDU nets, and NAN nets and wi-fi nets.

3. In understanding the difference between following the incumbent’s technology model and the model made possible by newer Ethernet technology, one must understand the significance of symmetry versus asymmetry in transport technology. When one realizes that asymmetry originates as a part of the basic technology nature of the telco- and MSO- based designs, it is easier not to feel conspired against by the incumbent.

4. One needs also to understand the consequences of network architectures that are asymmetric in their restriction of upstream bandwidth. Since these tend to preclude useful economic activity on the part of their users, this is one reason why it may be best not to copy telco architecture in one’s local network efforts.

5. It will be quite important for communities to understand the capabilities of the RBOC FTTP commitments, as communities make judgments about what the benefits of RBOC FTTP architectures will offer.

6. Another part of the problem with reliance on the LEC is that it is in a position to make the rules for its needs – needs that are not always congruent with those of its customers. Control over network use, bandwidth caps and pricing leverage reside in centers of power far away from end user communities.

Frank concludes: “It’s a little bit late for recriminations and finger pointing at this stage of the game. What we have today is what we have. So, if we leave alone the fact that the larger incumbents along with their regulatory and politician partners had a major hand in the matter and they demonstrated very poor abilities in negotiating disruptive change, consider that they are in some perverse ways actually correct when they now say that it’s not their fault, and that it will take them years to fully catch up to the rest of the world, assuming they ever will. And that they can’t work any harder or any faster or any more economically than they already have been in order to make things right.

It’s nothing short of preposterous to think that the US should have to wait for that period of time, or should have been put in a waiting position in the first place. Don’t you think so? What is even more preposterous is to suggest that the economic well being of a nation and all its citizens should depend entirely on the capabilities of a few private corporations like the RBOCs. What is especially bizarre to me is that the government has provided the protections to the ILECs that preclude other providers from helping them meet national objectives. Now, how’s that for twisted logic, eh? Although when we remind ourselves that national political leaders have been incapable of discussing national objectives because of avowed beliefs that only the market, in the most narrow of definitions, can decide, while thoroughly ignoring the fact that markets depend on the economic viability of the nation’s local communities, our current predicament may be seen as inevitable.

The calculus of the last mile problem has been screwed to a fare-thee- well for a while now. It’s time that it gets fixed, but it won’t get fixed by stakeholders following the same belief system, and their providers following the same blueprints and roadmaps that they have up until now. Which is to say, following the direction of Washington and the quarterly expectations of Wall Street alone simply won’t cut it. So, where do municipalities go from here? “

Where we go from here is that each municipality must pull itself up by the bootstraps. We should all understand that it is not the last mile that implies the beneficence of the centralized MSO or telco extending its reach down to the customer but rather it’s the first file as the customers begin to take respons- ibility for connecting themselves to the rest of the world. The municipality must also understand that there is no one right way wrong way in deciding how to go about this process. Each municipality is different. Each one possesses a different environment, constituency and has consequently differing local needs. Each one needs however to educate itself and take charge of its own fate. For the complex reasons laid out herein no white knight is going to ride in and save the day. Eventually the old infrastructure will be replaced. The need is not to have to wait 25 years. Our economic competitiveness won’t last that long.

The technology, although rapidly changing, is known. However, the processes of how to analyze and implement it are not well known. While Frank’s knowledge gained from 35 plus years experience in the field of building telecom networks is encyclopedic and that the number of online fora he writes in and lists he reads are very extensive, I take pride in having gathered together a diverse group of some of the best minds in the industry – a group with particular strength in the muni field and one which became the catalyst for the expression and continued testing of these ideas.

Having said all that, we gather some preliminary conclusions here with the opening chapter of Frank’s depiction of the range of possibilities and his analysis of how to think about and plan for building local infrastructure. This issue begins a process of describing something that I feel confident has not been well thought out before. After some considerable examination of Philadelphia’s process, I would suggest that it could be improved by the more thorough and methodical approach with its attention to governance that Frank is beginning to lay out.

This issue presents part one of Frank’s framework. The next issue in about 30 days (dated Sept – published about July 1) will present Part 2. Here in Frank’s words is his plan: My outline for Part 2 contains a section on the fiscal and technological responsibilities of the “loopco authority”, including its need to own internally, or rent through outsourcing, the knowledge that would be necessary to fully understand the social and economic ICT considerations affecting their stakeholders both today and into the future.

Drivers and inhibitors are discussed, placing the onus on the individual municipality to acquire the necessary human resources either organically or through hire, along with the other assets needed to form the basis of sound decision making.

These points, now that we’re discussing them, happen to be at the heart of my thesis, i.e., the need to establish “governance,” which is the term that appears in the main headline of this series.


Assessing the Impact of the Mega-Lecs
Value in the IXC Acquisitions Is Hard to Find
We Search Meanwhile for its Impact on Enterprise Networks and for a Framework for Local Infrastructure Building p. 1


Mergers Seen as Moment of Telecom Transformation

Farooq Hussain Asserts that Mergers Will Achieve
Operational Cost Savings Adds that Even with last Mile Control, Metro Gigabit Ethernet Opportunities Leave Room for Competition and Innovation p. 13

Mega-LEC Mergers Make No Sense Since They Fly in Face of
Broader Trend Toward Horizontal Layering
Tom Evslin Warns that IXC and LEC Vertical Operation
Shield Managemnet from Customer Contact p. 22

How an Effort to Form a Wireless Open Application Platform at Sprint Became a Walled Garden Focused on Billing for Every Bit p. 28

Symposium Discussion April 6 - 9, 2005

The Muni Network Wars - Reports from the Trenches Colorado, Texas, and Tenessee in April 2005 p. 34

Interview - Turned Essay

Beginning With Taxonomy And Architecture
Frank Coluccio Explains Why it is Time to Think
Logically and Thoroughly About Network Governance -
We Begin an Exploration of Investment in Telecom Infrastructure p. 39

Part 1 of 2 Parts - We Begin Exploration of Investment in Telecom as Infrastructure p. 39
Institutional Networks, Muninets, City Wide Wi-Fi Nets p. 40
The Problem of Intersecting With the Rest of the Telecommunications World p. 41
Multiple Dwelling Unit Nets and Neighborhood Area Nets p. 42
Service Offerings Fall Victim to the Incumbent’s Asymmetric Network “Cookie Cutter” Operations p. 43
The Problem with Copying the Incumbent’s Architecture p. 44
A New Framework for First Mile Architecture p. 45
Understanding the Difference Between the Sea Change in Europe and
Asia and What is Happening in the US p. 46
Defining the Problem by Looking at Service Choices p. 47
Balance Needed Between What Is Possible and What is Affordable p. 47
It’s All Local p. 48
Muninet as LoopCo? p. 49
In Part Two We’ll Consider Three Options and Pick One p. 49

Symposium Discussion - April 9 - May 9, 2005

Network Architectures and the Duopoly’s Plans for the Last Mile
A Discussion on Where the Technology and Economics are Headed

A MCI-Verizon: A Happy Ending, But for Whom? p. 50
LEC Survival Through the Enforcement of Last Mile Asymmetry? p. 51
Build Adaptable Flexible Infrastructure p. 52
But Where is the IXC Acquisition Value? p. 53
The Real Issue is to Find the Funding Path from “Here” to “There” p. 55
Issues Affecting Triple Play Services and the Market for Metro Fiber p. 59
LECs Betting Their Future on Bundled Residential Services p. 61
Optical Capacity Analysis p. 62
Connectivity Frameworks p. 66
Broadband Technologies Impact Both Enterprise and Last Mile Networks p. 69
Communications and Phase Change p. 70
For End user Infrastructure -- What’s Meant By a Raw Pipe? p. 73
So What Kind of Access Does LoopCo Sell? p. 74
IPCo Versus LoopCo p. 78
The Proper Place for IP and How to Create LoopCo p. 81
Divestiture One p. 82
Divestiture Two p. 84p. 55

Symposium Discussion: January 15- February 6, 2005

Video - Examining the Plans of the LECs versus the Entrepreneurs

The Terms of Debate Are Still Very Muddy p. 88
“Bronx Beats Babbio to Broadband Video” p. 90
Verizon Fiber As a Walled Garden p. 91

Interview and Discussion Highlights p. 94

Executive Summary p. 112

Side Bars

Where is Google Going? p. 57
Can One Apply Strategy to Telecom? p. 63
Broadband Properties Contents and Article Summary p. 89
Some Good News From Nepal - Mahabir Pun's Network Wins World Bank Grant p.115

Symposium and Interview Contributors to this Issue

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

Jim Baller, Partner in Baller Herbst law firm & Expert on Municiple Networks
Frank Coluccio, President DTI Consulting, NYC, high-capacity optical netw’k consultant
Peter Ecclesine, Technology Analyst, Cisco
Tom Evslin: Founder and former CEO of ITXC
Jim Forster, Distinguished Engineer, Cisco
Bob Frankston: developed Visicalc and Lotus and later home networking at Microsoft
Martin Geddes, Consultant and author Telepocalypse Blog
Fred Goldstein: Principal of Ionary Consulting, author of The Great Telecom Meltdown
Tom Hertz, CTO, Opportunity Iowa
Dave Hughes, Owner Old Colorado City Communications and wireless advocate
Farooq Hussain, Principal Network Conceptions
Francois Menard, Canadian policy expert and municipal fiber network architect
Andrew Odlyzko, Director Digital Technology Center, University of Minnesota
David Reed, Internet pioneer, spectrum policy expert, currently with Media Lab & HP
Jere Retzer, Sr Mgr, Next Generation Networks, Oregon Health & Science University
Bill St Arnaud,Director Ca*Net4 , Canarie, Canada
Chris Savage, Telecom attorney and Partner at Cole, Raywid & Braverman in Wash. DC
Ron Sege, CEO Tropos
Richard Stastny, Austrian Telecom author VOIP and ENUM Blog
Jeff Sterling, Interconnected Associates, Bellevue, Washington
Matt Wenger, Product Manager North America, PacketFront
Damien Wetzel, Network Consultant Paris, Formerly with Akamai and Internap
Bruce Williamson, CEO Windward Associates - economist formerly with SBC
Ron Yokubaitis, CEO Giganews