A Practical Navigator for the Internet Economy

Where is New Wealth Created? Center or Edge?

If in the Center, then the Duopoly Makes Sense - If at the Edge, We Better Understand How to Build Edge Based and Owned Infrastructure

Why is the US Betting on the Center and the Rest of the World Choosing the Edge?

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The September - October 2005 issue looks at technology's impact on wealth creation. It shows why, if one accepts the premise of The Only Sustainable Edge by John Seely Brown & John Hagel, the development of muni networks and edge owned infrastructure is the only responsible alternative to the oligopoly.

August 3, 2005 Ewing, NJ --Business strategists need to understand how changes in technology are impacting the creation of wealth. Or, as John Seely Brown and John Hagel put it in their new book The Only Sustainable Edge, they need to understand how business can build new capabilities. The authors assert that in a time of quickened technology development and a more tightly networked world, capability is built in loosely coupled, autonomous process networks that enable intelligent businesses at the center that understand and cooperate with this phenomenon to out perform businesses that don't.

If they are correct, and I think they are indeed, then independent locally-controlled and operated telecommunications infrastructure becomes the most critical enabler for the new found wealth creating capability of the edges.

Hobbled by Lack of Systems Thinking and Failure of Imagination?

Having long thought that bigger is better, some of us in the US may no longer be steadfastly certain about our worship of size. The apparent lesson of the last week of July involved Cisco - one of the largest and smartest companies out there. Clearly, in packet networks diversity is a strength . Unfortunately we now have, for the most part, a Cisco router monoculture (80% plus penetration). But with the Cisco IOS source code having been stolen in May of 2004, the pain was compounded with the much publicized incident at Black Hat where security researcher Michael Lynn demonstrated how IOS could be maliciously hacked. To those who understand how dependent our economy has become on those Cisco routed Internet backbones, it became more obvious at the end of July that we face a dangerous situation. But let me not unduly chide Cisco for its success. Instead I am ready to argue that too much of our business culture is founded on the building of wealthy fiefdoms at the center and shackled by the failure of our imagination we are missing important changes that are taking place at the edges.

Some seem to think that Seidenberg and Whittacre, as imperial CEOs, are driven as much as anything else by a desire to increase the size of their kingdoms and salaries. They wonder whether this desire functions in isolation from different ways in which they could look at their business strategy. There are ways out there that some suggest might lead to a more resilient, efficient and cost effective future than their current attempts underlying their acquisitions of MCI and ATT. These attempts will entail spending tens of millions in acquisition costs in order to some day achieve cost savings by becoming lean and mean mega-LECs after having shed several tens of thousands of additional workers. But I wonder to what end? What good? Who wins and who looses? And will the policy really be successful?

In other words what is going on here? Let's step back and look at a bigger picture. Tom Friedman has gotten much publicity from his new book The World Is Flat. The quick sound bite reaction is that, with his title, he is referring to the global fiber IP network that he correctly identifies as the most important technology change of what he calls the third stage of globalization. Stage one being 1492 –1800 Exploration. Stage two lasting from 1800 to 2000 and marked by industrial technologies resulting in faster physical transportation. Stage three is the 21st century, marked so far by the global leveling made possible by the fiber optic Internet.

Freidman sees the world as flattened because, suddenly, the best minds in India and China can have access to the best minds and capital of the West. Work traveling the network can be shared and moved from development center to development center around the globe. More and more product development runs on a 24 hour cycle from Ottawa to Tel Aviv to Bangalore to name but one example that has recently come to my attention .

However John Gray, a Professor at the LSE, in his review of Friedman’s The World is Flat in the August 11 New York Review of Books, makes a very telling point. Friedman’s world is not really flat. It offers only a pseudo “equal opportunity.“ Freidman waxes ecstatic about his visit to the modern westernized campus of Infosys in Bangalore where he finds restaurants, a resort size swimming pool, and health clubs all hidden in a compound entered through a rickety road, lined with beggars and sacred cows.

Gray writes: “Friedman notes in passing that the Infosys campus has its own power supply. He does not ask why this is necessary or comment on the widening difference in standards of life in the region that it represents. Yet it is only by decoupling itself from its local environment that Infosys is able to compete effectively in global markets. Infosys demonstrates that globalization does have the effect of leveling some inequalities in world markets but that the success of the company has been achieved by using services and infrastructure that the society around it lacks.”

Now let me make it very clear that I do not intend to go off on a 1960’s rant about “inequality.” What I do want to bring out is that there is something more subtle about what is happening. The technology and the political and economic policies, identified by John Seely Brown and John Hagel in their Only Sustainable Edge discussed at the beginning of this issue, have created the soil that nurtures these newly found global capabilities.

Those who make the right choices and are at the right places at the right time can tap into them. Undeniably those who are able to hop on board “win.” Those who don’t or can’t join the new global mechanism for doing business lose. Most of those who lose don’t understand what is at stake or what has happened. All they know is that their jobs are gone.

A Walled Garden Flat World

I argue that the leaders of globalized corporations and their accompanying technology networks have indeed created their own version of a flat world but it is also one that is surrounded by a walled garden. Those inside the garden make a dizzying array of products. Those on the inside have been economically well cared for and so far can afford to buy them. But those who find themselves outside the "garden" with jobs anchored in the previous economy, find they must make choices. They may buy a lot of the toys, entertain themselves for a while and then go on to some other diversion. What increasingly they are not able to do is find from their current income adequate funds for investment in housing, transportation, medical care and education. They borrow, cut corners and close their eyes to the nature of their long-term problems.

Meanwhile it becomes maddening to observe how many of the captains of the flat global walled gardens can think only of how to control the rights to access of their interllectual property on their own terms. It seems to those of us on the edges that the corporate centers exist only to feed content to us at the edges and exact tribute in return. But, because the garden at the center is marked by the power to control not only product development and infrastructure use, those at the edges who can develop their own businesses find themselves hobbled and less able to share in the economic bounty delivered by the globalized corporations. Thus this ground, at least in the United States, is not flat. It is skewed.

I contend that several things follow from this unbalanced situation. The edges run low on money to buy all the goodies produced that the groups of walled garden strategists decide those, at the edges should want. There is far too much lack of cooperation between the edge and center. This last of coopoeration is important because, for the last century, only the center had the tools and capability to build products for the edge. Its strategy was trickle down and outward at the center’s pre-ordained speed.

It tried to offer value by increasing the bandwidth by which it could shovel its merchandise to its customers, regardless of whether the customers wanted it or not while it tried to protect its centralized control by making it as difficult as possible for customer to become producers. But when the customers -- walled off from the economic rewards produced by the center -- stopped buying what the center wanted to force feed them, the center howled with surprise and anger. For example, at the end of July, Sony slashed its profit expectations by 87%.

We need to ask what has happened at a broader level in the US during the last 15 years and especially during the last 5 years? Taking a somewhat cynical and high level gloss, I would argue that a libertarian disdain for government and worship of free markets yielded an ideology that, interacting with the smugness produced by the fall of communism, created an environment that decided it didn’t need to invest in education and infrastructure. Instead it put the muscle of the legislature into protecting Hollywood’s intellectual property rights by using DRM to stunt the capability of the new products turned out by Silicon Valley and now also by Bangalore and other Asian centers.

As John Hagel and John Seely Brown recently warned, many Silicon Valley captains of industry still think they have a monopoly on innovation in the US. They imagine they can fine tune the system to keep the profits rolling in. While at the same time, as CK Prahalad has pointed out, some of them seem to be unwilling to do the field work necessary to understand how to design a cell phone useful to the 700 million Indians without one. The market that has their attention is the one for even more feature filled and costly cell phones to be bought by the nearly two billion people who already own one.

No One Can See the Self-interest of the Entire System

No one can see the self-interest of the entire system. Even within the walled garden every company wants to do it all on its own terms for every-customer. The center has fooled itself into thinking it knows what the edge really wants as it tried to beef up next quarter's sales by incremental but rapid fire bells and whistles added on according to its marketing department’s vision of where it thinks the technology should be going. While this is going on, more and more open standards are given proprietary tweaks in an effort to gain temporary advantage in an otherwise commoditized market place.

Too many of our leaders lack systemic thinking and imagination. They hunker down at the center in order to protect their self-interest. At the same time while those on the edge made little progress, those in the center flourished, or at least, thought they were flourishing.

Quoting JSB and JH's book: “Static, zero-sum worldviews generally arise when people focus on the allocation of existing resources. Existing resources have a fixed quantity, and with relatively modest exceptions, if one party acquires a resource, other parties are deprived of that resource. This worldview is a natural orientation of large, well-established players - they become more concerned with defending existing resources because they have a lot to lose on this front, compared with the opportunity to create even more resources, With its seventy-year focus on equilibrium states, the economics profession has reinforced this orientation, Equilibrium states are easier to model quantitatively, but such models simplify the world, including the key assumptions that capabilities and consumer preferences are a given. “

The two Johns continue: “If we recognize that capabilities are not a given, but can be quickly built, our worldview undergoes a fundamental shift. Now, we become less concerned with the distribution of rents and more focused on the creation of new rents.”

Both of the above paragraphs gave me a chill when I read them on the way back from San Francisco.

Key Question for the New Century: Where is New Wealth Created - Center or Edge?

The struggle goes on and I am prepared to argue that in the US many captains of industry are fighting the last century’s wars, On Sunday July 30 I found the following in the Business Section of the NY Times. “Why Bill Gates Wants 3,000 New Patents, By Randall Stross”

“The staff of the United States Patent and Trademark Office has been deluged with paperwork from Microsoft of late. It was one year ago that the company’s chairman, Bill Gates, announced plans to pick up the pace, raising its goal of patent applications submitted annually to 3,000 from 2,000. The company is right on target."

"It must feel like a bit of a stretch to come up with 60 fresh, non obvious patentable ideas week in, week out. Perhaps that is why this summer’s crop includes titles like “System and Method for Creating a Note Related to a Phone Call” and “Adding and Removing White Space From a Document.”

[snip] “Why did Microsoft increase its patent-application target so sharply just last year?”

“We realized we were under-patenting,” Mr. Smith explained. The company had seen studies showing that other information technology companies filed about two patents for every $1 million spent on research and development. If Microsoft was spending $6 billion to $7.5 billion annually on its R&D, it would need to file at least 3,000 applications to keep up with the Joneses.”

Sadly Microsoft, in taking this attitude, is preventing the building of capabilities at the edge by making it as difficult as possible for any new software entrepreneur to compete. Microsoft is spending vast amounts on lawyers who will survey all the new products and extract tribute if any piece of software can be shown to intrude on patents. Suddenly patents are everywhere. Any company that wants to make commercial software has its barriers to entry raised by the need to pay its own lawyers to check for possible issues with the giant from Redmond.

And the reference to keeping up with the Jonses is eerily reminiscent of the July 27 Tom Friedman column on Lance Armstrong where Friedman pointed out the ludicrousness of the Morgan Stanley CEO demanding to be paid a salary that was competitive with what the CEOs of competing large banks were paid.

In Freidman's words: "We are now playing defense. A top C.E.O. wants to be paid not based on his performance, but based on the average of his four main rivals! That is like Lance Armstrong’s saying he will race only if he is guaranteed to come in first or second, no matter what his cycling times are on each leg."

Keeping up with the Jonses indeed. How we have blinded ourselves!

At one extreme it looks that new wealth, new capability is to be created only if the center allows it. This reminds me of the phone companies and cable cos and the general business ethos of too many leaders of corporate America who survey their wealth and think they are masters of the universe. That is the one extreme.

On the other hand, the other extreme is represented by people like Sam Pitroda. Educated in the US, and fortune made in the US more than 25 years ago, Sam went back to India and is building there technology for India and China’s billions of people that once upon a time could have been built in the US.

The question I ask is "what is it going to take to wake us up?" This September October Issue explores these topics both inside and outside of the US.

The American story that we explore is that of Medina County Ohio, stealthily pulling itself up by the bootstraps, and struggling to find less than 10 million dollars to modernize its infrastructure while Catalonia, a region in the northeastern corner of Spain about four times the size of Medina County, is to begin spending 50 to 100 million dollars per year installing one of the most advanced open access fiber networks in the world.

Community Networks are Necessary to Enable the Building of Wealth at the Edge

Our interview with Macy Hallock presents a detailed description that is almost a case study of how a group of concerned citizens have worked for nearly the past four years to establish a Port Authority to sell bonds and to finance and administer a 31.5 mile, open-access fiber ring that will connect together all the key businesses and institutions in the county of 150,000 population in northeastern Ohio. The ring will then connect to the rest of the world via fiber feeders to Cleveland to the north and Akron to the East.

The county plan embraces most of the most desirable approaches - run by an independent fiscal authority – open access at the physical layer. Hallock and his colleagues have done their homework well as they have worked with the director of the county economic development office. The educational role that they have had to play within the county since 2001 is very impressive. In listening to Macy describe a very daunting task where circumstances conspire to keep the perception of the interests of government, education, and business from coinciding, one wonders why the LECs seem so worried? They don’t yet face any kind of a concerted uprising against them. For every Medina County there would appear to be 500 more that sail on in blissful technology ignorance.

Meanwhile in Catalonia, the region that constitutes the northeastern corner of Spain, we present the most detailed view yet in English of the network plans of this triangular area that is about 150 miles on each side and includes Barcelona. These folk have REALLY got their act together as they prepare to launch next month a new legal entity called the neutral administrator that will control the use of rights of way for an open access fiber network that will invite companies to attach and sell competitive services. In conjunction with a university based entity called I2Cat, they are preparing what should become one of the most advanced public network infrastructures in Europe.

The I2Cat principal technical lead is Sergi Figuerola who has been a member of the development team for User Controlled Light Paths for Canarie. Process networks will flourish in this part of the Iberian Peninsula in a way that they rarely do on a similar scale in the US. The government and people’s payback for their investment in infrastructure will be swift. Unlike the U-turn executed in the United States, the EU has preserved liberalization and in Catalonia the “incumbent” telco faces mandatory opening of its local loop.

Finally we present an interview with Bruce Williamson, a consulting economist and statistician in telecommunications and public policy areas. Bruce has a doctorate in economics and had worked for SBC for many years before going to business for himself. His concern is that mega lLEC mergers will establish a price leadership oligopoly with Verizon and SBC able to set telco prices with Qwest and Bell South following along happily in the price shadow set by their larger brethren. Bruce states very clearly that the municipal network movement represents the best hope of an outcome in the US that leaves us free from the domination of the oligopoly.

Sixty days of Symposium discussion cover in depth such topics as an analysis of the LECs plans for using IPTV to try to role out their own triple play services. It explores IPSphere and IMS as the incumbent's hoped for means of being able to charge for all manner of add on services as voice revenues diminish. It looks at BrandX as a decision that will put new five pound weights on our already leaden boots as small businesses that must choose between tweedle dum and tweedle dee (cable co or telco) find themselves to be insignificant and uncared for customers of newly minted monopolies. These monopolies are spawned by a society that has not comprehended the folly of turning its telecommunications nervous system over to companies that work for share holder profit above all and have no comprehension of the new business models of loosely couple capability building described by Seely Brown and Hagel.

For the next two months, I will continue to explore these themes in the COOK Report. On August 1 I interviewed Cynthia Di Lorenzo on the struggle to keep her Fairfax Virginia ISP alive in the face of the oncoming duopoly. In a week I plan an interview with Francois Menard on Villages Branches dark fiber community network in Quebec. On July 31st, in a 2 hour 30 minute interview with David Hughes that I hope to publish in September, we discussed in great the plans for what he has been working on since the beginning of the summer of last year.

It is a process network, and an Internet based business – designed as a comprehensive system – it has huge potential to make it possible and desirable for both museums and individuals with images to use the internet at a comprehensive level to share and sell their content. It is this content that belongs to the users and has been created by them and not by a Hollywood studio that is likely to energize involvement and participation in a way not seen before. David and I talked about what he has done as being in part in response to a failure of imagination both at the center and at the highest levels of our society.

In my opinion our leadership is far too smug and simply has not comprehended the new catch-up work ethic flowing out of Asia. We can only begin to hope that the pendulum may swing back to the point where the concept of public investment in infrastructure rather than turning everything into private toll roads may come back into favor before the price we must pay is too great.

 

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Contents

Official US Economic & Telecom Policy Remains Trapped in 20th Century Views of Top Down Control While Internet and Rest of World Evolve a New Paradigm of Loosely Coupled and Horizontally Based Cooperation

We Look to Educate on Importance of Survival of Intelligent Edges p. 1

A Review of Supernova and
The Only Sustainable Edge by John Seely Brown & John Hagel p. 1
It’s the Edge Stupid! p. 6
John Seely Brown’s Supernova Presentation p. 7
A Constant Application of Learning p. 8
Extended Excerpts p. 10

Interview

In the MegaLEC Era a Telecom Economist Sees Municipal Networks as Best Hope for Competition Bruce Williamson Predicts a Price Leadership Oligopoly That Anti Trust is Ill Equipped to Deal With p. 14

Municipal Networks as the Only Barrier to Rule by the Oligopoly p. 14
Collection of Data Will be Difficult p. 16
Financial Management Risks in Municipal Ventures p. 16
Mission is to Gather Data to Show What We Are Up Against p. 17

Interview

Medina County Ohio To Build a Fiber Ring
How a Group of Dedicated Citizens Decided on Open Access and a
Port Authority as the Financial Vehicle - an Inspiring 3 Year Effort of
Education and Dedication Told Here for the First Time p. 19

Choosing the Port Authority Model p. 19
Cable Re-franchise Spawns a Telecom Assessment Group p. 20
An Underdeveloped Area Gets Things Done in Spite of the Phone Company p. 20
Education Must Precede Action p. 21
Complexity and Decentralization Makes Sensing of Impacts Very Difficult p. 22
Educational Work by and Backgrounds of the Key Sub-Committee Members p. 23
The Daunting Task of Consensus Building p. 24
Organizing the Port Authority and Additional Constituencies p.25
Educating the Financial Services and Consumer Products Companies p. 26
The Problem is Funding p. 27

Symposium Discussion May 19 -31, 2005

Divining Where Broadband Is Going In US Still No Agreement on Ownership Investment & Business Models while Rest of World Invests in It as Basic Infrastructure p. 28

Defining Competition - A Postscript to the May 17-19 Discussion p. 29
Wanted: Personal Broadband from Anywhere to Anywhere p. 29
Difficulties in the Uniform Use of Terminology p. 30
Marketplaces and Pricing Models p. 31
On “Natural Monopoly?” p. 33
FCC Mandates Scarcity p. 34
Verizon May Lease Optical-Fiber Network p. 35
FineGround at Cisco - WAN Optimization p. 36
Content Neutral Bandwidth? What’s a Commodity and What’s Not p. 37
The Coluccio Analysis p. 39

Symposium Discussion June 1- July 19 2005

The LECs Look to the “Triple Play” for Their Long Term Survival Is IPTV a Threat to Telco TV Roll out Plans? p. 41

Connecting Together the Right People and Interests p. 42
How to Think About a Routed Network’s Operational Cost p. 43
Sessions Bill or SBC Running Scared p. 46
Reaction to Frank Coluccio’s Broadband Muni-net Framework Essay p. 48
The LEC’s Triple Play Architecture p. 50
Is IPTV Altering the Network Landscape? p. 54
Macy Hallock and Medina County Ohio p. 55
Verizon Tries for Single Shot Statewide Franchise p. 56
Fanning Fear Uncertainty and Doubt “Should Cities be ISPs?” p. 57
Creating a World with More Ecological Niches p. 58
Supreme Court on Promotion and Destruction of Economic Development p. 61
Is US Gripped by a Static Zero Sum World View . . .? p. 62
IPSphere Initiative p. 65
After Brand X Comes Network Neutrality and What Kind of Broadband? p. 66
Attack on ISPs Relentless and Getting Worse p. 68
Muni-nets Not Sole Answer but Communities Should Have Access to Them as Part of Solutions Tool Chest p. 69
Lafayette Municipal Net Vote and Big Broadband FTTH p. 72
So What Is Understood as Broadband? p. 75
LoopCo’s, Cross Subsidization, and User “Taxes” p. 79
Is Economy of Scale Dead? p. 80
Coming Our Way “Evil” Broadband on the Coat Tails of IMS? p. 82
Who Gets the Walled Garden? p. 84
The Broadband Issue Is Not Just Speed But What Can the Network Do? p. 87
Beware of Centralized Limits on Communication p. 88
Where the Protocols Are Headed p. 92
Broadband Over Power Line Regulatory Aspects p. 94
Brookings Study on Right of Way and Brand X p. 96
A Brand X Bump? p. 97
Victory in Lafayette p. 98
Kevin Martin and the FCC p. 99

Interview

Building Regional Open Access Fiber Infrastructure in Catalonia (Northeastern Spain) In Interviews with Key Participants We Describe the Origins and Rational for one of the Most Important Regional Infrastructures in Europe Liberalization in 1998 Brought a Telco Cable Co Duopoly to Catalonia p. 100

In Four Years 300 Municipalities p. 101
Project Direction and Coordination by a Legally Constituted Right of Way Agency p. 102
Ens Gestor Abstract p. 103
Symposium Discussion of Catalonian Plans p. 106

Highlights p 109
Executive Summary p 134

Side Bars

Enabling Infrastructure by Intelligent Communities p. 45
Some Insights into the Chinese Situation p. 72
Telecom and Economic Development in British Columbia and Louisiana p. 73

Contributors to this Issue

Jim Baller, Partner in Baller Herbst law firm & Expert on Municiple Networks
Jordi Benasat, Administrator LocalRet in Catalonia
John Seely Brown, former chief scientist Xerox, now visiting scholar at U of Southern California
Frank Coluccio, President DTI Consulting, NYC, high-capacity optical netwk consultant
Peter Ecclesine, Technology Analyst, Cisco
Andres Figari, Co-owner Hostito Web Hosting, San Francisco
Sergi Figuerola, Network Rearcher I2Cat, Advisor to LocalRet in Catalonia
Jim Forster, Distinguished Engineer, Cisco
Bob Frankston, developed Visicalc and Lotus and later home networking at Microsoft
Vijay Gill, Director Peering, America on Line
Fred Goldstein, Principal of Ionary Consulting, author of The Great Telecom Meltdown
Macy Hallock, Medina County Ohio Port Authority
Kees Neggers, Director, SurfNet6, The Netherlands
Tom Hertz, CTO, Opportunity Iowa
Dave Hughes, owner Old Colorado City Communications and wireless advocate
Tony Li, Router Architect at Cisco, Juniper and Procket, recently returned to Cisco
Scott McCollough, Telecom Attorney Austin Texas
Franscois Menard, Canadian policy expert and municipal fiber network architect
Andrew Odlyzko, Director Digital Technology Center, University of Minnesota
Bo Parker, Managing Director of the Global Technology Centre of PricewaterhouseCoopers
David Reed, Internet pioneer, spectrum policy expert, currently with Media Lab & HP
Jere Retzer, Sr Mgr, Next Generation Networks, Oregon Health & Science University
Larry Roberts, Arpanet Pioneer, CEO Anagran
Bill St Arnaud,Director Ca*Net4 , Canarie, Canada
Brough Turner, co Founder NMSS
Bruce Williamson, CEO Windward Associates - economist formerly with SBC
Ron Yokubaitis, CEO Giganews