A Practical Navigator for the Internet Economy

Boundaries Are Dissolving

Caution Prevails as Shopping at a "Supermarket" of Telecom Services and Emphasis on Sustaining Cash Flow Rather than Expanding Markets Are Enablers of New Projects

Ingenuity, Cash and Legal Muscle Enable Intriguing ISDN PRI Business as a Replacement for ILEC UNE Platform Details in new Interview with WorldCall

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Introduction

The watchword, as the fall of 2004 begins, is the dissolution of boundaries of all sorts. It would seem that the only thing that is no longer viable is the grand all-encompassing plan for vertical telecom empires. The giant ILECs encompass all the layers of the protocol stack, for homes businesses, public internet, leased line VPNs, and enterprise network architectural design to name just a few. They are perhaps a bit like the dinosaurs trying to comprehend the vast and multiplying number of mammals running rapidly around their feet. The various aspects of the ILEC monopoly of the local loop are hard to compete against. But the competition is there as evidenced in a proliferation of "mammals" - smaller specialized businesses attuned to taking bites out of the dinosaurs' eco-system. We examine several such "mammals" in this issue.

Meanwhile as they seek to make their physical plant and operations more compatible with the packet based Internet protocol world, the well meaning men and women of the ILECs are finding it much more difficult to give their enterprise customers the most cost effective service. Why?

 

ILECs

Because they are constrained to an environment that functions best when selling vertical solutions. But, as long as networks must interconnect, they find that they are up against a large number of small fast moving specialists ready to sell enterprise services at whatever level is desired. Transport. Packet services of all types. Applications of all types. The range runs the gamut from VoIP to traffic shaping. The overall telecom industry still moves forward with new and diversified products. The knowledge needed to put together a cohesive picture of the whole is huge. Under these conditions specialists can put together enterprise solutions using new and ever cheaper equipment while the ILEC finds that, in trying to satisfy its customers, its choices are limited because it cannot swap out its hardware as rapidly as it more specialized niche competitors.

Consider the following 'straw in the wind.' An ILEC subscriber indexes our content. Some folk in the enterprise services division in a large urban area had been bedeviled by complaints from customers that high speed packet data services were available in the same area from the fiber of an HFC backbone belonging to an MSO for a tiny fraction of the price. The manager needed to find out as much as possible about the nature of the service. He searched the ILEC data base and came up with a nearly one thousand word description of the competitor's operation in our June-August issue. "Far more detailed than anything I had been able to find elsewhere" he said with gratitude when he called wanting to know more. I put him in touch with the symposium member who had provided the data who later told me that they had talked and that at the end the ILEC manager seemed to understand better why he was, in this significant area, outgunned.

The one thing the ILECs have that no one else does is the local loop. That is the fulcrum on which their existence is based. Now that the idea that newer companies can do their own Greenfield, facilities-based overbuilds and survive has been shown to be a fantasy, the ILEC's natural course of action is to take their local loop bedrock and try to offer services built on top. What they are finding is that they must compete with thousands of small, more nimble and technologically up-to date organizations that can concentrate on implementing small pieces of the old ILEC vertical empire.

Our interviews and Symposium show how small and agile companies can move in and take bites from the dinosaurs body at all levels of the stack for all conceivable markets. One is left with a three dimensional matrix representing the technology choices at each layer of the stack and the vertical integration of these layers and technologies into the geographic needs of larger organizations by network architects and integrators - specialists who help the customer make the coordinated decisions to fit requirements of geography, capability security, performance and price into a cohesive architecture for a large enterprise. The ILEC does not want to become loopco. However, being nibbled from top to bottom by newer and more cost effective alternatives, it seems that the huge vertical dinosaurs are inexorably being gnawed down to their local loop physical plant skeletons.

ISPs

In this context Paul Stapleton talks about the ISP and tells us how to judge the value of an estimated 200 companies with revenues of five to 100 million dollars per year. These are significant sized organizations that sit on top of perhaps one or two thousand mom and pop ISPs that are managing to pay their bills. He finds caution to be the watchword saying: "I think we may be entering the era of what I would call the disciplined service provider. These are service providers that . . . really understand their network and its cost structure. Investors should be looking for management teams that talk like cost accountants as opposed to marketers. In a commodity industry, knowing your cost structure is far more important that pursuing market share."

He sees automation as a major differentiator for positive cash flow: "Fundamentally these data networks are simple businesses. Most of your expenses are for people and network costs. After the deduction of SGNA from gross margins, we are left with operating income. I want to make the point that operating income of between 10 and 40% is a rather wide margin. The primary differentiator between what these companies make is their degree of automation. How well have they automated various processes such as provisioning of circuits and billing of the customer?"

We framed a statement and followed it with a question: "aside from marketing hype, the excuses on the part of companies taking frantic risks to increase market share of this technology that was perceived solely as a series of silver bullets that would change everything. Now that the silver bullets never materialized, and the industry is no longer brand new, what you are pointing out is that a more prosaic and even somber reality has arrived?" Paul replied: "Yes. You could say that it is back to being a boring business once again."

Reliance Telecom

In another Interview we see that the ability to set up tailored national networks has undergone huge change. In a decade we have moved from the builds of Qwest and Level 3, to NTT spending more than a billion dollars to buy Verio at the peak of the boom to Reliance Telecom setting up a major North American over lay network for likely less than a few tens of millions. Satish Bangara explains: "Reliance is a conglomerate like GE and Tata. It has big holdings in petroleum chemical, polyesters, textiles, oil and gas. From its other businesses, Reliance was generating roughly a billion dollars a year in free cash. Essentially, the startup of Reliance-Infocomm was self-funded." Management in Mumbai hired Satish who worked out of Washington and eventually hired a partner in New York. Beginning in 2002 these two set up North American Operations for Reliance Telecom. With the ability to outsource everything operations become one of placing the switches, signing the regulatory and tax paperwork, leasing bandwidth, turning on and testing the network, placing web pages and adds targeted at telecom services for the two million south Asian residents of the US and Canada, hiring a few accountants and watching the revenue roll in.

While Reliance has almost finished installing a 80,000 route kilometer modern fiber network on the Indian sub continent, in other parts of the world it has been able to acquire assets at fire sale prices. Eschewing debt, it is carefully defining and trailing niche markets which even in today's fragmented telecom can still be quite large. Like the well managed ISPs described by Paul Stapleton, Reliance will move the operations it has set up in North America to Europe and a slow and deliberate self-financed pace. In addition to geographical expansion, the market will also expand by offering additional telecom services to the customers gained by the original calling plans to India.

SBC, UNE-p, Interconnection and the Survival of Independent Data Service Carriers

Amidst the gnashing of teeth over the ILEC's recent success in keeping competitors off their networks a long interview with Scott McCollough describes the inventiveness of the "mammals" as they nibble at the physical layer of the ILEC monolith. He has teamed up again with Lowell Feldman who did the legendary Waller Creek Communications fiber overbuild around the University of Texas at Austin campus and gained rights to interconnect with CO to CO dark fiber in the five largest Texas metro areas before selling to El Paso Energy in the winter of 2001.

The new company, WorldCall, is designed as an enforcer of cost based interconnection to replace UNEs no longer available to LEC competitors. WorldCall will use Section 251(c)(2) Interconnection Rights to SBC inter Central Office dark fiber as a means of providing inexpensive ISDN PRIs to ISPs and small businesses. Those who understand how the complex three dimensional matrix of technologies and their respective economics mesh with the layers of the protocol stack are able to use capital and legal muscle to take an approach to very cost effective provisioning of bandwidth that keeps open the possibility of at least central office interconnection for providers who can take their own approach to delivery of services over the last mile. As long as Section 251(c)(2) survives and other providers have the right to interconnect with the LECs WorldCall is showing yet another instance of how technology and legal savvy can combine to provide alternative T1 service to business at prices the ILECs don't want to sell for.

Despite the ILEC's size and financial muscle WorldCall is showing that there is room for a competitor to come in and set itself up as a specialized intermediary to gain and then resell the bandwidth needed by ISPs and with the death of UNE-p at prices that will keep the small companies alive. What is also very interesting is the way that WorldCall set up as a holding company can provide services to CLECs like Premiere Network Services. Premiere had its own switch but in large part its business model centered on providing UNE platform type services to customers like American Airlines and Southern Methodist University.

McCollough relates how Premiere became a victim of SBC's "Premiere Project." There seems to have been a project by that name within SBC. Premiere has a former SBC employee working for them now who had some dealings with it. According to Scott Premiere's business plan was to find customers using UNE-P who generate access charge receivables for Premiere that are in excess of the sum of the UNE costs. SMU and American Airlines fit that description. So Premiere should have been able to pay its UNE bill from access charge receivables alone. He makes the following careful disclaimer: "I am not personally alleging fraud (or whatever the right word is, including perhaps perjury or altering/forging a government record) and have no personal knowledge of the validity of the claim." He continues: "The sum total of what *seems* to have happened - if you believe Premiere - is that SBC engaged in a concerted 3-prong effort to put them under. And succeeded. It lasted until January 2004 when Premier went into bankruptcy. And now, SBC is saying 'sorry we just don't want to do the UNE platform any more." The allegations are recounted in much more detail in the interview.

WorldCall proposed to offer Premiere the functional equivalent of the Une-platform service that SBC said it couldn't afford. As Scott said: "One would think that SBC would be ecstatic that we would step up to the plate and offer Premiere what SBC said they no longer wanted to do. Weren't we shocked and surprised to learn that when we showed up in bankruptcy court as a proposed alternative services provider for Premiere that SBC opposed our involvement."

Scott explained: "We devised a way for Premiere to keep providing retail services, receive revenues, earn a margin and ultimately emerge from bankruptcy. We also put them in position to offer many new services and support new applications. Of course SBC would be asked to cooperate in the transfer of customers including Southern Methodist University and all of its faculty and students and all those people who are trying to travel using American Airlines. SBC was saying it was losing money on UNE-P. Now we come up and say; OK we will light our own fiber and take them off your hands. You would think SBC would be happy. They would have lost a losing customer. But NO!"

SBC is fighting what WorldCall asserts as its legal rights every step of the way. And given that WorldCall has entered a business relationship with Premiere that will see it providing ISDN PRI services not only in Texas but also in many many other states where Premiere has all the necessary certifications to operate, SBC and the other ILECs involved will have tough times ahead.

We see WorldCall as yet one more fascinating case where telecom technology and economics is dissolving former operational boundaries

PSTN versus Internet Dichotomy No Longer Useful as Operators Construct Varied Networks to Suit Varied Customers

The discussions of the last six months have very much raised our awareness of the level of complexity that the entire field of telecommunications is under going. The introduction of this issue offers some insights.

In this introduction The COOK Report notes that telecom economics is likely to stay broken, first, due to oversupply, and second due to lack of differentiation on anything other than price across too many competitors in services and service providers. Third: because of very loosely bonded brand loyalty. A final and very serious additional problem is regulatory instability as the FCC struggles with historical precedent in its interpretation of legislation. It finds itself whip-sawed between its "vertical silo" model derived from the technology it regulates, and the increasingly advocated "horizontal network layer view" of the IP enabled services, including but not limited to VoIP, Video over IP, and so on.

As long-term, and, perhaps, not so long term, readers of The COOK Report are aware, this publication has not only long trumpeted the "bellhead vs. nethead" divide, but taken a partisan position where anything seen to be "bell-headed" was regarded as bad while "netheaded" was seen as the 'nirvana' to which the Internet would guide telecommunications.

"Nethead" versus "Bellhead" is a metaphor that at a moment in time in the mid to late 90s in the pages of Wired magazine was used to hype the new civilization changing Internet. It tried to encapsulate in a few broad brush stokes an Internet way versus a telephone company way of thinking about the changes brought about by the launch of the commercial Internet.

The dichotomy was based on the assumption that the Internet players possessed a level of understanding and ability that escaped the telephone companies. Like many of the assumptions that powered the dot com boom, the net head visions did not give their standard bearers enduring business models. Furthermore as TCP/IP founded technology grew and began to mature, the boundaries of the "nethead versus bellhead" world have now blurred as everyone enters everyone else's line of business. The metaphor was once powerful as a polemic. However, four years after the bust metaphors used in polemics cloud understanding. If we are to use metaphors in our attempts to understand reality, the metaphors should provide an accurate reflection of that reality. This introduction will explain why "nethead" versus "bellhead" can no longer provide such a reflection and hence should be banished from our thinking. Our introduction among other things presents the case for a horizontal layered view on the part of regulators.

Adjusting our vision on the nethead bellhead polemics has helped to make it easier to spot biases that we had missed before. For example there is the question of the PSTN. VoIP advocates talk about voice leaving the PSTN is such a way that tends to assume that the LECs are synonymous with the PSTN - something that obscures the issue that that the LECs are beginning to run their own substantial IP data networks. Boundaries, in other words, are fuzzy and getting more so. We noticed that among the most interesting of the biases were that SONET is a bellhead technology and therefore bad, while gigabit Ethernet represents a nirvana of almost unlimited bandwidth and very cheap prices.

Alas, reality is not so simple. The answers are not black and white but rather: "it depends"- among other things on what kind of network is providing the bandwidth over what geographical and operational boundaries for what purposes and with what kinds of customers in mind.

To prove this point Pete Kruckenberg who is building a major educational gigabit Ethernet network in Utah offers the following testimony. "I thought I was only buying Ethernet, so I demanded that my carrier provide me with Ethernet (GigE interfaces on a DWDM network to be more precise) and strip out all of the "overhead" of SONET that was driving the price up. I found out that I was actually buying more than Ethernet; I just didn't know it until all that overhead was stripped out. Turns out what I really was buying was Ethernet with some critical SONET functionality not yet available in Ethernet. Be careful what you wish for.

My concerns about GigE operational issues aside, I still believe that the direction to go is to simpler networks (which I believed even before I knew about the Stupid Network). Removing SONET (at least the current iteration) from the equation clearly (at least in my immediate situation) translates into significant per-unit cost savings. There's no doubt that at least for some products and some carriers, the carriers are anxious to find lower-cost (capex and opex) methods to deliver services, and pass those savings on to the customer.

For now, the most obvious solution seems to be IP-over-Ethernet-[over-WDM-]over-optical. But, I also disbelieve that the path to the future is a linear extrapolation from today. I wouldn't be surprised if the widespread optical network in 5-10 years looks very different from what I'm doing today (I sure hope it does, or I'll have to find a new industry to keep myself sane).

My issue right now with GigE is a Stupid Network issue. The smarter SONET network gave the carrier all the knobs and whistles to see what was going on. Now that DWDM has taken most of those away from the carrier, I need more of them at the edge so I can diagnose my own problems."

The Role of the Telephone Is Changing

In the lead paragraph of an essay called the edn of telecom Daniel Berninger writes:

"The most recent FCC Trend Report (May 2004, Table 14.2) shows a 50% decline in the amount of usage of each residential telephone line since 1997. The same report shows the arrival of significant Internet use in 1997 (Chart 16.1) along with rapid expansion of cell phones (Chart 11.1). The data shows what we all know from day to day experience - the information technology industry is annexing communication as an application - email, IM, VoIP, e-commerce, etc. We have fewer and fewer reasons to use plain-old-telephone-service." http://www.danielberninger.com/endoftelecom.html

These figures are stark indeed. But they also seem quite reasonable. During the 1990s I needed a fax at my desk. But for about four years the only working fax in my house has been banished to the floor under a table in an upstairs bedroom. Now that Skype is available for the MAC I am experimenting with its use in reaching VoIP expensive destinations like Nepal. Readers of the COOK Report are certainly leading edge adaptors of new technology while there are still huge numbers of trailing edge plain old telephone service users. Nevertheless the tide is clearly changing and the central question seems to be how fast the change will be. The 50% decrease in usage stats in the FCC Report is an indicator that the scope of change may be far more broad than so far assumed.

Contents

Why a Layered Model is the Only Reasonable Way to Evaluate Telecom

Lines of Business Have Blurred - Making the Regulatory Concept of Vertical Silos Archaic -- Time Has Come to Bury All “Bellhead versus Nethead” Polemics p. 1

Building a Post Crash Greenfield Carrier:

The Development of Reliance Infocomm, Inc. (India) and Reliance Communications Inc (USA) -- Build in India - Buy Access in US with Caution and Few People p. 8

Cash Flow Evaluation of Medium Size Service Providers

Evaluating Market Strategies for Survival Among Estimated 200 ISPs with 5 to 100 Million in Annual Revenues p. 13

 

Symposium Discussion -

Telecom Technology and Economics Dissolving Operational Boundaries

PSTN versus Internet Dichotomy No Longer Useful as Operators Construct Varied Networks to Suit Varied Customers p. 21


Why Fiber to the Curb? p. 21
Quality of Service in a Best Effort Network – High Stakes Arbitrage? p. 22
Years Later – Still Struggling with Packets in TDM Networks p. 23
The Enterprise Takes More Voice off the PSTN p. 24
Boucher VoIP Deregulatory Measure and Potentially Ominous Uses for ATM p. 25
What is the Current Role for ATM? p. 25
Where MPLS May be Headed in 2005 p. 27
ATT Leaves Consumers Behind p. 29
Telco’s and Sales p. 31

Be Careful How You Think About “Legacy” Systems p. 32
What Does the Enterprise Need to Know to Make Intelligent Network Build Decisions? P. 33
The Fate of the PSTN - Likely to Morph - Not Collapse p. 36
So What is Really Happening with VoIP? p. 37
Packet + Switched = HPSN p. 38

WSJ.com - Bride or Bridesmaid? AT&T and MCI May Compete for Suitors p. 39
Voice Costs and the “DS0 Mile” p. 40
How the Delivery of Voice Will Evolve p. 41
MCI’s Layered Regulatory Paper p. 42
Economic Benefits of Networks p. 42
Backbone Traffic p. 45
What About Sonet? p. 45

Symposium Discussion
August September


Shortcomings of IP over Gigabit Ethernet versus SONET p. 48
Complexity of Diagnosis Issues in SONET Versus Gig E Networks p. 49
Operational Maintenance and Failure Diagnosis Extremely Difficult with Wide
Area GIG E p. 51
Service Provider Network Diagnostic Capabilities p. 53


The Time Has Come to Bury All “Bellhead versus Nethead” Polemics p. 55
Desirable as a Layered Strategy Is, a Move is Difficult p. 58
Companies Specializing in Customer Owned Fiber Solutions p. 59
Broadband Miracle Article in WSJ p. 61
Unbundling In Asia and in Europe as France Becomes New Broadband Leader p. 62
End E-Rate Now, by Dave Hughes –No Say Many Symposium Members p. 64
LINX Fees Decrease p. 68

Drew Lanza – No Business case for Fiber to the Home p. 68
Faster than Real Time Delivery – A Desirable Goal? p. 70
Demands for Real Time Streaming p. 71

Interview

WorldCall Designed as an Enforcer of Cost Based Interconnection to Replace UNEs
Company Will Use Section 251(c)(2) Interconnection Rights to SBC Inter CO
Dark Fiber as a Means of Providing Inexpensive ISDN PRIs to ISPs and
Small Businesses

In SBC’s Worst Nightmare Its “Premier Project” May Return to Haunt it in Texas
and Many Other States p. 72

Symposium
A Discussion of the WorldCall Interview with Scott McCollough p. 82
A Model of a Mass Market Network Architecture p. 87
Edge Versus Core p. 88
Requirements for a Phase Transition in Telecom p. 90
Security and Internet “Overhauls” p. 90
Peering and Intel’s Remodeled Internet p. 92
Issues of P2P Control in Routers p. 93

Highlights p. 96
Executive Summary p.113

Side Bar:
A Late Summer Snapshot on Transit Prices from Nanog p. 30

Symposium and Interview Contributors to this Issue

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

Jim Baller, Partner Baller Herbst Law Group
Satish Bangara, President Broadband Business, Reliance Communications Inc.
Peter Cohen, Peering Director Telia-sonera
Frank Coluccio, President of DTI Consulting Inc. in New York City

Melissa Davis, optical network architect formerly with Cisco and now with RS Information Systems
Beth Gage, Manager, Solutions Marketing, Juniper Networks

Alex Goldman, Managing Editor ISP Planet
Dave Hughes, owner Old Colorado City Communications and no license wireless advocate
Peter Juffernholz, former Peering Director Teleglobe, currently Developer of Business Alliances DT
Ram Krishnan, Senior Director Technology, Axiowave Networks
Pete Kruckenberg, Architect Utah Education Network
Francois Menard, Canadian policy expert and municipal fiber network architect
Andrew Odlyzko, Director Digital Technology Center, University of Minnesota
Dave O'Leary, Emerging Products and Technologies Group, Juniper Networks

Taylor Reynolds, Policy Analyst, Strategy and Policy Unit, International Telecommunication Union
Jere Retzer Sr Mgr, Next Generation Networks, Oregon Health & Science University
Larry Roberts, Arpanet pioneer and founder Caspian Networks and Anagran

David Sandel, Chief Technology Officer NetLabs LLC
Chris Savage, telecom attorney and partner at Cole, Raywid & Braverman in Washington DC
Dave Siegel, VP Network Architecture & Long Range Planning, Global Crossing

Paul Stapleton, Editor-Publisher of I$P HO$TING Report: The Financial Newsletter for ISPs and Hosters
Darin Wayrynen, CTO GoodNet, Former VP Enginering Winstar, current ISP operator
Matt Wegner, Product Manager North America, Packet Front
Damien Wetzel, Network Consultant paris, Formerly with Akamai and Internap
Ronald Yokubaitis, CEO Giganews