Asset Based Telecom - an Overview

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This issue introduces and elaborates extensively on the concept of Asset Based Telecom. We see this phenomenon, first described by Bill St Arnaud, as a precursor of enormous change. Bill said on March 31, 2001

"In many ways the telecom industry of today is very much like the computing industry of the early 70s. It is characterized by a centrally managed architecture that sells network connectivity and bandwidth as a service. But there is a technology revolution under way with Gigabit Ethernet, condominium dark fiber and condominium wavelengths. Will history repeat itself with the coming credit crunch combined with these new technologies and change the telecom industry as it did the computing industry?" [Seventeen months later it is the premise of this triple issue of the COOK Report that Bill's prediction is coming true.]

"In anticipation of this move of telecoms from a service to an asset based industry CANARIE, as part of the proposed CA*net 4 networks, is working with its industry and university partners to develop the tools and technologies that will enable business and universities to ultimately control and operate their own optical network much like they do today with computers." [End of St Arnaud Quote]

While this is an excellent and prophetic description of things at the high end research arena, as this combined issue shows the same technology and economics are now making it possible for municipalities, enterprises and ISPs to build and operate their own systems. Now it is true that in doing so an enterprise or municipality will make some decision about transport that will affect its customers in much the same way that a carriers decision about SONET affects its customers. Nevertheless the significance of what is going on here is that the shift is away carrier control of its assets and services to assets owned controlled and operated by the folk who use telecommunications.

As someone else said: "signaling and routing is now controlled by the customer and not the carrier. Outsourcing data and telecom management is the only play the carriers have left except core backbone routing." Where then does asset based begin and leave off? We would suggest that it happens at no sharply defined black and white boundary. Asset based telecom is a devolution of the decision making process from the central telco to the telco's customers at the edge of the network. The equipment involved is generally owned more and more by the customer and not the telco which is there to render advice when asked and no longer to deliver a uniform service for which it decides the parameters and for which it bills the customer month after month.

This triple issue pursues the implications of this in great detail. This issue will show readers that the industry's main problems are and will remain political and economic. Future hope depends on finding ways to replace the ILEC's copper infrastructure with fiber and wireless that is paid for and therefore owned and controlled by those who live in the communities that install the new networks. This is beginning to happen. This issue discusses how and where.

While it finds that no single model for success has yet emerged. The leaders who are making these events happen help us to document in these pages the full range of the models that are under development. While there are many possible FTTH architectures none of which fits every situation, our experts are united that separation of ownership of the physical network from ownership of business that provide services over the network is mandatory both to deliver broadband and to unlock the economic development potential of user owned and operated network services and businesses.

While models of financing architecture and control are not fully agreed upon, important new networks are being built. Communities are beginning to lift themselves up by their own bootstraps. But while costs of FTTH are dropping rapidly, enough projects have not yet been done to have reliable cost model projections.

What is least understood and agreed upon is what needs to be done from a regulatory point of view to enable the transition. Growing newly built municipal networks from patches at the edge of the PSTN to a well-fashioned quilt that can replace the PSTN is the challenge that is getting underway. We present what amounts to the first handbook that points the way to the necessary transformation.

Broadband - Who Needs it?

In the context of ISP service in the rural west (Washington State and Texas) we present a discussion of broadband - definition, services and demand. Our discussion shows the difficulties inherent in developing a broadband business model. The two ISPs in our group know that their customers would like more bandwidth but perhaps only 3 or 4 times what they now have. They cannot imagine what their customers would do with a 100 or 1000 fold increase. Our other discussants who come more from the high end networking and research communities have an easier time explaining why a gigabit to the home or business could be very useful.

Municipal Networks - Why?

We examine what communities that are usually rural and far removed from the urban population centers that are served by DSL and Cable "broadband solutions" are finding out about the viability of building their own broadband infrastructure. Starting with condo fiber builds in Canada and continuing in increasing numbers of communities in the US communities are finding that there are diseconomies of scale in the companies of national size who tell them that their markets simply can't justify the expense of added services.

The economics of local phone services are such that the payback period to municipal government for the cost of installing its own fiber just for local government, fire police and hospital communication can be as short as six months. One reason is that the cost of local voice and data lines from the ILECs have declined little if at all during the past decade.

In an interview with Miles Fidelman who specializes in advising municipalities on the technologies and economics of developing their own telecom systems, we develop a profile of the conditions that favor the build outs of locally owned voice and data networks. The economics are such that income from utility sales and ownership of rights of way are especially favorable to those communities that operate their own electric utilities. Once a municipality begins a build out, the potential role of that government in providing infrastructure and acting on behalf of economic development with that area can enable a decision to serve the entire community.

Legal Issues

The ILECs have fought to block local infrastructure builds that they don't own and can control. Jim Baller (Virginia) and Scott McCollough (Texas) are two attorneys with national expertise in this are. They discuss approaches that are enabling communities to stand up on their own behalf to meet big phone company pressure.

Fiber to the Home and Community Network Economics

Bill St Arnaud points out reasons why the industry needs to recognize and encourage locally owned and controlled municipal networks. He says: "Currently the telecommunications sector is suffering from a massive debt hang over. It will take years to write down this debt through traditional telecom amortization processes. More importantly, it will be many years before the markets have their faith restored in the financial viability of the telecom sector. As such, for many small telecom companies, financing will continue to be problematic for the foreseeable future and the deployment of next generation broadband to the home may take decades to accomplish with current telecom business models.

Customer owned networks have the potential to move the financing problem away from the telecom company to the customer. The telecom company, instead, can focus on providing services for the management of the customer owned infrastructure as well as offering new and enhanced services that augment the customer owned infrastructure."

Earlier he explained: "Several next generation carriers and fiber brokers are now arranging condominium fiber builds. Among them are: IMS, QuebecTel, Videotron, Cogeco, Dixon Cable, GT Telecom, etc etc. Organizations such as schools, hospitals, businesses, municipalities and universities become anchor tenants in the fiber build. In the build each institution gets its own set of fibers on a point to point architecture, at cost, on a 20 year IRU (Indefeasible Right of Use). There is a one time up front cost, plus annual maintenance and right of way cost approx 5% of the capital cost. Fiber is installed and maintained by 3rd party professional fiber contractors - usually the same contractors used by the carriers for their fiber builds. Each institution lights up its own strands with whatever technology they want - Gigabit Ethernet, ATM, PBX, etc. Further cost declines are achieved by a new long-range laser will reach 120 km. Typical cost is $25,000 (one time for 20 years) per institution"

A Single Entity Must Not Own Both the Transport Network and Provide Services Over It

Kevin Kahn: "the ultimate fiber infrastructure at the access level will tend very strongly to be a natural monopoly in the same sense that roads are. It will be expensive enough to build it once and the tyranny of the take rate means that it is doubly bad to try to build it multiple times. On the other hand, competition is critical at as low a level in the stack as possible since the higher in the stack one goes the more chokepoints potentially get created. For example, if the common item is a conduit, one can choose the fiber type to put in it - probably not a critical choice. If the common item is the dark fiber, then the transport mechanism is open to competitive choice. If you go so high as to say that IP packets are the underlying item, then you start to get to where you have made some serious constraining choices - e.g., IPv6 transition timing. Thus I would prefer to see a common infrastructure to the dark fiber level and no higher with competition above that."

Grant County Washington's Fiber to the Home

The build out is closely examined. We offer a case study of the economics of a build by a large public utility district. The county appears to be doing a good job. However in relying to an exceptional degree on the advice of a single engineer for its tech planning and implementation practices the district could be taking a sizeable economic risk.

Fiber to the Home Architectures Critical to Economics of Competition

Fiber to the home is seen as the ultimate end game of all telecommunications infrastructure builds. Why? Because one cannot foresee any technology that would be a useful replacement since a single strand allows virtually unlimited bandwidth. Fiber becomes in effect the ultimate highway into and out of every community. For the economic independence and security of the community it is critical that it and not the services supplier control the highway. The LECs and Cable Cos. will favor PONs that will give them control of the pipe and content.

One such architecture could involve a " three-way separation of the network elements"

(1) Conduit and OFAB (the roads and parking lots)

(2) Fiber and CPE (the end-user's automobile)

(3) Service providers (the merchants in the mall)

This is the architecture scenario that grew out of the discussions with Francois Menard and Professor Alan McAdams in June and was presented at the IEES/USA Gigabit Ethernet conference in Washington on June 17. The architecture "associates a party or parties with each network element."

"Party 1, a neutral, not-for-profit entity (e.g., a municipality) deploys and owns the conduit to each end-user in a region. It also owns the physical facility, the Optimal Fiber Aggregation Point (OFAP), where the conduit terminates and where services are made available for selection by the end-user."

"Party 2, the end-user, owns (controls) its own fiber and the electronics that energize the fiber. The end-user is responsible for "blowing" its fiber through the conduit, choosing the CPE consistent with the services it selects and the timing of their activation."

"Third parties, service providers, connect to the open-access, neutral, OFAP and compete to be selected by end-users who are seeking converged services."

"The objectives of this approach are to:

(1) Minimize life-cycle costs

(2) Facilitate effective competition among suppliers of services

(3) Ensure the availability of converged services for end-users

As noted above, this architecture closely parallels the build-out of other municipal infrastructures for a local community, in that:

(1) The not-for-profit entity provides the conduit -- equivalent to roads

(2) The end-user owns and controls its own fiber -- equivalent to owning and driving its own motor vehicle

(3)The end-user's fiber interconnects at the OFAP -- equivalent to the shopping mall -- where the end-user shops to choose among competitively offered services

In this network access to competitively offered services [could be] controlled by the end-user through:

(1) "Virtual lambdas" (VPNs) over the fiber it controls

(2)"Real lambdas" with appropriate CPE at each end of the controlled fiber

(3) Multiple fibers blown through tubes of the conduit

(4) Some mix of the above"

Canadians Experimenting with User Control

St Arnaud in building CA*Net4 is determined to create a structure where users and not service suppliers own operate and control their networks. Using web services and Cisco's Scalable infrastructure, he is determined to give users control over Ciscos 15454 switches in order to enable them to control large slices of bandwidth to be used in connecting to other players. Indeed he is also looking at eventually enabling residential users to connect lightpath channels directly to other end users through the use of what he calls a reverse PON.

Regulatory Issues

Access to conduits will become the chief regulatory issue. Regulators must reassess their treatment of the phone and cable companies. They can forget about facilities based competition which means wherever it raises its head that the ILECs win.

With good leadership municipalities are building infrastructure at the edges as the center falls apart. These municipalities could gradually begin to demonstrate real demand for broadband. Through the use of 20 year conservatively funded municipal bonds the municipalities could also raise their own bail out funds.

Extensive discussion with Francois Menard and others shows the inevitable failure of the regulatory idea known as facilities based competition. This doctrine proclaimed that the existing last mile wireline infrastructure could be overbuilt by another entity that could manage to succeed in competing in an open market with the owner of the original infrastructure. The problem turned out to be that the local exchange carrier would always be able to use its infrastructure to put the would-be facilities based interloper at a disadvantage.

As Tim Denton remarked "the regulatory effort to provide neutral access to the PSTN is a waste of time. The relevant agenda has moved on. The sharing of support structures is now the relevant agenda. He believes, and in my experience there is much evidence for this view, that the neutral management of support structures requires a third party who is not able to offer services. The municipality (or someone with the [equivalent] clout) must undertake the role of the neutral provider of support structures, just as it provides sewers and roads today."

As Menard puts it: "Namely that broadband is defined by the user's ability to change the transmission equipment attached to his fiber at will." Consequently one wants to drive open access to include the data link layer.

Finally, as Bernard Daines says: One of the reasons that I want to see municipalities proceed in this [asset based telecom] area rapidly is that their doing so will show that the model works and secondly would prove that there is demand for broadband. The key is that once the demand starts, people will come along and say oh you mean if I put the hundred megabits into an area I can actually sell it and make money? People today simply don't believe this.

What we see as the business model is to target the "have-nots" who want to move first by installing technology that will last. Our model is that you put the fiber in. If you then add a 100 megabits or a gigabit at the ends, you are not going to have to change that real soon. Consequently, such equipment can be amortized over a much longer time and at cheaper prices that cable or DSL installations. [As time passes] I see more and more municipalities taking the plunge. You will find that the decision cycles are shrinking downward from a couple of years to a few months.

But Beware of Washington's Bungling

At the end of July Washington is beginning to wake up in a big way to the magnitude of the problem. The problem is that the people floating the trial balloons, Michael Powell at the FCC, those formulating 'cyber security policy' and most recently Eli Noam don't have a clue about the complexity of the problem. With their trial balloon solutions they allege that they will subject national policy to some small inconvenience in return for the gain of short-term stability. In reality what they would achieve is the betrayal of the nation's technology leadership in an ill begotten effort to indemnify the financial investments of those who caused most of the problems in the first place. The situation is actually far more dire than scenario of 'oversupply' and hence too low prices complained about by Professor Eli Noam in the Financial Times on July 19. The question is dire for whom? The Industry's CEOs and investors or the small business and far flung communities that could benefit from IP networks not dependent on the LEC owned and controlled local loop. The administration view is to protect the owners of capital from their mistakes at any cost and leave the rest of us to shift for ourselves.

The Republicans preach that capitalism is about taking risks. In telecom however, risk taking turns out to have been based on the engineering of frenzied speculation, the acquisition of massive debt and finally fraud in order to corner a market based on an exciting new technology. Faced with the facts the President's men can see nothing else to do except to bail out the perpetrators. Given the current direction, the lesson to the real risk takers will be that the creation of new technology that can make the economy from the grass roots up more productive is no longer welcome inside the boundaries of the new American Empire.

Better protect our dinosaurs and let mainland China commercialize and sell us this disruptive technology. And better let them do it on their own terms. The import of the rumblings that we are beginning to see is that the last decade's investment of a trillion dollars in new technology will be written off to ensure the survival of the capital invested in the biggest and most backward telecom players - the local phone companies. Not risk taking but size is what is important to this administration.

Assessing the Current Reality

Because we have fallen victim to belief in the sanctity of an alleged free competitive market syndrome for a service that is critical to the national economy and security, we have had a speculation and fraud filled free-for-all. There is now no money left in the system beyond the minimum needed to pay current operating expenses. But no one at the top in the chaos filled system can see how the services that make up the foundation are breaking down. Blindness will prevail until the fissures become so large that they cause real systemic collapses.

In the midst of the current rot, take two small examples from some of the foot soldiers manning the front lines. From one source well known to us for a period of several years: "many CLECs, and even the ILECs at this point, are not buying any new equipment on projects that I see. Rather they are taking used equipment off the shelf and refurbishing it and placing it in the network along with wire that is not always to the specifications of the task (but available) wherever it can be found."

From a different source: "Entity A is bankrupt. Entity A depends on entity B for access to right of ways. Entity B has told entity A no access until you pay us what you owe us. One result is that needed critical infrastructure is not being completed and other folk won't get paid until the mess is sorted out.

There is gangrene in the system and the folk in charge are blissfully unaware as it eats away at the infrastructure underlying the economy. Chairman Powell may be just beginning to wake up. Given that his way out is to suggest that a LEC might acquire WorldCom, we conclude that on the surface of things, Powell is in way over his head. McChesney's comments are on the mark when he says: "But what "deregulation" really means isn't [a kind of] deregulation where there is no regulation [at all]. It just means regulation on behalf of powerful interests with no one representing the public." McChesney however doesn't know telco economics well enough to understand why Powell's suggestion that a LEC buy WorldCom is absurd.)

Now because there is no money in the system beyond enough to barely pay operational expenses, virtually everyone in the system will go bankrupt. Left to happen on its own it could take 5 years plus or minus 3.

At present the only sectors with ANY money are municipal governments and electrical utilities. They are beginning to build their own networks. Such networks can be financed with 20 year bonds conservatively on a low risk, utility model where no one is allowed to own the infrastructure over which services are provided. Mid size independent ISPs may be able to stitch together these networks via on going break-throughs in peering and transit and neutral exchanges.

Unfortunately with the emerging news about the proposed role of the Department of Homeland Security in making fundamental decisions about the protection of telecommunications infrastructure, it looks like we will see bail outs and federal welfare for the corporations that caused the mess rather than an admission from anyone that his or her ideology was flawed.

For the long term, it may well be that using our own free market, and free trade tools, the rest of the world will buy our technology, finish its development, and sell it back to us at high rates. We are cutting our own throats with the knife of our 'conservative" ideology.