The Last Mile and Other Diseases
Kessler, Andy
The Last Mile and Other Diseases GIVE ME MY TWISTED PAIR OR GIVE ME DEATH! BY ANDY KESSLER I n 1904, the United States took on the task of building the Panama Canal, after the French company...
...Man, was I ever wrong...
...But those same high margins also attracted aggressive new players fuelled by joyous Wall Street capital, Level 3, Qwest, 360 Networks, ICG--massive new supply, in other words, which ultimately broke the pricing curves, so they are now selling bandwidth below sunk costs...
...The same idea can work for wireless...
...I used to think that anything that touched a private residence needed to be regulated, to avoid duplication...
...At $50 per month, 640K DSL service implies a $;1 per month cost for voice...
...times 100 million homes equals a quarter of a trillion dollarsuCapitol Hill kind of money...
...Sure, Metcalfe's law...
...NOVEMBER/DECEMBER 2OO...
...No problem--either put up the $2,500 yourself or let someone else do it in exchange for a five-year contract for data services...
...so by adding yours to the phone network, you increase its value...
...Right answer: Out of the box, into your hands So how do we cut back the forest, and make the last mile a workable proposition...
...SBC has paid $48 million in fines since July 2000 for dragging its feet...
...He looked at me like I was from another planet--SiliconValley was pretty far away--and with a wave of his hand more or less told me to get lost...
...meanwhile the "last mile" to potentially paying customers' houses sits mainly unused...
...So instead of pushing for something new, the 1996 act mandated that the phone companies open up their existing 34 THE AMERICAN SPECTATOR 9 NOVEMBER/DECEMBER 2OOI copper wires to all takers...
...Give the last mile to me.Well not just me--I mean me and you and every homeowner...
...He lives in Palo Alto, California...
...Had the FCC ever heard of the stock market...
...I shook his hand at the bar, introduced myself, and smugly suggested that I knew exactly what Worldcom was going to do: cut prices to the marginal cost of laying new fiber, the whole Ditch-Witch thing...
...The forest was cut back a mile on each side of the canal...
...Kill all the mosquitoes...
...Every guy with a Ditch-Witch and a right of way is laying fiber" I wrote...
...One thing is for sure, we have paid for those dinky copper wires to our homes again and againmevery five years is a good estimate...
...You add the value, not your phone company...
...Pushing the state of the world requires state of the art of telecom...
...Complete deregulation, everyone is just free to compete.The problem here is obvious: very few new players will enter the fray because no one else but the incumbents has the facilities or the money to make even the smallest dent...
...Unleash" them, as the TauzinDingell Internet Freedom and Broadband Deployment Act of 2001 suggests, and they will milk voice for another decade...
...Is there any legal precedent...
...And let's throw in reverse eminent domain, just for the hell of it...
...But instead of four or five ugly towers, there's usually just one...
...So Worldcom and its other bloated telco friends milked the high margins allowed by regulated RBOCs, keeping prices high while technology-driven costs plunged 30 percent to 50 percent annually...
...So they overcharged their guest-competitors for space and electricity...
...Risky investment for monopolists is unnecessary and wasteful...
...The Internet backbone is over-stuffed with unused capacity...
...The following spring, I attended an investor dinner hosted by DLJ at the Four Seasons restaurant in Manhattan...
...Unleash" the phone companies, as some are saying...
...Get rid of the monkeys...
...The regulated structure of the telecom business is a deformity mere capital can't cure...
...Applause, laughter...
...Why...
...nationwide carriers, and four or five competing companies in any given area...
...This monopoly mandate is the status quo...
...The gap is so wide, in the RBOCs minds, it can never be closed...
...This was back when Wall Street was still making money-hand-over fist...
...Next...
...The tour guide winked and said they will get to that pile over the next few years...
...But it's flawed...
...Many, many users share bandwidth simultaneously without stepping on each other, and new products like Wi-Fi are growing by consumer installations, away from carrier rollouts...
...Are you a heavy user and want a fiber optic line to your home...
...A standard estimate of the cost was $2,500 per household...
...Yet unlicensed bandwidth can be shared by using packet technology...
...Bob Metcalfe, the inventor of Ethernet data networking, famously noted that the value of a network grows as the exponential of the number of nodes on a network...
...They sent lawyers into action...
...The only way Worldcom can dry that supply up is by driving prices lower" I mean this is Economics 101--even people that slept through the lectures understood something this simple...
...Mosquitoes would suck infected blood from monkeys in the forest, fly to the dig zone, bite a worker, and pass on the infection...
...In the aftermath of the NASDAQ debacle, a lot of telecom investors and pundits are throwing in the towel, saying risk capital just doesn't work...
...And the famous quality-of-service question--when your house catches fire on a Sunday night in the middle of a blizzard, how do you dial 911...
...With most players stiffed, they have raised retail prices, and why not...
...No need for competing companies, digging up your lawn or street...
...The only solution is to get rid of the structural cause of the disease...
...Broadband woulduand some day will--put the phone companies on their death beds, so they delay...
...Innovation typically comes from entrepreneurs, armed with capital seeking high returns...
...It failed, merely creating new regulatory umbrellas for everyone to price under...
...O nly an asset grab from the phone companies will demonstrate the value of horizontal vs...
...But is there any other justification...
...The Homestead Act of 1862, which gave away 160 acres of government land (and a regulator, er, mule) if you upgraded it...
...BY ANDY KESSLER I n 1904, the United States took on the task of building the Panama Canal, after the French company that started the project gave up, having lost thousands of workers to malaria and yellow fever...
...One water pipe, one electric line, one sewer, one gas line, one TV cable...
...How do we induce a build-out and innovation, with the promise of a return on investment for new capital...
...And even the FCC has what is known as Pioneers Preference, which gives out new spectrum at previously unusable frequencies to those that develop it first...
...By 2000, the phone companies had enoughuthey raised wholesale prices for their facilities, and lowered retail prices, squeezing the debt-laden competition to death...
...One enterprising Australian rigged up a laser pointer to transmit data a couple of miles at 10 megabits per second...
...Cheap revenge...
...Worse, the incumbents, the Baby Bells, are monopolists.When you own a governmentmandated monopoly, your programming models always output "do nothing" to maximize returns in response to innovation or change.With a lot of investment, they could indeed offer voice and data and audio and video over that same twisted copper wire, but tkey couldn't charge much more...
...And cable...
...Declare that the homeowner owns the connection between a home and a designated termination point--the existing telco central office, a neighborhood gateway, a digital loop carrier...
...Companies can compete at the retail level for voice services...
...Disease declined drastically.Welcome to out-of-the-box thinking...
...Put another way, if there was only one phone, it would have no value...
...THE AMERICAN SPECTATOR 3 5...
...The Telecom Act of 1996 promised competition between phone companies and cable, between local and long distance players...
...The whole bubble could have been avoided with a modest knowledge ofhightech economics and a bit of free market thinking...
...The industry has organized itself horizontally, quite naturally...
...Bridging the "last mile" (the actual distance can be a lot less) from all that overstuffed fiber-optic backbone to people's homes was problematic, at least in 1996...
...Wrong Answer #2: Structural Separation The other school of thought has been pushed by the trendy Pennsylvania Public Utility Commission...
...In November 1997, I wrote Forbes article about Worldcom's purchase of an amalgamation of local and long distance telephony and internet access, MFS/LDDS/UUNET...
...Here's my suggestion...
...The wholesale entity is still a monopoly, and therefore almost certainly required by law to price below replacement cost.Which means no new build-out of better lines or fiber to homes, by them or anyone else...
...That would look cool as the fog rolls in the Bay Area...
...Fuggedaboudit--high-speed DSL at $50 month means that the real value of voice calls is $1 a month, 1/30th of what the telcos currently make...
...Use your cell phone...
...Because broadband~with its vanishing per bit costs~undermines their lucrative voice business...
...The last mile of the telecosm may not seem as pressing as improving cruise missile guidance systems, but is there any doubt that he who owns the means of production of smart weaponry owns the world...
...Wrong Answer #1: Unleash the RBOCs One school of thought says unleash all the players...
...So what is the fix...
...In this scenario, you forcibly separate the telecom companies' wholesale and retail businesses.At first I was lured by the simplicity: you remove conflicts of interest and build in the efficiency of a horizontal business model...
...Same with airwaves--divvy up the spectrum, three TV stations and two cellular phone companies...
...New players will emerge to upgrade last-mile connections, by enhancing the existing copper wires, running fiber, even going wireless...
...Two solutions are widely offered, and~like killing the mosquitoes or the monkeysmneither is palatable...
...They did but at a pace best described as slothy...
...The guest speaker was none other than John Sidgmore, the squirrelly looking founder and CEO of UUNET and at that point vice chairman of Worldcom...
...Hightech fighters and missiles used to be the tail that wagged the dog...
...Finally, someone figured out that the mosquitoes could not fly more than a mile without eating...
...Can-do Americans contemplated their options...
...As in the cellular business, horizontal players can operate the termination points, others the phone poles, others the residential gateways...
...Indeed, for the telcos, broadband investment increases costs without any revenue increase, so the spreadsheets scream "Why bother...
...Actually, the 1996 act didn't just fail--it created chaos, as Wall Street's spreadsheets screamed "huge returns" to anyone laying fiber under those huge price umbrellas...
...Companies like American Towers and Spectrasite Holdings own the towers, and lease them to the operators...
...Look at cellular...
...Instantly, new companies will surface that offer new services...
...Despite six nationwide carriers with their own licensed spectrum, they all charge more or less the same rates for basic voice service and exorbitant rates for limited mobile Internet access...
...Not likely...
...On a tour of one phone company central office, a three-foot pile of papers sat on a desk-requests for space and facilities...
...vertical markets, and unleash innovation...
...The worst form of capital comes from monopoly ratepayers, whose returns are guaranteed...
...Today, there are six Andy Kessler is a former hedge fund manager who is u~ting a book about predicting the past and studying the future...
...Well I say software should be free...
...Cutting back the forest--or rather, turning it over to consumersmturns the whole industry upside down, and puts consumers, not regulators, in charge of upgrading the system...
...Local TV stations, yes, satellite, yes--just about any regulated communications system can be put back into the hands of users, creating naturally competitive market places...
...Absolutely...
...now they're a byproduct of the digital econon W. To stay ahead requires an infrastructure for innovationm56K modems and even DSL don't cut it...
...At his talk, he used the sure-fire wisecrack that I have since heard a million times:"Bill Gates says bandwidth should be free...
Vol. 34 • November 2001 • No. 8
