How Workarounds Drive Telecom and Networking

[David Farber <dave () farber net>]

Begin forwarded message:

From: dewayne () warpspeed com (Dewayne Hendricks)
Date: May 1, 2009 11:26:26 PM EDT
To: Dewayne-Net Technology List <xyzzy () warpspeed com>
Subject: [Dewayne-Net] How Workarounds Drive Telecom and Networking

April 29, 2009

How Workarounds Drive Telecom and Networking
By Fred Goldstein
ionary Consulting
<http://ipcommunications.tmcnet.com/topics/ip-communications/articles/55155-how-workarounds-drive-telecom-networking.htm 
>

We like to think that the course of progress is dictated by scientific  
discovery, and by the work done by technologists and engineers to put  
it to practical use. But the dirty little secret of the  
telecommunications and networking industry is that it’s driven less by  
technical reality and more by a drive to work around regulatory  
absurdities. We have become so accustomed to this way of doing  
business that we don’t even notice what should be obvious! This is  
particularly true for the United States, but as the world’s largest  
market, it sets much of the direction for everyone else.

Pretty much everything in the Internet sector owes its existence to  
some foolish rule or another, either directly or indirectly. The most  
telling case is the status of the Internet itself, as well as the  
status of “IP-enabled services” such as Voice over IP (VoIP). Put it  
next to the telecom industry, the historically-regulated common  
carriers, and see how the two deal with each other, and the ironies  
become clear.

Telecom Was A Fantasy World Of Monopoly
For most of its life, the telecom industry was simply the telephone  
industry, primarily offering voice service across a ubiquitous,  
regulated network. When Bell’s patents expired in 1893, the industry  
became very competitive. Eventually, AT&T managed to create a system  
of territorial exclusivity, and by the time the Communication Act of  
1934 was passed, there was no competition left. So the regulations of  
the day locked in the monopoly.

Once competition is prohibited, prices can more easily deviate wildly  
from costs. Regulators liked the monopoly because it let them  
constrain the price of basic residential local service. “Residual  
pricing” was one such regulatory scheme, to maximize monopoly profits  
wherever possible so that the basic residential rate only had to cover  
the residue, not all of its own costs. State regulators were even  
adopting residual pricing plans into the 1990s. No wonder so many  
opposed every move to open up competition, from Carterfone (which  
allowed customers to attach their own equipment to telephone lines,  
rather than just rent from the phone company) to long distance and  
then local competition. And many tradition-minded regulators were  
uncomfortable with the Internet itself, which lived in a free-market  
cocoon of its own.

Vertical Integration Bound Facilities To Services
Another part of telecom policy was the coupling of physical facilities  
to the services that used them. Telephone wires were owned by the  
service provider, and were only designed, or upgraded, as that service  
provider saw fit. This vertical integration was not an issue when the  
one service that really mattered was Plain Old Telephone Service. In  
that era, the main issue was balancing the price of calls vs. the  
price of the line itself. Only a small portion of the actual cost of  
telephone service is usage sensitive. Long distance calls, and in some  
places local calls, were priced far above cost, in order to subsidize  
the fixed price of local service and pay for the expensive wires up on  
the poles and under the streets.

This service-driven model quietly started to fall apart in the 1980s  
when fiber optics became practical. Fiber changed the key economics.  
Up until then, high-capacity services were very expensive to  
provision, so they had to be expensive. Even a measly copper T1  
circuit, 1.5 megabits, leased for thousands per month. A strand of  
fiber was far more versatile, and had enough capacity to “bypass” many  
billable phone calls. Fiber could have been seen as infrastructure,  
but that was not compatible with a service-driven business model.

Crippling The Promise Of Fiber
One group of telco people, the engineers, got together in the 1980s to  
figure out how to light up the fiber that they assumed would be  
brought to most homes by end of the century. The ITU standards  
committees came up with a concept called Broadband ISDN, and developed  
a core technology for it called ATM. But the engineers had no say in  
how to charge for it. That was someone else’s problem, and those suits  
turned out to not have a good answer at all. If high-bandwidth  
services could be priced at a level that would stimulate demand, then  
existing low-bandwidth cash cow services might lose revenues to them,  
a process known as cannibalization.

I know the irony well: I was on a B-ISDN standards committee,  
representing Digital Equipment Corp., at the time a computer industry  
giant. They too worried about cannibalization. In the 1980s, their VAX  
minicomputer line was very profitable, but then cheap commodity PCs  
became available. Digital didn’t want to cannibalize high-margin VAX  
sales with low-margin PCs, so they avoided the PC business. Of course  
this didn’t stop others from killing their high-margin business. If  
you don’t cannibalize yourself, somebody else will. And Digital’s  
estate is now owned (via Compaq) by one of its former competitors,  
Hewlett-Packard, who learned to deal with the new realities rather  
than deny them.

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