How Workarounds Drive Telecom and Networking

[David Farber <dave () farber net>]

Begin forwarded message:

From: "Amy Wohl" <amy () wohl com>
Date: May 2, 2009 8:02:29 PM EDT
To: <dave () farber net>
Subject: RE: [IP] How Workarounds Drive Telecom and Networking

I would like to thank DeWayne Hendricks ( Fred Goldstein djf_) for the  
fine history lesson,
especially the part about he who is not willing to eat his own  
children gets
to watch someone else do the job for him.

I once had Digital as a valued client -- need I say more?  I can  
recall a
meeting with Ken Olsen where I asked Ken (whom I thought was  
wonderful) why
he didn't believe PC's were going to succeed (we were already in the
mid-80's by then).  He replied, "Because they're so expensive."  I  
believe
he meant relative to DEC VAXes.  I wanted to snap back, "You mean, DEC  
PCs
are so expensive," because they were incredibly over-engineered and
over-priced, but I couldn't say that to him.

It's very hard to participate in the next round of a market you've  
been a
leading player in.  The reason IBM succeeded in the PC market (for a  
little
while) was they were determined not to repeat their mistakes in the
minicomputer market.  But then they did it all over again in the
client/server market.  It's hard to give up high margin products.

The only way to avoid it is to nimbly keep reinventing markets and  
being a
premium innovator in each new market -- ask Apple.


Amy D. Wohl
Editor, Amy Wohl's Opinions
40 Old Lancaster Road, #608
Merion, Station, PA 19066
610-667-4842
amy () wohl com
www.wohl.com






-----Original Message-----
From: David Farber [mailto:dave () farber net]
Sent: Saturday, May 02, 2009 7:29 PM
To: ip
Subject: [IP] How Workarounds Drive Telecom and Networking



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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