Given the smartphone’s ubiquity and our dependence on it, “App Coverage” (AC) is something confronting us every day, yet we know little about it. At the CCA Global Expo this week in San Antonio Glenn Laxdal of Ericsson spoke about “app coverage”, which the vendor first surfaced in 2013. AC is defined as, “the proportion of a network’s coverage that has sufficient performance to run a particular app at an acceptable quality level.” In other words the variety of demand from end-users for voice, data and video applications is outpacing the ability of carriers to keep up. According to Ericsson, monitoring and ensuring performance of app coverage is the next wave in LTE networks. Here’s a good video explaining AC in simple, visual terms.
Years, nay, decades ago I used to say coverage should be measured in 3 important ways:
Geographic (national vs regional vs local)
In/Outdoors (50+% loss indoors)
Frequency (double capex 1900 vs 700 mhz)
Each of these had specific supply/demand clearing implications across dozens of issues impacting balance sheets and P&L statements; ultimately determining winners and losers. They are principally why AT&T and Verizon today have 70% of subscribers (80% of enterprise customers) up from 55% just 5 years ago, 84% of total profit, and over 100% of industry free cash flow. Now we can add “applications” to that list. And it will only make it more challenging for competitors to wrestle share from the “duopoly”.
The conference concluded with a panel of CEOs hailing Sprint’s approach, which Son outlined here, as one of benevolent dictator (perhaps not the best choice of words) and exhorting the label partner, partner, partner; something that Terry Addington of MobileNation has said has taken way too long. Even then the panel agreed that pulling off partnerships will be challenging.
The Good & Bad of Wireless
Wireless is great because it is all things to all people, and that is what makes it bad too. Planning for and accounting how users will access the network is very challenging across a wide user base. There are fundamentally different “zones” and contexts in which different apps can be used and they often conflict with network capacity and performance. I used to say that one could walk and also hang upside down from a tree and talk, but you couldn’t “process data” doing those things. Of course the smartphone changed all that and people are accessing their music apps, location services, searches, purchases, and watching video from anywhere; even hanging upside down in trees.
Today voice, music and video consume 12, 160 and 760 kpbs of bandwidth, respectively, on average. Tomorrow those numbers might be 40, 500, 1500, and that’s not even taking into account “upstream” bandwidth which will be even more of a challenge for service providers to provision when consumers expect more 2-way collaboration everywhere. The law of wireless gravity, which states bits will seek out fiber/wire as quickly and cheaply as possible, will apply, necessitating sharing of facilities (wireless and wired), heterogeneous network (Hetnet), and aggressive wifi offload approaches; even consumers will be shared in the form of managed services across communities of users (known today as OTT). The show agenda included numerous presentations on distributed antennae networks and wifi offload applied to the rural coverage challenge.
Developing approaches ex ante to anticipate demand is even more critical if carriers want to play major roles in the internet of things, unified (video) communications and the connected car. As Ericsson states in its whitepaper,
“App coverage integrates all aspects of network performance – including radionetwork throughput and latency, capacity, as well as the performance of the backhaul, packetcore and the content-delivery networks. Ultimately, managing app coverage and performance demands a true end-to-end approach to designing, building and running mobile networks.”
The US has lacked a telecom network visionary for nearly 2 decades. There have certainly been strong and capable leaders, such as John Malone who not only predicted but brought about the 500 channel LinearTV model. But there hasn’t been someone like Bill McGowan who broke up AT&T or Craig McCaw who first had the vision to build a national, seamless wireless network, countering decades of provincial, balkanized thinking. Both of them fundamentally changed the thinking around public service provider networks.
But with a strong message to the markets in Washington DC on March 11 from Masayoshi Son, Sprint’s Chairman, the 20 year wait may finally be over. Son did what few have been capable of doing over the past 15-20 years since McGowan exited stage left and McCaw sold out to MaBell: telling it like it is. The fact is that today’s bandwidth prices are 20-150x higher than they should be with current technology.
This is no one’s fault in particular and in fact to most people (even informed ones) all measures of performance-to-price compared to 10 or 20 years ago look great. But, as Son illustrated, things could be much, much better. And he’s willing to make a bet on getting the US, the most advanced and heterogeneous society, back to a leadership role with respect to the ubiquity and cost of bandwidth. To get there he needs more scale and one avenue is to merge with T-Mobile.
There have been a lot of naysayers as to the possibility of a Sprint-T-Mo hookup, including leaders at the FCC. But don’t count me as one; it needs to happen. Initially skeptical when the rumors first surfaced in December, I quickly reasoned that a merger would be the best outcome for the incentive auctions. A merger would eliminate spectrum caps as a deterrent to active bidding and maximize total proceeds. It would also have a better chance of developing a credible third competitor with equal geographic reach. Then in January the FCC and DoJ came out in opposition to the merger.
In February, though, Comcast announced the much rumored merger with TW and Son jumped on the opportunity to take his case for merging to a broader stage. He did so in front of a packed room of 300 communications pundits, press and politicos at the US Chamber of Commerce’s prestigious Hall of Flags; a poignant backdrop for his own rags to riches story. Son’s frank honesty about the state of broadband for the American public vs the rest of the world, as well as Sprint’s own miserable current performance were impressive. It’s a story that resonates with my America’s Bandwidth Deficit presentation.
Here are some reasons the merger will likely pass:
The FCC can’t approve one horizontal merger (Comcast/TW) that brings much greater media concentration and control over content distribution, while disallowing a merger of two small players (really irritants as far as AT&T and Verizon are concerned).
Son has a solid track record of disruption and doing what he says.
The technology and economics are in his favor.
The vertically integrated service provider model will get disrupted faster and sooner as Sprint will have to think outside the box, partner, and develop ecosystems that few in the telecom industry have thought about before; or if they have, they’ve been constrained by institutional inertia and hidebound by legacy regulatory and industry siloes.
Here are some reasons why it might not go through:
The system is fundamentally corrupt. But the new FCC Chairman is cast from a different mold than his predecessors and is looking to make his mark on history.
The FCC shoots itself in the foot over the auctions. Given all the issues and sensitivities around incentive auctions the FCC wants this first one to succeed as it will serve as a model for all future spectrum refarming issues.
The FCC and/or DoJ find in the public interest that the merger reduces competition. But any analyst can see that T-Mo and Sprint do not have sustainable models at present on their own; especially when all the talk recently in Barcelona was already about 5G.
Personally I want Son’s vision to succeed because it’s the vision I had in 1997 when I originally brought the 2.5-2.6 (MMDS) spectrum to Sprint and later in 2001 and 2005 when I introduced Telcordia’s 8x8 MIMO solutions to their engineers. Unfortunately, past management regimes at Sprint were incapable of understanding the strategies and future vision that went along with those investment and technology pitches. Son has a different perspective (see in particular minute 10 of this interview with Walt Mossberg) with his enormous range of investments and clear understanding of price elasticity and the marginal cost of minutes and bits.
To be successful Sprint’s strategy will need to be focused, but at the same time open and sharing in order to simultaneously scale solutions across the three major layers of the informational stack (aka the InfoStack):
upper (application and content)
lower (access and transport)
This is the challenge for any company that attempts to disrupt the vertically integrated telecom or LinearTV markets; the antiquated and overpriced ones Son says he is going after in his presentation. But the US market is much larger and more robust than the rest of the world, not just geographically, but also from a 360 degree competitive perspective where supply and demand are constantly changing and shifting.
Ultimate success may well rest in the control layer, where Apple and Google have already built up formidable operating systems which control vastly profitably settlement systems across multiple networks. What few realize is that the current IP stack does not provide price signals and settlement systems that clear supply and demand between upper and lower layers (north-south) or between networks (east-west) in the newly converged “informational” stack of 1 and 2-way content and communications.
If Sprint’s Chairman realizes this and succeeds in disrupting those two markets with his strategy then he certainly will be seen as a visionary on par with McGowan and McCaw.
The current debate over the state of America's broadband services and over the future of the internet is like a 3-ring circus or 3 different monarchists debating democracy. In other words an ironic and tragically humorous debate between monopolists, be they ultra-conservative capitalists, free-market libertarians, or statist liberals. Their conclusions do not provide a cogent path to solving the single biggest socio-political-economic issue of our time due to pre-existing biases, incorrect information, or incomplete/wanting analysis. Last week I wrote about Google's conflicts and paradoxes on this issue. Over the next few weeks I'll expand on this perspective, but today I'd like to respond to a Q&A, Debunking Broadband's Biggest Myths, posted on Commercial Observer, a NYC publication that deals with real estate issues mostly and has recently begun a section called Wired City, dealing with a wide array of issues confronting "a city's" #1 infrastructure challenge. Here's my debunking of the debunker.
To put this exchange into context, the US led the digitization revolutions of voice (long-distance, touchtone, 800, etc..), data (the internet, frame-relay, ATM, etc...) and wireless (10 cents, digital messaging, etc...) because of pro-competitive, open access policies in long-distance, data over dial-up, and wireless interconnect/roaming. If Roslyn Layton (pictured below) did not conveniently forget these facts or does not understand both the relative and absolute impacts on price and infrastructure investment then she would answer the following questions differently:
Real Reason/Answer: our bandwidth is 20-150x overpriced on a per bit basis because we disconnected from moore's and metcalfe's laws 10 years ago, due to the Telecom Act, then special access "de"regulation, then Brand-X or shutting down equal access for broadband. This rate differential is shown in the discrepancy between rates we pay in NYC and what Google charges in KC, as well as the difference in performance/price of 4G and wifi. It is great Roslyn can pay $3-5 a day for Starbucks. Most people can't (and shouldn't have to) just for a cup a Joe that you can make at home for 10-30 cents.
Real Reason/Answer: Because of their vertical business models, carriers are not well positioned to generate high ROI on rapidly depreciating technology and inefficient operating expense at every layer of the "stack" across geographically or market segment constrained demand. This is the real legacy of inefficient monopoly regulation. Doing away with regulation, or deregulating the vertical monopoly, doesn’t work. Both the policy and the business model need to be approached differently. Blueprints exist from the 80s-90s that can help us restructure our inefficient service providers. Basically, any carrier that is granted a public ROW (right of way) or frequency should be held to an open access standard in layer 1. The quid pro quo is that end-points/end-users should also have equal or unhindered access to that network within (economic and aesthetic) reason. This simple regulatory fix solves 80% of the problem as network investments scale very rapidly, become pervasive, and can be depreciated quickly.
Real Reason/Answer: Quasi monopolies exist in video for the cable companies and in coverage/standards in frequencies for the wireless companies. These scale economies derived from pre-existing monopolies or duopolies granted by and maintained to a great degree by the government. The only open or equal access we have left from the 1980s-90s (the drivers that got us here) is wifi (802.11) which is a shared and reusable medium with the lowest cost/bit of any technology on the planet as a result. But other generative and scalabeable standards developed in the US or with US companies at the same time, just like the internet protocol stacks, including mobile OSs, 4G LTE (based on CDMA/OFDM technology), OpenStack/Flow that now rule the world. It's very important to distinguish which of these are truly open or not.
Real Reason/Answer: The 3rd of the population who don't have/use broadband is as much because of context and usability, whether community/ethnicity, age or income levels, as cost and awareness. If we had balanced settlements in the middle layers based on transaction fees and pricing which reflect competitive marginal cost, we could have corporate and centralized buyers subsidizing the access and making it freely available everywhere for everyone. Putting aside the ineffective debate between bill and keep and 2-sided pricing models and instead implementing balanced settlement exchange models will solve the problem of universal HD tele-work, education, health, government, etc… We learned in the 1980s-90s from 800 and internet advertising that competition can lead to free, universal access to digital "economies". This is the other 20% solution to the regulatory problem.
Real Reason/Answer: The real issue here is that America led the digital information revolution prior to 1913 because it was a relatively open and competitive democracy, then took the world into 70 years of monopoly dark ages, finally breaking the shackles of monopoly in 1983, and then leading the modern information revolution through the 80s-90s. The US has now fallen behind in relative and absolute terms in the lower layers due to consolidation and remonopolization. Only the vestiges of pure competition from the 80s-90s, the horizontally scaled "data" and "content" companies like Apple, Google, Twitter and Netflix (and many, many more) are pulling us along. The vertical monopolies stifle innovation and the generative economic activity we saw in those 2 decades. The economic growth numbers and fiscal deficit do not lie.
Back in 1998 I wrote, “if you want to break up the Microsoft software monopoly then break up the Baby Bell last-mile access monopoly.” Market driven broadband competition and higher-capacity digital wireless networks gave rise to the iOS and Android operating systems over the following decade which undid the Windows monopoly. The 2013 redux to that perspective is, once again, “if you want to break up the Google search monopoly then break up the cable/telco last mile monopolies.”
Google is an amazing company, promoting the digital pricing and horizontal service provider spirit more than anyone. But Google is motivated by profit and will seek to grow that profit as best it can, even if contrary to founding principles and market conditions that fueled its success (aka net neutrality or equal access). Now that Google is getting into the lower layers in the last mile they are running into paradoxes and conflicts over net neutrality/equal access and in danger of becoming just another vertical monopoly. (Milo Medin provides an explanation in the 50th minute in this video, but it is self-serving, disingenuous and avoids confronting the critical issue for networks going forward.)
Contrary to many people’s beliefs, the upper and lower layers have always been inextricably interdependent and nowhere was this more evident than with the birth of the internet out of the flat-rate dial-up networks of the mid to late 1980s (a result of dial-1 equal access). The nascent ISPs that scaled in the 1980s on layer 1-2 data bypass networks were likewise protected by Computers II-III (aka net neutrality) and benefited from competitive (WAN) transport markets.
Few realize or accept the genesis of Web 1.0 (W1.0) was the break-up of AT&T in 1983. Officially birthed in 1990 it was an open, 1-way store and forward database lookup platform on which 3 major applications/ecosystems scaled beginning in late 1994 with the advent of the browser: communications (email and messaging), commerce, and text and visual content. Even though everything was narrowband, W1.0 began the inexorable computing collapse back to the core, aka the cloud (4 posts on the computing cycle and relationship to networks). The fact that it was narrowband didn't prevent folks like Mark Cuban and Jeff Bezos from envisioning and selling a broadband future 10 years hence. Regardless, W1.0 started collapsing in 1999 as it ran smack into an analog dial-up brick wall. Google hit the bigtime that year and scaled into the early 2000s by following KISS and freemium business model principles. Ironically, Google’s chief virtue was taking advantage of W1.0’s primary weakness.
Web 2.0 grew out of the ashes of W1.0 in 2002-2003. W2.0 both resulted from and fueled the broadband (BB) wars starting in the late 1990s between the cable (offensive) and telephone (defensive) companies. BB penetration reached 40% in 2005, a critical tipping point for the network effect, exactly when YouTube burst on the scene. Importantly, BB (which doesn't have equal access, under the guise of "deregulation") wouldn’t have occurred without W1.0 and the above two forms of equal access in voice and data during the 1980s-90s. W2.0 and BB were mutually dependent, much like the hardware/software Wintel model. BB enabled the web to become rich-media and mostly 2-way and interactive. Rich-media driven blogging, commenting, user generated content and social media started during the W1.0 collapse and began to scale after 2005.
“The Cloud” also first entered people’s lingo during this transition. Google simultaneously acquired YouTube in the upper layers to scale its upper and lower layer presence and traffic and vertically integrated and consolidated the ad exchange market in the middle layers during 2006-2008. Prior to that, and perhaps anticipating lack of competitive markets due to "deregulation" of special access, or perhaps sensing its own potential WAN-side scale, the company secured low-cost fiber rights nationwide in the early 2000s following the CLEC/IXC bust and continued throughout the decade as it built its own layer 2-3 transport, storage, switching and processing platform. Note, the 2000s was THE decade of both vertical integration and horizontal consolidation across the board aided by these “deregulatory” political forces. (Second note, "deregulatory" should be interpreted in the most sarcastic and insidious manner.)
Web 3.0 began officially with the iPhone in 2007. The smartphone enabled 7x24 and real-time access and content generation, but it would not have scaled without wifi’s speed, as 3G wireless networks were at best late 1990s era BB speeds and didn’t become geographically ubiquitous until the late 2000s. The combination of wifi (high speeds when stationary) and 3G (connectivity when mobile) was enough though to offset any degradation to user experience. Again, few appreciate or realize that W3.0 resulted from two additional forms of equal access, namely cellular A/B interconnect from the early 1980s (extended to new digital PCS entrants in the mid 1990s) and wifi’s shared spectrum. One can argue that Steve Jobs single-handedly resurrected equal access with his AT&T agreement ensuring agnostic access for applications. Surprisingly, this latter point was not highlighted in Isaacson's excellent biography. Importantly, we would not have had the smartphone revolution were it not for Jobs' equal access efforts.
W3.0 proved that real-time, all the time "semi-narrowband" (given the contexts and constraints around the smartphone interface) trumped store and forward "broadband" on the fixed PC for 80% of people’s “web” experience (connectivity and interaction was more important than speed), as PC makers only realized by the late 2000s. Hence the death of the Wintel monopoly, not by government decree, but by market forces 10 years after the first anti-trust attempts. Simultaneously, the cloud became the accepted processing model, coming full circle back to the centralized mainframe model circa 1980 before the PC and slow-speed telephone network led to its relative demise. This circularity further underscores not only the interplay between upper and lower layers but between edge and core in the InfoStack. Importantly, Google acquired Android in 2005, well before W3.0 began as they correctly foresaw that small-screens and mobile data networks would foster the development of applications and attendant ecosystems would intrude on browser usage and its advertising (near) monopoly.
Web 4.0 is developing as we speak and no one is driving it and attempting to influence it more with its WAN-side scale than Google. W4.0 will be a full-duplex, 2-way, all-the time, high-definition application driven platform that knows no geographic or market segment boundaries. It will be engaging and interactive on every sensory front; not just those in our immediate presence, but everywhere (aka the internet of things). With Glass, Google is already well on its way to developing and dominating this future ecosystem. With KC Fiber Google is illustrating how it should be priced and what speeds will be necessary. As W4.0 develops the cloud will extend to the edge. Processing will be both centralized and distributed depending on the application and the context. There will be a constant state of flux between layers 1 and 3 (transport and switching), between upper and lower layers, between software and hardware at every boundary point, and between core and edge processing and storage. It will dramatically empower the end-user and change our society more fundamentally than what we’ve witnessed over the past 30 years. Unfortunately, regulators have no gameplan on how to model or develop policy around W4.0.
The missing pieces for W4.0 are fiber based and super-high capacity wireless access networks in the lower layers, settlement exchanges in the middle layers, and cross-silo ecosystems in the upper layers. Many of these elements are developing in the market naturally: big data, hetnets, SDN, openflow, open OS' like Android and Mozilla, etc… Google’s strategy appears consistent and well-coordinated to tackle these issues; if not far ahead of others. But its vertically integrated service provider model and stance on net neutrality in KC is in conflict with the principles that so far have led to its success.
Google is buying into the vertical monopoly mindset to preserve its profit base instead of teaching regulators and the markets about the virtues of open or equal access across every layer and boundary point (something clearly missing from Tim Wu's and Bob Atkinson's definitions of net neutrality). In the process it is impeding the development of W4.0. Governments could solve this problem by simply conditioning any service provider with access to a public right of way or frequency to equal access in layers 1 and 2; along with a quid pro quo that every user has a right to access unhindered by landlords and local governments within economic and aesthetic reason. (The latter is a bone we can toss all the lawyers who will be looking for new work in the process of simpler regulations.) Google and the entire market will benefit tremendously by this approach. Who will get there first? The market (Google or MSFT/AAPL if the latter are truly hungry, visionary and/or desperate) or the FCC? Originally hopeful, I’ve become less sure of the former over the past 12 months. So we may be reliant on the latter.
Intermodal competition is defined as: “provision of the same service by different technologies (i.e., a cable television company competing with a telephone company in the provision of video services).”
Intramodal competition is defined as: “competition among identical technologies in the provision of the same service (e.g., a cable television company competing with another cable television company in the offering of video services).”
Focus on 4 words: same, different, identical, same. Same is repeated twice.
Saying wireless represents intermodal competition to wired (fiber/coax) is like saying that books compete with magazines or radio competes with TV. Sure, the former both deliver the printed word. And the latter both pass for entertainment broadcast to us. Right?
Yet these are fundamentally different applications and business models even if they may share common network layers and components, or in English, similarities exist between production and distribution and consumption. But their business models are all different.
Wireless Is Just Access to Wireline
So are wireless and wired really the SAME? For voice they certainly aren’t. Wireless is still best efforts. It has the advantage of being mobile and with us all the time, which is a value-added, while wired offers much, much better quality. For data the differences are more subtle. With wireless I can only consume stuff in bite sizes (email, twitter, peruse content, etc..) because of throughput and device limitations (screen, processor, memory). I certainly can’t multi-task and produce content the way I can on a PC linked to a high-speed broadband connection.
That said, increasingly people are using their smartphones as hotspots or repeaters to which they connect their notebooks and tablets and can then multi-task. I do this a fair bit and it is good while I'm on the road and mobile, but certainly no substitute for a fixed wired connection/hotspot in terms of speed and latency. Furthermore, wireless carriers by virtue of their inefficient vertically integrated, siloed business models and the fact that wireless is both shared and reused, have implemented onerous price caps that limit total (stock) consumption even as the increase speed (flow). The latter creates a crowding out effect and throughput is degraded as more people access the same radio, which I run into a lot. I know this because my speed decreases or the 4G bars mysteriously disappear on my handset and indicate 3G instead.
Lastly, one thing I can do with the phone that I can’t do with the PC is take pictures and video. So they really ARE different. And when it comes to video, there is as much comparison between the two as a tractor trailer and a motorcycle. Both will get us there, but really everything else is different.
At the end of the day, where the two are similar or related is when I say wireless is just a preferred access modality and extension of wired (both fixed and mobile) leading to the law of wireless gravity: a wireless bit will seek out fiber as quickly and cheaply as possible. And this will happen once we move to horizontal business models and service providers are incented to figure out the cheapest way to get a bit anywhere and everywhere.
Lack of Understanding Drives Bad Policy
By saying that intermodal competition exists between wireless and wired, FSF is selectively taking aspects of the production, distribution and consumption of content, information and communications and conjuring up similarities that exist. But they are really separate pieces of the of the bigger picture puzzle. I can almost cobble together a solution that is similar vis a vis the other, but it is still NOT the SAME for final demand!
This claiming to be one thing while being another has led to product bundling and on-net pricing--huge issues that policymakers and academics have ignored--that have promoted monopolies and limited competition. In the process of both, consumers have been left with overpriced, over-stuffed, unwieldy and poorly performing solutions.
In the words of Blevins, FSF is once again providing a “vague, conflicting, and even incoherent definition of intermodal competition.” 10 years ago the US seriously jumped off the competitive bandwagon after believing in the nonsense that FSF continues to espouse. As a result, bandwidth pricing in the middle and last mile disconnected from moore’s and metcalfe’s laws and is now overpriced 20-150x impeding generative ecosystems and overall economic growth.
Since I began covering the sector in 1990, I’ve been waiting for Big Bang II.An adult flick?No, the sequel to Big Bang (aka the breakup of MaBell and the introduction of equal access) was supposed to be the breakup of the local monopoly.Well thanks to the Telecom Act of 1996 and the well-intentioned farce that it was, that didn’t happen and equal access officially died (equal access RIP) in 2005 with the Supreme Court's Brand-X decision vs the FCC. If it died, then we saw a resurrection that few noticed.
I am announcing that Equal Access is alive and well, albeit in a totally unexpected way.Thanks to Steve Jobs’ epochal demands put on AT&T to counter its terrible 2/3G network coverage and throughput, every smartphone has an 802.11 (WiFi) backdoor built-in.Together with the Apple and Google operating systems being firmly out of carriers’ hands and scaling across other devices (tablets, etc…) a large ecosystem of over-the-top (OTT), unified communications and traffic offloading applications is developing to attack the wireless hegemony.
First, a little history. Around the time of AT&T's breakup the government implemented 2 forms of equal access. Dial-1 in long-distance made marketing and application driven voice resellers out of the long-distance competitors. The FCC also mandated A/B cellular interconnect to ensure nationwide buildout of both cellular networks. This was extended to nascent PCS providers in the early to mid 1990s leading to dramatic price declines and enormous demand elasticities. Earlier, the competitive WAN/IXC markets of the 1980s led to rapid price reductions and to monopoly (Baby Bell or ILEC) pricing responses that created the economic foundations of the internet in layers 1 and 2; aka flat-rate or "unlimited" local dial-up. The FCC protected the nascent ISP's by preventing the Bells from interfering at layer 2 or above. Of course this distinction of MAN/LAN "net-neutrality" went away with the advent of broadband, and today it is really just about WAN/MAN fights between the new (converged) ISPs or broadband service providers like Comcast, Verizon, etc... and the OTT or content providers like Google, Facebook, Netflix, etc...
(Incidentally, the FCC ironically refers to edge access providers, who have subsumed the term ISPs or "internet service providers", as "core" providers, while the over-the-top (OTT) messaging, communications, e-commerce and video streaming providers, who reside at the real core or WAN, are referred to as "edge" providers. There are way, way too many inconsistencies for truly intelligent people to a) come up with and b) continue to promulgate!)
But a third form of equal access, this one totally unintentioned, happened with 802.11 (WiFi) in the mid 1990s. The latter became "nano-cellular" in that power output was regulated limiting hot-spot or cell-size to ~300 feet. This had the impact of making the frequency band nearly infinitely divisible. The combination was electric and the market, unencumbered by monopoly standards and scaling along with related horizontal layer 2 data technologies (ethernet), quickly seeded itself. It really took off when Intel built WiFi capability directly into it's Centrino chips in the early 2000s. Before then computers could only access WiFi with usb dongles or cables tethered to 2G phones
Cisco just forecast that 50% of all internet traffic will be generated from 802.11 (WiFi) connected devices.Given that 802.11’s costs are 1/10th those of 4G something HAS to give for the communications carrier.We’ve talked about them needing to address the pricing paradox of voice and data better, as well as the potential for real obviation at the hands of the application and control layer worlds.While they might think they have a near monopoly on the lower layers, Steve Job’s ghost may well come back to haunt them if alternative access networks/topologies get developed that take advantage of this equal access. For these networks to happen they will need to think digital, understand, project and foster vertically complete systems and be able to turn the "lightswitch on" for their addressable markets.
Previously we have written about “being digital” in the context of shifting business models and approaches as we move from an analog world to a digital world.Underlying this change have been 3 significant tsunami waves of digitization in the communications arena over the past 30 years, underappreciated and unnoticed by almost all until after they had crashed onto the landscape:
The WAN wave between 1983-1990 in the competitive long-distance market, continuing through the 1990s;
The Data wave, itself a direct outgrowth of the first wave, began in the late 1980s with flat-rate local dial-up connections to ISPs and databases anywhere in the world (aka the Web);
The Wireless wavebeginning in the early 1990s and was a direct outgrowth of the latter two.Digital cellphones were based on the same technology as the PCs that were exploding with internet usage.Likewise, super-low-cost WAN pricing paved the way for one-rate, national pricing plans. Prices dropped from $0.50-$1.00 to less than $0.10. Back in 1996 we correctly modeled this trend before it happened.
Each wave may have looked different, but they followed the same patterns, building on each other.As unit prices dropped 99%+ over a 10 year period unit demand exploded resulting in 5-25% total market growth.In other words, as ARPu dropped ARPU rose; u vs U, units vs Users.Elasticity.
Yet with each new wave, people remained unconvinced about demand elasticity.They were just incapable of pivoting from the current view and extrapolating to a whole new demand paradigm.Without fail demand exploded each time coming from 3 broad areas: private to public shift, normal price elasticity, and application elasticity.
Private to Public Demand Capture.Monopolies are all about average costs and consumption, with little regard for the margin.As a result, they lose the high-volume customer who can develop their own private solution.This loss diminishes scale economies of those who remain on the public, shared network raising average costs; the network effect in reverse.Introducing digitization and competition drops prices and brings back not all, but a significant number of these private users.Examples we can point to are private data and voice networks, private radio networks, private computer systems, etc…that all came back on the public networks in the 1980s and 1990s.Incumbents can’t think marginally.
Normal Price Elasticity.As prices drop, people will use more.It gets to the point where they forget how much it costs, since the relative value is so great.One thing to keep in mind is that lazy companies can rely too much on price and “all-you-can-eat” plans without regard for the real marginal price to marginal cost spread.The correct approach requires the right mix of pricing, packaging and marketing so that all customers at the margin feel they are deriving much more value than what they are paying for; thus generating the highest margins.Apple is a perfect example of this.Sprint’s famous “Dime” program was an example of this.The failure of AYCE wireless data plans has led wireless carriers to implement arbitrary pricing caps, leading to new problems.Incumbents are lazy.
Application Elasticity. The largest and least definable component of demand is the new ways of using the lower cost product that 3rd parties drive into the ecosystem.They are the ones that drive true usage via ease of use and better user interfaces.Arguably they ultimately account for 50% of the new demand, with the latter 2 at 25% each.With each wave there has always been a large crowd of value-added resellers and application developers that one can point to that more effectively ferret out new areas of demand.Incumbents move slowly.
Demand generated via these 3 mechanisms soaked up excess supply from the digital tsunamis. In each case competitive pricing was arrived at ex ante by new entrants developing new marginal cost models by iterating future supply/demand scenarios. It is this ex ante competitive guess, that so confounds the rest of the market both ahead and after the event. That's why few people recognize that these 3 historical waves are early warning signs for the final big one.The 4th and final wave of digitization will occur in the mid-to-last mile broadband markets. But many remain skeptical of what the "demand drivers" will be. These last mile broadband markets are monopoly/duopoly controlled and have not yet realized price declines per unit that we’ve seen in the prior waves. Jim Crowe of Level3 recently penned a piece in Forbes that speaks to this market failure. In coming posts we will illustrate where we think bandwidth pricing is headed, as people remain unconvinced about elasticity, just as before. But hopefully the market has learned from the prior 3 waves and will understand or believe in demand forecasts if someone comes along and says last mile unit bandwidth pricing is dropping 99%. Because it will.
Wireless service providers (WSPs) like AT&T and Verizon are battleships, not carriers.Indefatigable...and steaming their way to disaster even as the nature of combat around them changes.If over the top (OTT) missiles from voice and messaging application providers started fires on their superstructures and WiFi offload torpedoes from alternative carriers and enterprises opened cracks in their hulls, then Dropbox bombs are about to score direct hits near their water lines.The WSPs may well sink from new combatants coming out of nowhere with excellent synching and other novel end-user enablement solutions even as pundits like Tomi Ahonen and others trumpet their glorious future.Full steam ahead.
Instead, WSP captains should shout “all engines stop” and rethink their vertical integration strategies to save their ships.A good start might be to look where smart VC money is focusing and figure out how they are outfitted at each level to defend against or incorporate offensively these rapidly developing new weapons.More broadly WSPs should revisit the WinTel wars, which are eerily identical to the smartphone ecosystem battles, and see what steps IBM took to save its sinking ship in the early 1990s.One unfortunate condition might be that the fleet of battleships are now so widely disconnected that none have a chance to survive.
The bulls on Dropbox (see the pros and cons behind the story) suggest that increased reliance on cloud storage and synching will diminish reliance on any one device, operating system or network.This is the type of horizontalization we believe will continue to scale and undermine the (perceived) strength of vertical integration at every layer (upper, middle and lower).Extending the sea battle analogy, horizontalization broadens the theatre of opportunity and threat away from the ship itself; exactly what aircraft carriers did for naval warfare.
Synching will allow everyone to manage and tailor their “states”, developing greater demand opportunity; something I pointed out a couple of months ago.People’s states could be defined a couple of ways, beginning with work, family, leisure/social across time and distance and extending to specific communities of (economic) interest.I first started talking about the “value of state” as Chief Strategist at Multex just as it was being sold to Reuters.
Back then I defined state as information (open applications, communication threads, etc...) resident on a decision maker’s desktop at any point in time that could be retrieved later.Say I have multiple industries that I cover and I am researching biotech in the morning and make a call to someone with a question.Hours later, after lunch meetings, I am working on chemicals when I get a call back with the answer.What’s the value of bringing me back automatically to the prior biotech state so I can better and more immediately incorporate and act on the answer?Quite large.
Fast forward nearly 10 years and people are connected 7x24 and checking their wireless devices on average 150x/day.How many different states are they in during the day?5, 10, 15, 20?The application world is just beginning to figure this out.Google, Facebook, Pinterest and others are developing data engines that facilitate “free access” to content and information paid for by centralized procurement; aka advertising.Synching across “states” will provide even greater opportunity to tailor messages and products to consumers.
Inevitably those producers (advertisers) will begin to require guaranteed QoS and availability levels to ensure a good consumer experience. Moreover, because of social media and BYOD companies today are looking at their employees the same way they are looking at their consumers.The overall battlefield begins to resemble the 800 and VPN wars of the 1990s when we had a vibrant competitive service provider market before its death at the hands of the 1996 Telecom Act (read this critique and another that questions the Bell's unnatural monopoly).Selling open, low-cost, widely available connectivity bandwidth into this advertising battlefield can give WSPs profit on every transaction/bullet/bit across their network.That is the new “ship of state” and taking the battle elsewhere.Some call this dumb pipes; I call this a smart strategy to survive being sunk.
The sports world is a great place to test and prove out management tactics and strategies.Unlike in the commercial world where reasons for and measurement of product success are highly variable and of uncertain duration, sports leagues provide tightly controlled competitive conditions that enable consistent quantitative comparisons.As a result, one can clearly see winning strategies and tactics based on season over season performance.None is more remarkable than Sir Alex Ferguson’s record at Manchester United, probably the best record of any team/coach at the top leagues in any sport over the past 2+ decades.Others have written about his management style here and here.
A great leader is one who gets the best from himself, his employees and customers regardless of the situation or context, be they sports teams, armies, corporations, academic institutions, societies, etc... SAF's record is more remarkable in that it has improved the game of soccer at the same time. Ultimately everyone is subservient and bound by the objective of the team, including himself. SAF's style is best described as a disciplined command and control approach that leads to employee empowerment. SAF has grown, bought, developed, and nurtured superstars and when they've outgrown the team, they are gone.
In his own words SAF says detail is important. He is probably an acolyte of Edward Tufte, who says more information is better.Through analytics SAF looks to gain the proverbial inch to give him the advantage over other teams.In the process his staff has increased from 8 to 30 people over the past 2 decades.In order to synthesize the information and implement strategy leading to individual decision making SAF has implemented an organizational matrix approach and not a management pyramid (or inverted one for that matter).The result is that on game day ManU teams are capable of making decisions on the field and have the resolve to come from behind more often than not.
Furthermore, soccer records and trophies are won not just by outright wins, as in most other sports, but by a combination of wins, goal differentials and draws. As well, Home and Away records are typically very important and a better than 50% winning percentage away from home means a lot. In the table of SAF's points analysis we see that he achieved his remarkable record not just because he won, but because he managed to lose fewer than half his games away from home. This record was achieved because he managed the goal differential ("for" over total goals in last column) significantly in his team's favor away from home. Anybody who knows the game of soccer knows the manager's strategy and tactics before and during the game typically has more of an impact on goal differential than luck. The chart illustrates that ManU's goals for percentage mirrors the total winning points percentage. For those who don't understand the subtleties of soccer's scoring, a 0-0 draw away from home can be the deciding factor in a trophy if a home win is managed. Furthermore drawing 0-0 away from home to a big club is synonymous with a victory during the regular season. (Of course an away goal in a cup competition is worth more than a home goal.)
So how did SAF manage this? As a soccer purist, I love the style of play that is uptempo and attacking.As a former defender I love when ManU’s right or left defenders become 3rd and 4th attackers up the wings. But at the same time, striking the correct balance offensively and defensively is key. By establishing a matrix approach SAF made it easier to move players around between and during games and to identify and increase their value relative to other players around them, so that a weakness in one area can be countered with strength in another. Furthermore, the matrix approach empowers weak players and makes superstars out of "ordinary" players like Ryan Giggs and Paul Scholes; whom many would never have guessed to have such an impact on the team, or the game, as individuals.
In a matrix, employees have a 3D view of their decisions and the impact on the rest of the organization (resource constraints/availability). From a tactical perspective (micro level) it enables forwards to play midfield and help on defense and defenders to develop the attack and even score.A good example is a player like Valencia who used to just be a wing at another team, but has become a very dangerous midfielder and at times has started at right-back for an injury-riddled defense this season.Strategically (at a macro level), the matrix defines key technology/product (supply) and customer/market (demand) parameters. With a matrix approach micro and macro perspectives can be easily related.For instance, SAF would never have let an individual player take over an entire organization’s public perception as Luis Suarez has at Liverpool this season.
Because of the matrix SAF’s strongest player is often the one others' consider weakest.Rather than focusing on his superstars, he focuses on getting the superstars to work with the weakest players and vice versa.Bringing this closer to home and more timely, the New York Knicks should implement a matrix approach both at the management/organizational and team levels.Just look at the benefit the team gets from a player considered weak, Jeremy Lin, but who passes the ball effectively to very talented players versus superstars like Carmelo Anthony or Baron Davis who have a hard time being “matrix” players.Every organization should develop its matrix and understand how employees play together as a team and how the organization is positioned in competitive industries.
Last week we revisted our seminal analysis from 1996 of the 10 cent wireless minute plan (400 minutes for C$40) introduced by Microcell of Canada and came up with the investment theme titled “The 4Cs of Wireless”.To generate sufficient ROI wireless needed to replace wireline as a preferred access method/device (PAD).Wireless would have to satisfy minimal cost, coverage, capacity and clarity requirements to disrupt the voice market.We found:
marginal cost of a wireless minute (all-in) was 1.5-3 cents
dual-mode devices (coverage) would lead to far greater penetration
software-driven and wideband protocols would win the capacity and price wars
CDMA had the best voice clarity (QoS); pre-dating Verizon’s “Can you hear me now” campaign by 6 years
In our model we concluded (and mathematically proved) that demand elasticity would drive consumption to 800 MOUs/month and average ARPUs to north of $70, from the low $40s.It all happened within 2 short years; at least perceived by the market when wireless stocks were booming in 1998. But in 1996, the pricing was viewed as the kiss of death for the wireless industry by our competitors on the Street.BTW, Microcell, the innovator, was at a disadvantage based on our analysis, as the very reason they went to the aggressive pricing model to fill the digital pipes, namely lack of coverage due to a single-mode GSM phone, ended up being their downfall. Coverage for a "mobility" product trumped price, as we see below.
What we didn’t realize at the time was that the 4Cs approach was broadly applicable to supply of communication services and applications in general. In the following decade, we further realized the need for a similar checklist on the demand side to understand how the supply would be soaked up and developed the 4Us of Demand in the process. We found that solutions and services progressed rapidly if they were:
easy to use
usable across an array of contexts
ubiquitous in terms of their access
universal in terms of appeal
Typically, most people refer only to user interface (UI or UX) or user experience (UE), but those aren't granular enough to accomodate the enormous range of demand at the margin. Look at any successful product or service introduction over the past 30 years and they’ve scored high on all 4 demand elements.The most profitable and self-sustaining products and solutions have been those that maximized perceived utility demand versus marginal cost.Apple is the most recent example of this.
Putting the 4Cs and 4Us together in an iterative fashion is the best way to understand clearing of marginal supply and demand ex ante. With rapid depreciation of supply (now in seconds, minutes and days) and infinitely diverse demand in digital networked ecosystems getting this process right is critical.
Back in the 1990s I used to say the difference between wireless and wired networks was like turning on a lightswitch in a dark room filled with people.Reaction and interaction (demand) could be instantaneous for the wireless network.So it was important to build out rapidly and load the systems quickly. That made them generative and emergent, resulting in exponential demand growth. (Importantly, this ubiquity resulted from interconnection mandated by regulations from the early 1980s and extended to new digital entrants (dual-mode) in the mid 1990s). Conversely a wired network was like walking around with a flashlight and lighting discrete access points providing linear growth.
The growth in adoption we are witnessing today from applications like Pinterest, Facebook and Instagram (underscored in this blogpost from Fred Wilson) is like stadium lights compared with the candlelight of the 1990s. What took 2 years is taking 2 months. You’ll find the successful applications and technologies score high on the 4Cs and 4Us checklists before they turn the lights on and join the iOS and Android parties.
You all know Monsieurs (MM.) Moore et Metcalfe.But do you know Monsieur (M.) Zipf?I made his acquaintance whilst researching infinite long tails.Why does he matter, you inquire?Because M. Zipf brings some respectability to Moore et Metcalfe, who can get a little out of control from time to time.
Monsieur Moore is an aggressive chap who doubles his strength every 18 months or so and isn’t shy about it.Monsieur Metcalfe has an insatiable appetite, and every bit he consumes increases his girth substantially.Many people have made lots of money from MM Moore’s et Metcalfe’s antics over the past 30 years. The first we refer to generally as the silicon or processing effect, the latter as the network effect. Putting the two together should lead to declines of 50-60% in cost for like performance or throughput. Heady, rather piggish stuff!
Monsieur Zipf, on the other hand, isn’t one for excess.He follows a rather strict regimen; one that applies universally to almost everything around us; be it man-made or natural.M. Zipf isn’t popular because he is rather unsocial.He ensures that what one person has, the next chap only can have half as much, and the next chap half that, and so on.It’s a decreasing, undemocratic principle. Or is it?
Despite his unpopularity, lack of obvious charm and people’s general ignorance of him, M. Zipf’s stature is about to rise.Why?Because of the smartphone and everyone’s desire to always be on and connected; things MM Moore and Metcalfe wholeheartedly support.
M. Zipf is related to the family of power law distributions.Over the past 20 years, technologists have applied his law to understanding network traffic.In a time of plenty, like the past 20 years, M. Zipf’s not been that important.But after 15 years of consolidation and relative underinvestment we are seeing demand outstrip supply and scarcity is looming. M. Zipf can help deal with that scarcity.
Capacity will only get worse as LTE (4G) devices explode on the scene in 2012, not only because of improved coverage, better handsets, improved Android (ICS), but mostly because of the iconic iPhone 5 coming this summer!Here’s the thing with 4G phones, they have bigger screens and they load stuff 5-10x faster.So what took 30 seconds now takes 3-10 seconds to load and stuff will look 2-3x better!People will get more and want more; much to MM Moore’s et Metcalfe’s great pleasure.
“Un moment!” cries M. Zipf.“My users already skew access quite a bit and this will just make matters worse!Today, 50% of capacity is used by 1% of my users.The next 9% use 40% and the remaining 90% of users use just 10% of capacity.With 4G the inequality can only get worse.Indignez-vous! Which is the latest French outcry for equality.” It turns out Zipf's law is actually democratic in that each person consumes at their marginal not average rate. The latter is socialism.
Few of us will see this distribution of usage as a problem short-term, except when we’re on overloaded cellsites and out of reach of a friendly WiFi hotspot.The carriers will throw more capex at the problem and continue to price inefficiently and ineffectively. The larger problem will become apparent within 2 years when the 90% become the 10% and the carriers tell Wall Street they need to invest another $50B after 2015 just after spending $53B between 2010-2014.
Most people aware of this problem say there is a solution.More Spectrum = more Bandwidth to satisfy MM Moore et Metcalfe.But they’ve never heard of M. Zipf nor understood fully how networks are used.Our solution, extended as a courtesy by M. Zipf, is to “understand the customer” and work on “traffic offloading” at the margin.Pricing strategies, some clever code, and marketing are the tools to implement a strategy that can minimize the capital outlays, and rapidly amortize investment and generate positive ROI.
We’ve been thinking about this since 1996 when we first introduced our 4Cs of Wireless (cost, coverage, capacity and clarity) analyzing, understanding and embracing 10 cent wireless pricing (introduced by French Canada's revolutionary MicroCell). As a result we were 2-3 years ahead of everybody with respect to penetration, consumption and wireline substitution thinking and forecasts. Back in 1995 the best wireless prices were 50 cents per minute and just for buying a lot of local access. Long-distance and roaming charges applied. So a corporate executive who travelled a lot would regularly rack up $2000-3000 monthly phone bills. The result was less than 10% penetration, 80 minutes of use per month, and ARPUs declining from $45 to $40 to $35 in analysts' models because the marginal customers being added to the network were using the devices infrequently and more often than not putting them into the glove compartment in case of emergencies. Fewer than 3% of the population actually used the devices more than 1x day.
We used to poll taxi drivers continuously about wireless and found that their average perceived price of $0.75 per minute was simply too high to justify not having to pull over and use a payphone for $0.25. So that was the magical inflection point in the elasticity curves. When MicroCell introduced $0.10 late in the Spring of 1996 and we polled the same set of users, invariably we were just able to avoid an accident they got so excited. So we reasoned and modeled that more than just taxi drivers would use wireless as a primary access device. And use it a lot. This wireless/wireline substitution would result in consumption of 700-800 minutes of use per month, penetration hitting 100% quickly and ARPUs, rather than declining, actually increasing to $70. The forecast was unbelievably bullish. And of course no one believed it in 1996, even though all those numbers were mostly reached within 5 years.
But we also recognized that wireless was a two-edge sword with respect to localized capacity and throughput; taking into account the above 3 laws. So we also created an optimal zone, or location-based, pricing and selling plan that increased ARPUs and effective yield and were vastly superior to all you can eat (AYCE) and eat what you want (EWYW) plans. Unfortunately, carriers didn't understand or appreciate M. Zipf and within 2 years they were giving away night and weekend minutes for free, where they could have monetized them for 3-6 cents each. Then some carriers responded by giving away long-distance (whose marginal cost was less than a minutes without access; but still could cost 2-3 cents). Then AT&T responded with the One-rate plan, which destroyed roaming surcharges and led to one-rate everywhere; even if demand was different everywhere.
Here’s a snapshot of that analysis that is quite simple and consistent with Zipf's law and highly applicable today. Unfortunately, where my approach would have kept effective yield at 8 cents or higher, the competitive carriers responded by going to all you can eat (AYCE) plans and the effective yield dropped to 4 cents by 2004. Had intercarrier SMS not occurred in the 2003-4 timeframe, they would have all been sunk with those pricing models, as they were in the middle of massive 2G investment programs for the coming "wireless data explosion", which actually didn't happen until 3G and smartphones in the 2008-2009 timeframes. It was still a voice and blackberry (texting and email) world in 2007 when the iPhone hit. With ubiquitous SMS and people's preference to text instead of leaving vmail, minutes dropped from 700 to 500, lowering carrier's costs, and they were able to generate incremental revenues on SMS pricing plans (called data) in the 2004-2007 timeframe.
All that said, the analysis and approach is even more useful today since extreme consumption of data will tend to occur disproportionately in the fixed mode (what many refer to as offload). I let you come up with your own solutions. À bientôt! Oh, and look up Free in France to get an idea of where things are headed. What is it about these French? Must be something about Liberté, égalité, fraternité.
67 million Americans live in rural areas. The FCC says the benchmark broadband speed is at least 4 Mbps downstream and 1 Mbps upstream. Based on that definition 65% of Americans actually have broadband, but only 50% who live in rural markets do; or 35 million. The 50% is due largely because 19 million Americans (28%) who live in rural markets do not even have access to these speeds. Another way of looking at the numbers shows that 97% of non-rural Americans have access to these speeds versus 72% living in rural areas. Rural Americans are at a significant disadvantage to other Americans when it comes to working from home, e-commerce or distance education. Clearly 70% are buying if they have access to it.
Furthermore we would argue the FCC standard is no longer acceptable when it comes to basic or high-definition multimedia, video and file downloads. These applications require 10+ Mbps downstream and 3+ Mbps upstream to make applications user friendly. Without those speeds you get what we call the "world-wide-wait" in rural markets for most of today's high-bandwidth applications. In the accompanying 2 figures we see a clear gap between the blue lines (urban) and green lines (rural) for both download and upload speeds. The result is that only 7% of rural Americans use broadband service with 6+/1.5+ Mbps versus 22% nationwide today.
The problem in rural markets is lack of alternative and affordable service providers. In fact the NTIA estimates that 4% of Americans have no broadband provider to begin with, 12% only 1 service provider and 44% just 2 providers. Almost all rural subscribers fall into 1 of these 3 categories. Rural utilities, municipalities, businesses and consumers would benefit dramatically from alternative access providers as economic growth is directly tied to broadband penetration.
The accompanying chart shows how vital broadband is to regional economic growth. If alternative access drives rural broadband adoption to levels similar to urban markets, then local economies will grow an additional 3% annually. That's because new wireless technology and applications such as home energy management, video on demand, video conferencing and distance learning provide the economic justification for alternative, lower-cost, higher bandwidth solutions.
A humble networking protocol 10 years ago, packet based Ethernet (invented at Xerox in 1973) has now ascended to the top of the carrier networking pyramid over traditional voice circuit (time) protocols due to the growth in data networks (storage and application connectivity) and 3G wireless.According to AboveNet the top 3 CIO priorities are cloud computing, virtualization and mobile, up from spots 16, 3 and 12, respectively, just 2 years ago! Ethernet now accounts for 36% of all access, larger than any other single legacy technology, up from nothing 10 years ago when the Metro Ethernet Forum was established.With Gigabit and Terabit speeds, Ethernet is the only protocol for the future.
The recent Ethernet Expo 2011 in NYC underscored the trends and importance of what is going on in the market.Just like fiber and high-capacity wireless (MIMO) in the physical layer (aka layer 1), Ethernet has significant price/performance advantages in transport networks (aka layer 2).This graphic illustrates why it has spread through the landscape so rapidly from LAN to MAN to WAN.With 75% of US business buildings lacking access to fiber, EoC will be the preferred access solution.As bandwidth demand increases, Ethernet has a 5-10x price/performance advantage over legacy equipment.
Ethernet is getting smarter via a pejoratively coined term, SPIT (Service Provider Information Technology).The graphic below shows how the growing horizontalization is supported by vertical integration of information (ie exchanges) that will make Ethernet truly “on-demand”.This model is critical because of both the variability and dispersion of traffic brought on by both mobility and cloud computing.Already, the underlying layers are being “re”-developed by companies like AlliedFiber who are building new WAN fiber with interconnection points every 60 miles.It will all be ethernet.Ultimately, app providers may centralize intelligence at these points, just like Akamai pushed content storage towards the edge of the network for Web 1.0.At the core and key boundary points Ethernet Exchanges will begin to develop.Right now network connections are mostly private and there is significant debate as to whether there will be carrier exchanges.The reality is that there will be exchanges in the future; and not just horizontal but vertical as well to facilitate new service creation and a far larger range of on-demand bandwidth solutions.
By the way, I found this “old” (circa 2005) chart from the MEF illustrating what and where Ethernet is in the network stack.It is consistent with my own definition of web 1.0 as a 4 layer stack.Replace layer 4 with clouds and mobile and you get the sense for how much greater complexity there is today.When you compare it to the above charts you see how far Ethernet has evolved in a very rapid time and why companies like Telx, Equinix (8.6x cash flow), Neutral Tandem (3.5x cash flow) will be interesting to watch, as well as larger carriers like Megapath and AboveNet (8.2x cash flow).Certainly the next 3-5 years will see significant growth in ethernet and obsolescence of the PSTN and legacy voice (time-based) technologies.
Even though the US has the most reliable electric system in the world, utility companies are not schooled in real-time or two-way concepts when it comes to gathering and reporting data, nor when it comes to customer service. All of that changes with a “smart-grid” and may be the best explanation why so many smart-grid solutions stop at the meter and do not extend fully into the customer premise. Unfortunately, utilities are not prepared to “get” so much information, let alone “give” much to the customer. Over 20 million smart meters, representing 15% penetration in residential markets, have been deployed as of June, 2011 according to IEE. They forecast 65 million (50%) by 2015, at an average cost of $150-250 per household. While these numbers are significant, it will have taken 15 years to get there and even then only 6 million premises, less than 5% of the market, are expected to have energy management devices by 2015. So while the utilities will have a slightly better view of things and have greater controls and operating efficiencies, the consumer will not be engaged fully, if at all. This is the challenge of the smart-grid today.
Part of the issue is incumbent organizations--regulatory bodies, large utilities and vendors--and their desire to stick to proven approaches, while not all agreeing on what those approaches are. According to NIST, there are no fewer than 75 key standards and 11 different standards bodies and associations involved in smart-grid research and trials. The result is numerous different approaches, many of which are proprietary and expensive. As well, the industry breaks energy management within smart-grid into 2 broad categories, namely Demand Response Management (DRM or the side the utility controls) and Demand Side Management (DSM or the side the customer arguably controls), instead of just calling it “end-to-end energy management;” which is how we refer to it.
Another challenge, specifically for rural utilities is that over 60% have PLC meters, which don’t work with most of the “standard” DRM solutions in the market, necessitating an upgrade. This could actually present an opportunity for a well designed end-to-end solution that leapfrogs the current industry debate and offers a new approach. Such an approach would work-around an expensive investment upgrade of the meter AND allow DSM at the same time. After working with utilities for over 10 years, we’ve discovered that rural utilities are the most receptive to this new way of thinking, not least because they are owned by their customers and they can achieve greater operating efficiencies from end-to-end “smart” technology investment because of their widely dispersed customer base.
Ultimately the market will need low-cost, flexible end-to-end solutions to make the smart-grid pervasive and generate the expected ROI for utility and customer alike.
profits at Apple, AT&T vs VZ, Google, most notably,
and who wins in social media and what is next.
In my opinion they are all related and the Cloud plays the central role, metaphorically and physically.Horowitz recently wrote about the new computing paradigm in defense of the supposed technology valuation bubble.I agree wholeheartedly with his assessment as I got my first taste of this historical computing cycle over 30 years ago when I had to cycle 10 miles to a High School in another district that had a dedicated line to the county mainframe.A year or two later I was simulating virus growth on an Apple PC.So when Windows came in 1987 I was already ahead of the curve with respect to distributed computing.Moreover, as a communications analyst in the early 1990s I also realized what competition in the WAN post-1984 had begat, namely, Web 1.0 (aka the Internet) and the most advanced and cheapest digital paging/messaging services in the world.Both of these trends would have a significant impact on me personally and professionally and I will write about those evolutions and collapses in future Spectral issues.
The problem, the solution, the problem, the solution, etc….
The problem back in the 1970s and early 1980s was the telephone monopoly.Moore’s law bypassed the analog access bottleneck with cheap processing and local transport.Consumers and then enterprises and institutions began to buy and link the PCs together to communicate, share files and resources.Things got exciting when we began to multitask in 1987, and then by 1994 any PC provided access to information pretty much anywhere.During the 1990s and well into the next decade, Web 1.0 was just a 1.2-way store and forward database lookup platform.It was early cloud computing, sort of, but no-one had high-speed access.It was so bad in 1998 when I went independent, that I had 25x more dedicated bandwidth than my former colleagues at bulge-bracket Wall Street firms.That’s why we had the bust.Web 1.0 was narrow-band, not broadband, and certainly not 2-way.Wireless was just beginning to wake up to data, even though Jeff Bezos had everyone believing they would be ordering books through their phones in 2000.
Two things happened in the 2000s.First, high speed bandwidth became ubiquitous.I remember raising capital for The Feedroom, a leading video ASP, in 2003 and we were still watching high-speed access penetration reaching the 40% “tipping point.”.Second the IP stack grew from being a 4 layer model to something more robust.We built CDNs.We built border controllers that enabled Skype VoIP traffic to transit foreign networks “for free.”We built security.HTML, browsers and web frontends grew to support multimedia.By the second half of the decade, Web 2.0 became 1.7-way and true “cloud” services began to develop.Web 2.0 is still not fully developed as there are still a lot of technical and pricing controls and “lubricants” missing for true 2-way synchronous high-definition communications; more about that in future Spectrals.
The New “Hidden Problem”
Unfortunately, over that time the underlying service provider market of 5-6 competitive service providers (wired, wireless, cable) consolidated down to an oligopoly in most markets.Wherever competition dropped to 3 or fewer providers bandwidth pricing stopped falling 40-70% like it should have and only fell 5-15% per annum.Yet technology prices at the edge and core (Moore’s Law) kept on falling 50%+ every 12-18 months.Today, the price differential between “retail” and “underlying economic” cost per bit is the widest it has been since 1984.
That wouldn’t be a problem except for two recent developments:the advent of the smartphone and the attendant application ecosystems.So what does this have to do with cloud computing, especially when that was “an enterprise phenomenon” begun by Salesforce.com with its Force.com and Amazon Web Services.A lot of the new consumer wireless applications run on the cloud.There are entire developer ecosystems building new companies.IDC estimates that the total amount of information accessible is going to grow 44x by 2020 to 35 zetabytes.And the average number of unique files is going to grow 65x. That means that while a lot of the applications and information is going to be high-bandwidth (video and multimedia), there are also going to be many smaller files and transactions (bits of information); ie telemetry or personal information or sensory inputs.And this information will be constantly accessed by 3-5 billion wireless smartphones and devices.The math of networks is (N*(N-1))/2.That’s an awful lot of IP session pathways.
Why is That A Problem?
The problem is that the current wireless networks can’t handle this onslaught.Carriers have already been announcing datacaps over the past 2 years.While they are falling over themselves to announce 4G networks, the reality is that they are only designed to be a 2-3x faster, and far from being ubiquitous, either geographically (wide-area) or inbuilding.That’s a problem if the new applications and information sets require networks that are 20-50x faster and many factors more reliable and ubiquitous.The smartphones and their wireless tether are becoming single points of access.Add to that the fact that carriers derive increasingly less direct benefit from these application ecosystems, so they’ll have less and less incentive to upgrade and reprice their network services along true technology-driven marginal cost.Neustar is already warning carriers they are being bypassed in the process.
Does The Bubble Have to Burst?
Just as in the late 1990s, the upper and middle layer guys really don’t know what is going on at the lower layers.And if they don’t then surely the current bubble will burst as expectations will get ahead of reality.That may take another 2-3 years, but it will likely happen.In the meantime, alternative access players are beginning to rise up.Even the carriers themselves are talking about offloading traffic onto femto and wifi cells.Wifi alliances are springing up again and middle layer software/application controls are developing to make it easier for end-users to offload traffic themselves.Having lived through and analyzed the advent of competitive wired and wireless networks in the 1990s, my sense is that nothing, even LightSquared or Clearwire in their current forms, will be significant enough to precipitate the dramatic restructuring that is necessary to service this coming tidal wave of demand.
What we need is something that I call centralized hierarchical networking (CHN)™.Essentially we will see three major layers with the bottom access/transport layer being controlled by 3-4 hybrid networks.The growth and dynamic from edge to core and vice versa will wax and wane in rather rapid fashion.Until then, while I totally get and support the cloud and believe most applications are going that route, let the Cloud Players be forewarned of coming turbulence unless something is done to (re)solve the bandwidth bottleneck!
1) How does information flow through our economic, social and political fabric?I believe all of history can be modeled on the pathways and velocity of information.To my knowledge there is no economic science regarding the velocity of information, but many write about it. Davidow (OVERconnected) speaks to networks of people (information) being in 3 states of connectivity. Tom Wheeler, someone whom I admire a great deal, often relates what is happening today to historical events and vice versa. His book on Lincoln’s use of the telegraph makes for a fascinating read.Because of its current business emphasis and potential to change many aspects of our economy and lives social media will be worth modeling along the lines of information velocity.
2) Mapping the rapidly evolving infomedia landscape to explain both the chaos of convergence and the divergence of demand has interested me for 20 years.This represents a taxonomy of things in the communications, technology and internet worlds. The latest iteration, called the InfoStack, puts everything into a 3 dimensional framework with a geographic, technological/operational, and network/application dispersion. I’ve taken that a step further and from 3 dimensional macro/micro models developed 3 dimensional organizational matrices for companies. 3 coordinates capture 99% of everything that is relevant about a technology, product, company, industry or topic.
3) Mobile payments and ecommerce have been an area of focus over the past 3 years. I will comment quite a bit on this topic.There are hundreds of players, with everyone jockeying for dominance or their piece of the pie.The area is also at the nexus of 3 very large groupings of companies:financial services, communications services and transaction/information processors. The latter includes Google and FaceBook, which is why they are constantly being talked about.That said, players in all 3 camps are constrained by vestigial business and pricing models. Whoever ties/relates the communications event/transaction to the underlying economic transaction will win.New pricing will reflect digitization and true marginal cost. Successful models/blueprints are 800, VPN, and advertising.We believe 70-80% of all revenue in the future will derive from corporate users and less than 30% will be subscription based.
4) Exchange models and products/solutions that facilitate the flow of information across upper and lower layers and from end to end represent exciting and rewarding opportunities. In a competitive world of infinite revenue clouds of demand mechanisms must exist that drive cost down between participants as traffic volumes explode.This holds for one-way and two-way traffic, and narrow and broadband applications.The opposing sides of bill and keep (called party pays) and network neutrality, are missing the point.New services can only develop if there is a bilateral, balanced payment system.It is easy to see why incumbent service and application models embrace bill and keep, as it stifles new entrants.But long term it also stifles innovation and retards growth.
5) What will the new network and access topologies look like?Clearly the current industry structure cannot withstand the dual onslaught of rapid technological change and obsolescence and enormously growing and diverging demand.It’s great if everyone embraces the cloud, but what if we don’t have access to it?Something I call “centralized hierarchical networking” will develop.A significant amount of hybridization will exist.No “one solution” will result.Scale and ubiquity will be critical elements to commercial success.As will anticipation and incorporation of developments in the middle and upper layers.Policy must ensure that providers are not allowed to hide behind a mantra of “natural bottlenecks” and universal service requirements.In fact, the open and competitive models ensure the latter as we saw from our pro-competitive and wireless policies of the 1980s and 1990s.
In conclusion, these are the 5 areas I focus on:
2)Mapping the InfoStack
3)Applications and in particular, payment systems
The analysis will tend to focus on pricing (driven by marginal, not average costs) and arbitrages, the “directory value” of something, which some refer to as the network effect, and key supply and demand drivers.
Today, April 18, 2011 marks my first official blog.It is about making money and having fun.Actually I started blogging about telecommunications 20 years ago on Wall Street with my TelNotes daily and SpectralShifts weekly.Looking back, I am happy to report that a lot of what I said about the space actually took place; consolidation, wireless usurpation of wireline access, IP growing into something more robust than a 4 layer stack, etc…Over the past decade I’ve watched the advent of social media, and application ecosystems, and the collapse of the competitive communications sector; the good, the bad, and the ugly, respectively.
Along the way I’ve participated in or been impacted by these trends as I helped startups and small companies raise money and improve their strategy, tactics and operations.Overall, an entirely different perspective from my ivory tower Wall Street research perch of the 1980s-90s.Hopefully what I have to say is of use to a broad audience and helps people cut through contradictory themes of chaotic convergence and diverging demand to take advantage of the rapidly shifting landscape.
I like examples of reality imitating art.One of my favorites was Pink Floyd’s The Wall, which preceded the destruction of the Berlin Wall by a decade.Another, the devastating satire and 1976 classic Network, predating by 30 years what media has become in the age of reality TV, twitter and the internet moment.I feel like a lot has changed and it’s time for me to start talking again.So in the words of Howard Beale (Peter Finch) “I’m as mad as hell, and I’m not going to take it anymore.”
Most of the time you’ll see me take an opposite stance from consensus, or approach a topic or problem from a 90 degree angle.That’s my intrinsic value; don’t look for consensus opinion here.The ability to do this lies in my analytical framework, called the InfoStack.It is a three dimensional framework that maps information, topics and problems along geographic, network and application dispersions.By geographic I mean WAN, MAN, LAN, PAN.By network, I mean a 7 layer OSI stack.And by applications, I mean clouds of intersecting demand.You will see that I talk about horizontal layering and scale, vertically complete solutions, and unlimited “cloud-like” revenue opportunity.Anything I analyze is in the context of what is going on in adjacent spaces of the matrix.And I look for cause and effect amongst the layers.
I see us at the beginning of something very big; bigger than in 1987 at the dawn of the Wintel revolution.The best way to enjoy the great literary authors is to start with their earliest works and read sequentially; growing and developing with them.Grow with me as we sit at the dawn of the Infomedia revolution that is and will remake the world around us.In the process, let’s make some money and build things that are substantial.