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.
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.
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.
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.