Wednesday, November 02, 2005

Issues raised by comments by Ed Whitacre, CEO of SBC as quoted in MarketWatch and Business Week remind us of how dysfunctional the current telecommunication system is. From MarketWatch about Ed Whitacre

He argued that because SBC and others have invested to build high-speed networks, they are due a return.

The problem goes well beyond cost-plus entitlement. As billing model has a pervasive and corrupting effect. Rather than just using IP, the DSL typically uses a strange concept called PPPoE (AKA PPoE) which runs IP packets over the phone network to an access point which then connects to the rest of the Internet. This goes beyond just saying that the Internet is a service, it runs IP over the expensive phone network rather than avoiding the overhead.

Even more troubling, the assumption that SBC can make the content provider pay shows a fundamental failure to understand the basic concepts of the Internet. It's as if SBC is so blinded by their jealously of CableCos who control the content that they don't understand that separation of content and transport which is fundamental to the architecture of the Internet. The CableCos too will lose their ability to control the content.

I coined the term "The Regulatorium" (implicitly referring to the world of the FCC) because of the warping (or Whorfing) of reality. The gratuitous complexity of approaches like PPoE are a result of trying to map a system framed in terms of the Regulatorium into business and implementation models.

By giving the Regulatorium a name I hope to be able to legitimize not wearing the Regulatorium Blinders (available at an FCC near you) and talking about basic principles of economics (and physics) rather than just manipulating a set of fantastic rules. I shouldn't have to add IANAL (I Am Not A Lawyer) when talking about basic principles.

Unfortunately the biggest challenge is in getting people to accept that beneath and belying the incredible complexity of the Regulatorium are simple principles. Perhaps it's a bit easier with the Internet as a dramatic case study but people have trouble giving up the illusion that there is a need for a "phone company".

The points are very simple

• The FCC was created to manage scarcity and now is the primary reason there is such scarcity.
• Signaling restricted to single frequencies in a single hop creates scarcity and the requirement that we prove there can't be any interference is thus an unconstitutional imposition of priority restraint. IANACL (C for US Constitution).

The second point has the advantage of appealing directly to the US Constitution -- I see the First Amendment as an essential economic driver for the US and I fear a court that is capable of decisions like Dred Scott. Even if one doesn't accept the full argument against spectrum allocation at very least the interference rules should be suspect.

The first point appeals to antitrust legislation so is a bit more difficult though I would like to think that there are first principles which are deeper. It's difficult to justify prohibiting cities from providing communications services but the Regulatorium makes it easy to extend this prohibition to pure connectivity thus mandating multiple expensive delivery systems.

To fully appreciate these arguments and, more important, to see why they matter and why this isn't just another obscure battle over gaining advantage via regulation (though that is the norm within the Regulatorium) it does help to understand simple concepts including

• Bits are bits. Meaning they are fungible and that there is no intrinsic meaning in the bits that makes them distinguishable.
• Marketplace architecture matters. Those that decouple elements yield rapid growth by removing impediments to innovation. Antitrust regulation nibbles at this but I don't think it's well articulated. That said I would hesitate to be too prescriptive because neither marketplaces nor their architectures can be static for more than brief periods of time.
• As I keep saying -- Marketplaces that create opportunity rather than just deliver solutions allow demand to create supply. It's another take on the end-to-end (vs womb-to-tomb) principles. In order to see how disparate behavior composites it is important to understand how digital systems work and regenerate what is viable and slough off what isn't. Unlike analog systems where entropy is evenly distributed digital systems create anti-entropy islands (thus seeming to defy entropy and create order when they are merely sharpening distinctions).

I see my role as trying to create understanding rather than a frontal assault on the Regulatorium. I don't accept the argument that only incremental change is possible. Just the opposite, any complex system such as the Regulatorium can absorb attacks. It's only by questioning the entity as a whole that we can effect real change.

I've been writing about the Regulatorium for years but something is different now. Even if people don't understand the complexities new concepts like municipal Wi-Fi and VoIP are coming into the mainstream. New content providers like Google don't have the concept of giving the carriers a portion of their value added just to get access to the carriers' customers. The customers no longer even belong to the carriers -- the customers already have relationships with the new "providers".

Not only that, the newcomers are very familiar with the technology and understand that connectivity itself is nearly free. Their revenue doesn't come from the transport and is often indirect via mechanisms such as advertising. No wonder the carriers are in deep trouble -- the carriers have competitors that not only do not need to make a profit in the carriers' core business, they can afford to give it away. And it gets worse because wireless connectivity is no different. Protocols that encrypt and maintain relationships at the edge allow the packets to travel independent of whether there are wires. And it gets even worse because any user can extend connectivity and create a ubiquitous wireless cloud.

The sooner we recognize that Connectivity as a Utility the sooner we can take advantage of abundance. Municipal Wi-Fi, as a concept, is a vital wedge. It makes it increasingly difficult for the carriers to argue against municipal connectivity and it gives municipalities and other groups a model to build from. Once we have connectivity, even if by accident, it's hard for the carriers to explain their relevance.

Whitacre is right -- without a special role he can't pay for his infrastructure by taxing his customer's value. Even if he isn't articulate, he is admitting defeat -- his business simply isn't viable. He may not understand this but his remaining shareholders are going to wake up. It might not be long till even Congress becomes aware that the world has changed -- even if they can't provide leadership they are very good at following.

Change is happening -- there is no need to talk about the Regulatorium when we should be talking about the new opportunities. And, perhaps, perhaps, the salvage value of the carriers' physical plant.

Note that I've been doing most of my posts off of SATN -- Check my main listing for other writings.