What is really being adopted–and not by Congressional law–is adjusting the process of forbearance to non-regulated broadband services instead of focusing on legacy facilities and competition as subscribed under CA1996.  It’s this aspect of the “Third Way” where the FCC is going to (once again) touch the third rail.  The CLEC whiners are for the “third Way” because Wall Street has yet to punish them for not being enabled to handle organic bandwidth demands beyond 1.5 megabits, bonded pairs or regulated special access (transport) prices.

So, my prediction is that the ILECs will play paddy-cake with the FCC because every day of  paddy-cake that goes by is just another day of more CLEC rental money pouring in on rental infrastructure that was paid for decades ago and continues to get reinvested into ILEC fiber optic platforms.  Once, the FCC makes a move and the paddy-cake game stops,  expect 18 months of court battles and, based on the law covered under CA 1996, the ILEC to once again prevail.

It’s a nice try to modify forbearance to extend the gravy train to rental type 2 and special access CLECs but it has limited legs and the FCC knows it.  And if things this November turn out the way pundits are predicting in the mid-term elections, we are talking endangered species for those whom have done little or nothing after 14-years to become ILEC infrastructure independent.

With all that said, here are my solutions:

1.    Recognize we need more infrastructure deployed for transport.  Unbundled transport regulation will be a deterrent to private investment into non-ILEC controlled infrastructure.
2.    Instead of giving away $7.2 billion in grants, why not take another $7 billion and create a 50% government matching bond pool for 10-year bond issuance in the public markets for infrastructure investment.  The 50% match gives the bond a high rating provided that those that qualify are known performing entities, prohibited from over-building an already open access network, and the infrastructure deployed by these bonds are required to be open access infrastructure.  Dominant carriers like Cable Companies and ILECs are ineligible.
3.    Take my idea in #2 a step further and create a 25% government-matched bond for ten years–but make those bonds tax free.  Dominant carriers like Cable Companies and ILECs are ineligible.
4.    The FCC needs to start behaving differently and should ask for a new charter from Congress.  That charter is to stop the rhetoric about “protecting the consumer” and move on to a charter that is focused upon what is “Good for all of America in a Global Economy.”  Fiber optic transport is the new oil.
5.    Bill and Keep–get it over with.  It’s a digital IP world, the terminating access game is over.
6.    Sunset copper loops in 5-years whereby the ILEC can charge whatever they want to whoever wants them.  Give the ILECs a tax incentive to sell loops to CLECs that want them with title–sort of like an IRU, but requiring yearly maintenance charges.
7.    Sunset regulations on special access in 5 years.  Leave it alone for now.  After 5 years the ILECs are lightly regulated on special access for two more years.  After 7 years–no regulation.  That gives the Type 2/Special Access crowd 21 years since CA1996 to figure things out.

I actually believe these seven starter items are will create new investment into infrastructure–along with all sorts of new jobs–and facilitate resurgence in the IPO market for service and technology companies associated with the infrastructure.

Get the horse (fiber optics) ahead of the cart (applications).

Before closing out my diatribe: where we need FCC neutrality-issue focus is not on unbundled transport.  We need network device neutrality, network protocol access neutrality, peering-point neutrality, application programming interface (API) neutrality and any other neutrality to further the advance of investment into wire line and wireless infrastructure for new market entrants.

Finally, for my friends in the Beltway: America was not built on an equal playing field.  When the Beltway or State regulates for an equal playing field in burgeoning areas of technology, they destroy innovation, economic expansion and global competitive advantage.  America was built upon innovation, but not always by competing on a level playing field.  We need winners and losers when it comes to entrepreneurial risk and undertakings–not a level playing field catering to the lowest common denominator–where we can declare everyone a winner due to a lack of political will and leadership.

America is getting too close to the third rail in more ways than one!

I read lots of articles, reports, analyst’s reviews, technical briefs and congressional filings.  Yes, I know, I need to get a hobby.

I usually like to digest things before commenting such that there is level of objectivity and credibility in my observations.  Some times, things I read give me indigestion and that’s when the real sarcasm appears.  My itch today has to do with this “Third Way” proposal that my buddy FCC Chairman, Julius Genachowski, is pursuing relative to re-regulating broadband from an information service to a fully regulated service.  As I continue to read, I am becoming more and more suspicious that Chairman Julius has stopped reading my blog.

The FCC is about to become a Yoga pretzel all tied up in knots in this scheme to regulate the transport aspects of broadband.  Transport being limited to wire line, not wireless, though I assert to you that wireless is an oligopoly being dominated by a handful of bi-modal competition rules from previous Chairman Martin.

So who is going to be the Yoga instructor on this one for the FCC?  Well, it’s not going to be Richard Simmons.  In the end, it will be the ILECs at the Federal Court level once again telling the FCC you regulate to the laws created by Congress.  Chairman Jules – just listen to me now and save the tax payers millions in legal fees.

Actually, the “Third Way” for neutrality is a façade.  It’s like a slight of hand trick.  The issue being advertised has to do with remnants of network neutrality (Comcast v. FCC) where Comcast was the Yoga instructor of choice.  Just like Chairman Martin, the FCC was told you are not Congress; you must follow the law as set by Congress.

The ‘Third Way” is an attempt to regulate the Internet and previously lightly-regulated information services such as VOIP and applications.  The guise of the proposal is to regulate transport on an unbundled basis – an area that needs less regulation and more incentive for infrastructure builds.  But the whining copper loop and special access (aka Type 2) CLEC crowd who have played arbitrage since the Communications Act of 1996 (over 14 years ago), are still pursuing that ILEC teat instead of investing into their own facilities or the facilities offered by non-ILECs.

Over the past 14-years, the Communications Act has increased competition and has lowered market prices.  Lower prices are not a good thing for any operator unless their costs drop at a rate faster than price.  Thus, every time the CLEC whiners start whining, it is because their love of arbitrage and margins are getting squeezed by lowering market prices while being dependent upon the ILEC teat for infrastructure at regulated fixed costs.  So the cry for the “Third Option” is to get even lower cost prices from the ILECs who are investing heavily in more cost efficient platforms called fiber optics.

It’s no secret that 1.5 megabits just doesn’t float too many boats anymore–even Harry Homeowners boat.  So with an organic increase in demand for bandwidth far exceeding 1.5 megabits, an emphasis is being placed on regulating unbundled transport prices to further the 14-year arbitrage game.

So, that’s the slight of hand so far.

Tune in on Friday to read the remainder of Dave’s rant–

As much as I dislike going political, let’s use industry terms…

We need to “churn” out our elected officials inside the Beltway – all of them.  Forget tenure and your self-serving interests because your representative has been there for years.

Korea is going 1 gigabyte by 2012 … I have written about this before.  What is in the water inside that Beltway?

Wake-up America!

http://joongangdaily.joins.com/article/view.asp?aid=2900490

Well, FIOS is a fiber platform – it does not know what service runs over it.  Moreover, FIOS is a fiber termination directly into a home or business.

Why do I bring this up?  Let’s play connect the dots.

First, for disclosure purposes, I am a fiber bigot – dark, dim or lit – I am a fiber bigot. I guess one can say I have diversity towards and sensitivity to optical fiber.  Lit fiber provides a host of spectrum colors as well beyond dark and dim.  I am like part of a fiber Optic Rainbow Coalition – I like all the things fiber can do.

Today I happen to read that Motorola has sold off its Fiber-To-The-Pedestal (FTTP) business and is keeping its Fiber-to-The-Home (FTTH) business of products.  For those of you still relying on Ma Bell, “to the pedestal” results in the last point between the pedestal and the building/home are copper.  For those looking at the “H” in FTTH – once again, whether it’s a home or building – the fiber strands do not discriminate.

Question: Why did Motorola sell off FTTP business but not FTTH interests?

Another article I read from Infonetics Research states that video will triple in consumption by 2013.  For sake of connecting the dots, let’s say Infonetics Research is half-right with their forecast.

Cisco also announced a new product this week.  This product is geared to the television set to provide – get this — affordable video conferencing.  Sure there will be early adopters, but it is fairly important Cisco is making such a capability available targeted to households.

Connect the dots … what medium can handle this with scale, reliability, speed and lowest/cost per bit?  Copper?  Coax? EVDO? 3G? 4G? LTE? WiMax?  BPL? Fiber?

I’ll let you be the judge.

By the way — those televisions supporting high-definition video – its 30 megabits a channel.

Connect the dots my friends – unless you are moving, you want to have a direct fiber connection.

Motorola is making a move, Cisco is making a move, and Infonetics if half right…which tells me the legacy networks are incapable from a physics perspective.

Then again, this past week, our government issued a definition of Broadband for America as a measure: 768 kilobits.  Can someone give me the math on watching a high-definition video or real time program via IPTV over a 768 kilobit link?

I am curious, is Long Distance Access costs such a big deal since the RBOCs own the major IXCs?  I know for years the IXCs have been asking for Access reform but I haven’t heard much of late.  I guess the last was maybe the Missoula plan that AT&T promoted.  What do you think?

-Loyd

Loyd,

-Dave

Did you know that the key to fiber route value is placement–unique routes, versus over-built, redundant, joint-built fiber routes?

Let me explain. If you have 5 carriers on the same fiber route, each with their own fiber sheath, what you have is a 40-year supply and demand imbalance and an inability to make a profit. Often this imbalance creates “distressed assets.” If you are from the beltway, and thinking about handing out our cash, read this paragraph a few times until you understand it. History has a way of repeating itself.

Just like UNE-Loops of copper, an IRU is not network ownership, it is a rented privilege. If your carrier has an IRU-based business model of a few fiber strands, you may need to ask some questions about future supply availability and/or overall capacity. Those who own the cable sheath control the supply and have unlimited capacity ability.

The costs to deploy fiber optic networks increase every year as labor is 60% of the cost!

What cost a $1 to build in 2000, now costs $2.00. Yes, distressed assets–they are distressed for a reason. The route…redundant cables…joint-built routes…fire-sold IRU’s to competitors, etc. These reasons gave credence to a massive fiber glut (circa 2001 to 2006), according to the real smart guys on Wall Street.

Since 2001, the Ma Bells of America have collectively spent over $25 billion on the deployment of new fiber optic networks. With such a supply glut as recent as 2001-2006, one would think there would be no need.

What is going on?

Owners of fiber optic cable infrastructure that allow IRU’s to be sold are actually providing open networks, which promotes real facility or network-based competition. However, our regulators don’t discriminate as they should between open and closed networks. The government should be bending over backwards for open-access network providers to promote substantive competition. More on this subject in a future blog.

Anyhow, there are different types of networks: oceanic, long haul, metropolitan and access. Let me describe each one in simple terms because I want to make sure we don’t piss away money needlessly:

Oceanic: Dropped from a barge to the ocean floor, this is a cable sheath wrapped inside of a steal sheath that connects continents or countries. Its capabilities are strictly transit and aggregation of point-to-point traffic. As many bits you can aggregate is what gets shoved down this pipe.

Long Haul or Regional Long Haul: This is the terrestrial version of Oceanic, but without the need for a barge or steal sheathing around the fiber cable. Long haul networks can be buried underground or strung from poles. This type of network terminates in what is called a carrier hotel in a given city or metropolitan statistical area (MSA). Long Haul capabilities are strictly transit and aggregation of point-to point traffic. As many bits you can aggregate is what gets shoved down this pipe. A national long haul network can run coast-to-coast, while a regional long haul network can cover a state or a region, such as the Northeast.

Metropolitan Network: This is the backbone network inside a city, suburb, town or village that enables connectivity between the access network (last-mile) and the long haul networks. These networks are not just bit stuffing aggregation networks.

Access Network: This is the last-mile or first-mile network that connects into the “edge” or metropolitan network backbone, which in turn connects to local data centers or the carrier hotel. Wireless last-mile broadband fantasies aside, the typical flavors of the access networks are copper, or–in less than 10% of situations–fiber optics. Copper has physical limits for moving bandwidth just like wireless silicon where fiber optics does not.

So what is my point?

Just follow the demand…do not build supply-side infrastructure with government tax dollars without the demand.

Next lesson…Traffic Engineering.

I wanted to see if you would comment on the differences between running a wholesale business vs. an enterprise business.  It has been my recent experience that the next gen companies that have tried to combine the two models have had only marginal success.  An analogy that told to me is that it’s like running a corporate bank versus a retail bank.  The skills of the executive team has to be different with different philosophies on how to build market share taking into account off-net strategies, empowering local sales managers to expect lower margin or longer payback on companies with great long term potential, and how much to invest in SG&A etc.

The issue of retail v. wholesale business management skills is a matter of segmentation and focus. I do believe that you can be a better retail provider if you have wholesale network operating skills and experience to be applied.  Someone with purely retail skills, well, there just isn’t much differentiation — the retail side has become a “me too” value proposition.  The other nuance and trap of retail is the lust of revenue growth for the sake of revenue growth.  The real smart guys on Wall Street seem to focus their attention on a company’s revenue growth and growth prospects and think everything else is secondary.  Then there are the CEOs in retail growth for the sake of testosterone/estrogen buzz of having a big revenue business with a wish of reading about themselves in the Wall street Journal with a dot matrix photo of themselves.

Silly us at AFS, we focused upon long term sustainability and profitable growth — one building at a time.

Why we don’t like retail at this time is simple.  There are no barriers to entry.  Anyone can get a CLEC license and start reselling, ILEC renting or what have you doing nothing more than competing on price.  Retail means lots of customers, lots of small ARPU’s (we average $6000 ARPUs), lots of sales people, lots of back office complexity, lots of customer hand holding and lots of churn.  Very costly and risky.

Eventually this will change as bandwidth demand outstrips copper facilities rendering most retail models obsolete.  Having direct building or residential access is the long term game.  Most retailers today have no long term position or underlying staying power.  The more a competitor to an ILEC is dependent upon the ILEC, the greater the risk of not being here in the long run.  Anyone relying on the Federal Government by way of the FCC or Congress is, in my informed opinion, a fool.  As we are learning via the financial collapse we are facing, Congress is for sale and non-ILECs don’t have the cash collectively to be noticed.  This is a reality of which so many are in denial.

The bottom line: if I were an investor in a “provider” that is trying to straddle retail and wholesale — I would rethink that investment, refocus the business on a winnable, defensible niche or change out management, or at least have management get a drug test.

Today, our (AFS) position in the value chain is one of opportunity.  We can inch up this chain toward retail as the economy and opportunity presents itself.  Our high fixed costs capital expenditures are behind us and we can lever very profitably as driven by demand.

My opinion, the present state of our economy is going to be brutal on highly leveraged, highly ILEC-dependent retail companies.

Agree? Disagree? Weigh in by shooting Dave an email or sounding off with comments below.

Forbearance comes from our “friends” in the legal community. Forbearance as applied to the telecommunications service providers is a legal instrument that determines on a market-by-market basis if there is adequate competition whereby Ma Bell no longer needs to supply Ma Bell wannabes wholesale services at government regulated prices.

Only Ma Bell can apply to the FCC to be granted forbearance to lift the market specific regulatory burden. In filing a forbearance petition to the FCC, Ma Bell must submit documentation and analysis that adequate competition exists. They may demonstrate market share loss or line loss due to wireless substitution, as two examples. Of course, the Ma Bell wannabes can file petitions in response, playing the same song since the Communications Act of 1996 some 12 years ago.

Why I favor granting forbearance is that I believe it will provide an impetus to build out fiber optic facilities to homes and offices. As long as forbearance gets denied, alleged ”competitors” of Ma Bell have no incentive to advance true broadband capabilities as the result of relying upon Ma Bell copper loops and/or special access wholesale. From a physics perspective, fiber optics offers unlimited bandwidth capabilities when compared to copper facilities or fixed wireless alternatives. From an economic perspective, fiber optics enables us to be globally competitive. From a national security perspective, the more last mile fiber we deploy, the sooner there is no longer a need to locally centralize trunking at Ma Bell central office wire centers. Router capability in each home and business will distribute access whereby terrorists targeting wire facilities would become very discouraged in doing so.

We have had 12 years since the Communications Act of 1996 to develop businesses that are not dependent upon Ma Bell. Instead, those that argue against forbearance are actually arguing for the status quo especially if in 12 years they have not enhanced shareholder value by being independently competitive of Ma Bell infrastructure. Here we are – it’s 2008, yet after 12 years of deregulation some 90% of business buildings are still served by one providers infrastructure, that being Ma Bell. And the vast majority of telecom services are provisioned over bandwidth limited copper facilities. We don’t need another 12 years of renting copper; we need greater grants of forbearance to drive a different competitive mind set.

Got something you want answered about forbearance or other telecom issue? Send me a question now.

Assume that the FCC, Lobbyists and Congress actual took an Economics 101 course. By granting forbearance, in the short term, wholesale prices will and should go up thus generating higher profits. As higher profits are generated, new capital will flow into the market for a share of this new found profit opportunity. New entrants, having the wisdom of the past 12 years, would rationalize their entry in raising the bar of performance.

Translated: new entrants will build new strategic facilities and offer optical connectivity that would elevate the United States on a globally competitive basis … considering our poor rankings. A byproduct of this is that the consumer is more connected globally, without limits, and may innovate as he or she may wish. Generating more true facility based competition in the long run will lower the price per bit to the consumer.

What forbearance does is stifle pent-up demand. When the FCC maintains/limits competition to legacy copper facilities where do they think we are going? This supply protectionist desire by the FCC to stimulate “demand” has not demonstrated anything appreciable in the world theater of global competitiveness on the part of the United States. The same FCC that denies forbearance is the same FCC that said cable company infrastructure is closed to competitors and new fiber deployments by ILECs are closed to others. It’s the same FCC that is trying to figure out how much a pole attachment should cost depending upon what application that a physical cable may be carrying!!!

Declaring a victory for a denial of forbearance, in my opinion, is stifling to our economy and global competitiveness. We need more true facilities based competitors not less. The FCC is not encouraging new entrants; they have handed the ILECs one sweet deal, and the CLECs in plausible denial clap/applaud as the FCC continues to stifle new infrastructure investment while the ILECs and cable companies build out optically.

Now the average whiner will say: “But if we don’t have access to their copper …”

Here is the reality: anyone and everyone relying on Ma Bell for type 2 circuits are in the same boat … you all pass on the costs and a small margin to the customer. If the ILEC raises wholesale prices, everyone will pass them along as well, assuming you are a rational competitor. Plus, if type 2 access was of such strategic importance, I am befuddled by the lack of wireless last mile access that can emulate the limitations of copper or exceed it. There is true technology choice available to all competitors for copper equivalent data rates by wireless access.

The proverbial horse left the barn 12 years ago. What needs to be done is quite simple. The FCC should sunset wholesale regulations in a declining manner over the next five years, At the end of five years, the wholesale market would be driven by market-based facility competition and priced accordingly.

One would think that after 17 years, if you have not figured out how not to rely on Ma Bell, you never will.

Remember: the softest pillow is a clear conscience.

The most recent forbearance petition denial of Qwest by the FCC is not a step forward in the interests of the consumer or our nation. It is a step backwards.

The Communications Act of 1996 was allegedly designed to foster competition in the interest of consumers of telecommunication services. The Communications Act of 1996 was not designed to benefit competitors. It has been 12 long years and what do we have? A bunch of competitors of Ma Bell that still want to hang off of her teat. It’s been 12 years … when will competitors figure out how not to rely on Ma Bell? Are these same competitors going to lobby Congress for perhaps another 12 years? That would make it a quarter of a century of government protection on a class of competitors that want to hold this country back because they don’t get it (and neither does Wall Street).

If the FCC truly wants consumer advantage, it would get out of the way and stop providing this form of corporate protectionism. After all, isn’t 12 years a long time to figure things out? We sent a man to the moon in less time.

I believe in open market competition. Markets will sort themselves out. Artificially regulating wholesale prices hinders growth, it does not encourage growth or investment.

Next time we’ll talk about why forbearance has a positive impact for the United States globally.