Why the Telecos Should Be Allowed to Fail

Letter to FCC Chairman Michael Powell, signed by our own David Weinberger, Doc Searls, and Kevin Marks, among a number of other digerati:

Dear Mr. Chairman:

We thank you for your leadership in FCC efforts to understand the causes of the current telecom debacle, and especially for convening the FCC’s October 7, 2002, Telecom Recovery En Banc hearing.

We were dismayed that several of the En Banc speakers confused causes with effects. We believe that balance sheet weakness, long-haul overcapacity, and even the recent speculative bubble, are effects, not causes. If we attempt to treat the symptoms, we risk missing the causes and prolonging the agony.

We hold that the primary cause of current telecom troubles is that Internet-based end-to-end data networking has subsumed (and will subsume) the value that was formerly embodied in other communications networks. This, in turn, is causing the immediate obsolescence of the vertically integrated, circuit-based telephony industry of 127 years vintage. CLEC, IXC and ILEC bonds used to purchase now-obsolete infrastructure assets have become (or inexorably are becoming) bad debt. Weak last-mile competition prevents the most powerful technological advances from reaching all but a few customers; this is the largest cause of long-haul over-capacity.

One En Banc participant, NYU Professor Larry White, had views that seem consistent with ours. He recommends that we let firms that are failing fail as quickly as possible. We believe that it would be harmful if government actions prevent, delay or interrupt this evolution. It must proceed if the United States is to continue to be a leading contributor to communications progress, and if its citizens are to benefit from the technologies that are now available and the applications that they enable.

The telecom debacle is not a cyclical phenomenon. The telephone network’s technological base, and the business model under which this old technology thrived, are obsolete. Recovery is not an option. We can only move forward; how far and how fast will be determined by our continued freedom to innovate. Let the United States learn by not duplicating the Japanese banking experience in the telecom arena.

We need to see the current situation not as a disaster, but as a natural event; part of a revolution in productivity and human benefit as big as the agricultural and industrial revolutions.

Given these views, we urge the FCC to:

Resist at all costs the telephone industry’s calls for bailouts. The policy should be one of “fast failure.”
Acknowledge that non-Internet communications equipment, while not yet extinct, is economically obsolete and forbear from actions that would artificially prolong its use.
Discourage attempts by incumbent telephone companies to thwart municipal, publicly-owned and other communications initiatives that don’t fit the telephone company business model.
Accelerate FCC exploration of innovative spectrum use and aggressively expand unlicensed spectrum allocation.
Mr. Chairman, we note with gratitude your impatience with antique regulatory structures, and your attempts to embrace new technology. Also, we acknowledge the burden inherent in the FCC’s duty to ensure the continuity of communications, especially basic dial-tone continuity, in the face of such changes; we are prepared to lend assistance as the FCC grapples with this issue. Notwithstanding, we urge you to continue against the inevitable onslaught of those seeking to preserve an impossible status quo.

Clay Shirky, purveyor of the Networks, Economics and Culture list sees the stakes as these:

The current crisis in the telecom industry is the clash of two 18th century ideas – Alexander Graham Bell’s telephone, and George Boole’s two-state system of logic, which became the foundation of digital networks. For most of the last century, if you’d asked anyone which of those two men’s inventions was most important, the answer would have been Bell by a mile. The phone was on the short list of absolutely critical inventions, while Boolean logic was on a much longer list of
interesting mathematical curiosities.

Over the last 3 decades, however, that situation has been reversed. Like the telegraph before it, the telephone turns out to have been only a short-term patch, and digital logic is the invention of long-term importance for telecommunications.

Almost every choice critical to the operation of the telephone network turns out to have been a bad choice, and a hundred and fifty years after Boole’s work, the digital alternatives turn out to be the better ones. Telephone networks assume that conversations must be given an entire circuit for the duration of the call. Digital networks can break up data into packets and share infrastructure much more efficiently. Telephone networks are optimized for voice at every part of the system. Digital networks treat voice as one of many possible data applications. Telephone networks are optimized for synchronous
and one-to-one communications. Digital networks can support those patterns of communication, but also asynchronous, one-to-many and many-to-many patterns as well.

In addition to being philosophically superior, voice as a digital application is now good enough for the early adopters of Voice over IP to disconnect from telephone networks, relegating voice to just another item of a large and growing list of broadband applications.

This is the transition from sail to steam, in other words, and the owners of the sailboat cartel aren’t very happy. The incumbent telecoms are fighting against the change harder than the beneficiaries of digital networks are fighting for it, because for the telecoms, their existence is at stake. Their current strategy is simple: they want the FCC to outlaw competition, or, if that proves to be
impossible, then they want to use the lever of Government regulation to slow and weaken their competitors in order to be able to milk their outdated network architectures and fee structures for as long as possible.

We must not let that happen.

More info from the Paradox of the Best Network FAQ’s:

Q: Why do you want the telcos to fail?

A: The letter to Chairman Powell doesn’t express a desire but an assessment. The incumbent telecommunications industry is already in the process of failing financially. The letter recommends a course of action given the inevitably of that failure.

Q: Are you saying that Verizon (or whoever) is going to go bankrupt?

A: No, we are not making predictions about particular companies. We are saying that there are structural problems with the telecommunications industry as a whole.

Q: What interests does your group represent?

A: We are in no way an organized group. Generally, we are “net heads” – Internet businesspeople, consultants and analysts – who believe that the future of telecommunications will inevitably be via the Internet. We think it better if we get there sooner rather than later.

Q: Why have some non-Americans signed?

A: Because the ‘net erases borders, and because people from other countries benefit when progress occurs in the U.S. Metcalfe’s Law states that the ‘net gains value as the square of people attached to it. Reed’s Law is stronger, N to the N. So if U.S. connections are impoverished, everybody all around the world loses. But more importantly, the U.S. has had the lead since the invention of the Internet, and everybody around the world has benefited — and there’s a strong sentiment among the world’s Netheads that this continue.

Q: We bailed out the airlines, why not the telcos?

A: The airlines were not undergoing industry restructuring. They did that 20 years ago — People Express, etc., was a response to the advent of the jet plane. Remember Eastern? Pan Am? Dozens of others?

And the jet was just a 10x, or maybe, liberally, a 100x over the DC-3. Now we do 10x every couple of years.

As David S. Isenberg pointed out at the Fiber to the Home Council Annual Meeting last week in New Orleans, if dial-up Internet is a one-lane road, and DSL is a freeway (with 1 lane to work and 8 lanes home), then one fiber — a single fiber lit at today’s speeds would be a road with 25 million lanes. That road would be 57,000 miles across. You could wrap it around the world width-wise 1 and a half times. That one fiber could carry the busy hour traffic of 1600 towns with 100,000 phones each. If everybody in the U.S. had a telephone, then two fibers could handle the conventional telephony busy-hour traffic. We could handle the entire world’s telephony on 40 or 50 fibers (assuming everybody in the world had a telephone). And you can get such a fiber to your home — an entire fiber, to be lit as fast as necessary — for $3000.

Q: But if we let the telcos go bankrupt, will there be any telephone service? Won’t the communications infrastructure collapse?

A: Of course there will be telephone service, and in fact you won’t even notice a change.One of the best things about our economic system is that we have a very efficient mechanism to purge stranded capital without ruining the businesses themselves… it’s called chapter 11. If an airline in Chapter 11 can still operate planes and get you safely from one airport to another, a telco operating in Chapter 11 can complete a telephone call. Just look at Worldcom. But of course, failing telcos will howl for government support, claiming that the sky is falling. We musn’t give in to their pleas. Their businesses will emerge from chapter with a much lower capitalization and lower cost base, and will be able to charge lower prices.

Q: What will replace the phone system?

A: You’ll pick up the handset on your Internet Protocol phone, and make a call, simple as that. What you won’t need is a vast conglomeration of mainframe computer switches to do it, and you won’t need to differentiate the service from your internet service.

Take caller ID as an example. The phone company charges you say, eight dollars a month to deliver ten bits of information: the number that’s calling you. The only reason they can get away with it is that they have an antique monopoly. What does it cost you to know who sent you an e-mail? Nothing. What does the internet provider charge you to find out? Nothing. On an internet phone, the caller ID revenue goes to zero. THAT’S the future the telcos have to deal with.

Q: What about the Internet bubble? If the Internet is taking over telecommunications, how come all those dot coms went down?

A: Distinguish between dot coms (companies that own websites) and Internet technology. We’re talking about what happens once the Internet protocol is used for all telecommunications, including voice. It brings the cost of telecom vastly below current telco rates. The Internet bubble inflated because people speculatedin website companies like theglobe.com, drkoop.com, and pets.com. That’s just tulip mania updated to the year 2000. And remember, the amounts lost in the Internet bubble, by comparison with the telecom debacle, were tiny.

Q: If internet protocol telephony will rule, then why did companies like Global Crossing and 360 Networks go belly up?

A: Besides simple speculation excess, those companies were premised on the end use of their fiber getting to homes and businesses and driving demand much faster than it did. The obsolete telco industry still controls the last mile, and until that control is less absolute, too much backbone capacity equals bankruptcy. But, rest assured, the business model of the
last mile is due to change dramatically.

Q: When the telcos fail, won’t a lot of highly skilled employees suffer?

A: Yes, there will be unemployment among highly skilled network engineers. But necessity is the mother of invention, and these people, freed from the old tech base and the old business model will become much more productive sources of networked value than they were when they were shackled to the old circuit-switched technology and old, vertically-integrated business plan.

If there is to be government assistance, let it be aimed at providing ways for unemployed, talented, highly trained network engineers to continue to create wealth, national advantage and benefit for humanity by doing research and exploratory development on even newer network technologies and architectures. Remember, the Internet began with a $150 million DARPA project, and even today many Internet pioneers can write a check for that on available funds. Many important discoveries remain undiscovered – the nation’s communications engineers could make them.

Also, Bell Labs is a shadow of its former self. Remember the transistor, the DSP, stereo recording, speech coding, etc., etc., came from Bell Labs. Bell Labs was a national treasure. Perhaps we can find new ways to catalyze the industry’s talent.

Q: If the telcos have the last mile sewn up, how can they ever lose?

A: They’re losing now. They’re losing access lines for the first time since the great depression. Large and medium size businesses can already bypass the last mile entirely with internet based telephony. That capability is going to go downstream right into the residence in just a few years.

Q: Is there any good news in this?

A: There’s plenty:

The movement of telecommunications to the Internet infrastructure will enable an outburst of innovation; anyone with an idea and some capital will be able to enter the market, rather than having to wait for a telecommunications company to decide to build it into its aging network. A group of reactionary companies will no longer keep innovation trapped in a copper cage.
Telecommunications will become less expensive, more mobile, more personal, more customizable.
Vast amounts of bandwidth will become available. High bandwidth connections will become almost ubiquitous.
Since scheduling programs is really a way of managing insufficient bandwidth, television and other entertainment media will become more available and responsive to customer desires.

We live in a time of tectonic changes: will we ride on top of them or be crushed between them?