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Telecom Deregulation Gets Extreme

The Telecom Act of 1996 is rapidly being dismantled. Verizon asked for, and received, regulatory relief on business leased lines provided to businesses.

Covad and Earthlink were shattered by rulings ending their right to lease back physical connections into residences. This was first challenged and won by the cable industry in the Supreme Court Brand X decision, and DSL was reclassified as an information service by the FCC shortly afterwards. At this point, the companies that own the physical infrastructure that connects your residence to the Internet do not need to share that connection with another carrier or ISP. Verizon no longer is legally obligated to lease it’s copper pairs to Covad or AOL at prices dictated by the FCC.

In December 2004, Verizon petitioned the FCC to handle business connections in the same manner. The FCC commision (two Republicans and two Democrats) voted 2-2, and the lack of any conclusion on their part automatically forced the petition to be granted. FCC Chairman Kevin Martin put his stamp of approval on the outcome yesterday.

This is very radical stuff. The MCI/Verizon merger united a company with the access lines with a company that derives it’s most profitable business from connecting businesses. A major condition of this merger was that the companies unbundle the access lines to MCI competitors- the exact regulation that was just removed by the FCC.

The ruling is likely to face significant court challenges from companies like XO communications, who provide enterprise connectivity. They are analogous to Covad in the residential market, and such a ruling is a large strategic threat to their business.

Deregulation is now driving innovation in how broadband connections are made to the home. After the FCC indicated that new investments to the home would not need to be shared, Verizon and AT&T have aggresively started deploying new infrastrucutre.

Most businesses today use 20 year old T1 or T3 technology to connect to the internet or provide intranet connectivity between their sites. Now that the carriers can set pricing on their infrastructure, and set pricing on new, more advanced infrastructure, we should see these lines finally start to be replaced.

Another observation is that a lot of duplicate last-mile infrastructure to the business will need to be built in order to navigate around the Verizon monopoly. The dark-fiber guys with connections to downtown buildings suddenly are going to have more customers like XO looking to use a new right of way.

Lot’s of thinking to still be done on this subject. It’s a very disruptive event.

UPDATE: Lightreading has a comprehensive article on this subject.

Discussion

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  1. It certainly appears that the telecoms are going to be able to push forward with their tiered internet services and in the short term will likely profit from this scheme. I would be interested in knowing how WiMax works into your long term calculations though. It seems to me that a tiered system will only further spur investment in competition and if the market is efficient would quickly offer alternatives to such an upopular initive. I could see Murdoch support tiered service, but theres no way that Google would ever allow it. Do you have any concern that this move will only prompt Google to go head to head with the telecoms? Other then the delivery of televison (which is still a long way off) I don’t see how a broadband line would have many advantages over WiMax. Even in the short term I don’t see many ways that tiered access is going to be crucial for business to have. If WiMax remains net neutral, wouldn’t this threaten these new found revenues? History has taught us that there are always plenty of competitors whenever profits start to get too fat. I can understand why the telecoms are moving forward with this, but in a lot of ways it seems really short sighted given the public, political and economic backlash that we could see.

    Regards,

    A Digital Elite

    Posted by davis freeberg | March 21, 2006, 9:18 PM
  2. I know very little about Wimax. I do know people who know a lot about Wimax, and universally they indicate the entire standard has been whored out by marketing folks to be much larger than life. It’s hard to get the signal from the noise, which is something I always try to do.

    The only clear applications I see for Wimax today in any large scale are rural broadband access (a low-latency alternative to satellite) and muni-fi wireless backhaul.

    Here’s the best analogy I can make between Wimax and wired broadband.

    People have always said that memory would go solid state and eliminate the hard drive. The silicon format has every advantage over the drive with the exception of cost/bit. Both formats have made enormous strides in the last 20 years. Yet everytime an application that was once served by disk gets eaten up by flash, applications emerge that demand the cost and density of disks. The first Ipod had a disk, the Nano with equivalent storage now has flash. Yet some iPods still have disks,

    Today, I can get 40x the flash capacity in a thumbnail micro-SD than I had in my 1992 Intel-486 based PC (with the 17 inch CRT that I lusted after). Yet I still have a spinning disk in my PC 14 years later.

    Broadband will be the same way. Wimax and Muni-Fi work OK for low bandwidth applications, and they will get faster. Meanwhile, FTTH and wired broadband will enable new applications and provide the platform for high-bandwidth application innovation.

    As for Wi-Fi as a ubiquitous access solution, my experiences while travelling don’t match others. The reliability sucks, and it doesn’t always work out of the box. That may be find for a wunderkind hacker, but things need to get a lot easier, in fact they need to be seamless, for it the be a medium people rely on. Filling out 5 forms just to get wireless access at a Starbucks sucks.

    As for net neutrality and tiered access, far too much has been made of this whole ordeal. The biggest threat from net neutrality is getting the government re-involved in a market that is improving only because they stopped being involved a few years ago. If the Telcos abuse net neutrality in an egregious way that upsets the consumer, the government will crash the party, and if it doesn’t markets, just like nature, will find a way.

    PS – Your coverage (http://www.thomashawk.com/) of Tivo is awesome, and your Flickr photos are amazing.

    Posted by Andrew Schmitt | March 23, 2006, 9:28 AM
  3. Thanks for your thoughts Andrew. In all honesty, I’m not sure how WiMax will factor into it, but I’ll be interested to see whether this ends up backfiring for the telecoms or not. I may disagree with your support of the inititive, but I do agree that this shouldn’t be a government issue, it should be a market issue. In the end, the Invisible Hand usually does a pretty good job.

    Thanks for the compliments on the Hawk, Tom is a fantastic photographer and it adds a lot to the site. As far as TiVo goes, I’ve been obsessed with the company for the last 5 years and have spent a lot of time following their progress. It’s a good thing the blogosphere likes hearing about them because my friends are all tivoed out by my non stop chatter about TiVo this and TiVo that. Mike Ramsey was a huge disappointment, but it’s encouraging to see Rogers take a more businesslike approach to the company. Over the years people have been overly pessimistic on the stock and it’s nice to see investors taking a fresh look at the company again. There is still a lot of risk to their business model, but considering that even at $7 their market cap is barely $600 million, I think that we still have a significant ways to go.

    Posted by davis freeberg | March 23, 2006, 7:21 PM