by Judi Clark
Law 595, Independent Study
JFK Law School, Walnut Creek, CA
The incumbent local telephone carriers (ILECs) have long offered telephone services, and more recently, telecommunications services. A great deal of the telecommunications sector, however, is currently in financial jeopardy. Services that fill our communications needs include several alternatives to the telephone. This report looks at some of the business opportunities that are developing to augment, supplement or replace the telephone companies. It looks at two-way broadband Internet and mobile service providers, including cable and a host of radio or frequency spectrum-based technologies—whose regulatory and commercial futures are uncertain but whose potential impact is tremendous.
In a recent paper entitled The Future of the Bells, we learned that our four Bell Telephone companies, the incumbent local telephone exchange carriers (ILECs), are holding a collective $135 billion debt in the form of long-term loans, and that their income stream for repaying these loans is diminishing because of market pressures based on a new set of technologies and telecommunications needs (e.g., the Internet and mobile communications such as cell phones). Recognizing that the telecommunications network has become an essential part of our daily lives, we saw how the ILECs have held their monopoly position against the government's policies and against the public interest by maintaining exclusive control over the last mile: the connection between the telecommunications network and nearly all homes and businesses. But even their arrogance and monopoly position will not save them from increasing debt and decreasing business. The paper concluded that as the ILECs' financial problems increase and bankruptcies are announced, we may witness the end of an era.
As the ILECs' monopoly power is effectively limited by new policy, legal and financial means (as they slowly declare bankruptcy and merge into greater monopolies), what will become of the telephone network? This is an important question in two contexts:
A major disruption of telephone and telecommunications services would be disasterous for our society, businesses, and government. Communication is so critical to our daily lives that the networks are becoming a part of our social and cultural "commons." Current and perceived threats to the stability of this resource is causing an ad hoc social movement to emerge. New technologies are evolving to empower this social movement, which in turn is challenging controls by monopoly powers.
In order to circumvent the ILEC- and cable-controlled wires, people are increasingly turning to wireless technologies that make use of radio spectrum—arguably another element of the public commons (explored below). Many different factors will affect the uses and successes of this approach. This essay discusses some of the opportunities that will arise in a newly-competitive telecommunications marketplace.
Over the last few years, we have seen several prominent Internet service providers abruptly close their doors, leaving a large body of commercial, non-profit and residential customers stranded and without a connection to the Internet. Many of these carriers were operating as competitive local exchange carriers (CLECs). Abetted by the Telecommunications Act of 1996, the CLEC market rose and fell at the hands of a "deregulated" but tightly controlled telephone line-based environment. The CLEC bankruptcies were the result of a number of factors, with the major one being the inability to work with or circumvent the ILEC's last mile barriers.
Competition as we have come to know it in recent years is quickly and quietly disappearing. The many Internet Service Providers (ISPs) from which we have chosen are now or soon to be gone. Infinite variety has been largely replaced by two choices: one monopoly phone company offering DSL, and one monopoly cable company offering cable modem service.
Digital Subscriber Line (DSL), a copper loop transmission technology, is a product of the phone companies to allow Internet access over (and not interfering with) a regular phone line. The ILECs hold over 80% of the DSL market, having largely foreclosed a competitive future from CLECs. While some of the telephone companies are currently on shaky financial ground, their future as providers of "broadband" services is, at least temporarily, supported by current congressional and regulatory activities, discussed below.
What if you don't want, or for reasons of distance or availability, can't get DSL? "The only real competition for Baby Bells is cable—which also has consolidated into four main players and is dominated by two" (AT&T Broadband and Time Warner Cable). Encouraged by the Telecommunications Act of 1996, cable is also a viable alternative as competition for local phone service. Cable subscribers, however, are not a happy bunch: "...the industry is one of the worst when it comes to customer satisfaction." Nonetheless, cable providers are also being supported by current congressional activities and regulatory posturing.
The Congress and the FCC have favored ILECs and cable companies with their recent policy decisions. The recently passed Congressional Tauzin-Dingell bill, for example:
"...(gives) the Bells control of the nation's telecommunications and technology infrastructure and threaten(s) the future deployment of both broadband and dial-up Internet access, as well as of competitive telephone service. The result for consumers would be less choice, lower quality service and higher prices for everything from basic phone service to Internet access."
Similar bills are circulating in the Senate with favorable support. The FCC is likewise concluding that "competition" will fairly be accomplished by market forces.
"The FCC tentatively concluded the wireline broadband Internet access services—whether provided over a third party's facilities or self-provisioned facilities—are information services, with a telecommunications component, rather than telecommunications services. Information services include such services as voice mail and e-mail, which ride over telecommunications facilities."
This classification "would free both [cable companies and ILECS] of requirements that have forced ILECs to unbundle their networks and allow competitors to use incumbents' phone plants to deliver competing DSL services." The effect of this regulatory decision is profound. "The Federal Communications Commission is quietly handing over control of the broadband Internet to a handful of massive corporations."
With demand for service strong, how is it that monopoly ILECs could be going bankrupt? Minimal competition for broadband services between ILECs and cable, or in some areas ILECs alone, is bad for business: higher prices, long service contracts, expensive equipment charges. Though the ILECs have demonstrated their desire not to unbundle their local resources by forclosing the Competitive Local Exchange Carrier (CLEC) market's future, the fact remains that competition from DSL service providers would have promoted sales of ILEC resources as well. Service expansion is also hindered by available installation personnel—and ILECs are not hiring to expand at this time. Finally, what little competition exists between ILECs and cable providers helps lower prices, though DSL prices remain higher than cable—which continues to install at a rate of two cable modems to one DSL. Price parity affects market parity. The ILECs seem bent on squeezing every last penny from their diminishing future. Once other broadband and mobile communications alternatives are set loose on the marketplace, ILECs will certainly be in for a wild ride.
While current regulatory support firmly favors market forces, consumer support may not last. Dissatisfaction with customer pricing and service, problematic timely delivery and declining quality of service is fueling the larger debate about a structural separation of the carriers from control of the content that travels over the Internet.
In addition, calls are coming from many public and commercial fronts imploring the Bush administration to develop a comprehensive policy to encourage broadband deployment and use. No clear plan or path has yet been announced, though the FCC said "that it will review most of its media ownership limits in one sweeping proceeding, delaying an expected relaxation of the caps for nearly a year." A senior researcher at SRI predicts that "such potential relaxation of media ownership does not appear likely to create a more competitive DSL market, but more likely will enable further consolidation and quite possibly fewer competitive choices for subscribers."
Business and residential consumers are not content to stand still and be abused. Current broadband alternatives to DSL and cable (wire-based networking) include wireless (including satellite, terrestrial wireless, and optical) and, to a lesser extent, fiber networking. Wireless is generating the most interest—on the commercial front as well as to governing bodies.
Wireless networking uses an over-the-air interface, using radio frequencies, to create connections between computers. These frequencies are often in the unlicensed range of spectrum as allocated by the FCC.
"Unlicensed spectrum has two principal advantages. First, because there is no licensing procedure, deployment can be fast and inexpensive. This makes it practical to mass market inexpensive wireless systems for which the cost of a single license would be a significant part of a system's overall deployment cost. Second, unlicensed spectrum is shared. Such sharing is essential for wireless systems that are moved from place to place, like laptop computers that can be connected via a portable wireless local-area network..."
Unlicensed spectrum has several relevant characteristics: it is in limited supply, technical and end-user competition is momentarily problematic, incompatible technologies are built on specific frequencies, and special interests want to claim and license it as their own resource. Vastly greater public good could be achieved by maintaining or expanding this resource and allowing technology developers to solve some of their current problems.
Unlicensed Spectrum and the Wireless Alternative
Unlicensed spectrum, available in certain frequencies, is used by several wireless applications including wireless home telephones and home networking. Several different technologies and companies are making use of this free resource. Some technologies conflict in their implementation and use with other popular technologies (802.11b networking with 2.4 GHz wireless phones, for example). Many represent business models that are yet to be proven. Some of these approaches (both business models and technologies) are potentially disruptive to the assumptions of the current power holders.
The broad and uncoordinated use of unlicensed spectrum raises management issues, including overuse and conflicting uses. Many manufacturers recognize the need to optimize or coordinate their purposes so as not to needlessly interfere with each other. Still, this spectrum is limited and may not accommodate all interested parties—adding a large element of uncertainty.
One proposal is to expand the available spectrum by re-purposing other existing uses. For example, more than 70% of households get their TV from cable or satellite. That means that VHF and UHF broadcasters are using valuable frequencies to satisfy a relatively small market. VHF frequencies also have special characteristics (the ability to bend around corners) that make it more valuable for public use. Since broadcasters who hold current licenses have never asked for a 2-way signal (enabling them to send and receive), the proposal suggests that the government should study the possibility of re-purposing the UHF/VHF licenses to provide an open, public good in the form of additional usable spectrum, with the unlikely possibility of creating a lifeline cable/satellite service to subsidize pay-TV as a more affordable, desirable alternative. This would, it's said, prevent a limited commercial market from hogging up desirable bandwidth.
This proposal begs the question: whose spectrum is it anyway? The public is happy to make use of it under the common assumption that spectrum is a public good. The Telecommunications Act of 1996 includes a section on "spectrum flexibility" that might allow such a re-purposing to occur. Such an action would certainly encourage broadband deployment and use, a Bush administration priority.
How is this likely to happen? Broadband competition is likely to take one (or more) of three forms: 1) a new marketing effort (and subsequent competition minimizing) by the incumbent ILEC/cable companies, 2) one or more new companies and technologies, or 3) community-based networks. Each will look a little different in the early stages. Examples might be illuminating.
New marketing efforts are but short-term strategy to maintain their monopoly positions. Observing past behaviors, we might expect that any new plans introduced by incumbent ILEC and cable companies would restrict or prohibit any outside use of their resources, effectively strangling any competitive opportunities. Combined with flashy marketing campaigns and commercials, incumbents would likely undermine the efforts of competitors. What once was "new" would soon be more of the same old thing.
If a new company (or a few) were to begin, we might see a path similar to the introduction of the "horseless carriage" (as against the incumbent buggy manufacturers and railroad companies). In 1908, Henry Ford introduced his first Model T for an affordable $850. Five years later, Ford slashed prices.
"By 1930, the number of registered cars on U.S. roads [soared] to 23 million. ...[This was] a car that [achieved] unparalleled popularity and change[d] the automotive industry, and American life, forever."
What kind of "carriage" are these new telecommunications access players offering? There are several families of technologies, including ultra-wideband, spread spectrum, 3G and 4G wireless, optical, and wireless mesh networks, and satellite access, among others.
Ultra-Wideband (UWB) technology transmits and receives very brief, energy efficient radio signals across a wide range of frequencies at once. Low power requirements make UWB difficult to detect and relatively mobile (due to low battery drain). The wide range of frequencies give UWB location flexibility—devices can be used inside and out, above and underground.
Critics claim UWB causes interference. The parties expressing the greatest concern may be those in the military infrastructure who are concerned about UWB devices interfering with Global Positioning Systems (GPS). Though UWB does span licensed and unlicensed frequencies, it can be tweaked to maximize its carrying capacity and security while minimizing or avoiding interference.
Spread spectrum (SS) is a very useful technology that employs one of several frequency sharing models. One such model, frequency hopping, was co-invented by actress Hedy Lamar for use in World War II. Here, a transmitter and a receiver are synchronized to assemble a signal sent over rapidly switching frequencies. Another model, direct sequence, has less interference (it's more like background noise). Each has characteristics good for different settings. SS has the capability to be difficult to eavesdrop or jam, hence its use by the military.
SS technology is currently in wide use by several different industries, including CDMA (such as used in Sprint's cellular) networks, many Bluetooth and 802.11 wireless networking device manufacturers, and cordless home telephone makers. One of two approaches are taken in design and development: crowd out the competition so others can't use the assigned frequencies, or share the spectrum in a "peaceful coexistence" with other industries, service providers, and device manufacturers.
"There are other ways to share spectrum, such as time division multiplexing (when a user is assigned a time slot rather than a frequency band), but this requires central coordination of every connection, so that time slots can be assigned and re-used efficiently. In contrast, SS allows many simultaneous connections to coexist by design (rather than by centralized control). Designers enable such built-in compatibility by agreeing in advance—that is, standardizing—various design parameters like spreading factor, sequence length, and power limits."
As in the case of UWB, migration challenges are the biggest issue here: how do we move from popular, in-use technologies to better, faster, more efficient, but incompatible ones? Once solved, SS devices would have a longer range and higher security. Which approach do we want to encourage? What best serves the needs of the public?
3G and 4G Wireless
In an ever-expanding bubble of hype, next-generation wireless networks are at the center of the marketing universe. Third generation (3G) and fourth generation (4G) are touted as the desirable paths on which we're headed. Neither has arrived yet, and some have cast doubt on the future of 3G, given the troubled state it's currently in.
Current telephone networks are slow and largely single-purpose. Integrated high-speed voice and data networks are the promise of 3G. They are slowly being rolled out, but are not fulfilling the marketing promises due to high cost and conflicting standardizing issues. Alternatively, 4G promises a true wireless broadband experience but is not expected to become a reality until late in this decade.
Enormous debt plagues the 3G operators, notably European giants BT (formerly British Telecom) and Deutsch Telekom. Although these companies have not emphasized the use of 3G for residential broadband service, it's plausible that—assuming these networks roll out as planned—3G providers will need to find every possible avenue to collect revenue. Though they now seem to insist on reserving 3G for mobile services—and pricing accordingly—the day may come when 3G companies experience pressure to exploit their spectrum for fixed broadband service as well. The 3G technical specifications currently include this possibility.
Two optical networking technologies are prominent: Passive Optical Networking (PON) and Free Space Optics (FSO). Both are concentrating on the "last mile" bottleneck: connecting the larger network to the home and business.
Passive Optical Networking (PON) lowers the cost of deploying broadband municipal fiber networks. PON takes 2 fiber optic strands and splits them, for example, into 8 user strands. This technology is passive, which means no power is required and maintenance costs are much lower. "PON lets carriers go into new markets and share fibers among residential and small business customers." Incumbent telephone companies are also expected to make use of it in their DSL deployment. Amusingly, PONs have existed since the early 1990s, when many analysts expected incumbent phone carriers to use them for so-called "video telephone" services that never materialized.
Free Space Optics (FSO) lowers the cost of deploying broadband municipal wireless networks. "Currently, about 75% of U.S. companies are within one mile of fiber optic backbones, but only 5% actually have connections. FSO is a line-of-site technology that uses modulated laser signals to transmit data through the air." Advantages include its quick deployment, cost efficiency, and the absence of license fees. Concerns exist regarding perfomance during wet weather, but FSO networks are in service in several areas, including Tampa Bay, Baltimore, Philadelphia, Detroit, and New Jersey. Like other wireless technologies, FSOs have the merit of often being easier to install: Rather than the enduring the costly process of laying fiber underground or via aerial lines, FSO users may simply mount optical transceivers on the exterior of buildings. It's good for temporary installations as well.
Wireless Mesh Networks
Mesh networking connects computers and other devices with each other in a way that enables and extends the reach of all users throughout the network. Mesh networks contain client and access points, which act as relays and routers to pass traffic on to similar devices. Traffic bounces along a series of these devices until it gets to its destination, much like packets on the Internet. This form of moving data allows for wireless access in areas that might not otherwise be served by larger broadband interests.
Mesh networks have special design characteristics that make them desirable for certain areas or applications (e.g., the military): a line of sight between connecting devices is not required, devices are free to move around arbitrarily, efficient energy use, and limited physical security requirements. Latency, or relatively slow movement across the net, is a disadvantage.
While still a bit costly, satellites have the ability to send and receive data in frequencies that range from multiple continents (for major broadcasters) to a single continent, and down to a single device. Satellite, ideal for remote locations not served by DSL or cable broadband, is used for a wide range of services including voice and video telephony, and non-streaming multimedia applications.
Unfortunately, two characteristics of satellites—very high latency and limited bandwidth—make interactive applications problematic. Use is also limited relative to where the satellite is in the sky—users must be in its footprint.
One other technology to watch is Software-Defined Radio. These new radios do a better job of using the "radio spectrum" to deliver advanced features and services. The reason: Hardwired radios require the establishment of standards that are extremely difficult to change, even when advances in technology yield better solutions. Software-defined radios (SDR or SR, for short) use a variety of modulation, frequency use and security techniques, and are programmable, which circumvents the problem of future obsolescence. In an age of changing and incompatible wireless technologies, SDR has the potential to adapt. "SDR is uniquely suited to address the common requirements for communications in the military, civil and commercial sectors." While they are flexible, they are also very costly right now. Over time, cost will certainly decrease.
The approaches discussed above were about technology. The best of science and engineering is nothing, however, without a context. In community networking, it's about the people that use technology. Devices are becoming simple enough that almost anyone can—and will—use them to enrich their homes, workplaces, and lives.
This is the social movement mentioned above. People are taking matters into their own hands—to the extent allowed by technology, the FCC regulators and incumbent power bases. Indefinite future use of volunteer networks is highly uncertain. Community activists, public-minded technologists, public interest groups, and other change leaders are working to support a broader social good in favor of private greed. The public interest model is about expanding services and availability in a sustainable way.
The perception at the business level is that you can't make money at wireless broadband, particularly using unlicensed spectrum. Even though the cost of hardware and networking resouces decreases as they become commoditized, even if there are no licensing fees to contend with, unlicensed spectrum use has problems. There is no priority of one technology, vendor, or use over any other, so any one technology can and often does interfere with everyone else. No successful business model has yet been developed for anyone other than the slight profit margins allowed to commodity equipment manufacturers.
If community networks were to take hold, it might feel like the introduction of calculators to the slide rule manufacturers:
"Tiny companies, many in Asia, began preprogramming silicon chips with mathematical functions, and powering them with batteries, resulting in hand-held calculators that:
a. were far more accurate and easier to use than slide rules,
b. had a host of additional functions as part of the package, and
c. were increasingly affordable.
Result: Big plastic slide rule makers went belly-up."
Here, the technologies used to light up the public "commons" include wireless hotspots, and rooftop and neighborhood networks. On a practical, community level, "it's easier to point antennas than it is to drag wires through the streets."
Users have a growing demand for new and flexible ways of connecting to the net. "Hotspots—short-range wireless connectivity access points in public areas (coffee shops, hotels, airports and the like)—have emerged as a leading final-feet solution." We're not talking "last mile" or bottlenecks controlled by ILEC/cable companies. We're checking our email while waiting for a plane, or having a mocha at Starbucks.
Rooftop and Neighborhood Networks
"When different wireless LANs are linked, you've got a permanent revolution. Right in your own backyard." Groups of idealists and civic-minded activists can be a crazy bunch, especially when they have something to share with others. Here, it's broadband access. A growing number of network users are taking matters into their own hands and openly sharing their access with their neighbors. Here, we're walking down through the Presidio (in San Francisco), or to Bryant Park (in New York), or by almost any of the government buildings in the state of Utah, opening up our wireless-enabled laptops or handheld devices, and we are on the net—often for free.
With over 8 million 802.11b wireless network interface cards sold in 2001, and about one million chips sold each month, wireless networking represents a significant foray into alternative network connections. This is the technology used in neighborhood nets.
In another kind of neighborhood, apartments and other multi-dwelling units are partnering with Internet and telecommunications service providers to give their buildings wired access at a reasonable price. Many building managers are taking on the role as BLECs: building local exchange carriers, with slightly better power to negotiate terms of access than, say, a single home owner.
Several factors will determine the success and future of these business models and technologies. We can bank on continuation of the social and commercial need for voice, data and wireless communication. The most significant factors will center, perhaps not surprisingly, around money, politics, and access to resources. The most unpredictable will be the public.
Recently we witnessed the disappearance of venture capital as the telecommunications sector experienced the beginning of a massive shake out. Many funders now question the accounting practices and investment histories of the major players, frustrating the influx of investment capital. Increasingly, funders are not working from the same business model as the established ILEC/CLEC and cable industries, choosing instead to fund promising, cutting edge, and potentially disruptive efforts. The venture capitalists, and the marketplace, will be directed by the local networking movement. We have yet to see just how powerful it will be. Will home networking community ever pose a serious threat to incumbent telecommunications providers? Will the influence extend to developing new presumptions and communications priorities?
On the market side, how ready and influential are ILEC alternatives (cable, fiber, wireless) to cooperate and embrace open architectures as a competitive strategy? What of their dreams of dominance?
Politics, as discussed above, will also be influenced by the burgeoning interest in frequencies of the radio spectrum. FCC's Commissioner Powell has confirmed his belief in market forces, but we have yet to see if his regulatory favors extend to the public as well as, or by way of, incumbent industries. Alternative telecommunications investment and development will help steer the market toward the public interest, but we have yet to see if regulatory or legislative interests will support coalitions and cooperation among service providers, manufacturers, and users alike.
Access to resources will remain an area to watch. Will the government and/or courts enforce or encourage access to local rights-of-way? Currently, nine states have barriers to or have outlawed publicly-owned telecommunications networks. Interested citizens as well as funders should revisit the city and state power to grant monopolies, especially when they adversely affect the public interests.
Finally, access to and use of the recently developed fiber optic network will be an area to watch. Two mindsets are at work here: 1) protecting scarce resources for profit maximization, and 2) adding capabilities as needed. "Supply and demand will be growing at comparable rates. As such it is very likely that pricing will begin to play an even more important role in the evolution of traffic." Who will be adding the needed bandwidth, and how might they impact the access and costs to the end users? What constraints will be imposed, and will users be able to circumvent them? Who will really be in control of our future?