FREEWIRE

Building a Telecom Company for the 21st Century

In the July 15 issue I looked at the guerrilla war brewing in Internet telephony, a bottoms-up attack on protected telecommunications markets by a loosely connected group of underfinanced entrepreneurs operating largely from theirbedroom closets. Although this cyberinsurgency warms the heart as it delivers cut-rate long-distance calls to venturesome consumers, it is by no means the only front in the war on entrenched monopolies and the regulators that serve them.

Of perhaps greater importance to corporate telecommunications users, whose stringent quality and reliabi lity demands genera lly rule out ad hoc solutions, are the efforts being made by the Competitive Access Providers (CAPs) to turn themselves into full-service telecom companies. These increasingly potent players, with the financial muscle and technical acumen to build large networks based on the most advanced fiber-transport and packet-switching technologies, are quietly rolling out a worldwide infrastructure that will establish radically new cost/performance benchmarks that the incumbent operators will be hard- pressed to match. These benchmarks, rather than the dictates of regulators, ultimately will determine who will thrive and who will founder in a truly competitive world.

Step One: Lay The Fiber The CAPs began life with a fairly simple proposi tion--helping business customers in dense urban areas bypass the monopoly Local Exchange Carriers (LECs), avoiding the onerous access charges that add 40 percent to the cost of a long-distance call. Beginning in the late 1980s, companies like Metrop olitan Fiber Services (MFS), the Teleport Communications Group and the Intelecom Group began deploying fiber loops in cities that didn't explicitly outlaw such activity, linking large office buildings like pearls on a string. From a foothold in the basement of each building, they marketed services to the tenants, focusing on connecting PBXes to the long-distance carriers as well as providing high-speed data connectivity for corporate LANs.

In order to compete with the incumbent telephone monopoly, the CAPs had to offer not only lower prices but superior quality and reliability. Doing this required that the CAPs push the frontiers of technology and target customers wisely. MFS, for example, became the first company to offer a national ATM network as well as the first company to offer frame relay over ATM. Unencumbered by regulatory obligations to provide universal service, and the cost-shifting that goes along with it, the CAPs shunned lower density areas in favor of target-rich downtown business district s. This, not surprisingl y, enraged the LECs and their friendly state regulators, who accused the CAPs of "cream skimming," and warned of a collapse of telephone service if new entrants were allowed to destabilize rigid price controls.

This collapse, of course, never occurred and the CAPs ultimately won co-carrier status under the Telecommunications Reform Act of 1996. For the first time, the CAPs and the incumbent LECs are playing on a level playing field, a political concession the Bell companies made in return for being allowed into the long-distance business. Included under co-carrier status are provisions that guarantee number portability, competitive network interconnection, bulk-number resource arrangements, and even the unbundling of the local loop. The last, a highly contentious provision whose details are still being worked out, allows the CAPs to lease existing copper lines from the local telcos for a fixed monthly fee without being forced to buy switching services. This will allow CAPs to ser ve customers who may not b e located directly on their fiber plant, expanding the areas in which customers might have a real competitive choice. Once this happens, look out.

Step Two: Merge Voice and Data While the events listed above were going on, the Internet Service Provider (ISP) business was being born. Leveraging the economic advantages of packet switching and using TCP/IP as the lingua franca, companies like UUnet Technologies, Netcom, BBN Planet Corp. and PSInet created their own nationwide webs of interconnected routers that we collectively call the Internet. Unlike the CAPs, the ISPs invested in switching but did not build their own transport facilities, instead leasing T-1 and T-3 circuits from the long-distance carriers for their backbones and using either dial-up access or local leased lines obtained from the LECs to connect to their customers.

Truth be told, the ISP business is mostly a giant game of tariff arbitrage, taking advantage of pricing anomalies that eventually must go away. Dial-up access to the Internet, made possible by flat-rate local calling, is horrendously inefficient, tying up both central-office switch and inter-office trunk capacity in a manner that was never anticipated by network traffic engineers. (This, by the way, is why the Bell companies are fighting flat-rate, unlimited ISDN tariffing tooth and nail: They fear that users will nail up connections 24 hours a day to support Web servers--an absolutely insane way to use an expensive central-office circuit switch.)

The ISP business enjoyed meteoric growth as long as the raw transport providers weren't payin g attention, but things began to change when AT&T, MCI and then many of the Bell companies began to offer Internet services. Having the advantage of owning their own transport facilities, it didn't take a genius t o figure out that the original IS Ps would find it difficult to compete with these larger, well-financed players. Thus began the great ISP shakeout, which continues to gain momentum as the numerous smaller providers consolidate.

In a move of paramount strategic significance, MFS, the No. 1 CAP, merged with UUnet, the first and one of the largest commercial ISPs, thus creating a billion-dollar company that could well become the model telecommunications provider of the next century. Aside from the obvious economic synergy between the two businesses, both of whom stick to corporate customers exclusively, it would not be an exaggeration to proclaim this merger the symbolic beginning of the end of separate voice and data networks.

Step Three: Redesign the Switching Fabric The key to understanding the changes taking place in switching architectures is to look past the illusion that bandwidth is going to be "free," implying that it will be just fine to waste it. First of all, people don't buy raw b andwidth, they buy configured bandwid th. All the dark fiber and unused spectrum in the world has not one bit of impact on the street price of a T-1 connection. Second, the price of bandwidth, like anything else in a competitive market, ultimately will be set by the law of supply and demand. Supply may be increasing but demand is exploding, so while the cost of transporting a bit from here to there is declining, there are many more customers to be served, each of whom has many more bits to be carried. We saw the same thing happen to MIPS in the PC industry and I certainly don't see anyone giving Pentium chips away for free.

What this means is that switching architectures that use bandwidth wisely, while offering more flexible services, will prevail over architectures that waste bandwidth and only offer fixed-connectivity options. There is something profoundly unsatisfying about being able to buy connectivity only in 64-Kbps chunks that you pay for by the minute, whether you're using it or not. Yet outsid e the Internet, the entire worldwide pu blic telecommunications network is engineered this way.

The folks at UUnet, who call multi-million-dollar 5-ESS central-office switches "boat anchors," say they foresee the day when we will all buy bandwidth on demand, independent of the application, paying a reasonable but modest margin above the raw transport costs. MFS, in fact, already has introduced what it calls a Wide Area Voice Exchange service based on multiplexing variable bit-rate voice with LAN corporate-data traffic over common ATM facilities. Instead of dedicating fixed connections to a voice call, throwing away all that bandwidth during the silent intervals in normal speech, corporate-data traffic will be able to slip in and get a free ride.

Step Four: Expand and Kick Butt So here we have some brand new companies building networks based on hot new technologies gearing up to compete with a system whose design principles were laid down in the 1950s and whose switching infrastructure was de veloped in the 1970s. Is this going to be f un to watch or what?

Along with a plan to expand the number of cities served until it covers 70 percent of the U.S. business market, MFS, which until recently has leased its intercity connections, has announced plans to build or buy its own long-distance links, including transoceanic fiber cables. These will be configured as high-speed Sonet systems, completing MFS' transformation from a regional CAP to a global, full-service telecommunications company.

The price tag isn't small--MFS figures it will cost $1 billion per year to pursue this plan--but the rewards are many. Best of all, the discipline these new players will inject into the market will force the incumbents to reinvent themselves. As long as the regulators can be dissuaded from freezing things while the mar ket is still restructuring, this can be a big win for everyone.

Bill Frezza is the President of Wireless Computing Associates. He can be reached at frezza@interramp.com.