The Enronization of Telecom
(and other good stuff)
[FAC: With all due deference to Bill St. Arnaud, David Isenberg, Roxane Googin and Gordon Cook, I'm posting this piece as I received it this evening from Bill St. Arnaud's Canarie newsletter. I should mention that I have been personally, albeit peripherally, privy to some of Roxane's and others' thoughts and findings that are discussed in this article. The interviews on this subject that will be released over the next couple of issues of the Cook Report are nothing short of blockbuster grade, imo. And the endorsement of the Cook Report given below, while entirely warranted imo, does not do full justice to the leg work that Cook does each month. I say this especially when I compare the Cook Report on Internet to the other paid subscriptions that come to my [e-]mail box each month now with most of them coming to me, reluctantly, with their tails between their legs. With that, I'll leave you to enjoy. BTW. Elmatador? Are you still with us? This one's partially for you! ;]
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For more information on this item please visit the CANARIE CA*net 3 Optical
Internet program web site at canet3.net
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SMART Letter #67 -- February 6, 2002
Copyright 2002 by David S. Isenberg
isen.com -- "no account"
isen@isen.com -- isen.com -- 1-888-isen-com
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CONTENTS
> The Enronization of Telecom
> Not Quite Ready to Blog
> Conferences on my Calendar
> Copyright Notice, Administrivia
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THE ENRONIZATION OF TELECOM
by David S. Isenberg
Irony (n) (1) The use of words to express something
different from and often opposite to their literal meaning.
(2) Incongruity between what might be expected and what
actually occurs.
Enrony (n) (1) The use of accounting to express something
different from and often opposite to its financial meaning.
(2) Incongruity between what might be expected and what
actually occurs.
I just received a startling reaffirmation of the idea that
the even the mightiest telcos could be heading for a fall
from The Precursor Group, a Washington DC institutional
investor advisory service. The Precursor Group has an
inside track on the Washington DC tech-reg scene, including
issues before the FCC, Congressional committee action, etc.
They're not the place to watch for outside disruptive
influences (in a year-old survey of telecom technologies
they left out fiber and unlicensed wireless), so when they
say that something is happening, you can be sure it is
mainstream-ready.
Precursor Watch (2/5/02) says:
"The fundamental health of the [telecom] sector is likely
to get worse before it gets better . . . The combination
of: the sector's anemic growth outlook, the
cannibalizing competitive mega-trends of wireless
substitution, voice to data migration, Bell entry into
long distance combined with local competition, and the
bubble-induced excesses in debt and over-capacity, all
create a powerful wealth destroying dynamic. Telecom's
'debt spiral' has gotten so bad that even the relatively
strongest players who are still able to raise
significant capital (VZ, SBC, and BLS) don't want to
assume any more liabilities or business risk.
Consequently, Precursor is reversing its long held view
that consolidation can help improve the sector from
excess capacity and debt any time soon."
The Precursor piece ends ominously:
"Policymakers throughout the Government remain largely
oblivious to both the magnitude and economic
implications of the telecom-tech meltdown and the
destructive role government competition policy has
played in helping precipitate this market debacle."
[For more info see precursorgroup.com]
Roxane Googin, following from her interview in SMART Letter
#64, has given a longer, more in-depth interview for the
next issue of the Cook Report on Internet. Gordon Cook has
a Ph.D. in Russian history and a nose for behind-the-scenes
shenanigans, so 'in depth' is pretty deep. Googin and Cook
cite chapter, verse, row, and column (and provide URL
pointers to ILEC annual reports) to show exactly where
incumbent telcos are losing lines, minutes, revenues. They
deconstruct the Annual Report as a literary form -- for
example, "Over the years, the voice, or core business, part
of the income statement appears later and later as the bad
news is buried ever closer toward the rear." And --
surprise! -- Googin and Cook find places among the reports
where it is impossible for even an Arthur Andersen
accountant to infer what is going on. Fall into the GAAP.
[The Cook Report on Internet is only available by
subscription -- see cookreport.com for
subscription info and executive summaries. The Googin
edition of the Cook Report will be worth the annual
subscription fee itself. An extended commentary on Googin
by bullshit-buster Andrew Odlyzko, which takes issue with
many of Googin's specifics but concurs on general
direction, is also included. It is also worth the
subscription fee itself. (For comparison, this edition of
the SMART Letter is worth a mere 5.2% of its subscription
fee.)]
I've been thinking about Googin's plaint for a year and a
half, off and on. I'm coming to the view that she's seeing
two loosely coupled, separable phenomena. The first thing
she's seeing is the general malaise in the telecom sector,
aggravated by bubble-busting, debt-hiding, other accounting
tricks, and not-very-radical technology substitution (e.g.,
cell phones for land lines, email for phone calls). The
second phenomenon, the stranding of network assets because
they're rendered obsolete by radically cheaper,
fundamentally simpler networks, is potentially much more
powerful, but is a longer-term phenomenon that has not yet
hit the local telco's fan.
The long distance market provides a model for how the
latter might happen. Qwest (the former aggressive startup)
was the first long-haul network company to build a
nationwide network using the new, radically simplified,
radically abundant fiber technologies. The Qwest network
came on line in 1997 and 1998. Joe Nacchio, Qwest's CEO,
sitting pretty on a plush pile of potential profit margin,
said that he did not want to start a price war. And at
first he didn't.
But Qwest's new network set up a powerful economic tension.
When GTE made Qwest an offer to buy twelve transcontinental
fibers, which would (for all intents) pay for Qwest's
entire build, Qwest could not refuse. Suddenly there were
two competitors with radically reduced cost bases,
radically increased capacities, and an insatiable hunger
for new traffic. Suddenly it was inevitable that long
distance prices would fall steeply. Nevertheless, it has
taken the long-distance-classic sector (AT&T, Sprint, WCOM)
four years to show visible financial signs of tottering.
(The long-distance guys did a pretty good job of holding
off incumbent LEC entry into LD, so this is a fairly pure
case.)
In contrast, the local market is still an old guard, old
tech monopoly. The incumbent-killing economics of radical
abundance have not kicked in. There is not that much fiber
in the ground. Most of the fiber that exists is not
available to its potential market. According to Steve
Garofalo, the visionary founder of MetroMedia Fiber Network
(since Enronized), building the new local network will
require about 25 times the time and 25 times the expense of
the long-haul network build-out. All the accounting tricks
in the world will not reduce the time or effort required.
[I did an extensive interview with Garofalo last May (with
Annie Lindstrom), and I'm still waiting for MetroMedia
Fiber Networks' permission to publish it. I'm guessing
they're too busy Enronicizing.]
Meanwhile, the SONET/ATM access networks of the local
telecom giants are clunky, complicated, expensive and
inappropriate for Internet Protocol data, but they have not
been superceded by radically cheaper *installed* technology
(except in rare cases).
There is a plausible scenario in which multihop unlicensed
wireless mesh networks will render access-a-la-ILEC
obsolete long before the local giants are killed by IP-
over-light. Multihop wireless networks have some very nice
properties that favor near-term installation, but they
don't pack as much bang per buck as fiber, and benefits are
more linearly related to costs, so a tech-related ILEC
collapse due to multihop wireless technology will be a much
slower motion affair.
Eventually fiber will be the preferred method of access.
Eventually Steve Garofalo's vision of fiber connections in
every room in the developed world will come to pass. But
it is still years away. The ILECs might not last that
long. And if they fail prematurely, before substitute
networks are rolled out, we'll *really* be in a pickle.
To repeat Precursor Watch's warning:
"Policymakers throughout the Government remain largely
oblivious to both the magnitude and economic
implications of the telecom-tech meltdown . . . "
Washington turns ugly when it is surprised. The re-
regulation following an ILEC collapse could be as panicky
and ill considered as the USA PATRIOT Act that followed the
collapse of the World Trade Towers. The Precursor gang is
noted for its insider judgments of Washington reactions.
But in this case, I'm hoping they're wrong.
David Weinberger and I have written an essay inspired by
Googin's insight that the best network is the hardest to
make money at. We call it, "The Paradox of the Best
Network." Find it at netparadox.com. In it we try
to outline some policy and business responses that would
paint a more optimistic future for telecom.
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NOT QUITE READY TO BLOG
by David S. Isenberg
I've said it before -- I'm a mid-tech kinda guy. It takes
me a while to 'get it'. I'm not interested in the geekiest
new thing. I want tools, not coding puzzles -- winner
apps, not IRQ settings -- connectivity, not NetBEUI.
The whizziest SMART People have been writing weblogs for
years. And last week I caught Blog Fever. I've got it
bad. Previously I'd been known to dip into somebody's blog
once in a while. But now I've got it, caught it, I'm swept
up in it, and I'm teetering on the edge of starting a blog
of my own.
It has been said that the Internet is proof that even
1,000,000 monkeys at keyboards *still* couldn't write a
Shakespeare play. Clearly, many blogs will play to *ahem*
limited audiences. Many contain the fascinating details of
what-I-had-for-breakfast. Others muse about show-tables
bookmarklets and plugin filesize animation loadtimes. It
takes a good writer to write a good blog.
There are lots of good writers around. Doc Searls is one
of them. Doc is a professional wordsmith. He edits Linux
Journal. I've been reading Doc's blog
doc.weblogs.com for longer than the others. His
coverage of the September 11 tragedies was more informative
than most of the media. I especially liked his coverage of
the war metaphor according to Professor George Lakoff. Doc
provides a link to Lakoff's Fairy Tale of the Just War:
"Cast of characters: A villain, a victim, and a hero. The
victim and the hero may be the same person.
The scenario: A crime is committed by the villain
against an innocent victim (typically an assault, theft,
or kidnapping). The offense occurs due to an imbalance
of power and creates a moral imbalance. The hero either
gathers helpers or decides to go it alone. The hero
makes sacrifices; he undergoes difficulties, typically
making an arduous heroic journey, sometimes across the
sea to a treacherous terrain. The villain is inherently
evil, perhaps even a monster, and thus reasoning with
him is out of the question. The hero is left with no
choice but to engage the villain in battle. The hero
defeats the villain and rescues the victim. The moral
balance is restored. Victory is achieved. The hero, who
always acts honorably, has proved his manhood and
achieved glory. The sacrifice was worthwhile. The hero
receives acclaim, along with the gratitude of the victim
and the community.
Lakoff wrote this in the early 90s, when the Villain was
the head of an identifiable country. For the whole Lakoff
essay (highly recommended!) see:
lists.village.virginia.edu
cholarly/Lakoff_Gulf_Metaphor_1.html
Lately I've been reading a number of other weblogs on a
regular basis. Dan Gillmor has a great blog at
web.siliconvalley.com
blog/ Dan holds down a San Jose Mercury News column, so he
knows how to cobble sentences. I'm a bit jealous that Dan
got to go to the World Economic Forum and I didn't, but he
covered it nicely -- and personally -- in his blog. Dan
points to another blog -- Lance Knobel's Davos Newbies
weblog davosnewbies.com, which, Gillmor says,
"is better than the newspaper coverage of the event." I
agree, even though Knobel is no Davos Newbie, having
attended every Davos since 1992. He's also a writer. He's
editor of the Davos magazine World Link.
David Weinberger is relatively new blogger. He's another
professional wordsmith -- not only did he co-author the
Cluetrain book, and a newly-minted book that is billed as A
Unified Theory of the Web, his e-newsletter, Journal of the
Hyperlinked Organization (JOHO) is a read-me-first when it
hits my inbox. JOHO, the Blog,
hyperorg.com can be even better; Weinberger
excels when his muse is lounging in informal conversation.
[Also see Weinberger and Isenberg's soon-to-be-famous
"Paradox of the Best Network" at netparadox.com]
SATN -- satn.org is "owned" by three people -- none
of them professional wordsmiths. They are Dan Bricklin,
Bob Frankston and David P.Reed. Bricklin and Frankston
wrote Visicalc, the first winner app for Apples. And David
P Reed is an early architect of the Stupid Network -- only
he called it "the end-to-end principle. The SATN blog is
an informative amusing collection of technology snippets,
insights, essays and experiences. SATN stands for Software
Arts Technology Notes -- telco execs may think it is
pronounced "satan" but the authors assure us it is
pronounced "satin".
Metafilter metafilter.com is another blog that I
find fun and useful. It calls itself a Community Weblog.
It has a lot of members, who post links along with a few
lines of comments on the front page. Other members can
comment on these postings -- these comments appear on a
secondary page. The community is remarkable self-
disciplined. It seems to be self-policing, because the
signal-to-noise ratio is quite high. Unfortunately, the
community is closed to new members, so us latecomers
perforce must lurk.
Blogs have a way of sucking you in. Most blogs point to
other blogs -- Doc Searls calls this "blogrolling". Such
blogs are often as good as the blog that sent you to them.
Doc lists about 80 -- and some are pretty good. There's a
whole new world out there. If you have not already done
so, make a folder for blog bookmarks -- and don't look
back.
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CONFERENCES ON MY CALENDAR
March 17-22, 2002. San Jose CA. The Cisco Powered Network
Operations Symposium. I'll be speaking on March 19,
focusing on the distinction between connectivity and
services. The symposium is not exactly open -- your company
must be part of the Cisco Powered Network program, see
cisco.com. More information on the symposium is
at cisco.com.
April 8-11, 2002. Seattle. VON (Voice on the Net).
On April 10, at 9:35AM, I'll be leading a panel on
"Financing Disruption" that was inspired by SMART Letters
#64 and #65. The panel will feature CIBC analyst Stephen
Kamman, an extremely rare public appearance by Roxane
Googin, some other SMART People as I confirm their
participation, and yours truly. My bottom line is that
voice is a diminishingly tiny deal on The Stupid Network,
but it still accounts for a disproportionate share of
revenues. Come for the Googin-Kamman show, but stay to get
the latest on SIP, the technology that will disrupt telco
voice whether or not we get Fiber-to-the-X. More info at
pulver.com.
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COPYRIGHT NOTICE: Redistribution of this document, or any
part of it, is permitted for non-commercial purposes,
provided that the two lines below are reproduced with it:
Copyright 2002 by David S. Isenberg
isen@isen.com -- isen.com -- 1-888-isen-com
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