re: yesterday's action by GTE to embrace three DSL operators into agreements
Note: This message contains my complete reply to Mark Duper on the COVD thread (his post #395 there), where I explain the reasons for moving it.
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Hello Mark (and Ken, et al)
You asked:
"What do you think of yesterday's action. Do you think it has to do with
the FCC's decision to open the lines?"
This subject was brought up yesterday on the Last Mile thread, and later in
the day on the FCTF board last night by Ken De Paul, as well. See the
following link and the ensuing discussion:
Message 11908560
In the link which follows immediately below, I suggested the same thing.
See my closing sentence in:
Message 11911622
I asked:
"Do you suppose they are doing this to preempt being forced into the
situation where they 'must' supply the loops to their adversaries?"
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A more complicated set of thoughts have occurred to me since that posting
(these were actually in the back of my mind all along, I was just too tired
last night to articulate them) from the perspective of startup investors.
Forgive me if I jump around a little going forward here, but the following
represents my uncultivated and knee jerk reaction to yesterday's action.
These are only my opinions:
IMO, some of the incumbents may now find it outside of their reach, given
the arcane accounting principles that they are mandated to use in assessing
pricing elements, to make a profit on DSL alone if they were forced to both
provide it themselves, and at the same time wholesale it, as well.
Or, in those situations where the ILECs already have a head start in
deploying "next gen" subscriber platforms (true, these are not many in
number, but the ones which exist are formidable) which include high speed
'net access, they may be looking for a "way out" where those markets
which are more problematic, such as undeserved areas, and other hard to
justify situations on their own, are concerned.
Or, in fact, in addition to their arcane accounting principles which at times
defy reality, they may find similar unattractiveness in the realities associated
with sustaining decent levels of service at the reduced prices, as well.
And the burdens that many ILECs would face are not "merely" financial
ones, alone.
These would include many intangible shifts in cultural and mindset
adaptations, as well, which, given the embeddedness of cultural patterns
within large organizations such as those which exist within the ILECs,
would be extremely difficult to achieve in any time frame that would make
a difference. Or, so the theory goes.
In such instances that I am familiar with, the aircraft carrier always
manages to somehow miss the smaller boat. So, their underlying motives
would actually and through necessity be multifaceted, if I had to guess.
One such factor, I believe, is that the ILECs may find these combined
conditions too onerous in their overall effects to make a profit themselves at
the end of the day, when all business revs (wholesale and retail) are totaled
up. There would always be a form of tension, probably on many levels,
between the two models which would begin to offset any of the gains of the
other.. especially if they were to create an unregulated subsidiary. This is in
part due to their carrying costs associated with their existing makeup, as
well as the more obvious economic factors having to do with bandwidth
delivery in the face of fiber- and improved wireless- economics.
[[Of course, logic would dictate that just the opposite would occur, since
these improvements in economies of scale should yield higher margins, but
this has seldom proved to be the case upon first generation deployments
of new technologies, where ILECs are concerned. Just the opposite, in fact,
has been demonstrated, in the past, as I believe we are seeing once again,
in those more advanced platforms I just alluded to, above.]]
These considerations may lead them to perceive an ever diminishing level
of achievable margins in an increasingly competitive space (vis a vis
existing bundled cable modem- and nascent wireless- alternatives), which
spell out additional downward pressures associated with the pricing of all
Internet access offerings, in general. The startups may see it another way,
and in assessing the startups' views, the following offsets come to mind.
And again, these are only my opinions.
-------
It's one thing to leverage the forgiving aspects which can be traced to the
phenomenon of the Internut bubble, with respect to surrealistically long
horizons to profitability and out of sight PEs, during startup and migration
phases, but it's something else again to cross over to profitability at some
point that investors will be sated by, pointing to that day into the distant
future (if, and) when ebitda ever takes a turn to the positive. It's my belief
that the startups may be taking full advantage of these conditions, and in
turn are biding their time waiting for another form of relief. Namely, an exit
strategy which once again includes the ILECs as participants, in one way,
or another.
If the ILEC is able to extract a fair price at the wholesaling level (and I can
almost assure you, short of legislative or injunctive intervention, we will
never see closure to this matter unless they "do" extract a fair price), one
must stop to wonder what is left over for the startup, if indeed a fair profit
from an undiluted offering was deemed to be unattainable, from the getgo.
Okay, there's a lot of fluff in here, a lot, but fluff is what makes up the
larger part of the regulated space anyway, despite the case in point. It's
with us to stay for a while, so let's not kid ourselves. The DSLs knew these
facts going in, IMO, and their strategy might be all along, accordingly, to
exit in grand style after being taken out by one of the incumbents (if such
actions could escape regulatory scrutiny, since this could be construed as a
form of predatory action, and even if the startups were game, there would
be noise from elsewhere), or the startups might be hoping to see the rules
of the game reversed at the accounting levels, which would make their
journeys more viable.
As it stands now, if all we are talking about are the merits of bandwidth
sale and 'net access alone, I'm not so sure that their paths are very viable. I
would actually suggest that they are not.
Just like other bandwidth providers, they will need to add value elements
along the way to bolster their revenues, since bandwidth alone at some
point will not cut it.
They must not only 'offer' added solutions, such as packetized voice,
VPN access to users' corporate LANs, etc., but their subscribers must also
be willing to 'pay' for those services, as well. The latter qualification
represents a huge difference which many onlookers often ignore.
This brings to my mind the many years of haggling and appeals that T and
the ILECs underwent, when the former sought to resell and brand
the latter's access facilities as loops of their own.
Note, I would caution against making simplistic observations while using a
hand held calculator in this instance, concerning what the costs to the
service providers are. Back-end infrastructure and upstream bandwidth
provisions, and other back office provisions, including operations support
systems, and any other voice or multimedia services, can be considerable.
And these usually escape the attention, at first blush, of the would-be
telecomms analyst. FWIW.
Comments and corrections always welcome.
Regards, Frank Coluccio |
