Tom Nolle on SBC: Management Briefing
Mom?s apple pie, the flag, and high-speed Internet for everyone. It?s hard to argue with any of those icons, and certainly
SBC didn?t attempt to in its recent announcement on high-speed services. By 2002, they have DSL available to 77 million
users (?Americans? in the press release, hence the flag). Video mail is a service SBC likes for the future, a service that will
let you at least see Mom?s apple pie, if not consume it.
The details of this announcement are even more interesting, and perhaps most interesting of all is how the whole thing has
been covered.
SBC said that it will be spending $6 billion on the ?Project Pronto? initiative to create a platform for the delivery of
next-generation broadband-powered services, including Internet access. About a quarter of this will focus on the
office-to-office or trunking network, and the remainder at the customer edge. The empowered customers will have what SBC
calls ?e-tone? (a kind of dialtone-on-steroids) to reflect the greater capability of broadband services to deliver versatile
information offerings to buyers.
A large part of the press release, of course, is focused on the Internet and how DSL will revolutionize that experience. Since
SBC has, in the past, shown itself to be a canny planner and competitor, we attribute this focus to its recognition that only the
?I-word? gets press. Why do a press release if not to do that, so Internet focus it is.
The meat of the SBC announcement is a concept they call the ?neighborhood gateway?, a broadband fiber remote that would
replace the current GR-303 or DLC remote technologies. SBC says they will push CO facilities closer to the customer,
another way of saying that they?ll be smart devices with more than just traffic multiplexing capability. SBC says they?re
going to have 25,000 of these in place.
What SBC is announcing, of course, is a new-generation outside plant architecture for broadband service delivery. They?re
doing this just weeks after the FCC issued a critical ruling on packet wholesaling, and that?s no surprise either.
The FCC ruling arises out of the old appeals of the RBOCs to have their advanced services infrastructure exempt from the
wholesale requirements of the Telecom Act. The FCC ruled last year that they couldn?t do that, but promised additional
rulemakings to guide the RBOCs in how to divide advanced services up between their ILEC core entity (which is subject to
wholesale restrictions) and CLEC-like subsidiaries that would have no such obligation.
In September, the FCC issued a summary of its position on a key issue?just what the RBOC obligations for wholesaling
digital next-generation infrastructure would be. The Commission indicated that while the RBOCs would have to wholesale
connection services out of a packet outside plant network to all competitors, it would not have to wholesale UNEs out of that
plant (in general; there were some limits here that aren?t important for this summary).
This is an absolutely critical move, because the UNE issue on new digital infrastructure was the most troubling to the
RBOCs. Any broadband access network would have to depend heavily on fiber, and if they were obliged to unbundle the
fiber and resell it as a UNE, the low price of residential services would set a low value on the glass, opening up a major
competitive risk. Now, the FCC has said that that unbundling doesn?t happen, and the RBOCs are thus free to deploy digital
infrastructure out of their incumbent entity.
SBC has proposed that all along, of course. Bell Atlantic, arch-rival, has yet to announce it?s own plan, but the FCC position
certainly opens the likelihood that they?ll follow suit and deploy DSL and packet infrastructure out of the ILEC.
What?s really interesting about this announcement is that SBC says it?s going to be based on, guess what, ATM! The
requirement that the incumbents wholesale at least the total access service package to competitors is enough to push them
away from IP infrastructure, since that would have direct resale appeal.
Look at the announcement another way, sports fans. SBC is announcing that 77 million customers are going to be touched by
a new ATM-based digital infrastructure. Furthermore, via the Williams partnership SBC references in its release, that ATM
infrastructure will extend over the long haul. Between major metro areas, at least, we?ll have ATM capability.
The initial offering will involve a DSL-integrated primary voice connection and high-speed data connection suitable for
Internet access or other applications. Future offerings will expand to support up to 16 voice lines over SDSL to businesses,
and four additional lines to residences. Future offerings will also include support for SVCs to facilitate redirecting the
Internet access connection to a corporate VPN for telecommuting.
SBC indicated that it is already committed to a significant xDSL deployment in support of telecommuting, which is no
surprise given that this market offers higher willingness to pay and easier sales cycles than standard Internet access. The
telecommuting focus is consistent with what we believe is a business-directed sales strategy for the broadband services
created out of this new structure.
Residential DSL access to the Internet isn?t a super revenue opportunity for the RBOCs in general. It?s true that there are a
zillion residential users, but it?s also true that there?s enormous downward price pressure on residential services of any sort.
The revenue gains SBC could expect from broadband access to residential users would probably be significant only if SBC
could capture a significant number of the subscribers for its own Internet service, or if another type of service were to be
marketed to residential users.
There seems to be no question that the Telecom Act and FCC regulations compel SBC to offer equal access to their DSL
infrastructure, not to mention deals already struck with people like AOL. There also seems to be no question that while there
are other things that could be done with a DSL network to support residential users, none of those things show signs of
creating a near-term market. To earn a return on the early roll-out, SBC would have to rely on business sales.
There?s no reason why they can?t. Neighborhood gateways don?t have to serve exclusively residential neighborhoods, and in
the metro areas where SBC proposes to deploy first, many businesses are intermingled with residential units in any case.
OK, analysis time. Here are the key points we take from the SBC release:
ú RBOCs will use the FCC packet-unbundling exemption to justify their deployment of digital outside plant and
ATM interoffice networking technology. They probably won?t spin DSL into a CLEC subsidiary, but rather will
spin off data service provisioning.
ú Digital/packet outside plant will provide welcome relief to service providers from the congestion-induced
limits to exploiting customer opportunity. This should expand interest in new-generation services like VPNs.
ú New services over broadband infrastructure are mandatory now that the RBOCs have committed to lowering
per-bit access costs. Otherwise, their revenue model will tank to the extent that they are successful in the packet
space. Not a happy prospect.
ú IXCs will use ATM integrated access from the RBOCs to support their own integrated services initiatives.
Sprint?s ION, troubled by poor acceptance, can now at least be framed in a logical structure. We believe that the
IXCs may then ?backfill? their long-haul services with local voice based on a feature-flexible architecture and
compete with the ILECs.
ú Data CLECs will have a challenge building a business case on integrated access to the Internet, because the
ISPs they support will be able to wholesale ATM-based access from the ILECs themselves. Since packet UNEs
won?t be wholesaled, this would mean that except for those users with home-run copper, data CLEC exploitation
of the DSL opportunity would involve wholesaling the very service the ISP could get directly, then marking it up!
ú Voice over IP is dead in the local exchange because if the RBOCs don?t provision it, nobody of consequence
will. Thus, VoIP is dead in an equipment opportunity sense, since outside the local exchange the number of
devices needed to support a VoIP network is just too small to fulfill companies? earnings needs. Hey, if this
surprises you, you?ve never read any of our views before!
ú The FCC has decided that ?local exchange competition? means ILECs versus cable companies, because the
CLECs have failed to produce a rational business model despite having been given years of opportunity to run
rampant when the ILECs were in regulatory never-never-land. Continued propping up of the CLECs could only
cause a delay in broadband gratification overall.
ú Virtually every service access device vendor has been obsoleted by the decision to re-architect the outside plant
into multiplexed digital technology mode. The products of today assume a physical media or TDM aggregation.
A new model of how services (including voice) will be offered to broadband customers is needed.
ú New-generation voice players need to focus on ATM access since that?s what will prevail on a large scale.
Many have developed product architectures which, if not IP-specific, are at least dependent on some deployment
of IP to carry signaling. At the very least, this should elevate the current ?features-creation? players to the head of
the class, since everyone else was presuming IP-driven evolution would eventually change the voice landscape.
ú Access infrastructure changes like the SBC one are more important in a revenue sense than IP in the near
term, at least. SBC will spend about a year?s worth of router sales on this modernization alone, not counting
CPE, switching changes, and other good stuff. They represent about a quarter of the likely local exchange refit
spending. A vendor play based on filling the need for big routers is, at the very least, aiming at ?where they?re
not? in a marketing sense. Until access changes, demand for larger core boxes can?t develop.
ú Optical network evolution will likely be faster than electrical evolution inside the carrier cloud. As is the case
with edge networking, optical core networking can be seen as a positioning issue. Carriers need infrastructure to
sell anything to anybody. That should help out incumbents Lucent and Nortel, newcomers like Sycamore, and
validate purchase of Cerant and Monterey by Cisco. For Cisco, it says that their hope of selling tons of big iron
to facility-based carriers will be delayed behind the positioning deployments in the core and at the edge.
ú The press is clueless in this absolutely pivotal event. The FCC ruling wasn?t covered at all, and the coverage of
the SBC announcement not only omitted any insights, it also omitted most of the facts in the release. One national
rag did about a third of a page on the release and never even pointed out that this was an ATM play
There is always a chance that the SBC moves are simply hype, of course, but we don?t think so. The RBOCs know that they
need to support evolving broadband demand or be bypassed with respect to all the key customers. This move clearly
addresses that in a way that?s optimal, given the business and regulatory conditions that prevail. What else, then, could they
do?
If SBC does go forward, then this is the start of a trend that?s going to change all our lives to some extent or another. Every equipment vendor, user, and service
provider needs to analyze how this will impact their interests, or they risk a complete loss of market relevance?and eventually of their customers.
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