Fascinating Wired article. Ominous Tolling of the Bells
[RBOCs vs. computer industry]
by Randolph Court
10:16am 12.May.98.PDT
wired.com
The blockbuster SBC Communications-Ameritech
merger announced Monday came as no surprise
to Victor Schnee, whose firm, Probe Research,
predicted a month ago that it would happen.
That might not seem like a remarkable prediction.
After all, in the context of SBC's acquisition of
Pacific Telesis last year and the nearly US$23
billion merger of Bell Atlantic Corp. and Nynex
Corp., it probably seems obvious that the Baby
Bells have long since begun making moves toward
reconstituting something resembling the old AT&T
monopoly.
But, according to Schnee, the SBC-Ameritech
deal will ultimately have a bigger impact in the
computer industry than in the telecommunications
world. In fact, Schnee is firmly convinced the
merger is a critical early chapter in a wide-ranging
war that is developing between the computer and
telecommunications industries over control of the
Internet.
"Unfortunately for the computer industry, the
SBC-Ameritech merger is as bad as it gets,"
Schnee said.
He has been right about these sorts of things
before. In 1976, as a Wall Street research analyst,
Schnee wrote a book called "The Future of AT&T"
which accurately predicted the coming breakup of
the national telephone monopoly.
He formed Probe Research that year, in part to
market the book, and in part to continue
researching the telecommunications industry. In
1994, he and his colleagues at Probe released a
study called "The End of the RBOCs," which
foresaw the competitive dynamics in local phone
markets as we've come to know them in the wake
of the Telecommunications Act of 1996.
The firm's most recent report, "Mega Strategies:
Winning the Computer-Telecom War," was
released in April. It predicted that an
SBC-Ameritech merger would be the key event in
the formation of a "Neo Bell System." This cartel,
reduced by mergers to two or three gigantic
companies, will gradually absorb interexchange
carriers (such as AT&T, MCI and Sprint) and other
telecom companies, and ultimately gain effective
control over the Internet. That scenario would be
disastrous for the computer industry's vital
interests, the report concludes, because the
telcos' interests are fundamentally different.
"The telcos don't care about Moore's Law," said
Schnee. "They don't care whether computer power
doubles every year, or every three years. They're
used to slower introductions of technology."
The Mega Strategies report documents how, over
a 20-year period, the telephone industry has
professed to be taking steps to reorganize its
networks for data transmissions, when in fact it
hasn't. Those networks -- and the regional Bell
business models -- are still fundamentally set up
for voice communications, Schnee said. An
SBC-Ameritech merger doesn't change that.
Despite the recent formation of cross-industry
coalitions like the Universal ADSL Working Group
(an alliance between Microsoft, Intel, Compaq and
other PC-worlders, and telecommunications
companies like Ameritech, SBC, GTE and Sprint,
formed to speed up data transmission over
standard telephone lines), telcos have only been
glad-handing the computer industry, Schnee said.
"The telcos have always basically done this
filibustering act on technology that doesn't fit into
their agenda," Schnee said. Typically, he said, the
telcos react slowly to rapid changes in
technology, like the evolution of the Internet, which
hurts the vital interests of the computer industry.
Schnee cited ISDN (integrated services digital
network) services, which allow the transmission of
voice, video, and data over telephone lines, as an
example. ISDN could have been implemented in
the mid- to late-1980s, but wasn't, partly because
of telco foot-dragging, Schnee said.
"For the telcos to say, 'Let's cooperate' translates
to: 'Time is on our side,'" Schnee said. "This stuff
will get implemented. But to be done right, it will
take a long time -- too long for the computer
industry."
For several years, the computer industry has
understood that its fortunes are increasingly tied
to the Internet, Schnee said. (In the early stages
of its court battle with the US Justice Department
over its practice of bundling Internet browsing
technologies with the Windows operating system,
Microsoft produced documents to prove its
executives came to the realization in early 1994.)
The rate at which consumers will buy the new
technologies that computer hardware and software
companies are constantly rolling out is tied to the
rate at which the consumers can actually put the
technologies to use -- which increasingly involves
communications.
The 1994 Probe study, called "Taking Over
Telephone Companies," said: "The sheer growth of
the number of devices that must communicate and
the types of communications ... which these
devices enable, dictate ... communications
networks must evolve into computer networks.
"... As the two industries converge, the computer must put ceaseless pressure on telephony to
create suitable information networks, which is
likely to be tantamount to forcing wholesale abandonment of the obsolete, voice-real-time-optimized networks of the RBOCs."
But, even now, the computer industry hasn't put
nearly enough pressure on the RBOCs, Schnee
said. Microsoft, in particular, has been too naive
about the pace at which it expects them to
change, he added.
SBC's takeover of Pacific Telesis would have been
the perfect opportunity to apply some pressure,
Schnee argued. "Who says that when a phone
company is taken over it has to be by another
phone company?" he asked. "We point out that
SBC took over PacTel for about $17 billion -- less
than two times its revenues. Bill Gates could have
stepped in and bought it and shown what a
next-generation telco should be."
For an RBOC to be a next-generation telco,
Schnee said it would have to optimize its network
for growth of data traffic and provide scale for
advanced technologies like digital subscriber lines.
Midwestern RBOC US West has been rolling out
DSL services with great fanfare, and several of the
RBOCs have applied to build in-region IP
networks, Schnee admitted. "This is too big of an
industry to say nobody is doing anything," he
said. "But everything is being done at different
paces in different places."
"If the Bells can do it at their own pace, the world
will never change," he added.
In the end, Microsoft didn't buy PacTel. SBC did,
and now it's trying to buy Ameritech, too. And as
far as Schnee is concerned, that is ultimately
going to be bad for Redmond and everyone else in
the computer industry.
"Consolidating as much as possible is crucial for
the cartel to sustain itself," said Schnee. "In a
period of humongous change, the RBOCs have
kept their basic business model together, and
profitable, [in part by] absorbing other companies rather than getting absorbed by someone
themselves."
Related Wired Links:
Mega-Merger Draws Early Fire Wired News
Report
11.May.98
A Long Distance to Approval
11.May.98
FCC Wins Ruling on Long-Distance Service
20.Mar.98
Calling Grandma Bell?
11.May.98
The Top 10 Mergers
11.May.98
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