Industry Leaders: IP Telephony Is Pushing Access Reform
The following information has been excerpted from the October 19, 1998 edition of Communications Business & Finance.
The pace at which packet-switched communications is replacing circuit-based switching is accelerating, and that fact may force regulators finally to address the growing tensions within access charge and universal service policies, according to industry leaders gathered last week at a conference in New York. Especially troublesome may be the federal access charge exemption for enhanced service providers, including Internet service providers, speakers suggested.
At the Wall Street Journal's annual Technology Summit, which this year focused on the future of communications, Internet protocol (IP) appeared to be the packet-switched technology of choice for most CEOs and chairmen speaking at the two-day event. They touched on a plethora of subjects affecting information technology and the deployment of advanced communications services.
Level 3 Communications, Inc., President and CEO James Q. Crowe proclaimed that IP was the networking protocol for the 21st century. Even established carriers AT&T Corp. and British Telecommunications plc, he said, embraced that notion when announcing their joint international services venture late in July.
Some say IP as a voice medium is flourishing only because of access charge and, more importantly, international settlement rate arbitrage, Mr. Crowe said. That may have held true at one time, he said, but when one considers the relative cost improvement of packet-based over circuit-switched communications, it's clear IP soon will be the only standard.
"IP is simply less expensive today and, perhaps more importantly, improving more quickly than the 100-year-old alternative," he said.
Of course IP isn't the only packet transmission technology, but it's gaining ground against others. "IP is the [standard] hardware and software manufacturers all around the globe have devoted energy and time and capital developing," Mr. Crowe said, and that is beginning to build on itself. In the 80 months it takes to double the cost efficiency of circuit switching, there's a 16-fold increase for packet switching, he said.
In a panel discussion on Internet telephony, ICG Communications, Inc., President and CEO J. Shelby Bryan said all voice communications eventually would be carried over packet-switched networks.
"There's going to be a very interesting-and maybe difficult-time period where we're evolving these networks. We need to be concerned about the quality of those networks, but that quality issue is a very short-term problem," he said. "The great minds in this country are focusing on packet switching," he added, predicting that the reliability and quality of voice-over-IP telephony would exceed that of circuit switching.
Mr. Bryan said he saw no reason IP telephony wouldn't spread to consumer as well as business markets. "The drama of this application is it can become so ubiquitous so quickly. If you ask Bell executives how they feel about it, they'll give you a 'Well, maybe it's going to take a percentage of the long distance network' . . .I think it's more fundamental."
Although most attendees said they'd never made an Internet telephony call, ITXC Corp. Chairman and CEO Tom Evslin informed them that many had. Long distance companies-especially prepaid calling card companies and switchless resellers-increasingly are routing calls on IP networks. They do so without the knowledge of the end user, Mr. Evslin said.
"There's so much that's being developed on top of IP that it's going to be a great base for the future," Mr. Evslin said. "IP networks are much more open to innovation than the circuit-switched network ever was. You can't develop a new application of '800' [number] services in your garage because you can't play with AT&T [Corp.'s] intelligent network," he explained.
But What About Farmer Brown?
Messrs. Bryan and Evslin and panel participant Lee McKnight, a professor at Tufts University's school of law and diplomacy, agreed that IP telephony could strain the access charge system and, with it, universal service support mechanisms. BellSouth Corp.'s move to begin collecting access charges from IP telephony providers was effective in bringing the issue to the forefront, Mr. McKnight said. "This is really a shot across the bow to put pressure on the FCC and state regulators," he said, predicting the matter soon would be in the courts.
Nevertheless, regulators are afraid to take action because they know IP telephony can move into the mainstream, and they don't want to prevent that by prematurely regulating what still is a relatively small pot of money, said Mr. McKnight.
"This is an issue that's not going to go away quickly," ICG's Mr. Bryan said. "This reflects the fear that the Bell operating companies have, correctly, that this is the start of the end of their business." He said IP telephony might be the "tool that brings down access charges," an FCC goal when it issued its access charge reform order last year. He stated, "There is only one concern, and that concern is Farmer Brown: universal service."
"All of us in this business want to be sure that universal service is honored," Mr. Bryan said. "Having arbitrarily high access rates or making new entrants pay arbitrarily high money to people who already have been operating as monopolists for many years and have retained earnings on their balance sheet doesn't seem to be a sensible, fair thing to do."
@Home Corp. Chairman, President, and CEO Thomas Jermoluk said widespread broadband access was coming and called on policy-makers to be patient. Despite having deployed 500,000 cable modems, cable TV companies are holding back mass-scale modem rollout for the time being. "What they want to deploy is the standards-based technology that will be available just one quarter from now," he said. The @Home cable TV partners are targeting 100% deployment.
Delivering a luncheon address, Ameritech Corp. Chairman and CEO Richard C. Notebaert pushed a different alternative to bringing broadband services to residences. Ameritech is prepared to provide 1.5-megabit connections to each home in its region and could reach 60% of those homes within three years, he said. But it won't do that under rules proposed recently in the FCC's Common Carrier docket 98-147 proceeding on advanced service deployment.
"In our headquarters' state of Illinois, there are 14 LATAs [local access and transport areas]. That's more than even California has," he said.
If Ameritech wanted to provide enhanced data capabilities between Sears, Roebuck and Co. offices throughout the state, it would have to build separate network facilities in each LATA and negotiate with interexchange carriers (IXCs) to carry traffic between the network facilities. A business case for such a scenario can't be made, he said.
Regarding the data revolution, "We get it," Mr. Notebaert said. Ameritech this year is spending $2.9 billion on in-region infrastructure, up from $1.9 billion in 1994. He expects the company's 1998 revenue from data services to be $1.5 billion, he said.
The goal of the Telecommunications Act of 1996 was to open the local telephone monopoly to competition, said Sprint Corp. Chairman and CEO William T. Esrey, and "that has not happened." He said the Bell companies "have resisted in every way possible. . .but by law now they at least have to provide the pathway to the home or business. That's all we need. We don't want the circuit switches; it's old technology."
Local exchange competition nevertheless is coming, Mr. Esrey said. "It was unrealistic to think [so soon] after the Telecommunications Act was passed, suddenly the world was going to change. It doesn't happen that fast. But the horse is out of the barn, and changes are happening."
Internet telephony, he said, is going to push federal access charge reform to the front burner. "The Internet is going away as we know it. . . The principles will stay, but there will be rationalization in the economics," he said. A system in which 40% of long distance bills are represented by access charges can't long exist beside an IP telephony scheme with no access charges, he explained.
Ultimately a network that uses the IP standard will replace the public-switched telephone network, said consultant John M. McQuillan. International Data Group VP-technology Robert Metcalfe suggested that IP networks would succeed all networks-public and private. But the processes will be slow, he said, and it could result in placing an unintended financial burden on incumbent local exchange carriers (ILECs). Telcos will have to accelerate their depreciation schedules dramatically, he said.
Regarding the Internet, GTE Internetworking President Paul R. Gudonis said his company recognized that it had to "cannibalize" itself or "somebody else" would.
CLEC Plans
Representatives of competitive LECs (CLECs) outlined their business strategies. Royce J. Holland, chairman and CEO of Allegiance Telecom, Inc., and David C. Ruberg, Intermedia Communications, Inc.'s chairman, president, and CEO, have a similar game plan in that they intend their companies to provide a full suite of products to small and midsize businesses. Mr. Ruberg said Intermedia was now the "largest independent CLEC."
Covad Communications Group, Inc., however, has a more focused approach and only intends to offer xDSL (digital subscriber line) services using "last-mile" network element connections obtained largely from ILECs, said President and CEO Robert E. Knowling Jr.
Covad also intends to differentiate itself with customer service. "We show up on time," Mr. Knowling said. He called on the FCC to move on "cageless collocation" rules recently requested by the Competitive Telecommunications Association. Finding space at LEC central offices increasingly is becoming a problem, he said.
Catherine M. Hapka, president, CEO, and founder of closely held Rhythms NetCommunications, said her company was finding a market in servicing "teleworkers" and remote corporate offices not connected to fiber rings. The company's target audience doesn't represent a "niche play," but a broad market, she said. "Probably 95% of the connections that exist in the local market are off the fiber network and, therefore, do not have access to high-speed services today," she added.
She said Rhythms differentiated itself by providing high-speed access to a national network to customers who previously had Internet access only by using a dial-up modem. Rhythms initially is offering high-speed access but then will launch more advanced offerings such as computer-file backup services. "The 'killer app' is going to be high-speed local access," she said.
Allegiance's Mr. Holland acknowledged that the recent downturn of global securities markets had dried up high-yield financing options for CLECs. But that won't be a problem for Allegiance. "I think we were probably the last fish to get through the net," he said.
"What you've basically got is companies that are funded and those that aren't. . .We do have our business plan essentially funded and don't have to go back to the markets anytime soon. We've put our heads down and started executing," he said. The Allegiance business plan is prefunded until it reaches free cash flow, although Mr. Holland said Allegiance might have to curtail expansion plans if the high-yield market didn't pick up again.
Teligent, Inc., Chairman and CEO Alex J. Mandl said his company's business plan is superior because it offers CLEC services using fixed-wireless technology in the 24 gigahertz band and, thus, completely bypasses ILEC facilities. "There are only two or three other companies who can make that claim," he said. "We're one of the few companies building a big pipe into the 'last mile'" for all its local customers, he said.
Despite the proliferation of local fiber, only 3% of business buildings and one-third of business access lines are connected to a fiber ring. That leaves a big opening for Teligent, he said.
Once fully deployed, Teligent's network will be able to serve 27 million access lines. As with Allegiance, Mr. Mandl said, Teligent's plan was financed fully, and it had $1.67 billion in capital lined up. "Now it's a simple matter of execution," he said, adding that Teligent would be cash flow-positive by the year 2003.
Mr. Mandl, too, believes that voice traffic will be absorbed into data networks-a process that he says could be completed within 10 years. Although the volume of data traffic is eclipsing that of voice, in the short term 80% to 85% of telecom revenues will remain from voice services. Thus the key for new market entrants, wireless and wireline, is to build a single platform that can handle both. Teligent has chosen an ATM infrastructure.
Satellite Platforms
Teledesic LLC and SkyBridge L.P. are developing ambitious satellite projects to bring broadband Internet access to every point on the globe. But the projects have fundamental differences in design. Teledesic essentially plans to put switches in the sky; SkyBridge's plan calls for "bent-pipe" satellites, with most of the intelligent infrastructure remaining on the ground.
By putting much of the intelligence on the satellite, the Teledesic system will be more portable, and the company can better guarantee end-to-end service, said Steven W. Hooper, co-CEO of Teledesic.
SkyBridge President and CEO Pascale Sourisse said her company initially would roll out services in developed countries and later would go global. "SkyBridge is really addressing that issue of bandwidth limitation in the local loop," she said. She contended that by using less-sophisticated bent-pipe satellites, SkyBridge could keep up with evolving technology better.
ICO Global Communications (Holdings) Ltd. is developing a product more similar to wireless telephony. CEO Olof Lundberg said there was plenty of potential business for ICO, considering that terrestrial wireless phone systems cover only about 20% of the Earth's land mass and 80% of the population.
He said $5 billion to deploy an "absolutely ubiquitous global service" wasn't too expensive; Sprint PCS is spending about twice that to develop a terrestrial wireless system just in the U.S., he said.
ICO competitor Iridium LLC will target international travelers who visit remote regions with little wireless infrastructure, said Vice Chairman and CEO Edward F. Staiano. Iridium also is targeting industrial customers involved with oil or mineral extraction and has received strong signs of interest from them, he said. When asked about Iridium's competitive advantage, Mr. Staiano responded, "We're launching Nov. 1." ICO is about two years away from commercial launch.
Also speaking at the conference, Joseph P. Nacchio, president and CEO of Qwest Communications International, Inc., expressed fears that a wireline duopoly-akin to the cellular market before the advent of PCS-is looming in light of Tele-Communications, Inc.'s proposed merger with AT&T.
Citing the spate of industry mergers, he said, "In our view customers have fewer choices since the Act. . .Economics dictate that [the Bells and AT&T-TCI] won't compete head-to-head."
A day after troubled Motorola, Inc., reported financial results beating analysts' expectations for the second quarter in a row, CEO Christopher P. Galvin articulated how his company was beginning to look toward "life sciences" as a means to develop advanced technology.
He said future developments in life sciences would create new demands to move information in ways that "no one yet has been able to imagine." The human body has a most unique and effective communications architecture, he said, and it someday may change telecommunications. Lessons learned from life sciences already are being used to improve semiconductor production.
Ciena Corp. President and CEO Patrick H. Nettles said a new generation of fiber transmission technology was in the works.
It will have as big an effect on the long distance industry as dense-wavelength technology is having today, he predicted.
This new technology-frequency division multiplexing-further will increase the carrying capacity of fiber by implanting radio frequencies on each lightwave created by dense-wavelength technology. Hundreds and potentially thousands of signals will be sent simultaneously through a single fiber strand, he said.
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