america's bandwidth deficit 2014

Information Velocity Partners, LLCMichael Elling, @infostackmichael@ivpcapital.com973-222-0759

AMERICA’S REAL DEFICIT

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MODERN DIGITAL INFORMATION REVOLUTION

RateOf

Change

Hi

Low

Telco Monopoly

Wireless MonopolyAnd USF

CarterfoneModems/FaxCable licenses

PrivateInventions Equal Access for

Voice, Data, Wireless

1996TelecomAct

SpecialAccessDeregulation

BroadbandEqual AccessRevoked

WiFi EqualAccess BySteve Jobs

70-100% competition30-70% competition0-30% competition

WE KILLED MOORE & METCALFE 10 YEARS AGO

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HOW TO KILL COMPETITION

• 1996 telecom act: a well intentioned farce• open access not applied universally• average cost models (TELRIC) out of touch with technology reality• baby bells have singular (political) mission

• 2002 deregulate special access• highly concentrated market• easy to implement anti-competitive pricing• mid-mile impact on last-mile margins kills latter

• 2002-05 band-x• universal death of equal access • final consolidation of baby bells and IXCs (rebuilding Mama)

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COMPETITORS & CAPITAL MARKETS NOT BLAMELESS

• vertical business models• that’s the way it was done• digital fundamentally different from analog (not understood in 80s-90s)• easiest way to maintain monopoly

• antithesis of smart capital• classic irrational exuberance• opex/capex tradeoffs not well understood• linkages between upper & lower layers & across networks not perceived

• antithesis of good analysis• price cap and rate of return trained• rapidly evolving landscape provided few historical markers• inability to model supply and demand drivers

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• wired vs wireless• telco vs cable• video vs voice• broadcast vs 2-way• pc vs smartphone

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WHY? CONFLICTING & CONFUSING FORCES

• mobility/BYOD• blogging/tweeting• social networks• app ecosystems• 4 screens

• old business models & network/service definitions gone• end-user wants choice, flexibility and control• role of corporation, institution, individual all changing

divergence of demandconvergence of supply

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• fcc: broadband summit: adoption & usage february 7, 2013

•silicon flatirons: digital broadband migration february 10-11, 2013

• isen.com: freedom2connect march 4-5, 2013

• fcc: 3.5Ghz workshop march 13, 2013

• fcc: technology transitions policy task force workshop march 18, 2013

• free state foundation: completing the transition to digital march 21, 2013

• fcc: gigabit communities workshop march 27, 2013

•no focus on marginal cost or cost savings

• it’s all high investment & high growth• everything is new; revolution, not evolution• big & confusing challenges ahead

•no focus on changed or changing network theory

• “its just a technology transition”• nothing learned from recent past• perpetuating failures of the pre-1983 past

•no clear consistent path• lack of good data• muddle along strategy• lots of illogical and inconsistent policy• “less” regulation because of “bad” regulation

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TODAY: WHAT STAKEHOLDERS AREN’T SAYINGkey industry discussions net takeaways

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HOW DO WE GET FROM A TO D?

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i. it’s not about• regulation vs deregulation• competition vs monopoly• liberal vs conservative

ii. it is about• analog vs digital• closed vs open• vertical vs horizontal• average cost vs marginal cost• moore’s, metcalfe’s AND zipf’s* laws

*--3 major laws behind network theory, moore is processing, metcalfe is network effect, zipf is congestion management

set priorities determine approach

i. learn from 3 prior digital shifts (WAN, data, wireless) and role of equal access & pricing

ii. get on same page semantically; stop debating meaning (like ‘net neutrality’)

iii. rigorous data collection and analysis (quantitative and qualitative)

iv. develop ex ante marginal cost models clearing expected supply and demand

v. develop a “communications graph” and common reference framework

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MOORE IS ALIVE AND WELL

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Source: Matthew Komorowski.

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DIGITAL PRICE REFLECTS MARGINAL COST

analog: 20 cents

digital**: 2 cents

coax: $450

fiber***: $45

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1996: marginal costof wireless minute*

2013: marginal costof broadband gigabyte

*--1983: voice digitization, 1990: data digitization**--imputed from MicroCell 400/$40 bucket***--imputed from Google KC $70/gig price

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Supply DemandCost User-Interface

Coverage Usability

Capacity Ubiquity

Clarity Universality

SUPPLY & DEMAND MODELED “EX ANTE” DRIVES MARGINAL COST & PRICING

SUPPLY/DEMAND MODELED ACROSS THE STACK• geographic boundaries

• location and density of demand• network assets and boundary points• fixed vs mobile• traffic type

• service layers• broadly defined by lower, middle and upper layers• narrowly defined by: physical, transport, switch, control, session,

billing, application• vertical completeness vs integration• horizontal scale counters rapid obsolescence

• application/market clouds• commercial, institutional, residential• work, social, play• text, data, voice, multimedia, video• every individual uniquely situated

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A 3-D COMMUNICATIONS GRAPH & REFERENCE MODEL

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geography/density

serv

ice

laye

rs

• consistent• objective• comprehensive• common language• illustrative and graphic• highlights relationships• educational• promotes data collection• aids supply/demand modeling• estimate marginal cost at every

layer and boundary point

the infostack™ why?

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IS COMPLEXITY BEST UNDERSTOOD THIS WAY?

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OR USING A CONSISTENT GRAPH TO MODEL PAST & FUTURE?

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Fiber/Wlx/HetNetsEthernet/MPLS

IP/Opto-electric

Mediation/SDN/CDN

Session Control/Settlements

Application Billing/Support

Communication/Commerce/Content Applications

“the past = vertically integrated biz modelsbound by geographic & regulatory constraints” “the future = horizontally scaled intranets

serve infinite demand”

infinite market segments, generative competition, and

virtual economies

silo-ed supply/demand,non-generative markets

Upper

vs

boundaries varyby application

& marketsegment

across layers

Middle

Lower

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A GRAPH TO OBJECTIVELY UNDERSTAND

• the cloud, the smartphone, OTT• hetnets, technology and business model transitions• interoperability, device availability, roaming• USF and rural broadband reform and development• spectrum allocation, reuse, sharing• backhaul and mid-mile costing; transport caching and CDNs• development of balanced settlement solutions• corporate VPNs and centralized procurement• equal access, net neutrality and monopoly bottlenecks• prices, terms and bundles• marginal cost of operations and investment• restructuring and repurposing of existing assets & companies

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INTERCONNECTION AND OPEN ACCESS WORKS

• Dial 1 equal access

• Computer 2/3

• Wireless A/B/PCS interconnect/roaming

• Number portability

• Must carry

• WiFi/802.11

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Applications

Networks

App/Net A SettlementExchanges App/Net B

CLEARING TRAFFIC NORTH-SOUTH & EAST-WEST

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LEADING TO FAST INTERNET FREE EVERYWHERE

• huh? but doesn’t someone always pay?• yes, but remember that 3 digital waves in 80s-90s taught us much about equal

access and marginal cost…• …& got us to where we are; but few have learned the lessons• 17 years of competition in the WAN led to 90% of long-distance communication

thought of, perceived as, or actually was, “free”• despite that industry revenues in 2000 > 1983• same trends in internet, cloud and wireless (802.11 fully, 1G-4G partly)• price reflecting marginal cost at every layer and boundary point is highly

generative and stimulative (look at google fiber kc)• balanced settlements will lead to new services, infrastructure investment and

centralized procurement and subsidization• competition leads to ubiquitous and universal (free) service: fife

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PAST FORMS OF FREE

• 800• VPN• Ad sponsored content• WiFi• Email

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FIFE

Efife

Michael EllingInformation Velocity Partners (IVP)michael@ivpcapital.com973-222-0759 © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C