A Practical Navigator for the Internet Economy

Ca*net 4 Plans Customer Control of Lambdas

Regional Nets, Universities and Researchers to Be Able to Establish Wavelength Peering via Specially Tailored Switches

Making Telecom a Customer Owned Asset May Create Favorable Impact on What Appears To Be Surplus Fiber Infrastructure

New Tools May Enable Users to Solve Trust Problems & Build Communities

pp. 1 - 18

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Introduction

While we still have a global Internet and probably always will -- (at least in the sense of something defined as mail and web servers connected via DNS to the ICANN legacy root), it is now clear that technology is taking us far beyond this initial two dimensional Internet. It is giving us the ability to establish our own networks that may or may not be directly attached to the global internet.

We may now network all manner of devices running TCP/IP. As a result of this new ability, we will begin to create new, locally originating networks that grow and shrink on a dynamic ever changing basis in sync with the needs of those behind them. With access to wireless spread spectrum 802.11b devices and before long with access to wavelengths that are becoming more and more affordable, we will increasingly begin to build own physical networks.

However, with other technologies located at the content layer of the network, we can also use TCP/IP to set up and tear down inter-networked subsets of communications, along with communities of interests and content based on those interests. For some of us the global legacy Internet is now about to become a myriad of tribalized mini-internets. Many people may begin to drift in and out of these communities, using them like the UseNet of old to connect to others with whom they wish to do business. While the legacy Internet will capture the vast majority of available 'eyeballs' for the foreseeable future, we predict that many people will begin to spend portions of their time attached to all of these networks.

Larry Lessig bemoans (in his new book reviewed in this issue) the corporate propelled movement to "enclose" the Internet by means of walled gardens and other restrictions of expansively defined intellectual property. While this movement continues to press forward, we predict that there will be groups of people unable to do what they want within the realms of the old technology who will begin to experiment with new ways of communication.

The Canadians have a vision that has been lost in the free market purity of the United States' political environment. Consider the theme of the CANARIE's 7th Annual Advanced Networks Workshop being held this week in Toronto.

"Following the recent release of the National Broadband Task Force report, there is increased awareness that a national broadband infrastructure serving all Canadian communities will be critical to Canada's ability to innovate. Information technology infrastructure will be one of the most important vehicles for promoting innovation and improving Canada's productivity, leading to increased wealth and economic growth.

Community broadband networks, provincial networking initiatives and national research backbone networks, are all part of the same continuum of providing a national innovation infrastructure.

In the future, research, education and innovation will not be solely a product of universities and research centers. A national innovation infrastructure will allow all Canadians in our schools, communities and businesses, no matter how remote or how distant, to be full participants in developing and using innovative applications and services.

New concepts involving "grids" and "eScience" are coming to assume greater importance in many branches of science. Some of this work could allow students in our schools, and eventually members of the public, to participate in basic research that otherwise they could only read about, thereby engaging them directly in Canada's "innovation culture." See also : http://www.canarie.ca/advnet/workshop_2001/agenda.html

CA*net 4 is to be built in part on the premise that with huge amounts of fiber laid and very large amounts lit but still not fully utilized direct control of actual bandwidth can, for the first time, be placed into the hands of customers and then end users. According to Bill St. Arnaud: "Today networking is like computing was 40 years ago when the market was dominated by large mainframe computers. But in the 1970s the mini-computer came along followed by the PC which fundamentally changed our thinking of how to do computing. Computing became personal. The user was empowered to develop new applications and services that were not possible on a mainframe computer. With CA*net 4 we hope to move networking in the same direction as computing has gone in the last 30 years." Arnaud wants to turn the network itself into a customer owned and controlled asset.

"From day one we will be assigning ownership and control of individual wavelengths or STS channels to the GigaPOPs, universities and perhaps even individual researchers. They will be free to trade and swap amongst themselves and do what ever they want with those wavelengths. From day one we will also encourage these organizations to directly peer with each other and other international research networks using these wavelengths. But, initially the BGP optical peering will be done manually. Once OBGP is successfully implemented, it will allow theses organizations to automatically change the routing of the wavelengths and peering relationships without first contacting CANARIE. So rather than operating a traditional hierarchical IP network as many other research networks do today, CANARIE will only offer an aggregate IP network as an optional service for those organizations that don¹t need their own wavelengths."

When we asked his thoughts about the ways in which CA*net 4 might help the Internet build a viable business model for life after the current down turn, he replied: "I think the business and architecture model of the future will be of control and management moving increasingly closer to the edge, not only of the in terms of applications, but also in terms of control over the infrastructure. I think that one of the drivers for this will be as a consequence of the issues that of Larry Lessig has raised where content and distribution companies are trying to exert control over the Internet infrastructure to protect their intellectual property interests. Decentralization and minimizing control at the center will help thwart these challenges. We are already working on concepts with our industry and research partners to extend this concept of customer control of wavelengths all the way to the individual home. . . . .

In the future we see a physical network infrastructure that closely parallels Morpheus and other peer to peer networking paradigms. The end user will have a choice of whether they wish to subscribe any number of "walled garden" service providers. Or they may chose to physically connect to community networks to share files and data with high speed Gigabit wavelengths bypassing all traditional hierarchical service providers.

A lot of these concepts are still very speculative and unproven at this point in time. But what it does point out - is the critical role that research and education networks still play in the ongoing development of the Internet. . . . . Most importantly research and education networks will continue to play an absolutely critical role in exploring new concepts in networking which initially may appear very radical to the traditional telecom world.

Trust as Qualified Reliance on Information

by

Ed Gerck, pp 19 - 24

The trust definition and issues raised in Ed Gerck's essay have been discussed online since 1997 in several technical groups including the MCG and IETF's PKIX lists, and have also been presented in books and essays. Detailed and in-depth online discussions among the experts, as well as practical applications, have helped Gerck evolve and test these concepts over time. What has been missing is a summary and clarification of the arguments. This is what we present in the article on pages 19 - 24 of this issue.

Trust is a word that is commonly applied to many situations and consequently has many shades of meaning. This essay by Ed Gerck focuses on one precise set of coherent meanings: the concept of trust in the context of communication. More specifically, in the context of the engineering problem of Internet communications. Gerck defines trust as "that which is essential to a communication channel but cannot be transferred from a source to a destination using that channel." Thus, trust is considered something essentially communicable, but with specific rules for its communication. For example, self-assertions cannot induce trust. Client-server communication is not enough to induce trust. Gerck demonstrates why trust is needed and shows the interplay between trust and power. His exposition also discusses the induction (communication) of trust in heterogeneous environments, from human to machine, machine to machine, and machine to human.

The Future of Ideas

The Fate of the Commons in a Connected World

by Lawrence Lessig ­ A review, pp. 25 - 31

Lessig's book explains why and how corporate America has brought the seemingly uncontrollable Internet under its control. It was too successful and too ripe a target for ots own good. Turned commercial and subject to tremendous hype as the engine of and means for commerce for the 21st century, the Internet quickly became a strategic corporate target for the telecom, computing and media and content sectors. It was seen as the next great source of wealth and power. As such it had to be exploited and controlled.

Lessig "My central claim throughout [this book] is that there is a benefit to resources held in common and that the Internet is the best evidence of that benefit. As we will see the Internet forms an innovation commons. It forms this commons not just through norms but also through a specific technical architecture. The Net of these norms and this architecture is a space where creativity can flourish. Yet so blind are we to the possible value of a commons that we don¹t even notice the commons that the Internet is. And, in turn, this blindness leads us to ignore changes to the norms and architecture of the Net that weaken this commons. There is a tragedy of the commons that we will identify here; it is the tragedy of losing the innovation commons that the Internet is, through the changes that are being rendered on top," [Lessig, p. 23]

Here is his own description of the task he sets: "Changes threaten the power of those now in power; they will work in turn to protect themselves from the changes. In the balance of this book, I want to detail their work to change the Internet, and the legal culture surrounding it, to better protect themselves. Some of these changes are legal; some are technical; and some use the power of the market. But all are driven by the desire to assure that this revolution doesn't muck things up-for them. There's nothing immoral in this desire. This is not a battle between good and evil. Stockholders demand that management maximize its income; we shouldn't expect management to do anything different. But, even if this is "only business" to them, this does not mean it should be "just business" for us. [p. 146.]

Lessig summarizes with scholarly detail the war waged by the interests of corporate control on behalf of corporate profits against the physical , logical and content layers of the Internet. His conclusions are steeped in pessimism and anger. In our opinion he expressed them even more forcefully in a paper at a November 9-11 2001, Duke University Law School symposium. "If communism vs. capitalism was the struggle of the 20 th century, then control vs. freedom will be the debate of the 21 st century. If our question then was how best to control, our question now will become whether to control. What would a free resource give us that controlled resources don¹t? What is the value in avoiding systems of control?" [p. 178]

"We allow these changes, they don't just happen. We stand back as they occur, they don't happen in the night. We let them occur because most of us believe they should; control is good, better control is better, these systems of control are ways to make sure the better comes from the good. It is an attitude and blindness and a pathetic resignation that permits this change. So enamored we are with the invisible hand, so convinced we are of the genius of property, so blind we are to what makes innovation possible, that we allow the undoing of the most significant chance for something different that we have ever seen." [p. 190]

ICANN Annual Meeting Security Sideshow Fails to Upstage Completely the Nasty Question of an At-Large Membership,

pp. 31 -32

An article from ICB Toll Free news summaries the latest series of contortions by ICANN's leaders to explain why ICANN's secretive intellectual property cadre cannot afford to keep promises made to Congress by the likes of Esther Dyson and others. The sad and dismal on going story of the self-selected elete that pretends it still has a mission critical to the stability of the internet.

Interview/Article Highlights, pp. 33 - 38

Executive Summary, pp. 38 - 41

The United Kingdom Has its Own Local Loop Problem, pp. 41 ­42

 

New Peer-to-Peer Technologies Impact Internet

Maturation of Peer-to-Peer in Computing Spreads to Internet as Customer Control at Network Edges

New Non DNS Dependent and Customer Defined Architectures Enabled,

pp. 1-5

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An "Overview" by Gordon Cook

In working with Ed Gerck on the publication of his paper on trust, we especially liked the idea that the adoption both of the concept of trust as defined by Gerck and its related tools might enable users to define their own networks and connections, allowing them to build their own communities of interest. Even better it seemed was the promise that such communities, once defined, could then find each other on the Internet. For some in the "peer-to-peer" field, this is nothing less than the holy grail of peer-to-peer networking.

Since publishing the article, we realized that one of the attractions of Gerck's work was that it can be seen as an example of a new realm of peer-to-peer (P2P) applications. We expect to explore this realm in future issues.

To summarize a few examples: The coming together of internet telephony protocols via SIP proxy servers and related tools that we wrote about in our November 2001 issue is an example of these "peer-to-peer" capabilities. CANARIE implementation of OBGP fits the same pattern. In an economic and policy context, P2P concepts are particularly relevant to the building of customer-owned networks that don't rely on monopoly incumbent carriers. Ca*Net 4 which was funded by the Canadian government at a level of $110 million Canadian dollars on December 10, 2001 will bring peer-to-peer management of network resources directly to its end users. "Peer-to-peer" looks to be an important tool in helping users define on their own terms their own use of TCP/IP based Internets.

Speed Alone Must Not Define Broadband Technology Issues in Policy Making,

pp. 6-7

Patricia Fusco writes about FCC Chairman Powell: "broadband is a non-analog communication system that is IP-friendly, always connected, and eternally scalable. Eureka! For Powell's FCC, broadband is a premise, not a practice-a theory, not a technology. Egads, what a vexing muddle. How do you regulate conjecture?"

Francois Menard replies: Broadband cannot only be defined in terms of speed. I know of a company that has begun to use the following definition of broadband in its feasibility study reports:

"Broadband shall be defined as the capacity of end-users to replace transmission equipment connected to the network, as frequently as their needs changes and at the same pace as the progress of technology".

In other words, if you don't have these rights, you only have high-speed access. The speed that you get will be whatever speed the carrier decides to grant you. With that carrier's control of the physical facility are likely to come other limitations such as end-users being prevented from implementing end-to-end integrated services.

Dreams of IPv6 Continue

But Investment in v4 Infrastructure and Unresolved Routing Issues Continue to Thwart Deployment -- Meanwhile IETF Routing Director Resigns

More Static Public Internet May Push Innovation into Efforts Like Peer-to-Peer,

pp. 8 - 15

IPv6 is still seen as a way to avoid reliance on NAT and enable increased availability for protocols designed to take advantage of the nets end-to-end architecture. Yet the realization is growing that any sizable commercial transition will never take place until a transition to multi-homing under IPv6 is developed.

We republish a discussion from the IETF list that shows while pressure for v6 is growing, the cost of deployment remains high and roll out is likely to be slow.

Passive Optical Networks as a Means of Getting Affordable Fiber to the Home

Important but Troublesome Topic Debated in Ethernet in the First Mile Protocol Development Mail List,

pp. 16 - 23

PON [Passive Optical Network] is a means of sharing fiber to the home so that the installers don't have to run a strand to every house all the way back to an exchange point or a telco CO or a CATV head end. If you are going to bring Ethernet in the first mile technology to homes via fiber, according to some telcos, PON is the only way it will make economic sense. However, other players don't agree. Deployments of active architectures and Point-to-Point architectures for fiber-to-the-home are also occurring. We republish a discussion of ideas about the development of PON from the EFM list

Anatomy of a Small Revolution

by

Dave Hughes,

pp. 24 - 35

In time of national crisis and the apparent collapse of much of the early Internet dream, it seemed useful to talk with a man who single handedly had been able to "make a difference."

Dave Hughes tells in two parts (the conclusion will run in our March issue) the story of how he became a telecom community activist in Colorado Springs 25 years ago. He brought reforms first as a futurist in Army Green to Fort Carson in 1971-73. When General Rogers asked Hughes to accompany him to Washington and abroad, Hughes said: "Bernie, Washington has become a great soggy log floating down the Potomac, with a millions ants on it thinking they are steering it. Been there, done that. Anything worth value in THIS country, starts at the bottom, the grass roots of America. By the time it gets to Washington, in a FUTURE SHOCK - rapidly changing - society, its already obsolete.

No thanks, I am going to retire in my own city, and follow Voltaire's Candide's advice - 'Cultivate your own Garden.' Take a 'neighborhood on' as my Garden, use a microprocessor as a hoe, a modem as my wheelbarrow, and if I can make my Neighborhood work, maybe help greater Colorado Springs next, possibly Denver. But I won't live long enough to do Washington over, besides who cares?"

ICANN, Ignoring California Statute, Refuses to Show Its North American at Large Director its Books

Opportunity for Independent Review of Finances Lost,

pp. 36 ­ 40

Editor's Introduction: Karl Auerbach whose ICANN at Large Director's term is more than half over has now come squarely up against ICANN's attitude towards it's own directors and to the laws under which it is chartered. ICANN staff do what they want and defy the corporation's own Directors to stop them. Auerbach's experience should make it very clear to anyone contemplating any Directorial relationship with ICANN that those running this organization want only figureheads who will serve as window dressing for an organization that purports to serve the Internet while in reality it serves only the inner circle of corporate interests who set up the ICANN shell in the first place. ICANN's nature is becoming much more clear to those who pay attention to it. Folk who have studied it closely like Michael Froomkin, Milton Mueller and Larry Lessig see it for what it is. ICANN is an effort by a relatively small number of players within the information technology industry to use for their own advantage a US Commerce Department granted charter that calls on ICANN to act in the interest of all segments of the Internet community.

Our article concludes with the reasons why ICANN will likely get away with thumbing its nose at California state law.

Article and Discussion Highlights,

pp. 40 - 46

Executive Summary,

pp. 46-48

 

THE FUTURE OF THE INDUSTRY

Why the ILECs Are in Trouble

New Technology Has Stood their Business Model on its Head and Is Beginning to Erode their Revenue Base

Googin Asserts that Caught in a Vice Between Shift to Unprofitable Data, Declining Use of Network and Long Depreciation Schedules for Heavy Debt ILECs Will Find Themselves Unable to Pay their Debt

pp. 3 - 14

A Special Combined Issue to Mark Beginning of Our Second Decade of Publication

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Introduction

February 18, 2002 -- In this issue we shift from technology to economics and business models. A year after folk could no longer ignore the bursting of the bubble, the industry is still headed downward. We seek to define the problem and the reasons why. The reasons of course are to be found in a mixture of technology and business models as constrained by the policy frameworks in which they must operate.

The most critical insight to result from our efforts at problem definition is Roxane Googin's assertion that there is a combination of economic and technology forces eating away at the ILECs that will bankrupt them. While the same combination of forces will play out differently with the old line IXCs, their future (especially that of AT&T and MCI WorldCom) is also grim. Between 1985 and 1995 the legacy telco networks were structured for the digital delivery of circuit-switched voice with the purchase of a very expensive SONET based infrastructure. With data representing a small but growing share of traffic their business model seemed to permit them adequate time to convert their networks and financing to cope with a data dominant future.

What their planners hadn't reckoned on was the impact of the internet and web driving data growth even more rapidly than they had projected between 1995 and 2000. At the same time, rapid improvements in optical network and gigabit Ethernet technology greatly reduced the costs for both capital expenditure and operating expenditure while at the same time providing a more data-appropriate infrastructure. As a result, almost overnight their new SONET networks were rendered obsolete. This flew in the face of the 20 or 25 year economic life cycles anticipated by the ILECs for their SONET gear, as exemplified by the 20-25 year amortization schedules for this equipment. They used these amortization schedules as the basis of their bond repayment schedules. Consequently, the quality of such bonds now must be viewed with increasing skepticism.

Meanwhile, new players with newer networks, therefore lower cost bases, are able to offer less costly transport and connectivity services, which further erode the revenue base of the incumbents. Notwithstanding, these new players have not grown fast enough to reach economic viability. Most are bankrupt or tottering on the brink.

What is left for the incumbents is a high cost obsolete local loop in a era where people want broadband that the copper cannot deliver. Furthermore, the ILEC infrastructure requires a work force of hundreds of thousands to maintain it limiting their financial flexibility in the face of their need to replace that equipment. Legacy ILEC operating expenses are not to going to be able to be rapidly reduced. In the past, as long as operating income was growing, the difference between revenues and expense in the form of earnings would permit the ILECs to try switch to a newer and more cost-effective infrastructure. But today, the difficulty of carrying out such a switch is increasingly obvious.

Googin points out that in 2001 something absolutely critical happened. While ILEC data growth continues, data does not bring in anywhere near the revenue that voice does. Furthermore, voice as measured in number of access minutes to ILEC networks and number of lines in service is now not only flat but actually declining. The result is that revenues are going down while costs are not and profits are disappearing. When the profits are gone, and the bondholders can no longer be paid, the outcome (bankruptcy and restructuring) appears to be inevitable. Our small panel of experts assembled for this issue sees no deus ex machina waiting in the wings to reverse the current course. The only variable looks like the speed of the downfall. There readers will find some difference of opinion in the essays that follow.

In Need of Cassandra?

Who will speak the painful truth? Two years ago the commonly accepted wisdom said that the net heads would take their IP, fiber and stupid networks and sweep the old line phone companies aside. But even then there were some cracks in such an assessment. Andrew Odlyzko three years ago began to explain why the foundation of bandwidth doubling every 90 days on which both the dot com craze and fiber builds of 1996 - 1999 were based was not reality but a myth.

In a similar vein Roxane Googin for about two years has been explaining why the much feared re-integration of telcos into an ILEC led monopoly won't happen either. If Odlyzko delivered the first piece of bad news by telling us we had geared up for a demand that wasn't there, Googin has a her own dose of harsh reality to present. The new technology although itself not yet built into viable companies is eroding the base on which the circuit switched telcos operate rendering their balance sheets unsustainable as well. It is our contention that if we grasp both of them and understand how one flows from the other we will begin to be able to address industry's problems. It is our objective to do just this in this issue of the COOK Report.

We are at about the same point in perception of Googin's message that we were with Odlyzko's at the end of 1999. She has been a subscriber for several years but, until David Isenberg described her analysis in mid December, we had not understood what an important contribution she had to make. We persuaded her to follow up with us what she had begun with Isenberg. She had concluded in Isenberg's Smart Letter #64 http://isen.com/archives/011216.html that the industry had tanked and the only recourse to a prolonged downturn would be recognition of the severity of the problem by wiping balance sheets clean and starting over again.

While this injunction may be more easily said than carried out, the conclusion to be drawn is that, until people realize the breadth and depth of the problem, change will not occur. Instead we will simply continue this downward spiral as the black hole of debt absorbs all economic growth, just like Japan. While Wall Street optimists may continue to forecast a second half rebound (just as they did last year) they are simply deluding themselves. Unresolved debt in Japan has contributed to an 18-year decline. If we don't restructure this debt, however, that is just where we are headed.

Roxane Googin believes that problem definition is the order of the day. Agreeing, we asked her to do a core dump. Three hours of interviews just before Christmas have been followed by further extensive voice and email correspondence over the past three weeks. The result is the interview that forms Part One of this issue. We asked David Isenberg, Andrew Odlyzko and Bill Klein (an internet infrastructure equities analyst) to join in reacting to and commenting on the interview. Isenberg's reaction was his Enronization of Telecom article in Smart Letter 67 http://isen.com/archives/020206.html.

Comments and questions by Odlyzko, Klein and your editor are contained in Part Two below. In Part Three Googin responds to Odlyzko's critique incorporates a key part of his argument and shows that her key insights are still valid. David Isenberg's Enroonizaztion of Telecom that was inspired by his participation in our discussions. appears as Part Four

The "April" issue ends HERE

Parts Five through Nine below are the content of the May issue to be published by Feb 25.

In an essay that appears in Part Five Bill Klein presents his analysis of the fate of the carriers and explains the perils inherent in any attempted nationalization of telco assets. In Part Six Andrew Odlyzko concludes that the ILECs better take Roxane Googin's warnings very seriously. if they do they may survive by adopting an assets based approach.

Part Seven is your Editor's own brief look at ATT, Print, MCI, and Global Crossing. Part Eight is our detailed examination of Level 3 and Part Nine is by Gordon Cook and contains 3 sections. (1) Why the fiber-based greenfield model has failed. (2) Why Congress and everyone else should regard claims by Internet 2 to have an answer to the broadband problem and why funneling money to the NSF for an Internet 2 solution to broadband and shot in the arm for the industry would be a bad idea. (3) What is asset based telecom and why it is likely the only answer for the industry's problems.

Contents

THE FUTURE OF THE INDUSTRY

Bill for Global Fiber Expansion, Optical and IP Technology, as Well as Problematic Accounting Hits Local & Global Players -- Googin, Odlyzko, Isenberg and Klein Explore Why Impact of Optical and IP Technology on Telco's Is Producing Global Economic Train Wreck pp. 1-2

Part One:

Why the ILECs Are in Trouble New Technology Has Stood their Business Model on its Head and Is Beginning to Erode their Revenue Base Googin Asserts that Caught in a Vice Between Shift to Unprofitable Data, Declining Use of Network and Long Depreciation Schedules for Heavy Debt ILECs Will Find Themselves Unable to Pay their Debt pp. 3 - 14

Part Two

Andrew Odlyzko Critiques the Googin IntervOdlyzko Finds Some Areas of Technical Disagreement -- Cook and Bill Klein Comment pp. 15 - 20

Part Three

Googin Replies and Incorporates Odlyzko's Voice Versus Cost Data Figures Plugs Revision into Her Framework and Shows the ILECs still Going Broke, pp. 21-23

Part Four

The Enronization of Telecom, by David Isenberg, pp. 24-25

 

Defining New Internet Business Models

Internet Performance Measurement Applied by Matrix Net Systems to the Solution of Enterprise and ISP Problems

John Quarterman and Peter Salus Explain Measurement Techniques Enabling Independent Evaluation of SLAs and Bandwidth Pricing,

pp. 1 - 23

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We interview John Quarterman and Peter Salus on the subject of Internet performance measurement and analysis as performed by Matrix NetSystems of which they are respectively Chief Technical Officer and Chief Knowledge Officer.

In a 15,000 word interview he and Salus explain the technical and business aspects of their work. They measure by using more than 80 "beacons" scattered at strategic locations around the world to ping and traceroute to 120,000 "destinations" in more than 100 nations collecting hundreds of millions of data points per day.

They have been doing this on a smaller scale since 1993. They have traffic data since then measured by latency, packet loss, and reachability to a core set of Internet destinations. As a result they explain how they can compare over time how the reachability of this set of destinations has been impacted by earthquakes, hurricanes, and the terrorist attacks of September 11.

On an on going basis, the products and services of Matrix require the distillation of masses of automated data and analysis of the results. Matrix can then advise global corporations how to tune their network connections to ISPs to better serve their customers or show ISPs similar means of improving their own network's performance.

Quarterman and Salus explain how a New York City based global financial services organization gave Matrix the IP numbers of 33,000 of their own customers around the world. This is a group of people for whom fast and reliable connectivity is imperative because the lack of same could have major negative impacts on their financial transactions. Plotting network performance over time for these customers of the financial services institution makes possible performance rating of the customer's ISPs. By comparing the performance of various ISPs in places in the world like Hong Kong, Singapore, Europe and the US, Matrix is able to advise the financial services organization how varied placement of servers can be expected to improve performance.

The performance monitoring that Matrix does can also be used as a means of independently validating ISP service level agreements. It has monitoring of latency packet loss and reachability for about two dozen large ISPs posted for public review on its web side. By monitoring performance from nodes on the network of a given ISP to a wide range of Internet destinations, Matrix can get not only information about the performance of the customer's network but also data on how well through its peering, it delivers transit to the entire Internet on behalf of its customers.

We said to Quarterman: "Two years ago in attempting to commoditize bandwidth so that it could be traded, the critical lacking ingredient was the establishment of a benchmark price. That is to say a unit of measure by which other units of bandwidth could be valued. Thinking at the time was that the benchmark would likely be settled on as something like a DS3 between New York and San Francisco. The breakthrough in the commoditization of natural gas was to separate it from the influence and cost of the network that transported it."

"However what is becoming clear from talking to you is that while fine for natural gas, this tactic is simply unworkable for IP bandwidth. There can be no meaningful way to benchmark a DS3 from point a to point b in isolation from the network on which it rides. Bandwidth as a stream of photons traveling along a fiber is very different from natural gas which can be easily stored at local collection points before use. The availability and performance of the stream of photons is what makes it useful. Therefore a lightwave sent from one city to another can not be realistically valued for trading purposes without its basic price being tied to an index of the performance of the network that transports it.."

"The index is a function of your measures of latency, packet loss and reachability, of the transport network taken on an hour-by-hour, day-by-day, week-by-week basis over a period of time. All of which means a DS3 from New York to San Francisco on UUNET might be worth X dollars while a DS 3 on ATT's backbone New York to San Francisco might be worth Y number of dollars where the difference between X and Y is a function of the difference in the performance index of the two transport networks. Furthermore that the value of the bandwidth would fluctuate over time as network performance fluctuated. Your Foresight performance index sounds like has a reasonable chance of acceptance. If it does become accepted, you have solved an important problem. Bandwidth trading has not been viable because there has been inadequate information on which to make it happen. You may have the information needed to make it possible."

Quarterman responded "Yes, network performance provides price differentiation for links in addition to bandwidth and geography. Indeed this idea would be applicable to bandwidth trading. From the financial side of the coin, there are also major benefits using the approach to bandwidth pricing. As price is more commonly associated with a QoS level, a carrier can use index data to enable itself and others set prices on the services it performs. A trader will call this concept "price transparency", and even though trading has "fallen into disfavor," the concept is still very useful to the marketplace. With price transparency, if a carrier knows their network inventory position and the size of the outstanding service level agreements for which they have contracted, the carrier can then perform serious quantified risk management and asset level management functions, This capability becomes a very powerful decision making tool for the CFO."

"If providers can model their current inventory, we can help them value it. If we can map the carrier's network to begin with, we know the carrier's inventory, and that's a CFO's asset base. The carrier's outstanding SLAs are its outstanding liabilities. If we can associate a value with those inventory positions, we have the core of every risk management or asset liability management analysis. These two kinds of analysis are very powerful decision support tools for the CFO."

We asked: Another way of saying all this is that you appear to have the means by which ISPs can define for the first time a viable business model. That is a rather important accomplishment. Quarterman replied: "Yes, a big problem with the current ISP business model is that they're all basically selling connectivity with the only differentiator being price, so they end up competing for the cheapest rates. The only companies making money on the Internet have been outfits like Cisco that sell equipment to ISPs. That's like selling shovels and bacon to gold miners during the gold rush. Most of the miners didn't make money, but some of the vendors did. But during the current market slump even the shovel vendors aren't making much money."

Software-Defined Radios Enter the Limelight,

p. 23

We republish a pointer to an excellent essay By Mark Long on the state of the art of software defined radios. On January 8, 2002 Long wrote: According to the SDR Forum, the term software defined radio (SDR) is used to describe radios that provide software control of a variety of modulation techniques, wide-band or narrow-band operation, communications security functions such as hopping, and waveform requirements of current and evolving standards over a broad frequency range. The end result is a completely new technology for enabling a wide range of applications within the wireless and broadband industries that potentially can provide efficient and comparatively inexpensive methods for overcoming many of the technical constraints that currently limit existing telecommunication systems.

Optical Signaling Systems by Scott Clavena (From Light Reading.)

pp. 23 -24

Optical networking may have gone from boom to bust in the past year, but the need for a totally new way of controlling carrier networks has never been stronger.

In order to survive and prosper, service providers need to make more money from their existing infrastructures, and they also need to slash costs. Well, guess what? That's exactly what new signaling technologies like GMPLS (generalized multiprotocol label switching) and standardized interfaces like the Optical UNI (user network interface) aim to make possible.

In essence, these protocols promise to automate the operation of telecom networks so that capacity can be used more efficiently and services can be provisioned much more rapidly, from remote consoles or via requests from client gear. That promises to radically reduce the need to send engineers out into the field to manually reconfigure equipment.

Editor: The above are the first 3 paragraphs of a long (22,000 words) and very good tutorial.

ICANN and Antitrust,

p. 24

by Michael Froomkin & Mark A. Lemley

Editor's Note: This is another excellent footnoted article from M. Froomkin and a new colleague argues that ICANN's behavior is likely in violation of antitrust statutes. He finds it likely that it is not immune from anti trust liability. The paper is 55 pages long and is available as a 179 kilobyte PDF from the URL below.

http://personal.law.miami.edu/~froomkin/articles/icann-antitrust.pdf

Empowering the Customer or Empowering the Telco?

Betting Your Company's Future on Your Understanding of the Right Mix of Technology, Economics and Policy,

pp. 25 - 29

The Internet has not as yet solved the problem of how to deliver huge quantities of bandwidth at a price that enables providers to pay off debt and make a profit. In this sense it has not yet developed a viable business model. The irony is that its new technology has been successful at undercutting the prices enjoyed by incumbent carriers and needed by them to maintain the financial viability of their services. Indeed it has become so successful in this respect that some analysts are beginning to fear for the stability of the global telecommunications system.

As recently as 1999 analysts were predicting that the IP technology of the packet switched Internet would sweep away the old circuit switched telecom technology. they were wrong. It did not collapse under the onslaught of a triumphant new global packet network bringing vast amounts of inexpensive bandwidth to every home and business.

One reason it did not was that the technologists were so certain of the superiority of their product and were so good at driving the hype that got them their early stage capital investment they were able to sail forward without a long term viable business model for what they were doing. Build it and you will be saved - somehow. The provisioning of vast amounts of cheap bandwidth was seen as a sustainable business model for the Internet.

The problem is that ten years on the bandwidth business model has not proven to be a viable one. We contend that the question is whether bandwidth is something on which a business model can be built? Or is bandwidth, like a highway, just an enabler? We started out a decade ago talking about the information super highway and then proceeded to try to build multiple global privatized versions. Imagine if Ford had spent tens of billions building a global interstate for its cars. While GM. Daimler-Chrysler and Honda and Toyota had each done the same thing. What has been built are highways with largely identical performance and capable of huge indiscriminate through-put of "vehicles" or packets. They have lead to an unsustainable business model. "Become a customer of my commodity system." "No. Not his. Mine. I just doubled the speed and I will sell you access for 20% less. I only had to borrow another billion dollars against my non existent profits." Yes we have a train wreck. Any wonder?

In the context of this economic upheaval the most significant technology trend that we see is one that will present managers, investors and policy makers with a choice pointed out by the title of this report. Empower the user. Or empower the telco. Choices are being made. The technologists are driving control of lambdas into the hands of end users. Peer-to-peer, as software and infrastructure, is enabling the formation of communities of users at the network's edges. Here the goal is generally to make the center and anything associated with it disappear. The impact of technology on network architecture will be the most important trend to watch in 2002.

But, as many have found out to their dismay, we can no longer make intelligent decisions in telecommunications absent a thorough understanding of the industry's economic picture. Indeed analysis of technology trends done without understand of their economic impact, are, in this climate, of limited use.

We are marching toward a denouement designed to allow the ILECs to try to be the last ones standing by allowing them to use their control over the "last mile" to re-monopolize service. This after all, is what the "free market" has given us. We owe the great boom of the last 20 years to our faith in the free market so if we just hang on a while longer someone or something will save us. Indications that the new technology may also bankrupt the ILECs are not yet on the radar screens of most analysts.

This leaves us in a strange situation. One where we are so smart that we can shove billions more photons down the same thread of glass this year than we could last year. But it is also one where we are also so ideologically blinded that we remain wedded to the building and maintenance of multiple privately owned systems when experience now shows us that there is no business model that can pay for multiple competing privately owned commodity systems.

Roxane Googin, Editor of the High Tech Observer, in a short essay in David Isenberg's Smart Letter 64 has captured the essential problem: "But even though the attackers are starving, they are forcing marginal bandwidth prices below the ILEC's cost of provisioning -- not only replacement but also provisioning. So the ILECs are going to get squeezed because they have this complex, labor-intensive infrastructure that is no longer supported by a viable economic base."

"In this kind of nightmare scenario, nobody wins. It is just a big mess because the attackers are [also] going under. Meanwhile, they have crippled the incumbents. We are witnessing the perfectly predictable outcome of this process: no equipment sales, and no more progress." [Snip] "So we have to fix the problem. This means restructuring the debt and owning up to what the real issues are. This owning-up hasn't been done yet."

This is a dilemma that we shall be exploring further in our April 2002 issue with a long interview with Roxane Googin.

Anatomy of a Small Revolution (Part 2)

by Dave Hughes , pp. 30 - 43

Dave Hughes brings the story of Old Colorado City up to date. He writes: "I have watched the area grow and change. Change in ways that are not necessarily good. It's been a long time - 25 years. And nothing is forever. Even though Old Colorado City and the Westside remains so much better off than it has ever been before, and by every objective measure is an unprecedented (in Colorado Springs) success for which I am given ample credit, still I have watched human, business, residential, and government 'nature' at work over time, and see lots of reasons why it may not sustain itself forever."

Article and Discussion Highlights,

pp. 43 - 48

Executive Summary,

pp. 48 -52

 

THE FUTURE OF THE INDUSTRY

Bill for Global Fiber Expansion, Optical and IP Technology, as Well as Problematic Accounting Hits Local & Global Players

Googin, Odlyzko, Isenberg and Klein Explore Why Impact of Optical and IP Technology on Telco's Is Producing Global Economic Train Wreck

pp. 1-2

Find out how to order single copy ($125) or group license ($250) for just THIS MAY issue.

February 25, 2002 -- This combined April May Special issue of the COOK Report on Internet takes an exhaustive look at the train wreck produced by the collision of ten years growth of IP and optical data networks with the circuit switched world. In preparing the second half of this issue we have taken a hard look at the world of fiber, IRUs (both for dark fiber and lambda sales) and, resultant bandwidth over capacity. What we have found tells us that the telecom industry carnage is likely to continue until it burns itself out.

It is immune to attempts at rational policy making and perhaps even to informed judgments by the economic markets because we simply do not have good data broken down by carrier on bandwidth capacity and sales. We have been able to compile some data on our own. The picture this data presents is discouraging because in not knowing precisely what the carriers are selling we simply do not have a fix on bandwidth demand and consequent monetary return to carriers for their huge investment in optical technology. Individual companies may understand the industry's problems but they can hardly afford to be publicly vocal out of fear of depressing their share prices even further.

Looking at how we got into the current mess, we find that between 1985 and 1995 the legacy telco networks were structured for the digital delivery of circuit-switched voice with the purchase of a very expensive SONET based infrastructure. With data representing a small but growing share of traffic, their business model seemed to permit them adequate time to convert their networks and financing to cope with a data dominant future.

Meanwhile, new players with newer networks, therefore lower cost bases, were able to offer less costly transport and connectivity services, which further eroded the revenue base of the incumbents. Notwithstanding, these new players did not grown fast enough to reach economic viability. Most are either bankrupt or tottering on the brink. Legacy ILEC operating expenses are not to going to be able to be rapidly reduced. In the past, as long as operating income was growing, the difference between revenues and expense in the form of earnings would permit the ILECs to try switch to a newer and more cost-effective infrastructure. But today, the difficulty of carrying out such a switch is increasingly obvious.

Andrew Odlyzko three years ago began to explain why the foundation of bandwidth doubling every 90 days on which both the dot com craze and fiber builds of 1996 - 1999 were based was not reality but a myth.

In a similar vein Roxane Googin for about two years has been explaining why the much feared re-integration of telcos into an ILEC led monopoly won't happen either. If Odlyzko delivered the first piece of bad news by telling us we had geared up for a demand that wasn't there, Googin has her own dose of harsh reality to present. The new technology, although itself not yet built into viable companies, is eroding the base on which the circuit-switched telcos operate rendering their balance sheets unsustainable as well. It is our contention that, if we grasp what both Odlyzko and Googin are saying and understand how their conclusions mesh, we will begin to be able to assess the industry's problems. It is our objective to do just this in this issue of the COOK Report.

The shape and economics of telecommunication and the Internet is on the verge of continued massive change despite appearances of consolidation. Amidst the pressure of uncertainty that will make many yearn for just a few new and stabile mega corps, there are too many new pieces of peer to peer and wireless technology emerging to enable the building of an empire that controls everything.

We shall have centralized legacy structures lumbering on for sure. But you will also have technologies that put music photos and video at users fingers tips and with the tools by which to share them an opportunity to use plentiful band width should it be delivered. We see some big picture changes on the way. Asset based telecom will begin to deconstruct the industry into hundreds of thousands of loosely coupled miniature telecom companies. Users of 802.11b nets and peer to peer technologies will weave an independent spheres of telecommunications as the centralized corporatized giants are restructured, we must hope, in more benign and viable forms.

We may not have seen the last of the new technologies either. Just as the web emerged from no where, the creation of peer to peer like "trust" technologies from Safevote http://safevote.com and NMA, http://nma.com, not to mention the newly emerging field of "web services", may well add new demand for services -- both at the edges of the telecom system and from more centralized services that also communicate with vast user communities at the edge.

Part One:

Why the ILECs Are in Trouble

New Technology Has Stood their Business Model on its Head and Is Beginning to Erode their Revenue Base

Googin Asserts that Caught in a Vice Between Shift to Unprofitable Data, Declining Use of Network and Long Depreciation Schedules for Heavy Debt ILECs Will Find Themselves Unable to Pay their Debt

pp. 3 - 14

Googin: What I am suggesting is that we must start by looking at the problem and get people to accept that there is a problem. Do this by studying the manifestations of the problem. And then look for solutions. People are confusing the problem and its manifestations with solutions because they can't stand the tension of not knowing what will happen. But its only after you sit with the uncertainty for a while can you come up with a good solution. Knee jerk solutions based on inadequate understanding won't help.

The Telecom problem is certainly not isolated to the newcomers. To me the fact that people seem to think it is isolated to the newcomers is a bad sign. Why? Because the real Telecom problem is with the incumbents. This makes things even messier because the new green field companies that we were counting on to implement the new technology are themselves damaged. We are in danger of finding ourselves in a situation where the attackers are unable to succeed and where the older players with nonproductive technologies are seen as unable to fail. The attackers are running out of cash before they can get big enough for their operations to scale and pay their operating expenses.

The LECs voice operations on which they depend for their profits have stopped growing and with respect to access lines and minutes of long distance calls terminated to subscribers are shrinking. The LECs tout data growth but income from data services is not enough to offset that lost from more expensive and profitable voice. We simply do not have accurate statistics on total minutes if use of the local voice network. However on page 54 above Andrew Odlyzko points out a fascinating statistic from the United Kingdom - namely that minutes of use of the local network in the form of dial up Internet access are more than 50% of the total as of July 2001.]

A key question to ask is At what point does this snowball beyond the ability of the US government to do anything?

Googin thinks probably this year. It's inevitable, she says. The only uncertainty is the precise timing. They will restructure. It will be ugly. People will loose money. But we will live through it.[snip]

Part Two

Andrew Odlyzko Critiques the Googin Interview

Odlyzko Finds Some Areas of Technical Disagreement -- Cook and Bill Klein Comment

pp. 15 - 20

Googin: Everyone has been playing a little game which now is ending because of IP. Everyone is saying IP will drive prices down by a factor of ten. What people have forgotten about asking is what happens when you own that great big house that you have mortgaged to the moon and all of a sudden your income goes down by 90%.

Odlyzko: Not "[e]veryone is saying IP will drive prices down by a factor of ten."

Part Three

Googin Replies and Incorporates Odlyzko's Voice Versus Cost Data Figures Plugs Revision into Her Framework and Shows the ILECs still Going Broke,

pp. 21-23

Roxane thanks Andrew Odlyzko for elucidation of technical detail that could mitigate against the percipitous decline of the LECs. She then says: "However, the issue at hand is so massive, I doubt it can be understood by reductionist, incremental, thinking that I see in Andrew's critique. While this use of bottoms-up logic forms the well-proven basis of the scientific method, it does not address radical change well. I am therefore approaching the problem from a top-down, holistic viewpoint. I am basically asking what happens when the irresistible force (optical/IP pricing) meets the immovable object (legacy Telco infrastructure, debt, headcount, equipment, copper, and all)".

The points I am making about data boil down to my saying that using the sketchy information available, phone companies are about breaking even on their data revenues on an EBITDA basis, as they receive about 25% of "voice VGE" dollars in on a product that costs about 25% of "voice VGE" dollar to provide. Since EBITDA means earnings BEFORE interest, taxes, depreciation and amortization, this means we have a growing problem if you hold the bonds, or want to sell them any gear. To my best guess, this scenario says that the declining (voice) business has to pay ALL interest, cap-ex and debt principal payments. This would explain the recent RBOC behavior in terms of cap-ex and headcount cuts, with continued declines in margins. [snip]

We can ask all day how fast prices will decline, how fast traffic will move, or what regulators will do, but that hinges individual human behavior, which is inherently non-deterministic. Here, one person's guess is as good as another's.

What is of use to ask is "What happens to a leveraged, legacy, infrastructure when a "killer" technology that costs 1/10th as much to own and operate comes along?" One might say, "it will drive down prices and profits". Then, you start looking for declining prices and profits, which is exactly what we are seeing now. I report what I see, not what I think people will do.

The RBOCs are not healthy today. They are losing their all-valuable access lines, and those pricey access minutes. They are cutting cap-ex and headcount, and are still struggling to meet reduced expectations. I am an analyst's analyst, the one professionals call in to see whether their own analysts are giving them the straight poop. I am paid to know clearly what Wall Street thinks. From this vantage point I can state categorically that these companies are not cutting cap-ex to keep analysts happy, they are cutting it (and their people too) because the base profitability of their business is declining.

Part Four

The Enronization of Telecom, by David Isenberg,

pp. 24-25

I've been thinking about Googin's plaint for a year and a half, off and on. I'm coming to the view that she's seeing two loosely coupled, separable phenomena. The first thing she's seeing is the general malaise in the telecom sector, aggravated by bubble-busting, debt-hiding, other accounting tricks, and not-very-radical technology substitution (e.g., cell phones for land lines, email for phone calls). The second phenomenon, the stranding of network assets because they're rendered obsolete by radically cheaper, fundamentally simpler networks, is potentially much more powerful, but is a longer-term phenomenon that has not yet hit the local telco's fan.

Part Five

Some Thoughts on the Strategic Future of Wireline Services by William Klein

pp. 26 - 30

Klein states: The RBOCs may also face difficulties building a national business customer base. Businesses in general have widely accepted the RBOCs for local voice service, and in some instances for long distance voice service. However for data services, the RBOCs have yet to prove that they are capable of offering much beyond high speed DSL as broadband access in certain metro markets.

Of the long haul incumbents, the greatest question remains AT&T which for reasons unknown to me, is bent on building an IP overbuild network. This, in my opinion, is madness, given their financial flexibility and suite of service offerings today. How they have managed to hang on to their customer base frankly baffles me. Obviously, Armstrong's strategy (for both the consumer and enterprise markets) has failed miserably, causing investors great pains over the past few years. It would be far better for AT&T to bite the bullet and outsource its transport service, as IBM did when it transformed itself from "big iron" towards services. There is absolutely no reason, in my opinion, why AT&T could not buy lambdas from Level 3, Qwest, Williams and others for transport, and focus its capital expenditures on such important areas as innovative applications/services, as well as customer service/retention

Klein also presents an interesting argument against government involvement on behalf of failed networks.

Telcordia Comments on Googin's Analysis

p. 30

A short ILEC Point of view.

Part Six: Capacity Issues

Why the Carriers Are in Even Worse Trouble Than the ILECs

Crushed by Commodity Services, True Competition With No Captive Users, and Huge Over Capacity

Running Headlong Into a Wall of Debt and Unable to Pay

pp. 31- 33

We find that we are trapped between the jaws of huge ununsed capacity and content owners protection of intellectual property at any cost. The politics and economics of our slavish obedience to the "free market" is constricting the availability of bandwidth by placing marketing and policy in the hands of those who expect pay-per-use demand that lives in a walled garden to define and drive the development of broadband services.

Only about 5 or 6 percent of the long haul inter city fiber installed has been lit or will be lit in the foreseeable future. Of the fiber that is lit by 80 wavelength capable boxes only about 8% of what these boxes are capable of is in use. Each incremental wavelength used costs only a few thousand dollars per line card per a couple of dozen boxes to install. Adding ten gigabits to a backbone is relatively trivial and compared to the original cost of building and lighting the incremental cost of doing so is very small. Currently only about four to eight wavelengths per carrier are lit.

Consider demand. Just as the demand for dark fiber IRUs has peaked and fallen off, the demand for wavelengths may now be peaking. Until the fiber owners start publishing verifiable numbers every quarter on how many wavelengths they have "sold" via IRU and via lease there is no credible way to judge changing trends in supply and demand.

Now we can safely assume that with phone network use having peaked there will be little in the way of additional demand there. Assuming that data still doubles every year in North America, you may be able to sell an aggregate of 20 to 25 new lambdas this year to handle carrier data growth. But with fifteen American carriers and six Canadian each with 80 wavelength capable systems you have an easily provisioned supply of more than 1600 lambdas perhaps only 150 of which are lit. The problem is that without complete disclosure from each carrier there is no way of knowing exactly what capacity is actually in use.

Nevertheless our experts are all in agreement that used capacity is only a tiny fraction of what's available. Whether the amount is 4 percent or 12 percent, under current circumstances, makes little difference. In short we likely have at least a five or six year window with current growth before, with the addition of new lambdas, we fill the capacity of the fibers that have been lit. Sales of dark fiber IRUs have basically ended leaving long haul growth dependent on lambdas sales.

But who will buy? Prices are getting cheap enough for enterprise networks to consider using lambdas. But right now even the largest enterprise networks are mostly 155 megabits with a very few 2.5 gigabit links here and there. Most enterprises don't have the means of connecting 2.5 gigabits to a campus let along ten. This leaves other carriers who have a fraction of the capital they once did and whose need for new capacity has slackened.

Bill St Arnaud put it this way: "However, even given a rapid growth in data traffic, I think in the long haul it will be another 3 years before we see any new fibers lit, another 10 years before new fibers are blown in existing conduit and another and 15 years before new conduit is trenched in the ground." The situation seems dire and will determine the fate of many carriers. Policy makers and financial markets are being called on to make judgments but neither policy makers nor financial markets can see the carriers' resources. With the small resources at our command, The COOK Report certainly cannot do a definitive census of the carriers. But even if increased resources could be brought to bear, it is unlikely that carriers would admit to a highly embarrassing situation.

We are stuck with a conundrum where until the debt is wiped off carrier books or until demand skyrockets you have the entire industry embedded in a continued downward spiral that results in more and more bankruptcies. Demand will not skyrocket until the LEC controlled copper based local loop is by passed and either fiber or multi-megabit per second wireless reaches the vast majority of homes and businesses. Even then the demand may still be too easily filled by capacity on hand, until and unless the Canadians can make it possible to extend a wavelength to every home and business.

The technology has indeed overwhelmed the global infrastructure and its installed economic base and rendered it not economically sustainable. Canada looks to be following a strategy of enabling more uses for bandwidth while the United States follows a course of laissez faire in which the market knows best theory is freed to allow the concentration of media and carriers to consolidate an infrastructure duopoly where cable and DSL are the only officially blessed avenues to broadband. The US policy seems likely to be one of handing the market to huge and powerful old technology companies. The funny thing is that if Googin is right those companies will fail.

Describing and Understanding the Overcapacity

Bill St. Arnaud, Andrew Odlyzko and Robert Schult Discuss Details Carrier Networks with Lit Fiber, Prices, and Definitions of IRUs

pp. 34-36

A further difficulty in doing anything other than flying blind in this new wild and wooly telecom market that we were assured needed no regulation is that we don't even have standard terminology.

Consider for example the all important IRU. We asked St Arnaud for help. He told us. An IRU can be for any period of time but traditionally have been 20 years. IRUs started with underseas cables about 50 years ago when the cost of a cable was so prohibitive that a number of carriers were required to partner together to build the cable. The IRU was created by accountants and lawyers so that each participant could treat their portion of the cable as an "asset" with all the rights and privileges of other fixed assets like buildings - e.g the right to sell, depreciate, etc

As far as I know there is no formal legal definition of an IRU today. As such its use has become bastardized over the past years. In general an IRU implied an upfront capital payment. Leases implied annual or monthly payments - but most importantly title to the bandwidth remained with the leaseholder as opposed to IRUs where title is transferred to the IRU purchaser. In these crazy times you will see IRUs with monthly payments and leases with 100% upfront payments.

Odlyzko and St Arnaud Define the Economic Viability of the Newly Constructed Metro and Long Haul Fiber Infrastructure

pp. 37-38

Odlyzko: The general conclusion is that far more fiber was deployed in the long-haul market than was necessary, too much by a factor of at least 10. (The same conclusion does not apply to the metro area, however.) Thus in principle there is no need to deploy any more fiber in long-haul for 5 or more years. What will actually happen, though, is another issue, as the industry will be trading off deployment of new fiber versus deployment of equipment that can use existing fiber more intensively.

St Arnaud: Agree 100%. Not only was too much fiber deployed, but seriously too many fibers were lit with DWDM systems.

Odlyzko: 2. The prospects for the next couple of years are extraordinarily murky. The problem is that we have not just technology trends and the basic growth rate in demand for transmission (which is still high, approaching the approximate 100% per year that still seems to hold on the Internet) to contend with, but also the huge fiber glut (with smaller gluts of routers, etc.), and the dynamics of the financial markets and bankruptcy courts.

Part Seven

A look at a Few of the Carriers ATT, Sprint, MCI and Global Crossing -- A Brief Overview

pp. 39 -41

Chris Byron in the column cited above declared "Time is running out for WorldCom -- Sooner or later, company will almost certainly face liquidation."

"Over the last 19 years, investors have poured more than $100 billion into this rural Mississippi telephone company, and basically, Worldcom has done nothing with the money except buy other phone companies. As a result, the company now sits, as of Sept. 30, 2001, with worthless goodwill on its balance sheet totaling more than $50 billion - so far as I am aware, the biggest such mountain of fake assets in all of corporate America. Add to that some $30 billion of long-term debt, plus $10 billion of unpaid bills and other short-term obligations, and you've pretty much got the whole WorldCom financial picture.

And here's the really interesting thing: Over the course of the 1990s, this $100 billion Mont Blanc of waste has not been able to generate a single dime of net new cash for the business, with all free cash flow coming from stock sales and debt financings (the "Cash Flows From Investing" part of the company's financials). In other words, the second largest telecommunications carrier in the country hasn't actually been a sound business from Day One, but has only seemed to be so because the economy was growing and stock prices were rising."

Part Eight

End of the Global Greenfield Dream

Level 3 Slashes and Burns in a Valiant Effort to Stay Afloat

pp. 42 - 48

In doing this we have drilled down into just what dark fiber IRU sales are and the question of whether they will continue to play a major role in Level 3's revenue stream in the future. We conclude that they and the revenues derived from them will decline significantly. This is already happening. Level 3 does not dispute this and maintains that long term reliance on IRU income was never a part of its business plan to begin with. (Robin Gray Vice President Investor Relations For Level 3 said in an interview with us on February 19th: "We have already seen this decline. So hopefully that is factored in to our in large part already reported 2001 results."

Now it turns out that with the arrival of technology that made wavelength (lambda) sales possible in 2000 and the completion of L3's network in 2001 that lambdas (waves) began to be not only leased but also sold as IRUs. While dark fiber IRU sales already made by Level 3 will provide recurring revenue income, leases of light waves and sale of light waves as five year IRU's are now providing the bulk of Level 3 transport revenue.

Meanwhile as we have explained elsewhere in this issue the new IP optical network fiber based business model that was going to sweep the older circuit switched telcos into the proverbial 'dustbin' of history has itself failed and post Enron bought investigations onto the heads of Qwest, Global Crossing and 360 Networks. Investors are finding out that what they don't know assurances aside WILL hurt them.

Level 3 Vice President of Investor Relations Explains IRU and Revenue Issues in Interview With COOK Report

pp. 49 - 52

Grey: The majority of our historical IRU sales were dark fiber sales. Beginning in 2001, IRUs are both dark fiber and lit services. We view dark fiber IRUs in an opportunistic way. They were a great way to in effect reduce the cost of our network, but it was never strategic to the company.

Part Nine

Roxane Googin's Predictions and the Telecom World

by Andrew Odlyzko

pp. 53 - 58

The conclusion is that the long distance carriers should aim to model themselves after IBM. The most promising area for them is to manage networks that are largely owned by their customers. This will be a huge change, but the IBM example shows that it possible, and also that there is time to do it. The ILECs might be tempted to follow in this same direction, but are less likely to succeed, and may have to resign themselves to operating at lower levels of the networking hierarchy. However, there is likely to be enough opportunity for them even there to thrive.

Conclusion:

If not IRUs & Carrier's Carriers...Then What? Asset Based Telecommunications

pp. 59 - 61

Certainly the outlook for the long haul carriers is grim. A few months ago it was assumed that the LECs would buy them. Now this outcome is regarded as doubtful. Certainly we have come to believe that carrier equities and bonds are not the instruments to be basing one's retirement hopes on. LEC equities and bonds are stronger but the question is by how much. We have come to agree with Googin that the industry may well be headed for bankruptcy across the board.

But Bill St Arnaud suggests a different course saying Googin is absolutely right that the current model for investment is not sustainable. St Arnaud: I have suggested that this lack of sustainability might be the spur to move telecomm to an asset based industry as opposed to a service based industry - much like the computer industry has evolved over the past 20 years. There are companies with fiber resources who are now going into the market of designing and building for customers both condominium and wavelength approaches to the fiber market. In the design and build market a company practicing this business model will light up a dark fiber and take on responsibility of all maintenance etc on behalf of another carrier. The contract says that as the provider (fiber owner) adds additional wavelengths for other carriers to the same lit strand, the price will be reduced over time for the original customers. Also some equipment manufacturer's are moving into this space as well - some announcements pending."

COOK Report: What we have then is a kind of vertical disintegration of the carrier's carrier model which says that you build and light a global behemoth that provisions every kind of imaginable telecom bit service to every kind of customer anywhere in the world. The fiber owner may become an entity similar to a mortgage holding company. This kind of restructured company would maintain the physical resource, and enable others to gain access and to light strands that were contracted for. It would run an accounting operation that would book new customers and send out bills. It would cooperate with engineers and planners in a given area who wanted to work with it in bringing in their own groups of new customers for projects that they defined and sold. It might even have its own small team that, when it found its own customers, could light a few strands directly. Companies specializing in various aspects of network design could partner with the resource holder and then go their separate ways when assets were delivered to the customer.

Postscript

ICANN, Admitting Failure, Nevertheless Trys to Slither Forward into "Reform"

Froomkin Comments that Describing What these People Do is Difficult Given How They Have "Debased the Language"

pp. 62 -66

http://slashdot.org/article.pl?sid=02/02/25/035254

Interview and Article Highlights,

pp.67 - 76 Executive Summary, pp. 77 - 82