A Practical Navigator for the Internet Economy
Cable TV or the Telcos?

Who Will Build and Control the National Information Infrastructure?

Impact on Internet of Likely CATV Dominance Analyzed

Introduction

With the recent splash of news about CATV moving to 500 channels and National Information Infrastructure being written about in the context of the delivery of entertainment to the home, some observers of the Internet scene have been heard wondering whether the Internet will be reduced to a rivulet in the face of a flood of mindless "infotainment."

The COOK Report set out to find some answers to this question. What it found may be the keys to the Clinton Administration's policy on NII. CATV, by default, may now be in the process of becoming the provider of the NII's off ramps and on ramps. ARPA is funding technology development described below that may create a whole new class of Internet connectivity providers. The CATV industry has just reached the crescendo of a campaign to alert operators to the Internet as a service and a money maker. Telcos are scrambling for video dial tone and cable alliances. But many, realizing that they are out run and out flanked, are taking the only course left -- buying the CATV companies.

The Clinton Administration's policy appears to be largely one of both ignoring concerns that there could be any kind of downside to the new broadband technology and then standing back to encourage the "free market" to work its wonders. On the assumption that regulatory reform may not be possible, the Administration appears ready to encourage technologies that are likely to lead to a major upheaval in the telecommunications structure of the nation. Such events could render the current and admittedly antiquated regulatory structure superfluous.1

Associated with this piece are two insets:

Part I: The CATV Industry

At the beginning of 1993 the cable industry in the US had 9,610 systems ranging in size from a few hundred customers to 525,000 subscribers in Long Island, New York. With annual revenues of $15.7 billion, the industry employs 91,000 people. A "typical" current system, costing between $600 and $1200 per subscriber to build, offers 35 channels to 50,000 subscribers.

When cable systems sell their market value has been averaging between $1,800 and $3,000 per subscriber. These values are determined by current cash flow, potential for increased penetration and new revenue streams. In 1988 average annual revenue was $312 per subscriber. The average cash flow (or income after operating expenses, but before equipment amortization costs and taxes) was $150.2

Cable Labs, located in Boulder, is for the CATV industry rather like the Bellcore is for the RBOCs. Its self-defined mission is "to plan and fund research and development projects; to transfer relevant technologies to member companies and industry suppliers; and to serve as a clearinghouse to provide information on current and prospective technological developments."

In keeping with this last goal Larry Yokel Senior Analyst for Strategic and Competitive Assessment approached the Editor at the end of April and informed him that CableLabs was in the midst of a campaign to educate cable system operators about opportunities created by the commercialization of the Internet in the context of a National Information Infrastructure. Articles in their newsletter Specs were leading up to a special invitation only conference in Breckenridge Colorado on July 26 where Brian Kahin from the Kennedy School of Government at Harvard University would be a principal speaker. Would the Editor agree to write the Guest Column for the June issue of Specs? The assignment would be to explain what the Internet was in the context of current administration policy. The Editor accepted and the results have been published.

CableLabs is clearly the source of strategic guidance for the fast moving largely unregulated CATV industry. John Malone, President and CEO of Tele-Communications, Inc., the largest cable company in the US, is Chairman of Board of Directors the CableLabs. The remainder of the Board is made up primarily of the heads of fifteen large cable companies. John Malone, as head of three billion-dollar-a-year TCI, appears to be the master strategist behind these industry moves.

The CATV Agenda

If the CATV industry wished to move into broad based telecommunications services, it had a image problem noted by George Gilder: "The cable industry cannot become a full- service supplier of telecommunications until it changes its self image from a cheap provider of one-way entertainment services into a common carrier of two-way information. Above all, the cable industry cannot succeed in the digital age if it continues to regard the personal computer as an alien and irrelevant machine."3

On March 23, 1993 in testimony before the Subcommittee on Technology, Environment and Aviation of the US House of Representatives Committee on Science Space and Technology Dr Richard Green, President of CableLabs acknowledged the challenge posed by Gilder. Cable was prepared to expand its scope.

According to Green: First the US cable industry already has in place a network that can deliver multi-media services into American homes. "Indeed, cable companies have built the only broadband electronic pipeline into the average home."

Second: "Cable companies are creating a network that will be able to deliver such productivity enhancing services as high speed file sharing between computers, telecommuting, video-on-demand, and two way video conferencing."

"Mr. Chairman, the cable industry is making investments in these new technologies and services today - they are not merely pipe dreams on someone's drawing board. Moreover the cable industry's investments are privately financed with no public funding. They are relatively inexpensive and very cost efficient. Most important the entire cable infrastructure can be upgraded to provide two way interactive multimedia services for about $20 billion which is just a fraction of the $400 billion required for the telephone companies to comparably rebuild their local networks. [Furthermore] many of the upgrades which cable companies are making today to provide better television service are exactly the same steps required to transform cable systems from television only carriers to high-capacity, high- speed digital networks."4
In other words the cable industry is prepared to implement its own information infrastructure and do it without Federal investment. And when it completes such a transformation, the cable industry will be a two way digital carrier ready to take on many and eventually all of the functions of the telephone network.

Less than a month later on April 12, TCI's John Malone grabbed national attention with an announcement that said in effect that TCI would be the leader in building the on ramps and off ramps to the nation's much touted data superhighway. Malone stated that TCI would spend $1.9 billion by the end of 1996 to replace with fiber the coaxial cable reaching 90% of its ten million plus subscribers in 250 towns and cities across the nation. Initial spending would be more than $750 million in 1993 for the installation of about 7000 miles of fiber optic cable in more than 150 market areas served by TCI. "The entire cost of building and rebuilding its systems to be part of this full service network architecture, TCI said, will be borne by corporate cash flow. The company will not have to borrow funds to complete any portion of the project as it is now envisioned, company executives said."5

TCI's outlay for what it calls its "infostructure network," according to Malone, is directly tied in with the Clinton Administration's backing of a nationwide two way "information superhighway." Malone added that TCI is "building what amounts to the boulevards and side streets of that superhighway."6 In April 1993 the project was already underway in four regional TCI hubs - the San Francisco Bay Area, Pittsburgh, South Florida and Denver. Next in line would be Chicago, Salt Lake City and St Louis.7

In addition to 500 channels Malone pointed out that there would be "two way video telephony and full multi-media information retrieval." The implications for education include getting a college degree at home. Moreover the advent of two way communication would have "implications in industries ranging from publishing, entertainment and broadcasting to computers, music, education, retailing and banking," according to Malone.8

In the meantime Time Warner has announced a similar venture that it calls its Full Service Networks Project. It is currently about midway through installation in Orlando, Florida. According to George Gilder: "the Time-Warner showcase venture will be a giant client/server computer network, suggestive of the arrangements now ubiquitous in corporate computing. The wires will be a combination of fiber to the curb and coax to the home. Much of the system's hardware and software will be supplied by computer companies (allegedly including IBM and Silicon Graphics). The 'client' computers will be digitized TVs or telecomputers linked to powerful database computers that use a parallel- processing architecture to access hierarchical memory systems, from DRAM caches to optical disk archives. These memories will contain terabytes of digital video movies, games, educational software and other programming.

Perhaps the most dramatic breakthrough, though, will come in the switches. While much of the computer and telephone world continues to dither about the future of ATM (many consigning it to the pits of 2015), Time-Warner is committed to installing ATM switches, built by AT&T, beginning next year in Orlando. The ATM system will allow Time- Warner to offer telephone, telecomputer and multimedia services together, as soon as the regulators allow it."9

Entertainment to the Home or the Full Scale Provision of Business Telecommunications Services?

Hybrid Networks, Inc.

Malone's promise to build the on ramps and off ramps of NII is buttressed by TCI's current beta-testing of the ability of CATV to deliver an Ethernet LAN via a single channel. Two systems are being tested: the Digital Channel - a joint venture between LANcity and Digital Equipment Corp., and Hybrid Networks, Inc. Hybrid Access System. The first is a relatively high cost method of bringing an Ethernet LAN to businesses via CATV. The second is a much lower cost method of bringing an Internet carrying Ethernet channel into a home or business via CATV with a return channel provided by the telco. Both services bring a multi-megabit digital data pipe to a home or a business for a fraction of what a leased line could be obtained from the telephone companies.

Hybrid Networks, Inc was incorporated in June 1990. On March 30 1992 TCI announced that it was using Hybrid technology to conduct telecommuting trials via its San Jose California CATV channel. According to the press release: "the service, dubbed the 'IN Channel' by Hybrid extends corporate networks and computer based resources to employees homes."10

Hybrid also was very astute at reading the technology development tea leaves in Washington. While under test with TCI, it prepared and sent an unsolicited proposal to the Defense Advanced Research Projects Agency (DARPA - now just ARPA). Hybrid positioned their technology for DARPA as one that would provide the quickest and most effective off ramps and on ramps to the Internet and NREN and asked for $1.3 million dollars in order to be able to cut the sale price of their converter from $5,000 to under $2,000. DARPA agreed and on September 3, 1992 they got their grant.

According to a September 14, 1992 newspaper story "the federal government is busily compiling huge databases of educational information as part of the multi-departmental National Research in Education Network, a piece of the High-Performance Computing Initiative of 1991. The trick now is to get all that information into the nation's living rooms, and that is why DARPA approved an unsolicited proposal from untested Hybrid, Mr. Strachman said. The ten employee company, founded in 1990, should grow to 20 employees by the end of this calendar year. Hybrid is financed with $ 615,000 in private investment, mostly from individuals and company executives."11

What is the Market?

The Editor's conversations with CableLab's Larry Yokel had been focused primarily on the idea of CATV as a carrier of Internet technology to the home. When franchises came up for renewal (and a lot would in the mid 90's) the ability to bring the Internet into a local community would become an important part of the local system operator's public service commitment. Because of this assumption and the statements about building on ramps and off ramps to NII from both ARPA and John Malone, the Editor at first assumed that Hybrid Networks was only in the Internet home consumer market.

Such an assumption is not correct. The Hybrid Networks technology is not yet cheap enough to power an Internet-access home-consumer-market. For this to happen, one speculates that the one time cost of the necessary converter should not be more than $200. In the meantime what we have emerging with Hybrid is a new and different kind of Internet services provider ‹ one with a technology oriented to the needs of small high-tech businesses and independent professionals - especially those working at remote sites.

Hybrid Networks serves as a bridge between the Internet, the local CATV operator, the PSTN and the customer. In the San Francisco bay area they connect to the Internet via BARRnet. They run their own network POP (point of presence) which is connected to the head ends of CATV systems in San Jose, Palo Alto and Cupertino. Via the CATV coax they send customers a ten megabit-per-second Ethernet channel that pumps Internet data to those customers at the same rate.

To receive the service, the customer must purchase a Remote Link Adapter (RLA) from Hybrid. This is a $1200 to 1400 box into which the CATV coax is wired. From the RLA box a cable is used to deliver the Hybrid Access System IN Channel to a PC, a workstation, or to the file server for a small local area network. (An ordinary TV can also be attached to the RLA.) Since each RLA acts as a router, every computer attached to the IN Channel has a live connection to the Internet and may be given its own IP address. If a business has multiple LANs, that business may attach each LAN via a separate RLA. In addition to the cost of the RLA users will pay between $30 and 60 per month in access charges for the IN Channel service.

Data from the user's site is returned to the Internet via a telephone link that could be either high speed dial up via modems costing less than $300 each or an ISDN link should one be available. Yet another possibility that Hybrid is exploring is a return link through existing Internet service providers. Hybrid states that it doesn't currently use CATV upstream channel capability because most CATV systems don't provide it and those that do are limited to technology that provides only limited and noise-prone bandwidth. Also they point out that most use of the Internet is asymmetric with far more data incoming than out going. Certainly for between 80% and 90% of all users they are probably quite correct. And since the Hybrid RLAs offer data encryption, most business concerns about the public nature of the carriers involved should be satisfied.

Hybrid gives the CATV local operator the opportunity to sell bandwidth for business communications services. Its role is only to sell carrying capacity to Hybrid which, running its own network POP, provides the expertise to install and maintain TCP/IP communications and to coordinate the telephone-based uplink channel back into its Internet connection. CATV investment in Hybrid can be quite small, and with the tiny marginal cost of the added channel(s) plus the opportunity to learn about the interactive delivery of data at the higher levels of the protocol stack, the pay back may be quite large.12

Zenith Electronics Corp

As early as 1986 Zenith Communication Products began to offer products that would allow private CATV networks to be used in linking LANs. In the summer of 1992 it introduced a series of products permitting the linking of Ethernet and/or Token Ring LANs and asynchrous devices such as modems, terminals and mainframes over CATV backbones as long as 30 miles. A $1995 Channel Mizer unit connects workstations while $895 LANcards connect PCs. Galaxy Exchange routers costing $4995 connect Eithernet or Token Ring Lans to the CATV backbone at rates of 4 megabits per second per cable TV channel used. The router will support X.25, SDLC, frame relay and T-1 connections. For asynchronous to CATV backbone connections a LAN4000 Network Control Unit costs $270 a port and the LAN Network Manager costs $1995.13

According to Ed Zylka, Director of Marketing for Zenith Communication Products operation systems are being run by TCI in Glenview and Schaumberg Illinois, by Media General in Fairfax, Virginia, and Jones Intercable in Staples Point, Wisconsin. In Schaumberg the system links city hall, the police department and four firestations over a single channel that permits traffic at two megabits per second in each direction. Schaumberg intends to add the public works department, a family counseling center and financial management system to the network. In Glenview the K-12 schools use the Zenith CATV system for access to the Internet via a $3,000 per year 56kps connection from NetIllinois and a single $1995 Channel Miser for each school.14 The Schaumberg and Glenview Illinois systems CATV access is provided for free by TCI as a part of the license agreement with each town. Zenith only makes equipment that others use to connect to CATV. Unlike either Hybrid or Digital, it does not provide the CATV services as a partner or subcontractor to system operators. While the Zenith equipment compared to Hybrid is more expensive, it provides far greater flexibility. At the same time it appears to be considerably cheaper than the Digital Channel which appears targeted a high end business users.

The Digital Channel

While Hybrid views its market as the small business, telecommuter or single entrepreneur, Digital Equipment Corp. (DEC) has developed what it believes is a more robust business oriented version of Ethernet over CATV technology. In a joint venture with LANCity Corp. of Andover, Massachusetts, DEC is marketing what it calls the Digital Channel. The joint venture features a $5,000 converter called Channel Works that serves as an Ethernet bridge providing a community wide Ethernet over the backbone of the local CATV operator with a range of up to 70 miles between customer CPUs.

To connect with the local CATV provider the Channel Works bridge is connected to a standard CATV coax outlet and the local Ethernet LAN. Any of up to 83 6-MHz bandwidth channels can carry an incoming 10 megabit per second Ethernet and SNMP protocol. A second channel carries a 10 megabit uplink signal.15

A spokesman from LANCity described a hypothetical installation in a community where the city school system could be one customer, city government police and fire another customer, a local hospital a third, and three businesses the fourth, fifth and sixth. The traffic from each "customer" would travel independently and securely over a CATV downlink channel and return via a second separate uplink channel. Each customer could, with the agreement of other customers, configure its Channel Works bridge to receive and send inter-customer electronic mail or files in whatever levels of access security might be desired. However, each Ethernet subnet requires a separate Channel Works converter. For example, if the school district wanted to link 24 different schools, each school would require a separate $5,000 converter.16

Although the connection fees are less than the cost of multiple leased T-1 lines, compared to Hybrid Networks, they are very expensive. The Digital Channel is priced at $24,000 for the first two subscribers and $6,000 for each additional subscriber. On top of this there will be a monthly usage fee set by the CATV operator and currently estimated to run $500 per month. Included in these fees are DEC's testing and certification of the reliability of the CATV infrastructure, customer support and network management services.17 The Digital Channel is being tested by TCI, by Continental Cablevision in a Boston telecommuting project, and by city government in Worcester Mass. Cablevision Systems of Woodbury, NY has said it will offer the service.18

Two Different Ways to Approach Business Communication Markets

Digital appears to have no plans to offer Internet services over the Digital Channel. Zenith Communication Products users are through third parties using CATV channels as a backbone for the delivery of Internet services. On the one hand, the Digital Channel and Zenith Communication Products assume already existing Ethernet or other LAN technologies and merely use cable TV as a means of linking them together. On the other hand, Hybrid's IN Channel service brings the user the Internet and, as a by product of doing so, gives him an Ethernet.

In contrast to the Digital Channel and Zenith Communication Products, Hybrid's Ethernet is asymmetric. This means that with Hybrid one RLA can be used to service a theoretically unlimited number of workstations in an Ethernet LAN extending over multiple buildings. Still Ed Moura warns: "in practice we will impose an artificial limit (say 5 to 10 workstations) to the number of work-stations that can be used with a particular RLA. There are several reasons for this. One reason is if there are many users, all the users will have to share the same lower speed back channel."19

When the Editor asked whether the Hybrid In Channel could be used to link together two corporate LANs from point A to point B with a distance limitation equal to the distance covered by the CATV provider, Moura replied: "Connecting point A to Point B LANs between separate corporate buildings is a symmetric network application. The Hybrid Access System (HAS) is not suitable for such an application. This is what the DEC system is better suited for. The HAS is most suitable for remote access applications. Remote access is characterized by having smaller remote sites trying to reach a larger central site or a larger backbone network or an Information Provider."20

Rob Rich, Director of Public Network Services for Dataquest sees the Digital Channel as a "tremendous opportunity for cable companies. This is the first shot in the battle to win data traffic from voice carriers." What impresses Rich is the immediate availability of the CATV infrastructure, the installed Ethernet base that can benefit from such a service, and, compared to leased T-1 lines, the low cost.21 On the other hand in its offering of the Internet as a reason for purchase, Hybrid has the advantage of lower cost, a communications fabric that is doubling in size every year, and a medium that will allow interconnecting islands of activity by almost universally available e-mail and file transfer service. Furthermore, the architectural changes sweeping the cable industry should give the Hybrid technology added momentum.

The Fallout -- CATV Plans Major Architectural Changes to Its Networks

The Editor discussed the Hybrid and Digital Channel developments with some contacts in the telephone industry. The consensus seemed to be that the Hybrid Networks IN Channel service would have a negative impact on the telco's ability to market ISDN service as a means of Internet connection. Nevertheless one thing in favor of ISDN and the telephone industry in general was that ISDN is switched and can connect, in theory at least from anywhere to anywhere while the Ethernet over CATV services are isolated islands dependent on telephone technology to talk to the rest of the world. This may be true now. However significant changes in CATV architecture are under way. Systems are rapidly becoming linked, both to each other, and to the Public Switched Telephone Network (PSTN).

CableLabs has been well aware that current network architecture impedes the ability of the industry to take advantage of new business opportunities that fast moving technology is providing. In order to take advantage of such opportunities, it is rapidly changing CATV architecture.

The boundaries between cable and telephony "are melting," was the way CableLabs Pres. Richard Green characterized the current situation at the Cable Publishing Group's Convergence '93 conference in Denver on May 13th and 14th of this year. Green said that since cable is available to 95% of U.S. homes and is rapidly solving its service quality and reliability problems, the next frontier will be inter-system compatibility of operating systems and hard-wired interconnections between them. After that, he said, will come building connections to public switched telephone network.22

Stephen Dukes, Director of CableLabs Advanced Network Development, has been hard at work on the agenda set by Green. Duke has written a very interesting description of both current network architecture and a series of steps that system operators can take to migrate to a new regional hub network infrastructure designed by CableLabs.

Current Network Architecture

In a given region it is common to have multiple cable operators and multiple headends each serving particular geographic portions of the area. Each system operator provides its service independently of all the others even though this means that portions of the infrastructure such as satellite feeds, microwave facilities and off-the-air equipment are duplicated. Additional duplication is found in such areas as video storage and advertisement insertion. Because service providers lack horizontal integration, they are unable to act as quickly as necessary to implement new service activities.

The solution that CableLabs proposes it calls the Regional Hub. According to Dukes, a "regional hub is a centralized facility that is tightly coupled to a dual ring network topology that interconnects headends located in a common geographic region. The dual ring topology may interconnect a single operator's headends or the headends of any number of Multiple System Operators (MSOs) operating in adjacent serving areas.

[Figure 1: Network Architecture -- Regional Hub Concept]

A regional hub could be owned by a predominant cable operator in the region, a third party or a CableLabs subsidiary. Centralization of capital-intensive investments for a range of advanced functionality's at the regional hub allows the cable operators to spread the investments across a wider base. It also provides a platform for offering a common set of functionality's to large and small operators. It allows multiple cable operators to share the additional revenue streams as well as the risks associated with providing the advanced applications."23 What Dukes doesn't immediately say is that interconnecting is also the only way for the CATV industry to enter the marketplace of business communications services.

Dukes goes on to note that the regional hub will also provide a platform for rapid prototyping of advanced applications that will include wired and wireless telephony, information services, and business communications services. Further more the regional hub can function as an access point to other networks including interexchange carriers, local exchange carriers, alternate access carriers, satellites, microwave, cellular, and PCS providers.24

Furthermore many of the ring transport facilities (that can be used to interconnect headends) are already in existence. These facilities can be leased either through a competitive access provider or through metropolitan area network provider. "Alternatively they can be owned by a cable operator, or a consortium of cable operators, by other transport providers, such as a local exchange carrier, an inter exchange carrier, or by other private long haul carriers."25

The ring topology of the regional hub may also be interconnected with the rings of adjacent hubs. This extends their reach without significant increase in cost. For example in Colorado the main ring could serve "Denver, with coupled rings extending North to Boulder and another ring reaching south to Colorado Springs." Along the way smaller systems can interconnect with the rings. At many points in this network hierarchy, redundant systems will be installed to avoid single points of failure.26

[Figure 2: Network Architecture -- Avoiding Single Points of Failure]

Business Access

The network hierarchy extends from the subscriber's home through fiber nodes to fiber hubs. From these fiber hubs it connects to the headend and to the regional hub. Within the network of an MSO, the fiber hubs could be interconnected in a virtual private ring for business communications services. As Dukes explains it: "while a virtual ring serves to provide physical route diversity, a virtual private ring network functions as a physical overlay for business applications. While the virtual private ring network may reside in the same fiber sheath as the virtual ring, it will provide transport solely to business traffic." The business network is linked to the regional hub and the PSTN through the headend. [Figure 3: Network Architecture -- Business Access and Transport]

A different scenario would have fiber hubs as points of access for business traffic instead of a dedicated virtual private ring network.27

[Figure 4: Network Architecture -- Business Hub and/or Node]

A CableLabs Position Paper gives more information on the movement towards interlinked networks. "The cable industry has begun creating regional fiber optic networks in some major metropolitan areas. These fail-safe interconnections will enable an entire region's systems to share resources. Rather than actually installing fiber optic wires, cable operators have instead acquired existing fiber networks operated by companies known as competitive access providers (CAPs) or Alternative Local Transport Services (ALTS). The largest of these is the Teleport Communications Group, Inc. which was purchased from Merrill Lynch and is now owned by four cable operators." Other regional Networks are being established in Denver, Seattle-Vancouver, San Francisco and Pennsylvania.28 In the case of Pennsylvania, "cable operators are seriously considering a state-wide network connecting all the systems in the state."29

The pace of implementing these architectural changes has caught even CableLabs by surprise. According to its SPECS Technology newsletter the original plan for the Regional Hub Field Test Proposal was "to conduct a comprehensive field test at one site in the second half of 1993. However, due to the rapid implementation of the regional hub concept by member companies, the field testing had to be expedited by subdividing it into a series of separate tests at various locations." In early 1993 sites under consideration were in Boston, New York City, Toronto, and Seattle - Vancouver.30

All this rapid change was being driven by the perception of major business opportunities. At the mid May 1993 cable conference mentioned at the beginning of this section, cable executives were taking aim. "Cable's first telephony target should be $5 billion private line market," said Robert Annunziata, President of Teleport Communications, the competitive access provider (CAP) co-owned by 4 cable companies, but he said "the major money and the major marketplace is in switched services." CableLabs President Richard Green urged conference attendees to "check your guns at the door" and talk about ways of collaborating, not fighting, over past differences or future markets. As cable moves to offer PCS and wired telephony, and telcos evolve into video carriers, "the conventional wisdom about what business each of us is in becomes suspect if not totally misleading," Green said. Cable's move into telecommunications "is facilitated by new technologies, but it must be driven by applications. We cannot afford to build a 'field of dreams,'" said Optical Networks Inc. Pres. Andrew Paff. Paff said he sees future not as cable-telco war but as "a telco-telco war with cable companies as partners."31

Paff's statement is very accurate. Part II will look at some rear guard holding actions being engaged in by the telephone companies. Examination of each of these actions will show how the inexorable logic of technology progress and regulatory gridlock may end in various telephone companies in assuming a new and increasing important role as their core telephone business wanes. In this new role they would become more and more like bank holding companies used by various cable and entertainment conglomerates in their march into the new technologies.

Part II: The Telephone Industry Response

While the 168,000 miles of fiber optic cable that TCI has announced plans to lay will roughly double the fiber laid by the CATV industry so far, the telephone company networks are far larger. Thus the telcos have laid far more fiber and have been doing so much longer that the CATV industry. The difference is shown in Table I below.
All cable companies170,000
Pacific Telesis330,000
Ameritech445,000
Southwestern Bell542,000
US West720,000
NYNEX772,000
Bell South886,000
Bell Atlantic1.5 million
Other long-distance carriers2.6 million
Table I: Strand miles of fiber-optic cable owned by phone companies and cable operators32

Moreover, a critical difference is not so much in the amount of fiber laid but rather in coax versus twisted pair running from the curb to the customer's house. Coax can carry as much as 900 times more data.33 With recent advances in data compression, coaxial cable will be a quite adequate broad band pathway into the home while twisted pair copper, despite major recent advances, may not.

The fact that fiber interconnects so many points on the networks of local exchange carriers has created a problem for the phone companies. They have the intelligent switching capability to connect any point to just about any other point in the network -- something that the cable companies are now beginning to long for. Also, given the huge capacity of the fiber they have laid, many strands are dark - that is to say they lie there unused. When these conditions are combined with the voice-versus-data state-level regulatory anomaly, they create a new series of strains that are bringing new woes to the RBOCs. One of the ironies of the regulated telephone business is that, in order to keep residential phone rates low, most state Public Utility Commissions tend to price broad band services by varying multiples of the number of simultaneous voice phone calls such a leased line could handle. This tends to make price of 45 to 155 megabit lines considerably more than their cost and to drive the provisioning of such circuits into the hands of unregulated service providers who by pass the public switched telephone network.34 Combine this situation with one where, according to George Gilder, America's telephone companies have some two million miles of mostly unused fiber lines in the ground today, kept as redundant capacity for future needs, and you get a situation where the by pass carriers will want to rent the telco's unused fiber.

Consider the following example: Electronic Data Systems is a huge computer systems integration and telecommunications out sourcing company with recent revenue gains of about a billion dollars per year. The need to be able to supply state-of-the-art communications is critical to EDS's continued growth. According to Gilder:

"That need has driven EDS into an active role as an ex parte pleader in Federal Case 911416, currently bogging down in the United States Court of Appeals for the District of Columbia as the so-called "dark fiber" case. On the surface, the case -- known as Southwestern Bell et al. v. the Federal Communications Commission and the U.S. Department of Justice -- pits four regional Bell operating companies against the FCC. But the legal maneuvers actually reflect a rising conflict between the Bells and several large corporate clients over the future of communications.

Beyond all the legal posturing, the question at issue is whether fiber networks should be dumb and dark and cheap, the way EDS and other customers like them, or whether they should be bright and smart and "strategically" priced, the way the telephone companies want them.

On the side of intelligence and light are the phone companies -- Southwestern Bell, U.S. West, Bell South and Bell Atlantic. The forces of darkness include key officials at the FCC and such companies as Shell Oil, the information services arm of McDonnell Douglas and long-distance network provider Wiltel, as well as EDS. Most of the four-year course of the struggle has passed unnoticed by the media.

In the fall of 1990, the FCC ruled that the phone companies would have to offer dark fiber to all comers under the rules of common carriage. Rather than accept this new burden, the phone companies petitioned to withdraw from the business entirely under what is called a Rule 214 application. Since the FCC has not acted on this petition, the Bells have gone to court to force the issue. Their corporate customers are ready to litigate as well.

It is safe to say that none of the participants fully comprehend the significance of their courthouse confrontation. To the Bells, after all is said and done, the key problem is probably the price. Under the existing tariff, they are required to offer this service to anyone who wants it for an average price of approximately $ 150 per strand of fiber per mile per month. As an offering that competes with their T-3 45-megabit-per-second lines and other forthcoming marvels. Dark fiber threatens to gobble up their future as vendors of broadband communications to offices, even as cable TV preempts them as broadband providers to homes. Since the Bells' profits on data are growing some ten times as fast as their profits on voice telephony, they see dark fiber as a menace to their most promising markets."35

The squeeze under which the telephone companies find themselves continues. For in early April the FCC issued its report and order on the telco's 214 request to abandon their resale of Dark Fiber service. It refused the RBOCs request and told the four companies that had been offering Dark Fiber that they must continue to do so.36

A Telephone Technology Answer: Video Dial Tone

Using a technologies called ADSL (Asymmetrical Digital Subscriber Line) and HDSL (High Bit Rate Digital Subscriber Line), telephone companies have been able, at relatively small cost, to deliver more than 1.5 megabits per second of data over the small copper wires called twisted pair that reach into customer homes. This is considerably less than the CATV borne Ethernet services discussed above. It also suffers a distance limitation of about five miles from the telephone company central switching office. It is however good enough to deliver ordinary television and, compared to the cost of bring fiber to the home, it is relatively inexpensive. The availability of this technology has led to the introduction in Congress of legislation that would allow the "telcos" to deliver a "video-dial tone" to the home in order to compete with cable TV.

Under a prototype established by Bellcore in the Morristown New Jersey area, competing video service providers referred to as gateways would make their products available to consumers. "Just as it is theoretically possible to call anyone in the world from your home telephone, it also would be possible to dial up from a video dial-tone any program that has been put into a digital video format. The job of the gateway broker will be to locate and present the desired program to the viewer. Under this scenario, the phone company would provide the lines and technology, while numerous others would supply the programming. With video dial-tone, once a program is selected, the viewer has the same control over it that a videotape machine offers. The viewer can stop the program, back it up or skip ahead.

Video quality at Bellcore's prototype is comparable to that of an average TV picture seen in homes today. But with high-definition television on the horizon, with its far better sound and images, most telephone executives see the copper-wire video technology only as a transition. Bell Atlantic, for example, plans to use the copper-wire compression technology to sign up video customers who later will be upgraded to optical fiber. The electronic equipment needed to make a copper system carry video would be used in one neighborhood until about thirty percent of area homes signed up for video, he said. Then the switch to fiber would begin, and the copper compression equipment would be moved to another neighborhood.

Many experts say such plans look like prescriptions to lose huge sums of money. Telephone companies would spend hundreds of dollars per home to upgrade an area's copper phone lines to deliver video, only to spend thousands per home some months later to tear out the copper system and install fiber. 'The cable television operators already have a big lead over the telephone companies,' said Leland L. Johnson, an economist for Rand Corp. who has studied telecommunications issues for years. "Cable already serves more than half the homes in the country, and it passes 90 percent of them. It will be very hard to get customers to switch. You have to offer something better.'"37

On March 29, 1993 Television Digest announced an FFC approved video dial tone trial in Northern Virginia. The carrier, Chesapeake and Potomic Telephone (C&P), said it would be ready to launch the trial within a matter of weeks. The FCC approved what it called a "limited technical trial using ADSL technology to distribute VDT like video service over the copper loop to 400 employees of C&P parent company, Bell Atlantic."38

One catches a scent of desperation in these moves. Perhaps it's not just this one service but an entire multi-media future involving both residential and business customers that is pushing the phone companies. Video dial tone may not be economic but the willingness to do it, along with Ameritech's willingness to renounce the monopoly of the local loop may be enough to get the RBOCs the regulatory freedom without which they say they cannot modernize.

An Alliance Alternative?

One has to suspect that the video dial tone developments could be holding actions designed to gain the RBOCs time while Federal legislation and policy changes make alliances and buy outs more feasible. There is technical synergy between the two that is likely to push developments in these directions. As National Public Radio reporter John McChesney observed: "Gilder and others feel that joint ventures between cable and telephone companies would speed up completion of the system because each one possesses a different, but essential building block. The cable companies have broad-band connections leading into most homes in the country, while the phone companies have only a pair of copper wires, not big enough for large amounts of information to pass through quickly. But the phone companies have something that cable companies don't have - switching capability. That's what allows us to connect our telephone to any other phone in the country. And only when we can dial up any computer or provider of services, not just the cable company we happen to be connected with, will we have a truly interactive and open system."39

One call for alliances came from the RBOC Pacific Telesis in early April. In February Pacific Bell Telephone announced plans to build among the companies and universities of the San Francisco Bay --Silicon Valley area a state oriented version of NREN which it called CalREN (California Research and Education Network). On April 7, 1993 Pac Bell announced that while it was aiming to provide a digital superhighway for all Californians by the year 2015, the next 18 months would see a series of trials. By the end of 1994 it would (1) begin development of a broadband network in several new residential developments; (2) collaborate with at least one cable industry partner in providing broadband services; (3) finalize plans for bringing broadband capabilities to half its customers within the next decade, and (4) select between fiber to the curb and fiber coax networks based on laboratory and field tests of telephony over coaxial cable.

A major emphasis of the announcement was on alliance building and cooperation. "By this time next year, we'll have talked to most of the cable companies in our territory to determine their level of interest in cooperative ventures," said Quigley (the Pac Bell president). As Business Wire observed: "While Pacific Bell is committed to bringing a broadband superhighway to California, the company believes that a collaborative approach will allow that state to reap the economic and social benefits of an advanced communications infrastructure faster and at less cost."40

If You Can't Operate or Ally, Buy

The RBOCs have also been voting with their bank accounts for CATV as the future of telecommunications. Southwestern Bell has paid 650 million dollars for Hauser Cable the operator of two suburban Washington DC systems with a total of 228,000 subscribers. The price of $2,850 per subscriber was one of the highest ever paid for a system.41 Then of course there was the $2.5 billion that US West paid for a 25% interest in Time Warner Cable. What is going on? Consider the remarks of US West CEO John McCormick to the Washington Post: "We're looking for a way not to beat the competition but to be the competition." If regulatory changes currently under discussion become reality, the move to telco investment in CATV will be facilitated . On April 26, 1993 the FCC recommended to Congress that it repeal the 1984 ban on RBOC ownership of cable companies within their respective territories. As of late July bills are under consideration in both the House and Senate to do just this.42

Cable, it begins to seem, has won. Why is this? It has occurred for several reasons. In addition to regulatory freedom, fiber has been even more advantageous to CATV and the Competitive Access Providers (CAPs) than to the RBOCs. At the end of 1989 it became possible for the first time to send AM Video signals over a single strand of fiber in the same format that coax carries them directly into the home. As a result, for the first time it made economic sense to deploy fiber in CATV networks. By the summer of 1993 roughly 30% of them had fiber backbones. By 1996 the number is expected to reach 80 to 90%. CATV is finding that the cost of installing the fiber pays for itself in lower maintenance and operating expenses. This means that the vastly increased television services and two way business communications services that are made possible by the fiber come essentially as free bonuses.

Furthermore the Competitive Access Providers (CAPs) like Teleport and MFS are essentially all fiber operations that are more cost effective for large business users than the regulation hobbled RBOCs. Industry observers are speculating that it may actually prove to be a better deal for RBOCs to invest in cable owned CAPs outside their service areas than offering the new fast packet switching technologies within their service areas.43 In the meantime "the cable industry doesn't fear the telephone industry anymore. When Bill Gates of Microsoft, John Sculley of Apple, executives from IBM, DEC and just about every other computer company, IXCs and leading edge RBOCs are beating down your door, you know you have won the battle."44

Part III: The Internet Fallout

What does all this mean for the Internet? In the short term it means the arrival of an important new class of service provider. In the mid-term it means that the NREN program and with it the Internet will play an important role in establishing a data networking architecture for the United States. In the long run, the future is more cloudy - lost as it were in a series of emerging alliances between groups of companies each of which would like to be able to build the infrastructure and technology to deliver unlimited information and entertainment to Americans at home or at work or anywhere in between.

How Will Ethernet/Internet Services Over CATV Shake Out?

Because the delivery of Internet services is still a technically complex art of the integration of many complex systems, the technical systems that have so far emerged seem to be ones where CATV provides raw transport services.45 The question becomes who will fill the gap most quickly and effectively in working with CATV franchises to deliver Ethernet and TCP/IP services to business and then to homes? Perhaps because of the prohibitions against long distance service, the RBOCs which could have put together partnerships with the mid-level networks have done very little. Will the mid-levels have the agility to ally themselves with CATV providers or will they abandon this field to PSI and UUNET? A mid-level like NEARnet probably should be talking with Digital about making the Internet an offering on the Digital Channel. It should also be examining uses of the Hybrid and Zenith technology. For if the mid-levels don't move, how long might it take CATV operators to acquire their own expertise and overwhelm them in the market place? [SeeRobert Berger's analysis of Hybrid Networks in the textbox beginning on the next page.] The Mid-term: IBM and CATV in the Context of the NSFnet Solicitation

Readers would do well to remember how the first 6.5 years (soon to become 7 or more) of the NSFnet backbone cooperative agreement have been structured to fit the interests of IBM. IBM will likely put in a bid for the vBNS component of the new NSFnet that the NSF will find hard to turn down. On the one hand the NSF will carefully evaluate the "charity" (read cost sharing) of the IBM offer. On the other hand further impetus for accepting it will be found in the boost that such action will give IBM as a provider of telecom switching equipment. Helpfully nudging the aging giant into new technology markets may be seen by some as a desirable and much less costly outcome than letting IBM stand or fall on its now out dated mainframe and Systems Network Architecture (SNA) merits.

A quick review of IBM's gigabit router efforts will provide some context on which this outcome could be based. Development of the PARIS switch (router) began at the IBM Thomas Watson Labs in early 1988. In late October of 1991, Rogers Cable TV of Don Mills Ontario, Canada announced trials of the PARIS technology. Rogers was chosen by IBM because, beginning in 1989, it had installed an extensive fiber backbone extending over 500 miles. Consequently Rogers could offer the closest environment to that of a wide area coast-to-coast CATV backbone network that IBM would like to implement as part of a CATV consortium.

Computing Canada reported that: "The project will be initially conducted at internal Rogers and IBM sites, with outside end-users getting involved at a later stage. . . . . The high- bandwidth Rogers backbone network should enable it and IBM to test various applications, including a high-speed connection among local-area networks (LANs), video conferencing and computer-to-computer communications that would allow computer data to be exchanged with remote sites. . . . Rogers, through its division Rogers Network Services, will provide the fiber optic links that will connect sites across Toronto. . . . Montreal-based Rogers Cantel, a cellular phone company majority-owned by Rogers Communications Inc. of Toronto, will participate in the project, as will the carrier Unitel Communications Inc. of Toronto."46

The IBM technology being tested includes a complete WAN networking architecture that starts with the PARIS switch (by the summer of 1992 it was also being called PlaNet - packetized light architecture network). "PARIS is a fast packet switch based on a rack mounted RISC System/6000 Model 930 with a 6G bit per second bus and special adapter cards. The result is a 6G bit per second backbone supporting 1.2G bit per second fiber rings based on a new IBM protocol, Optical Ring using Buffer Insertion Technology [ORBIT]."47

From the way the use of ORBIT is described in another trade press article it seems likely that the "rings" it uses are the regional hub rings described above in the cable architecture section of this essay. According to Multichannel News, "the PARIS LAN, known as "Orbit" . . . , brings the full 1.2 Gbps transmission rate or "throughput" of the system to workstations and computers. This LAN topology can be applied across an entire region, so long as stations on the ring are no more than 10 kilometers apart. Complementing Orbit is the residential extension of PARIS from the local router. The cable-based Comet concept calls for allocation of as much as 550 MHz of cable bandwidth to standard AM programming channels, with another 450 MHz or so devoted to the digital services made possible by PARIS technology. So long as vendors write their interface codes to the specifications of the 32-bit IBM interface, the Comet system would support ongoing additions of service operating at different compression protocols."48

"IBM hopes to have 4 PlaNet [Paris] nodes in place in Toronto by end of the year, each with one 6-Gbps switch. Switches will be connected by dark fiber that Rogers already has in place. Each node will serve fiber loops using Orbit [LAN] technology to route data among offices. First test merely will connect data sources at IBM and Rogers, but Alan Baratz [Director of the Paris development effort] said a 'third party,' probably bank, would be added later in third quarter" of 1992."49 What test would do, according to Baratz, was turn a fiber based CATV network into one that could carry digital data at the rate of a gigabit per second.

While the actual tests are apparently now underway, they appear to be proceeding slowly. In November 1992 according Colin Watson President of Rogers, there was "an exciting demonstration of PC-to-PC full-motion video conferencing between their offices and ours."50 And by January 1993 two banks out of 20 scheduled had been connected to the network.51

In the meantime IBM Vice President Lucie Fjeldstad had been hard at work trying bring off a major IBM commitment to a national broadband data network. As reported in the Wall St Journal last September the network would, in its first three years, be used primarily for business purposes such as enabling users of corporate LANs to do video conferencing across a Wide Area Network. After that IBM's agenda is nothing less than an alliance with the cable TV companies to bring video entertainment into the home.

"In an interview offering details about the still shadowy venture, its chief architect, IBM Vice President Lucie Fjeldstad, said IBM and a small group of partners will launch the company within the next year by offering video conferences and other services for business. . . . . Ms. Fjeldstad said she proposed the information network to IBM's board in January 1991 and this May received a green light to find partners and launch a new company. She said that IBM agreed to spend 'in the low hundreds of millions' on the venture in its first five years. . . . .'I've got my dowry, I've got my dad's permission,' she said. 'All I need to do is get married. . . . .'"52

In mid 1992 a trade press article had speculated that a deal with Time Warner was near.53 When nothing happened, in late 1992 another article speculated that IBM had narrowed its search to TCI.54

In late January 1993 the Editor had a conversation with some Time Warner executives that indicated the Time Warner contacts had failed. As reported in the March 1993 COOK Report, they had the following to say: Time Warner had turned down the proposal for two reasons. IBM's PTM approach to its PlaNet switch seemed to them to be too proprietary. IBM also insisted on including a lot of hardware and software that Time Warner already provided on its own. The IBM approach would also have required them to deliver digital voice, a very difficult task which they weren't yet ready to take on because it would have required them to rebuild their network from the ground floor up. Time Warner did make it clear that, as they moved to implement digital technologies, ATM could be applied incrementally and cost effectively and would serve as their major underlying transport technology.

On February 26, 1993 Lucie finally closed a deal -- one that was rather small compared to a Time Warner or TCI aliiance. The deal was a 50% stake of unannounced value in a company called Digital Domain. The three Hollywood principals in the company were movie director James Cameron and special-effects veterans Stan Winston and Scott Ross. While Digital Domain's initial focus will be special effects, it will develop tools for film making and for mediums, ranging from interactive entertainment to videogames

"We can start with a special-effects digital production studio and make money on characters and software," said Lucie Fjeldstad. "That allows us to build the tools for the digital domain in the future. We're going to lead the next generation of computer platforms and applications." "The deal gives IBM a 50% equity stake in Digital Domain, the remainder evenly split among Cameron, Ross and Winston. The ownership of new products would be decided case by case, with IBM getting first look. IBM will also use the company as an R&D lab to develop software applications for other industries, ranging from medicine to construction, and even produce material for its long-rumored digital network. There's no commitment to use IBM hardware. . . . The start-up cost could be as high as $ 20 million, reportedly the budget for IBM's own digital studio, a project Fjeldstad's team has worked on since early 1991."55

In mid April, still without a mega deal Lucie as keynote speaker provided the National Association of Broadcasters a seat "on the front lines of the digital interactive TV revolution" via demonstration of voice-activated, two-way video communications. According to a story in the Hollywood Reporter "Ironically, Fjeldstad admitted to reporters querying her after the presentation that the types of technologies she was demonstrating wouldn't, in the foreseeable future, be possible using over-the-air, or broadcast, transmission, "which isn't fast enough." Such technology depended on fiber optic wiring of the type used in the NSFnet backbone where IBM was a partner. But even the current NSFnet is not fast enough for NTSC-quality moving video, she said. One network that is fast enough is Rogers Cable in Toronto, where IBM is conducting tests. It runs at 27,000 times the speed of today's phone lines."56 Still without its own showcase, IBM found it necessary to trot out the NSFnet and to high light its trial with Roger's Cable.

On May 27 Daily Variety dropped a bombshell, announcing that Lucie Fjeldstad would take early retirement and leave IBM on May 31,1993. One reason for the departure, according to an insider, was the absence of the mega-deal. Fjeldstad's bid to tie the knot with Time Warner to provide the switching system and storage for a digital superhighway was thrown over in favor of a bid from U S West. U S West poured $ 2.5 billion into Time Warner's coffers, far more than the $ 500 million IBM was reportedly willing to offer.57

It begins to look like although there is considerable interest in IBM's technology, the lean, mean and agile cable companies find IBM's style still too cumbersome. If this is an accurate conclusion, IBM ownership of the NSFnet vBNS 155 megabit per second backbone could become an increasingly attractive alternative. Indeed with Fjeldstad's retirement it could now be the only alternative.

Such ownership may be made possible by the National Science Foundation's apparent willingness to allow the winner of the cooperative agreement to resell unused bandwidth on the commercial market. The final language of the May 1993 solicitation was vague on this point. The Editor submitted a question in writing to the Foundation asking that its position be clarified. Although the Foundation answered over 60 other questions asked, it did not answer the Editor's question on commercial use of the vBNS.

Consequently it is very likely that IBM, in a partnership with a CAP like Metropolitan Fiber Systems or Teleport, can low bid the vBNS and emerge with taxpayer money to build the first nationwide backbone designed for interlinking the CATV regional architecture's and necessary for transforming CATV into a serious provider of business communications services. Such a win for IBM would also mean a national testbed for continued development of the PlaNet family of switching technologies.

As Alan Baratz warned in the pages of Network World a year ago, IBM will very likely bid on its own and leave Advanced Network and Services to fend for itself. Doing this will free the new IBM approach from the negative baggage now associated with ANS. It will also leave ANS free to compete for an award as provider of inter-regional connectivity. Of course, if IBM and MCI choose to continue to subsidize the existence of ANS, ANS's present backbone would offer excellent inter-regional connectivity not only for the mid- levels but also for regional CATV systems interested in transiting the vBNS.

What is certainly true is that, given business use of the Internet for data communications, and given the way that the NSF solicitation ties all other academic and commercial parts of the network to the vBNS, what we are witnessing is the construction in the name of the NREN program of a national commercial data networking architecture. Furthermore, as ATM becomes a dominant form of carriage, this new NSF created architecture will likely become a national blueprint for all our telecommunications. In the name of poorly understood and inadequately examined technology goals the Clinton Administration is moving toward major changes in national telecommunications structure and policy. Whether these changes will be good or bad is unclear. What is clear is that they should be understood and examined in the context of national policy before irrevocable commitments are made.

The Long Term Impact

The CATV - Telco battle is of course only part of the larger digital media explosion. Given the complexities of the technologies involved and the number of potential strategies for bringing them to market, the impetus is to act now and worry about the consequences later. In a mid July article the Wall Street Journal tallied a number of computer, communications and entertainment executives who, in just the preceding 30 days, agreed there had been a marked increase in efforts to build alliances in the digital media market.

The ultimate aim of the deal makers "is to allow consumers to obtain anything electronic, at any time, in the office, at home or on the road, through an abundance of devices and networks, wired and wireless. They concede that they don't know which products and services could turn into big markets. . . . . Intel Corp. Chief Executive Andrew Grove says that when speculating about what will be a hit, 'I don't know what the hell I am talking about, really. . . . We'll know the truth when we get there.' But many executives say they are compelled to go ahead with alliances precisely because future markets look so foggy. In an uncertain industrial atmosphere, they say, alliances can help to establish technical standards and spread costs and risks. . . . . In this vague new world, corporate strategists see that their companies' success depends increasingly on the quality of their allies. Inevitably this will spawn 'oligopolies', says Lewis Platt, Chief Executive Officer of Hewlett Packard Co. Adds Mr. McCaw: 'You sort of see the point where the world will team up into two, three, maybe four global alliances over the next five years.'"58

In the midst of such a herd mentality public interest voices have been in short supply. The Telecommunications Policy Roundtable (see announcement by James Love elsewhere in this issue) is a step in the right direction. Meanwhile Jeff Chester co-director of the Center for Media Education is asking some questions few others are: "What does it [the apparent rush to oligopoly] do to the pricing of information? What does it do to the diversity of information sources?. . . . The dominant mindset on this is - don't worry! The technology is going to be so cheap!"

"We believe that at least initially there needs to be a certain number of channels reserved with low cost rates in the community so that nonprofit groups can have access. . . . . Chester worries that joint cable, entertainment and phone company ventures could eliminate competition and that 'consumers could be paying up to $100 or more' monthly for interactive TV service. Video shopping malls could tempt adults and children alike to impulse buying once TV remotes allow ordering on screen products with a quick zap. 'You might come home to find that not only does your house look like a Macy's catalogue, but you have a $10,000 phone bill.' Even ordinary television viewing could become more costly. 'The meter could be running every minute and everything could be pay per view.'"59

The COOK Report wishes Chester and his new policy group luck in trying to make their voices heard.


Footnotes

1
Attempts to divine the Clinton Administration's telecom policy have been few. One such, by Alan Pearce, finds that there will be an emphasis on "unleashing the Regional Bells. The Clinton-Gore White House will work vigorously to get the Regional Bell Operating Companies (RBOCs) into new lines of business, including cable television, equipment manufacturing, and ultimately, long-haul telecommunications services. The policy objective here is to force the RBOCs to operate, not only as powerful telecommunications information conglomerates, but also as major research and development (R&D) entities. The new administration will place special emphasis on R&D, which it apparently views as vital to future U.S. technological economic leadership.

The flaw in "unleashing" the RBOCs is that it undoubtedly will meet with fierce opposition from parties with significant support in the Congress. These include the American Newspaper Association, the National Cable Television Association, the Information Industry Association and the Telecommunications Industry Association.

Federal - state jurisdictional issues. This issue also will need Congress' cooperation, and also will be opposed by powerful lobbying groups: state regulators, represented by the National Association of Regulatory Utilities Commissioners; and perhaps the National League of Cities, which represents municipal regulators.

Federal-state jurisdiction will be the focus of significant policy attention, because the Communications Act gives the FCC jurisdiction over international and interstate telecommunications information activities, leaving the states responsible for intrastate service offerings. A senior Clinton adviser on telecom policy explained: "There are certain sections of the Communications Act of 1934 that are obsolete. The telecommunications- information industry today serves national and global markets. So we must begin serious discussions in 1993 with the Congress -- and the state regulators -- to see if we can update the act to take account of the needs of the public and the companies serving the public in a high technology, rapidly moving, industry that is becoming global. For their part, the state regulators have got to come to grips with modern realities."

The administration's staff freely admits that the FCC must -- and will -- take a more active role in telecommunications policymaking. But the major thrust of this activity will focus on infrastructure development -- a critical technology and economic issue for the Clinton- Gore team.

According to a top administration aide, narrowband ISDN is not being deployed as rapidly as it should be by the RBOCs. The aide said: "The FCC must pressure the local telephone companies to deploy narrowband ISDN so that the American public can have the voice, data and video services that they want over an upgraded, public switched telecommunications network (PSTN). Quote from Alan Pearce, "Telecommunications Policies in the Clinton Administation," New York Law Journal, April 23, 1993, p.5.

2
Data from CableLabs, "Cable Television in the United States: An Overview," 4th Printing (December 21, 1992), pp.19-20. Off course, in comparison to the multi-hundred billion dollar a year telephone industry, the cable industry is small.
3
George Gilder, "Into the Fibersphere," Forbes ASAP, December 7, 1992.
4
Testimony of Dr. Richard Green, President of CableLabs, before Subcommittee on Technology, Environment and Aviation of the US House of Representatives Committee on Science Space and Technology, March 23, 1993 p. 1.
5
Barry Lane, "TCI Surveys Fiber-optic Future," Hollywood Reporter, April 13, 1993.
6
Pat Widder, "500 Cable Channels Not Remote: TCI To Build $2 Billion Fiber-optics System," Chicago Tribune, April 13, 1993.
7
"Anything on the Tube Tonight, Dear?" Sacramento Bee, April 13, 1993.
8
Widder, Chicago Tribune, April 13,1993. Tom Hargadon writing on page 18 of the July issue of Telecommunications notes that such fiber networks "are put into place only when there are good business cases for such development. The much ballyhooed $2 billion investment in fiber networks by TCI was only 50% higher than previous average investments."
9
George Gilder, "The Issaquah Miracle," Forbes ASAP, June 7, 1993.
10
Press release: "TCI Provides 'Cable commuting Service Over system in California - First Ever High-Speed Telecommuting Over Cable TV," March 30, 1992. Documents sent to the Editor by Ed Moura, Hybrid's VP of Marketing.
11
Jonathan Weisman, Hybrid Networks Receives Federal Funding, The Business Journal-San Jose, September 14, 1992, Vol 10; No 22; Sec 1; pg 9 and Editor's phone conversation with Ed Moura July, 6, 1993.
12
Description of Hybrid Networks Inc based on email exchanges and telephone conversation with Ed Moura, Marketing VP, and on printed matter sent to the Editor by Moura.

Here is an exchange on July 8th between the Editor and Moura: Editor - Let's say I have a 100 employee business. I have 50 workstations on 4 different lans. I want an Internet connection. But I am not a TCI customer. Can you and TCI become my Internet service provider? for what? Probably $50 a month per box and one box per LAN? If these assumptions are accurate, you could blow a lot of folk away.

A: Yes, $30 - 60 per remote site LAN plus the return line charges. We would like to work with the existing Internet service providers for the return line (back channel) side of the connection. This is how we will evolve the existing providers into the cable TV business. What this also means is that the SLIP/PPP return line charges cannot be any higher than say $45 month. Many of the existing Internet service providers are charging a lot more than that for SLIP/PPP service and they would have to lower their prices if they want to play in this new market."

Note that HAS In Channel will support NFS and Novell protocols as well as TCP/IP.

13
Caryn Gilooly, "Zenith Users Turn on CATV for LAN Links," Network World, (August 17, 1992), p. 15.
14
Telephone interview with Ed Zylka, July 21, 1993 and email from John Mundt, Head Administrative Computing, Glenview School District, July 19, 1993.
15
"Digital Enters CATV With Ethernet Offerings," Telecommunications, July, 1993, p.11 and Annie Lindstrom, "CATV to Interconnect LANs," Communications Week, June 21, 1993, p.33.
16
Telephone interview with Tony Dissessa, LANCity, July 15, 1993.
17
Telecommunications, July 1993, pp. 11-12.
18
Communications Week, op cit, June 21, 1993 and Lynda Radosevic, "Cable TV's wide pipes opening to data transfer," Computerworld, May 17, 1993, p.1
19
Email from Moura to the Editor, July 14, 1993.
20
Electronic Mail from Hybrid's Ed Moura to Editor July, 15, 1993.

Here is an exchange between Moura and the Editor on July 14. Question: "I read that DEC checks out and certifies each CATV provider for reliability. Their connection fees appear to be so damned much more expensive than yours that I guess they have to do something to justify them. What do you say if a customer is worried about cable reliability?

A: They have to. Most CATV providers do not have reliable upstream cable TV channels. That is why we had to created this Hybrid Access System architecture. DEC has to certify cable, otherwise their product would never work period. Cable TV operators are now better at providing reliable downstream TV channels. It is their main business. If a customer is still worried about cable TV reliability, we tell them that we plan to provide a one-stop customer support place to call. They call us and we troubleshoot the problem using our own network management and operations people.

When we start supporting upstream cable TV channels we will do it right. DEC's solution is expensive and it is not practical today. We don't need to re-engineer the RLA to support fast upstream cable TV channels. Our RLAs are already designed for independent transmit and receive channels. Our model 200 RLAs are completely flexible with respect to adding this new capability.

21
Telecommunications, July, 1993, p.12.
22
"Cable Officials Say They Are Targeting Telephony," Communications Daily, May 17, 1993. Vol 13, No 94, p.1.
23
Stephen D. Dukes, "Next Generation Cable Architecture," Cable Television Laboratories, Inc. Boulder, CO, 1993, pp. 3-4.
24
Dukes, Ibid., p.6.
25
Ibid., pp. 7-8.
26
Ibid., p. 10.
27
Ibid., pp. 14-15.
28
CableLabs, "Cable's Role in the Information Superhighway: a Position Paper," 1993, p. 8.
29
National Cable Television Association, "Cable Television and America's Telecommunications Infrastructure," April, 1993, p. A5
30
"Regional Hub Field Test Proposal," SPECS Technology, Vol. 5, No. 2 February/March 1993, p .2.
31
"Cable Officials Say They Are Targeting Telephony," Communications Daily, May 17, 1993. Vol 13, No 94, p.1.
32
Jube Shiver Jr, "TV Cable Firm Revs Up Race to Hot-Wire U.S.; Communications: In Scramble to Build Fiber-Optic Networks, the Government Risks Being Left Behind, Los Angeles Times, April 13, 1993.
33
CableLabs, "Cable's Role in the Information Superhighway: a Position Paper," 1993, p. 3.
34
The actual situation is quite complicated. According to Marvin Sirbu, in a response to Editor's query on the com-priv mail list: Operating companies do not have a free hand to set the relative prices for voice and data services. For many years, PUCs have ordered phone companies to set prices for basic residential service below cost. The losses are made up by setting various other services above cost.

Some PUCs think that data services are used primarily by businesses and that, therefore, it is perfectly appropriate for them to be priced significantly above cost so as to subsidize residential users. The problem with this strategy is that it breaks down in the presence of competitive entry (e.g. competitive fiber carriers). The competitors can come in and price data services below the RBOCs -- even if their costs are higher. Intra-LATA toll is another area which has traditionally been way over priced.

Gradually, the PUCs are beginning to recognize that they cannot maintain this price discrimination, and are allowing local rates to rise so that prices for data services or intra- LATA toll can fall. Just last week an administrative law judge for the California PUC presented a proposal to the commissioners which would open intra-LATA toll to full competition, and would, consequently, lead to a major reduction in intra-LATA toll charges and a corresponding increase in basic residential service rates.

Now the blame shouldn't be all on the PUCs. Some RBOCs have fought this arrangement more vigorously than have others. Sometimes they make tradeoffs with the PUC. If they are more afraid of intra-LATA toll competition than of data competition, they might say to the PUC, "Let us price intra-LATA toll closer to cost, and we'll make up the deficits on residential service by keeping leased line data rates high."

It's a very complex bargaining process. Gradually, however, with the advent of competition, prices are moving closer to costs all around.

35
George Gilder, "Into the Fibersphere," Forbes ASAP, December 7, 1992, p.112.
36
Marvin Sirbu, Economics Professor at Carnegie Mellon University to com-priv list on July 12, 1993.
37
Jon Van, "Vision of the Future: The Video Dial Tone," Chicago Tribune, April 19, 1993, Business, p.1.
38
Notebook, Television Digest, March 29, 1993, Vol. 33, No. 13, p.6,
39
"Cable Company Announces 'Information Superhighway,'" NPR Morning Edition, National Public Radio, April 13, 1993.
40
"Pacific Bell Announces Broadband Plans," Business Wire, April 7, 1993.
41
Paul Farhi, Cindy Skrzycki, "Southwestern Bell to Buy Arlington, Montgomery Cable," The Washington Post, (February 10, 1993), p. c1.
42
FCC, Common Carrier Bureau Action 4479, Telephone Company Cable Television Cross Ownership Rules, Section 63.54-63.56.
43
Jerry Lucas, "Telco Vs Cable? The Battle Is Over and Cable Is the Winner," TeleStrategies Insight, (June 1993), pp. 1, 12.
44
Ibid., pp. 12-13.
45
Consider the following comment from a reviewer in response to a draft of this study:

"Neither the cable companies nor the phone companies are prepared to supply the high level of system integration skills currently required to provide interoperability between systems on the Internet. The very system that you compose your mail on has configuration files that would boggle the mind. Internet service providers handle such in the normal course of business, whereas the cable and phone companies strive for much simpler customer interfaces.

The availability of very-inexpensive, very-high-speed bandwidth to the home is meaningless without a "service" which interfaces into an effortless manner to the home PC/Mac/etc. Interfacing to a TV screen and a keyboard is fairly easy, and hence offering interactive video games are certainly within reach of the cable industry. Interfacing a network service to a unique corporate network is an entirely different manner, and requires much more integration. Without this highly-technical component, the connection to the network is under used, unable to capitalize on the existing computing network in the facility."

46
Mike Edwards, "IBM and Rogers Cable TV. to study high-speed network," Computing Canada, Vol. 17, No. 22, (October 24, 1991) p.1
47
Kyle Nitzsche, "It's a Multimedia World," Network World Vol. 10, No. 2 (Jan 11, 1993) p. ss41.
48
Fred Dawson, "IBM zeroes in on cable partner?" Multichannel News, Vol. 13, No. 46 (November 16, 1992), p.1. 49 "IBM to test precursor to switched video on Rogers cable system," Communications Daily, Vol. 12, No. 137 (July 16, 1992), p. 2.
50
Fred Dawson, "IBM zeroes in on cable partner?" p.1.
51
Kyle Nitzsche, op. cit., p. ss41.
52
Michael Miller, "IBM Commits More Than $100 Million on Venture to Relay Video, Other Data," Wall Street Journal, September 16, 1992.
53
Fred Dawson, "What does IBM want?" Multichannel News, Vol. 13, No. 21 (May, 25, 1992), p.1.
54
Fred Dawson, "IBM zeroes in on cable partner?" p.1.
55
Matt Rothman, "H'wood Enters Digital Domain: IBM takes 50% stake in firm run by Cameron, Winston, Ross, Daily Variety, February 26, 1993, p. 1.
56
Paula Parisi, "IBM speeds through NAB: Big Blue shows off its two-way technology, but broadcasters can't use it," The Hollywood Reporter, April 21, 1993, p. 1.
57
Matt Rothman, "IBM Loses its Lead Pilot on multimedia," Daily Variety, May 27, 1993, p. 6.
58
Stephen Kreider Yoder and G. Pascal Zachary, "Vague New World: Digital Media Business Takes Form as a Battle of Complex Alliances," Wall Street Journal, July 14, 1993, p. 1.
59
Linda A. Johnson, "Coming of Fiber Optics for Millions," Associated Press, July, 19 1993.
Ethernet Over Cable
TV Contacts
Ed Moura
Hybrid Networks Inc.
Suite 300
20863 Stevens Creek Blvd
Cupertino, CA 950143-2116
(408) 725-3250
This email address is being protected from spambots. You need JavaScript enabled to view it.

Anthony DiSessa
Digital Equipment and LANcity
LANcity Corporation
100 Brickstone Square
Andover, MA 01810
(508) 475-4050
This email address is being protected from spambots. You need JavaScript enabled to view it.

Ed Zylka
Zenith Electronics Corp
1000 Milwaukee Ave
Glenview, Il 60025-2493
(708) 391-8000
This email address is being protected from spambots. You need JavaScript enabled to view it.