The Economist Gets It–RBOCs going down

The venerable magazine The Economist has an article in the current issue worth reading if you want to understand some crucial background to Lafayette’s recent fiber fight. The article outlines the “challenges” that the phone companies face and their meager resources for answering that challenge. Much of BellSouth’s recent questionable behavior in Lafayette is most charitably understood as desperation and this article lets you know why that desperation is appropriate.

If you’ve read this blog for awhile you’ve likely come away with the (accurate) impression that we think the Regional Bell Operating Systems (RBOCs), the offspring of the breakup of the Bell Telephone system, are in real trouble. They are, and the tools that BellSouth Louisiana was forced to use over the last year’s fiber fight is evidence of their desperation—if you’ve got anything else, you don’t use fear, uncertainty and doubt. You field a real argument and make it openly. Further evidence, if such is needed, of BellSouth’s desperation as is the fact that even after it became clear that referendum would pass and that further opposition would serve mainly to damage an already weakened competitive stance among Lafayette voters they could not follow Cox’s lead and back off completely. The difference? Cox, as little as they may like the idea, can mount a serious competitive response to LUS if necessary. BellSouth simply cannot. They may reasonably feel cornered and a cornered animal will take any shot they can get.

Here’s the nice, succinct way that The Economist describes the problem in the context of the necessity for the Regional Bell Operating Systems (RBOCs) to offer Internet Protoc0l TeleVision:

IPTV forms part of a larger, and quite desperate, defensive strategy now being adopted by telecoms firms against fierce attacks on multiple fronts. On one front are cable giants, such as America’s Comcast, which are luring customers with an enticing “triple-play bundle” of TV, broadband and telephony services. On a second front are mobile-phone operators, which young customers in particular are increasingly using to “cut the cord” from their fixed-line company.

But arguably most dangerous of all is the third front, where traditional telecoms firms are under attack from voice-over-internet-protocol (VOIP) providers, which use the internet to carry conversations that would previously have taken place via a conventional phone.

The Economist’s author, true to the discipline of economics, does not try to pretend that cell phone “modal” competition is direct competition for landline telephony. Such “competition” only incidentally erodes the old market while building a new one. Rather than directly competing with traditional telephony it has little effect on the price of traditional telephone service except, ironically, to force system costs on fewer users producing a long-term pressure to raise prices. Such “competition” is not good for those who remain on landlines. Would that the FCC understood the basic situation as well as The Economist. [If this seems strange reasoning to you, as it does to the FCC, please consider the case of the Railroad industry in the US. The car and the Interstate system didn’t compete with railroads; it displaced and destroyed the old railroad market–and with it an entire economic infrastructure. Railroads could not afford to lower prices and chose, wisely for their investors, to exploit their remaining niches ruthlessly.–In fact, LUS has had previous dealings with declining monopolies trying to protect their remainder niche businesses at the cost of LUS customers.]

The author correctly focuses on VOIP (Voice Over Interenet Protocol) which can directly compete for landline users offering the same quality of services in what appears to be an identical package–for less. That’s much closer to real competition and threatens to force price competition on the Bells wherever a competing network exists to carry VOIP. The problem, of course, is that the Bells need to milk their declining landline business for all that it is worth–doing so is how they financed a move into the new business of cell phone provision which is their current best hope of survival. A nifty graphic from The Economist more dramatically reveals their plight than any words of mine could do:

That’s a forecast of 30% revenue loss over 7 years. 25% if they can effectively answer the VOIP challenge. Either way the loss is devastating. They can’t hope, by competing with VOIP, to do anything more than slow the decline of their core market. And the attempt will make those last customers less profitable. They had surely intended to milk their installed base to, finally, rebuild the network that paid for their successful venture into wireless. But in the new situation that intention looks ever less likely than ever to be realizable. The cable companies spent their ample profits bulking up their systems, not to fully modern standards but to something that has a distinct competitive advantage over the RBOCs.

But if the RBOCs have missed the historic moment when they could have rebuilt their network with the profits from a healthy monopoly (and instead bought themselves into a cell phone future) they can still hope to recover by rebuilding part of their network–the most lucrative part. And that is why the RBOCs love Senator Ensign’s new bill recently put before Congress and why BellSouth was the first out of the gate with praise for the bill: it relieves them of their duty to serve the whole of the communities they are in. Local franchise agreements have forced this on the Cablecos, by and large, so being able to build only to the most highly profitable customers would give them at least some advantage vis-a-vis the cable companies. Probably not enough, frankly. But something. And as already been remarked, the desperate will grasp at any straw.

The death throes of large corporations are often downright dangerous for those still in its sphere of influence. And even a partially rebuilt RBOC network would, as is probably now clear, be in desperate straights. The Enconomist has one last warning for us all about a temptation that would be next to impossible to resist for a company that believes it has a natural right to the best telephone system:

Having literally sunk their billion-dollar investments in the ground, the telecoms firms will need to get a decent return on them. But in their nightmare scenario, customers may simply sign up to their huge bandwidth and then use it not to buy the services touted by the telecoms firms but instead to obtain independent or web-based services, such as Skype for making calls or (when the service is launched) Netflix for downloading movies. Can the telecoms firms do anything to stop that?

Stoyan Kenderov, an IPTV expert at Amdocs, a firm that makes back-office software for telecoms companies, says that the telecoms firms are building into their residential gateways new technology that will inspect the packets of zeros and ones passing through. This will let them identify traffic from third-party rivals, which might then end up at the back of the queue and thus be slow and patchy. The only hint that users might have of that going on, says Mr Kenderov, would be some very fine print on their bills explaining, in turgid legalese, that the provider guarantees the quality of its own services only.

The telecoms firms counter such suggestions with well-rehearsed indignation. In a hearing before the judiciary committee of America’s Senate in March, Edward Whitacre, SBC’s chairman, said in emphatic Texan that “SBC would not block any Vonage traffic or anybody else’s and has never done that, would not do that. That’s not the way we do business, and it’s just not going to happen.”

But we here in Lafayette know better. That is just the way they do business…

There’s rough waters ahead folks. And not just for Lafayette’s project.

“LUS system now allows online bill payments”

The promise of competition is that we’ll all see better prices and better service. We’ve already been seeing better prices from Cox–they’ve not visited us with the price hike they’ve imposed on Baton Rouge, for instance. Now we’re seeing better service from LUS in the form of online bill payments. Though it faded, there was a moment during the referendum campaign when the opponents of fiber tweaked LUS about not being tech savvy enough to even have online bill payments. I’ve never quite seen the point, since we much prefer to pay our bills through our online banking site; it keeps everything nice and neat. The real issue for most folks about paying their bills is how much you have left in your checking account–it’s much easier to track everything if you pay all your bills at the bank’s site. Still, a lot of folks apparently don’t mind traipsing all across the web to pay their bills, the Advocate story notes that about 1000 folks have already signed on before any real publicity that the service was available appeared.

Senator Landrieu Wanders into Telecom Thicket

Politicians wandering into issues that they know little about, armed only with information provided them by ‘think tanks’ that get funding from parties with a stake in the issue, is rarely a recipe for enlightened public policy.

Thus, the unease when I saw a blurb and link to this story in today’s edition of Benton FoundationCommunications Related Headlines” service.

Seems like Senator Mary Landrieu is attempting to triangulate her way to a position on reform of the Telecommunications Act of 1996.

As the National Journal story indicates, Senator Landrieu is relying on advice from the Progressive Policy Institute, a think tank associated with the Democratic Leadership Council — or, as I like to refer to it, the ‘Stand for Nothing, Fall for Anything’ wing of theDemocraticc Party.

The story notes that PPI gets money from BellSouth and other RBOCs.

Just a coincidence, too, that BellSouth’s top lobbyist in Washington is the former head of BellSouth Louisiana — Herschel Abbott — right?

Just another coincidence that BellSouth and their various friends have been big time contributors to Senator Landrieu’s campaigns, too, I guess?

It will be very interesting to see where Senator Landrieu comes down on telecom reform, particularly in the area of the rights of municipalities to pursue their own broadband solutions.

The fact that PPI has endorsed (PDF file) the concept of eliminating local franchise fees for cable and video services, as well as gutting the concept of Universal Service (oh, they’re for it, they just want to people who benefit from it to pay for it!), does not provide a great level of confidence as to where the senior Senator from Louisiana might drift on this issue.

Sue ’em into submission.

If you can’t win at the polls you can always sue ’em.

Now I admit that sounds a tad unfair–and in this instance it may turn out to be–but bear with me: suing your competition into submission is one of the favorite tools of corporations like BellSouth and Cox. They tried it in Bristol, Virginia; they are trying it in Utah, and they surely will be trying it here.

The immediate “cause of action,” according to the Advertiser, is a line damaged a year ago:

BellSouth attorney Gary Russo filed the lawsuit shortly before 4 p.m. Thursday in 15th Judicial District Court in Lafayette. The lawsuit claims LUS was negligent July 28, 2004, when workers damaged buried BellSouth telephone and telecommunications lines near 310 E. Foch St., interrupting services.

Lawsuits for damages must be filed within a year of the incident. Thursday was the deadline for BellSouth to file the lawsuit.

My (perhaps ungenerous) assumption is that following the election loss the good losers over at BellSouth immediately went about looking for ways to harass the winners and sicced the corporate lawyers on the problem. The lawyers built up a laundry list of things they could throw at LUS on the grand old legal principle that if you throw a lot of mud some of it is bound to stick to the wall.

When this old incident appeared on the list some legal eagle no doubt noted that the expiration date was about turn up and rushed down to the courthouse to make sure they didn’t lose that bit ammo.

I assume, based on the way these things have worked elsewhere, that the laundry list of unrelated complaints is still being prepared. This is what has happened in Utah where a regional network was hit with an omnibus lawsuit that included line cuts, complaints about poles, complaint about taxes, prices that were lower than the incumbents liked, zoning ordinances that even the incumbents benefited from, and on.. Oh yeah these guys are even suing for attorney’s fees for the expense of filing this mishmash of complaints. (article, Utopia’s response) (You gotta give credit for moxie with that last one. They must be being paid separately for each complaint they can cram in the lawsuit.)

So I’m looking for a nice fat lawsuit to come lumbering down the road any day now.

The overall strategy is delay, delay, and more delay. The LUS train has picked up a lot of speed. Once it makes it past the Public Service Commission there won’t be much stopping it and trying to slow it down will offer the best chance of finding some way, any way, to make sure that Lafayette does not succeed. We can only take cold comfort in BellSouth’s demonstrated competence so far.

(One final thought. Cox, with admittedly a much poorer public reputation to start with and so less public relations capital to begin with, is playing it much smarter than BellSouth. They are projecting the image of a company willing to compete. At this stage that’s good marketing. BellSouth is playing the bully and spending an advantage over Cox it should be conserving. I’m wondering if this has all gotten personal with Bill Oliver. If so, it’s doing the company no good.)

BellSouth has Bigger Worries than LUS Fiber

Network World columnist Johna Till Johnson used her July 25 column to look at BellSouth. The company has some choices to make and some challenges ahead. Surprise! Lafayette’s LUS fiber vote was not mentioned as one of those challenges.

Nope. The company faces some fundamental decisions that can’t be put off much longer. For instance, will BellSouth remain an independent company? Well, Ms. Johnson thinks there is reason to believe that it will not.

She admits that BellSouth could choose an alternate path, but that would require an affinity for risk and adventure which the company has not here-to-fore exhibited.

WBS: In Hawaii

What’s Being Said (WBS) Dept.

If you are as bored of the hooraw over the council members visit to Hawaii as I am you might have neglected to read down to the tidbit about fiber in yesterday’s article. (What? You say you don’t read the paper only for fiber news? I’m shocked.)

Anyway here is the short:

Lafayette became the talk of the NACo conference, Stevenson said, when voters in the city on July 16 gave Lafayette Utilities System permission to launch a controversial fiber-to-the-home project at a cost of up to $125 million.

‘They were pretty amazed by the outcome of the election because it didn’t pass anywhere before,’ he said. ‘Anyplace that had put it to a vote of the people, it always lost.’

The conference attendees discussed two pending competing bills in Congress dealing with municipal fiber projects. One bill would allow municipalities like Lafayette to offer telecommunications services. The other would prohibit the practice.

The prohibitive legislation’s passage would be bad for the rest of the nation but could be good for Lafayette if LUS’ project is grandfathered in. That would make Lafayette the largest municipality to offer low-cost fiber and telecommunications services and restrict other municipalities from following suit.

All easy jokes aside, I am sure that Lafayette’s victory was the talk of the conference. Telecom issues are a surprisingly important local issue and with the Feds trying to outlaw local franchises (and along with it franchise fees, local access channels, and universal service) public official across the country must wish they could get free of their dependency on the telecom corporations.

“Digital Media Initiatives”

The Independent notices a meeting I attended recently to help strategize ways to bring video game production to Lafayette and Louisiana. Video gaming production is already a large industry which promises to only grow—and to provide good-paying jobs. According to an article in Biz New Orleans:

Video games and simulations typically take one to two years to produce and can cost up to $50 million. The majority of the production budget is spent on computer programmers, graphic artists and technicians, according to Greater New Orleans Inc.

The average starting salary in this field is $54,300 with average regular salaries of $75,000.

It’s not just about video games, as attractive as that business might be; games also tend to push the envelope on technologies that later get pulled into more conventional applications.

Firefly Digital owner Mike Spears helped pull together the first strategy session. “We want to position Lafayette in the state landscape,”he says. “This isn’t just about entertainment. There are educational and business applications that can be developed in a video game environment.” He is also meeting this week with representatives of the tech communities from Baton Rouge and New Orleans: “We hope to develop a state strategy so we don’t duplicate efforts.”

The immediate issue is “workforce development” –building the educational pipeline and cultural surround that produces people the industry wants to hire. In that regard Lafayette is well positioned with at least the start of a pretty comprehensive framework ranging from Ninjaneering’s “Game Camp” to a tech high school to specialized game programs at UL.

This all comes up as a consequence of a new law, the Louisiana Digital Media Act, which gives tax credits to video game production similar to the successful law which does the same for movies–a law which has been imitated by a number of other states.

Lots coming together here…pervasive bandwidth, education, tax credits, and a vigorous tech community willing to aggressively pursue Lafayette’s interests.

“July 16 vote: ‘yes’ for Lafayette fiber optics”

The vermilion weighs in with a story on the fiber optic vote. This story is the only one to take on the issue of whether or not the election was an unmitigated good. Terry Huval and Joey Durel point out that, whatever else it was, it was an expensive one year delay that confirmed the original vote of the council. In the long run would I rather have the vote or the year? The unshakeable legitimacy of the vote, I think. Representative democracy and a vote of our elected council should have been enough. My hesitation revolves around the demonstrated willingness of the opposition to tear down legitimate procedures and valuable practices simply because they want to force their extreme ideological positions on this city. They will find it hardest to try and tear down to distort an overwhelming vote of the people.

(Time out for a straightforward complaint:

Because the opposition largely avoided admitting their self-interest or their ideological passions–motivations they knew the people of Lafayette would have little sympathy with– they often raised issues that made little sense if looked at even briefly. For instance: ILOT is a straightforward way to level the playing field in the competition between public and private entities, a great way to drive down taxes, has a long and perfectly legitimate history locally, and has been widely used nationally. It is a perfectly normal and unremarkable tool of good government. To try to raise resentment over it was irresponsible demagoguery. Similarly for the racial divisiveness of the repeated charges that the north side would never get fiber — a clear political impossibility that was also disproved by the whole history of LUS’s universal service in every other service category. But the charge built on and sustained racial resentments in order to advance the opposition’s almost purely ideological ends. And on and on for many “issues” raised irresponsibly by the opposition.

Close timeout)

Back to our regularly scheduled programming:

While the story raises valuable issues, the reader should be a little careful in their reading. There are some real inaccuracies, to wit: it isn’t true that it will take 50% penetration to pay off the interest. It will not. In fact, if they get 50% that can pay off the full bill in as little as 11 years. Somewhere between 21% and 30% is the breakeven point for the whole project over 25 years.

Quotable Quotes:

According to Durel, the project does not measure success by profit; as long as Lafayette residents receive better service at reduced rates, he said, the time and money will have been well spent. The election itself, however, was not the biggest challenge, he said.

“The election was definitely the biggest roadblock we faced,” said Lafayette City-Parish President Joey Durel, “but that was the easy part; now what we’ve got to do is make it work.”

“We want Lafayette to be the most wired community in the country,” said Huval, “or even the world.”

“Lafayette Bucks National Trend On Successful Fiber Vote”

The Lafayette Chamber of Commerce posted its own news story about the referendum it endorsed:

The Chamber-backed Lafayette Utilities System proposal to provide fiber connectivity to the premise passed handsomely last weekend by a margin of 62 percent to 38 percent. Passage of the proposed project has gained national attention since other such propositions have failed due to intense opposition by large, private competitors.

The Chamber’s unanimous support was crucial in establishing the credibility of the project with the business community, as I noted at the time.

WBS: “BellSouth, Cox Lose Battle Of The Bayous”

What’s Being Said (WBS) Dept.

Except for a little bit of overreaching that trades in the mighty Vermillion River and our midsized city for bayous and small town status (they’ve been reading USAToday) this story is a pretty fun read. The blooper:

The small town in the bayous has been garnering national attention because of the battle, in which the incumbents attempted to convince residents that they would be better off waiting until the year – some unspecified time in the future – when BellSouth and/or Cox might be willing to put in their own FTTx installations. Lafayette – which had faced the same situation 109 years ago with electricity and, as a result, wound up building its own utility system – wasn’t willing to wait.

TelecomWeb news break tracked down an ebullient Lafayette City Parish President (the local equivalent of mayor) Joey Durel in Washington, D.C., where he was on unrelated municipal business. Durel notes that both the vote (12,481 “yes” votes vs. 7,621 “no” votes) and the turnout of 27 percent of the voters showed massive public support for the city to float the $125 million in bonds it will take to fiber the town. Original estimates had been that only about 15 percent of Lafayette voters would go to the polls, a typical turnout for a one-issue referendum with no political offices on the ballot.

“The message that (the vote results) sends to the incumbents should be pretty strong,” Durel told us.

They’re also promising an “in depth” report in their subscription online magazine. They’ll let you sample it for free though. Scroll down….