U.S. Internet needs radical reorientation toward value-based, future edge demand

Legacy incumbent telephone and cable companies are fighting a fiber future for telecommunications infrastructure. People don’t need fast fiber connections, they maintain. Two legacy telcos, AT&T and Verizon, have urged the U.S. Federal Communications Commission to maintain its outdated definition of “broadband” at its current asymmetric 4/1 Mbps. (Not that it matters much anyway since the telcos have largely spurned federal subsidies to help them cover the cost of building out their limited footprints to serve premises lacking even that pokey standard of service.) Their stance reflects the incumbents’ decidedly retrospective philosophy, driven by their highly CAPex risk averse business models that are unlikely to change even though demand for Internet connectivity has grown substantially over the past decade. This retrograde view of Internet demand and infrastructure planning is largely responsible for the current dismal state of American Internet service where many homes and neighborhoods are unserved and those that are pay too much for sub-par service.

Industry expert Michael Elling argues rather than managing the economics of Internet infrastructure with an ex post, cost-based pricing model, instead it should be based on an ex ante, value-based pricing that takes into account the potentially enormous future demand for high bandwidth. The growth of bandwidth demand emulates Moore’s Law for microprocessors, roughly doubling every 2-3 years. It will continue to explode with applications such as 4k video streaming and two-way, HD videoconferencing.

Moreover, Elling astutely observes, contrary to the current market segmentation strategies where providers cherry pick discrete neighborhoods in densely populated metro areas, Elling sees the greatest demand growth for premise Internet service coming from less densely populated areas where residents obtain relatively higher value via its enabling remote work and e-commerce, distance learning and telehealth.

Elling also sees an ex ante perspective that anticipates future demand rather than focusing on past and present demand as mooting the current regulatory policy debate over net neutrality. The net neutrality issue has come about because providers at the core, transport and edge network layers don’t share a unified view of how prices for their services should be set. While those at the core and the transport layers might be inclined to work out a pricing scheme with the edge providers based on ex ante demand at the edge, it’s impossible to do so as long as the edge providers hang onto their ultra risk averse, cost-based ex post demand perspectives. If all the layers agreed to adopt an ex ante perspective, Elling believes, it would bring about a unified pricing scheme based on balanced settlements and price signals that would provide incentives for rapid investment and ubiquitous upgrades at all network layers.

Elling’s concept deserves serious consideration by Internet providers at all network layers as well as public policymakers and regulators. If the United States – the nation that invented the Internet – is to realize the Internet’s full potential and benefit for all Americans, it must first make an attitude adjustment. To an attitude that forsakes a retrospective orientation of bandwidth poverty and embraces a forward thinking outlook based on bandwidth abundance and prosperity.

Time for the FCC to hit the reset button on Internet regulation

Congressional Democrats jump into net neutrality mix - Tony Romm and Brooks Boliek - POLITICO.com: AT&T, meanwhile, launched a counteroffensive. Executives from the company warned the FCC in a Thursday meeting not to reclassify broadband as a telecommunications service, saying such a step “would ignite multiyear regulatory controversies on a variety of issues,” according to a filing with the commission. Telecoms dislike that approach because they fear new regulations would unfairly restrict their business.

By classifying Internet service on a par with telephone service subject to common carrier mandates that all premises be offered service, the U.S. Federal Communications Commission (FCC) would not be restricting telecoms. Just the opposite. It would be opening up their markets beyond where they want to go by forcing them to embrace the fact that the Internet is the new telecommunications system. Notably, that's something the telcos themselves acknowledge in petitioning the FCC for relief from rules governing analog plain old telephone service (POTS) so they can allocate more capital investment to Internet infrastructure. With this reclassification of the Internet as a telecommunications service, telcos would be barred from their current market segmentation practices that arbitrarily redline parts of neighborhoods and even discrete roads and streets.

Telcos have been trying to hold onto the past by acting as if it's still 1996 and the Internet is a novel information service and not the global telecommunications service it has now become, carrying voice, data and video. It's time for the FCC to do an intervention and point to a calendar that reads 2014 (and for the Obama administration to fire the enablers who help the telcos cling to the past.) And at the same time, develop a new regulatory framework that allows a fair and orderly settlement scheme across all network layers and boundary points as called for by industry expert Michael Elling. As Elling correctly points out, that's what the "net neutrality" debate is really all about.

How Google Fiber is revolutionary -- and how it's not

Google Fiber is revolutionary with the medium of its infrastructure: fiber all the way to the customer premise and the enormous headroom it offers to accommodate future bandwidth growth and new, high bandwidth services. This will allow Google Fiber to leap past the big incumbent national telephone and cable companies bogged down by their existing investment in wire cable infrastructure designed for a pre-Internet era. As Marshall McLuhan put it, the medium is the message. And the medium is fiber to the premise.

Google Fiber also has a revolutionary business model that lessens the pressure to get customer premises to subscribe in order to make the network economics pencil out. It allows customers to sign up for a low cost, multi-year, flat rate connection designed to cover the cost of connecting the premise. The big telcos and cablecos, by comparison, typically charge many thousands of dollars to connect a premise lacking access to a connection, with cablecos charging about $65,000 per mile.

Where Google Fiber's business model is not revolutionary is that like the big legacy incumbents, it is a closed "walled garden" that seeks to own the customer rather than an open access network that sells access to customer premises on a wholesale basis to those wanting to market services over it. This imposes major marketing costs to acquire subscribers one at at time, limiting Google Fiber to those areas where it can get a good return for its marketing and infrastructure investment.

Critics of this business model such as Michael Elling (featured in this video) contend it degrades the value of the network by limiting its ability to scale, invoking Metcalfe's Law -- that implies a network is only as valuable as the number of subscribers on it. Since fewer subscribers can connect to a limited, closed network, it becomes less lucrative in the larger scheme for those at the core providing Internet delivered services such as Netflix, Amazon and ironically, Google itself.