SMART Letter #67
The Enronization of Telecom
February 6, 2002

!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*() ------------------------------------------------------------ SMART Letter #67 -- February 6, 2002 Copyright 2002 by David S. Isenberg -- "no account" -- -- 1-888-isen-com ------------------------------------------------------------ !@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*()!@#$%^&*() CONTENTS > The Enronization of Telecom > Not Quite Ready to Blog > Conferences on my Calendar > Copyright Notice, Administrivia ------- THE ENRONIZATION OF TELECOM by David S. Isenberg Irony (n) (1) The use of words to express something different from and often opposite to their literal meaning. (2) Incongruity between what might be expected and what actually occurs. Enrony (n) (1) The use of accounting to express something different from and often opposite to its financial meaning. (2) Incongruity between what might be expected and what actually occurs. I just received a startling reaffirmation of the idea that the even the mightiest telcos could be heading for a fall from The Precursor Group, a Washington DC institutional investor advisory service. The Precursor Group has an inside track on the Washington DC tech-reg scene, including issues before the FCC, Congressional committee action, etc. They're not the place to watch for outside disruptive influences (in a year-old survey of telecom technologies they left out fiber and unlicensed wireless), so when they say that something is happening, you can be sure it is mainstream-ready. Precursor Watch (2/5/02) says: "The fundamental health of the [telecom] sector is likely to get worse before it gets better . . . The combination of: the sector's anemic growth outlook, the cannibalizing competitive mega-trends of wireless substitution, voice to data migration, Bell entry into long distance combined with local competition, and the bubble-induced excesses in debt and over-capacity, all create a powerful wealth destroying dynamic. Telecom's 'debt spiral' has gotten so bad that even the relatively strongest players who are still able to raise significant capital (VZ, SBC, and BLS) don't want to assume any more liabilities or business risk. Consequently, Precursor is reversing its long held view that consolidation can help improve the sector from excess capacity and debt any time soon." The Precursor piece ends ominously: "Policymakers throughout the Government remain largely oblivious to both the magnitude and economic implications of the telecom-tech meltdown and the destructive role government competition policy has played in helping precipitate this market debacle." [For more info see] Roxane Googin, following from her interview in SMART Letter #64, has given a longer, more in-depth interview for the next issue of the Cook Report on Internet. Gordon Cook has a Ph.D. in Russian history and a nose for behind-the-scenes shenanigans, so 'in depth' is pretty deep. Googin and Cook cite chapter, verse, row, and column (and provide URL pointers to ILEC annual reports) to show exactly where incumbent telcos are losing lines, minutes, revenues. They deconstruct the Annual Report as a literary form -- for example, "Over the years, the voice, or core business, part of the income statement appears later and later as the bad news is buried ever closer toward the rear." And -- surprise! -- Googin and Cook find places among the reports where it is impossible for even an Arthur Andersen accountant to infer what is going on. Fall into the GAAP. [The Cook Report on Internet is only available by subscription -- see for subscription info and executive summaries. The Googin edition of the Cook Report will be worth the annual subscription fee itself. An extended commentary on Googin by bullshit-buster Andrew Odlyzko, which takes issue with many of Googin's specifics but concurs on general direction, is also included. It is also worth the subscription fee itself. (For comparison, this edition of the SMART Letter is worth a mere 5.2% of its subscription fee.)] I've been thinking about Googin's plaint for a year and a half, off and on. I'm coming to the view that she's seeing two loosely coupled, separable phenomena. The first thing she's seeing is the general malaise in the telecom sector, aggravated by bubble-busting, debt-hiding, other accounting tricks, and not-very-radical technology substitution (e.g., cell phones for land lines, email for phone calls). The second phenomenon, the stranding of network assets because they're rendered obsolete by radically cheaper, fundamentally simpler networks, is potentially much more powerful, but is a longer-term phenomenon that has not yet hit the local telco's fan. The long distance market provides a model for how the latter might happen. Qwest (the former aggressive startup) was the first long-haul network company to build a nationwide network using the new, radically simplified, radically abundant fiber technologies. The Qwest network came on line in 1997 and 1998. Joe Nacchio, Qwest's CEO, sitting pretty on a plush pile of potential profit margin, said that he did not want to start a price war. And at first he didn't. But Qwest's new network set up a powerful economic tension. When GTE made Qwest an offer to buy twelve transcontinental fibers, which would (for all intents) pay for Qwest's entire build, Qwest could not refuse. Suddenly there were two competitors with radically reduced cost bases, radically increased capacities, and an insatiable hunger for new traffic. Suddenly it was inevitable that long distance prices would fall steeply. Nevertheless, it has taken the long-distance-classic sector (AT&T, Sprint, WCOM) four years to show visible financial signs of tottering. (The long-distance guys did a pretty good job of holding off incumbent LEC entry into LD, so this is a fairly pure case.) In contrast, the local market is still an old guard, old tech monopoly. The incumbent-killing economics of radical abundance have not kicked in. There is not that much fiber in the ground. Most of the fiber that exists is not available to its potential market. According to Steve Garofalo, the visionary founder of MetroMedia Fiber Network (since Enronized), building the new local network will require about 25 times the time and 25 times the expense of the long-haul network build-out. All the accounting tricks in the world will not reduce the time or effort required. [I did an extensive interview with Garofalo last May (with Annie Lindstrom), and I'm still waiting for MetroMedia Fiber Networks' permission to publish it. I'm guessing they're too busy Enronicizing.] Meanwhile, the SONET/ATM access networks of the local telecom giants are clunky, complicated, expensive and inappropriate for Internet Protocol data, but they have not been superceded by radically cheaper *installed* technology (except in rare cases). There is a plausible scenario in which multihop unlicensed wireless mesh networks will render access-a-la-ILEC obsolete long before the local giants are killed by IP- over-light. Multihop wireless networks have some very nice properties that favor near-term installation, but they don't pack as much bang per buck as fiber, and benefits are more linearly related to costs, so a tech-related ILEC collapse due to multihop wireless technology will be a much slower motion affair. Eventually fiber will be the preferred method of access. Eventually Steve Garofalo's vision of fiber connections in every room in the developed world will come to pass. But it is still years away. The ILECs might not last that long. And if they fail prematurely, before substitute networks are rolled out, we'll *really* be in a pickle. To repeat Precursor Watch's warning: "Policymakers throughout the Government remain largely oblivious to both the magnitude and economic implications of the telecom-tech meltdown . . . " Washington turns ugly when it is surprised. The re- regulation following an ILEC collapse could be as panicky and ill considered as the USA PATRIOT Act that followed the collapse of the World Trade Towers. The Precursor gang is noted for its insider judgments of Washington reactions. But in this case, I'm hoping they're wrong. David Weinberger and I have written an essay inspired by Googin's insight that the best network is the hardest to make money at. We call it, "The Paradox of the Best Network." Find it at In it we try to outline some policy and business responses that would paint a more optimistic future for telecom. ------- NOT QUITE READY TO BLOG by David S. Isenberg I've said it before -- I'm a mid-tech kinda guy. It takes me a while to 'get it'. I'm not interested in the geekiest new thing. I want tools, not coding puzzles -- winner apps, not IRQ settings -- connectivity, not NetBEUI. The whizziest SMART People have been writing weblogs for years. And last week I caught Blog Fever. I've got it bad. Previously I'd been known to dip into somebody's blog once in a while. But now I've got it, caught it, I'm swept up in it, and I'm teetering on the edge of starting a blog of my own. It has been said that the Internet is proof that even 1,000,000 monkeys at keyboards *still* couldn't write a Shakespeare play. Clearly, many blogs will play to *ahem* limited audiences. Many contain the fascinating details of what-I-had-for-breakfast. Others muse about show-tables bookmarklets and plugin filesize animation loadtimes. It takes a good writer to write a good blog. There are lots of good writers around. Doc Searls is one of them. Doc is a professional wordsmith. He edits Linux Journal. I've been reading Doc's blog for longer than the others. His coverage of the September 11 tragedies was more informative than most of the media. I especially liked his coverage of the war metaphor according to Professor George Lakoff. Doc provides a link to Lakoff's Fairy Tale of the Just War: "Cast of characters: A villain, a victim, and a hero. The victim and the hero may be the same person. The scenario: A crime is committed by the villain against an innocent victim (typically an assault, theft, or kidnapping). The offense occurs due to an imbalance of power and creates a moral imbalance. The hero either gathers helpers or decides to go it alone. The hero makes sacrifices; he undergoes difficulties, typically making an arduous heroic journey, sometimes across the sea to a treacherous terrain. The villain is inherently evil, perhaps even a monster, and thus reasoning with him is out of the question. The hero is left with no choice but to engage the villain in battle. The hero defeats the villain and rescues the victim. The moral balance is restored. Victory is achieved. The hero, who always acts honorably, has proved his manhood and achieved glory. The sacrifice was worthwhile. The hero receives acclaim, along with the gratitude of the victim and the community. Lakoff wrote this in the early 90s, when the Villain was the head of an identifiable country. For the whole Lakoff essay (highly recommended!) see: cholarly/Lakoff_Gulf_Metaphor_1.html Lately I've been reading a number of other weblogs on a regular basis. Dan Gillmor has a great blog at blog/ Dan holds down a San Jose Mercury News column, so he knows how to cobble sentences. I'm a bit jealous that Dan got to go to the World Economic Forum and I didn't, but he covered it nicely -- and personally -- in his blog. Dan points to another blog -- Lance Knobel's Davos Newbies weblog, which, Gillmor says, "is better than the newspaper coverage of the event." I agree, even though Knobel is no Davos Newbie, having attended every Davos since 1992. He's also a writer. He's editor of the Davos magazine World Link. David Weinberger is relatively new blogger. He's another professional wordsmith -- not only did he co-author the Cluetrain book, and a newly-minted book that is billed as A Unified Theory of the Web, his e-newsletter, Journal of the Hyperlinked Organization (JOHO) is a read-me-first when it hits my inbox. JOHO, the Blog, can be even better; Weinberger excels when his muse is lounging in informal conversation. [Also see Weinberger and Isenberg's soon-to-be-famous "Paradox of the Best Network" at] SATN -- is "owned" by three people -- none of them professional wordsmiths. They are Dan Bricklin, Bob Frankston and David P.Reed. Bricklin and Frankston wrote Visicalc, the first winner app for Apples. And David P Reed is an early architect of the Stupid Network -- only he called it "the end-to-end principle. The SATN blog is an informative amusing collection of technology snippets, insights, essays and experiences. SATN stands for Software Arts Technology Notes -- telco execs may think it is pronounced "satan" but the authors assure us it is pronounced "satin". Metafilter is another blog that I find fun and useful. It calls itself a Community Weblog. It has a lot of members, who post links along with a few lines of comments on the front page. Other members can comment on these postings -- these comments appear on a secondary page. The community is remarkable self- disciplined. It seems to be self-policing, because the signal-to-noise ratio is quite high. Unfortunately, the community is closed to new members, so us latecomers perforce must lurk. Blogs have a way of sucking you in. Most blogs point to other blogs -- Doc Searls calls this "blogrolling". Such blogs are often as good as the blog that sent you to them. Doc lists about 80 -- and some are pretty good. There's a whole new world out there. If you have not already done so, make a folder for blog bookmarks -- and don't look back. ------- CONFERENCES ON MY CALENDAR March 17-22, 2002. San Jose CA. The Cisco Powered Network Operations Symposium. I'll be speaking on March 19, focusing on the distinction between connectivity and services. The symposium is not exactly open -- your company must be part of the Cisco Powered Network program, see More information on the symposium is at April 8-11, 2002. Seattle. VON (Voice on the Net). On April 10, at 9:35AM, I'll be leading a panel on "Financing Disruption" that was inspired by SMART Letters #64 and #65. The panel will feature CIBC analyst Stephen Kamman, an extremely rare public appearance by Roxane Googin, some other SMART People as I confirm their participation, and yours truly. My bottom line is that voice is a diminishingly tiny deal on The Stupid Network, but it still accounts for a disproportionate share of revenues. Come for the Googin-Kamman show, but stay to get the latest on SIP, the technology that will disrupt telco voice whether or not we get Fiber-to-the-X. More info at ------- COPYRIGHT NOTICE: Redistribution of this document, or any part of it, is permitted for non-commercial purposes, provided that the two lines below are reproduced with it: Copyright 2002 by David S. Isenberg -- -- 1-888-isen-com ------- [There are two ways to join the SMART List, which gets you the SMART Letter by email, weeks before it goes up on the web site. The PREFERRED METHOD is to click on and supply the info as indicated. 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