DSL Prime: A Truly Worldwide Web Means Less for U.S. and European Backbones

A further price collapse in the backbones, caused by regional links obviating the need for all internet traffic to pass thorugh the U.S. and Europe, means even more problems for carriers.

by Dave Burstein of DSL Prime and Future of TV [December 22, 2005]

"Watch [cognitive radio] closely as it has the potential to rapidly multiply effective available unlicensed spectrum thus creating lots of additional capacity."
—Rod Hall DrKW. Someone please tell D.C. spectrum auctions and monopolies are now obsolescent.

Something is rotten in Telco land. Verizon kills pensions. Deutsche Telecom demands Merkel break EU competition laws or they will fire another 5,000 people. Mark Feidler and Randall Stephenson are trying to prevent access despite clear warnings from the FCC. Sol Trujillo at Telstra repeatedly attacks the government on the front pages, although they still own the majority of shares and could fire him.

These are desperate acts. I saw a similar pattern in 2001, when SBC raised DSL prices and shredded capital spending in order to paper over deep financial problems. Over the next two years, Verizon, SBC, and BellSouth lost over $250 billion in market cap, and earnings haven't yet recovered despite major tax cuts, death of most competitors, and highly profitable asset sales. I'm not sure things are that bad today, and in particular the Bell stocks are down so low Merrill thinks they will move up. My gut tells me we have some unpleasant surprises coming.

With a broken fibula after slipping on the ice, no conferences for the round fellow with a beard for a while. I'm doing fine, and will have another issue in a couple of days with worldwide numbers and some D.C. speculation. Meanwhile, best of luck to David, Elton, and the battle against bigotry.

Level 3 "Tantamount to a Default"
Backbone prices still low and dropping
The low bandwidth prices are taking a financial toll on the backbone companies. Eric Geil of Standard and Poor's identifies Level 3's latest bond swap as a "distressed exchange transaction." Investors with bonds due in two years are being asked to swap for six-year securities instead, because "Level 3 may not be in a position to pay them in 2008." Geil attributes this to "a difficult environment that can't generate sufficient cash flow."

The low pricing is painful for Level 3 but great for consumers and DSL operators. That's why the VDSL and fiber builds are logical now, and why IPTV is growing after "streaming media" failed miserably five years ago. Where fiber is in place, bandwidth costs are based on switching costs, which go down consistently with Moore's Law.

In practice, bandwidth costs per user have been dropping at most networks, as prices go down faster than traffic goes up.

Om Malik, reporting on the new direct India to China connections, notes the "reduced role for major US carriers like Level 3, MCI, and AT&T (currently the world's largest ISP.) It is a trend that is gathering momentum, and the network traffic that almost always used to flow through US is becoming more and more regional."

That matches Tony Werner's ability to peer 92 percent of the traffic of Europe's largest cable operator without paying transit fees, reported at http://www.futureoftv.net.

Om wonders if this is a "forbearer of a global trade shift. I believe that what sea-routes, air routes and highways were to the 20th century, broadband pipes are to the 21st century. And from that perspective, things could be shifting away from the US being the hub of global trade." At "Can Broadband Predict Economic Shifts" he calls on Dave Isenberg, Jeff Pulver, Pip Coburn, me, and several others to extend his remarks, which I've tried to do with the confirming price story above.

It's an honor to be part of a great community of writers who are spurring each other on to better understand the Internet. Others I read and recommend include James Enck, Susan Crawford, David Weinberger, Andy Abramson, Martin Geddes and a dozen more you can find linked at http://www.bloglines.com/blog/daveberstein.

BT: 900 More Jobs to India
Investment often reduces jobs
582 people will probably be fired at ClientLogic Derby and up to 304 more in Bristol, TheRegister reports. BT is leading the European outsourcing trend, with a major investment in Mahindra-British Telecom. Their partner in that venture, SBC, fought hard to allow more outsourcing in their new contract and has rapidly been moving jobs out of the U.S.

It's painful to watch the hypocrisy of governments like Michigan providing hundreds of millions of dollars in rate increases in the name of "protecting jobs" while in fact SBC is cutting.

"Long term employment is almost guaranteed to fall due to the efficiency of the new IP networks coming in Verizon and BellSouth," I wrote in the earlier draft of this article. Soon came word of 1,500 more job cuts at BellSouth. While Verizon is hiring for the first stage of installing FIOS, their financial justification for the project is that it will require far less labor in the long run. Telstra intends similar, with whole cities served by two soft switches and 4,000 redundancies. Success in broadband is no panacea; Hanaro in Korea just cut 25 percent. The trend for the next decade is likely to be a 4 to 7 percent per annum productivity gain unless the telco is under spending on capital. Job cuts are inevitable. The globalization of the labor market makes them extreme.

We all know the sometimes hellacious effects on some people's lives of these cutbacks. It's facile to say, "You can't stop progress" and "that's society's problem." Wish I had some answers: massive subsidies to companies in the name of make-work jobs are rarely the answer. The "jobs saved" are typically more prominent in the press releases than reality.

Copyright 2005 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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