ISPCON Keynote: Dave Schaeffer, Founder and CEO of Cogent Communications — continued

The core is a commodity
In contrast to the last mile, which is a premium monopoly, the core of the network has become a commodity, Schaeffer said. He pointed out that his network charges $10 per megabit and that the average bit travels 2,300 miles on Cogent's network to reach any one of 2,240 ASes.

"There used to be 200 backbones and now there's about a dozen," he said. "That's still too many. During the boom, we had $300 billion in upgrades to chase a $2 billion market. The downside was the destruction of capital, but there was an upside too: record productivity improvements."

The internet has delivered new business models and lowered barriers to entry in new and old businesses alike. It has broken open the networks so that there is no one decider for applications, ended the command economy of Ma Bell.

Broadcasting still has a place for sports and news and other mass media, but the internet can time and location shift professionally produced content (Slingbox, TiVO), and the internet has delivered an embryonic new kind of content, self produced (youtube, facebook).

Network operators, in their struggle to get costs in line with the expenses of their buildout, hope to shut out the internet. "Broadband is not internet access if it doesn't connect to other networks," said Schaeffer, and he was talking particularly about Verizon's FiOS.

"FiOS is justified by TV revenues. It's a walled garden. It's old thinking."

He mentioned that there's been no Carterphone case in wireless to force wireless networks to open up to every device. I suspect he was thinking of the cellular networks rather than the fixed wireless networks. He was certainly thinking of cellular networks when he pointed to the iPhone as an example of old thinking, saying, "service providers are allowing only some devices to connect to their networks in order to try to control content."

Later, he noted that cellular companies charge a premium for wireless services because they can deliver mobile voice. "Additional applications would unlock the potential and underutilized capacity of wireless networks," Schaeffer said.

The monopoly and the government
"Open access is in our interest," Schaeffer said. "We need to end the free ride on assets paid for by the rate base." One thing many phone company customers don't know is that phone prices were set to guarantee that the phone company would make a profit over a specific period of time on buildouts. On any infrastructure that's more than about 20 years old (less in some cases) the phone company has already made back not only its investment but also its government guaranteed profit. The phone companies complain to the FCC about regulation harming their "investments" when in fact they built their infrastructure in a market-free regulated monopoly.

The history of the phone companies, Schaeffer noted, includes a period during which the government allowed the Bell system to refuse to connect to other phone companies, thereby driving them out of business (Schaeffer did not mention it, but he's received the same treatment from competitors who are upset at his prices). The government allowed the Bell system to retain its monopoly gains by signing the Kingsbury Commitment in which it agreed to not use the same tactics on the remaining phone companies.

The phone companies are rich. "They don't need 400,000 people," Schaeffer claimed. "Cogent delivers 15 percent of internet traffic over 276,000 miles of fiber with 420 people. The phone company spends more money on measuring and billing than on the delivery of service."

"The phone company should admit it is a monopoly and ask for a 12 percent regulated return in exchange for structural separation. But it won't admit it's a monopoly and it cannot compete."

The phone company has wasted money on apparent innovation. "The phone company destroyed $4.5 billion in shareholder value in failed TeleTV investments."

When the phone company becomes a regulated monopoly, the shareholder will be the ratepayer, and the government's role will be to get out of the way, but to monitor waste. "The consumer will pay for service, but not for lobbyists and corporate jets. The executive offices at the phone company are as close to the style of living of the nobility in France before the revolution as you'll ever see in America."

Asked what to do about an FCC that is not responsive, Schaeffer said ISPs should go to the FTC and demand truth in advertising, which is clearly lacking.

— End

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