Alan K. McAdams, Ph. D.

1
The New Paradigm End-User Ownership of Advanced
Fiber Networks
NAMTAC, October 20th, 2003
Alan K. McAdams, Ph. D. Senior Member, Institute
for Electronic and Electrical Engineers Professor,
Managerial Economics, Johnson Graduate School of
Management 342 Sage Hall, Cornell University,
Ithaca, NY 14853-6201 607-255-6443
akm3_at_cornell.edu http//afn.johnson.cornell.edu/
2
Overview

• Advanced Fiber Network Technology
• Incipient Natural Monopolies
• Economic Consequences of AFN Technology
• With End-User Ownership
• With Third Party Service Providers Monopolies
• Implications of Government Implicit Support
• FTTH Scenarios Including End-User-Ownership
• Lessons From Korea and Japan
• Rough comparison of the United States and Canada
• Conclusion

3
Advanced Fiber Network (AFN) Technology

• AFNs Ethernet networks capable of gigabit
  speeds over fiber infrastructures
• They are
• Simple
• Flat
• Well Understood

4
The Economics Dictated by Uncongested AFN
Technology

• Results in an
• Incipient Natural Monopoly
• (Explain)
• That can be
• controlled
• or
• exploited

5
Realities Dictated by the Technology and
Economics

• End-User-Ownership of Infrastructure of an
  Uncongested AFN Allows for
• No-fee transport over the network
• (By having bandwidth to spare) (Explain)
• 2. So Requires Asymmetric Pricing (Explain)
• But also
• 3. Controls the Incipient Natural Monopoly
• (end-users dont exploit themselves)

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Realities Dictated by the Technology and
Economics

• B. ILEC-Ownership of Infrastructure of the AFN
  Allows for
• Embracing the Incipient Natural Monopoly
  (monopolists do exploit their end-users)
• Monopoly-fee transport over the network
  (despite bandwidth to spare)
• and
• Monopoly Strategies throughout network decision
  making

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Realities Dictated by the Technology and
Economics

• C. Exploitation of the Natural Monopoly by
  Service Providers has many potential
  consequences
• Monopoly-Fee Pricing for Transport, as above
• Content, Applications and Services that can be
  
• Controlled
• Censored
• Vertically-tied
• Limited
• So Likely Closed Networks
• Will Result in Digital Grand Canyon

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The End-user-owner Model of Deploying the AFN The ILEC Regional Monopoly Model of Deploying the AFN
Results in costless transport that simultaneously implies natural monopoly conditions exist Also results in costless transport that simultaneously implies natural monopoly conditions exist
But with end-user-owner, natural monopoly is controlled. One doesnt exploit ones self Here natural monopoly is exploited as mechanism to permit transport fees at monopolized levels, control of N/W access
Leads to no fee transport Facilitates peering Transport still costless to ILEC, but permits fee levels at what the traffic will bear
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The End-user-owner Model of Deploying the AFN The ILEC Regional Monopoly Model of Deploying the AFN
Requires only simple rules and monitoring to avoid congestion Requires only simple rules and monitoring to avoid congestion profit maximization, however, implies complex, costly monitoring
Therefore CAPEX smaller OPEX approaches zero Ethernet network infrastructure has lower on-going operational cost Therefore Increases CAPEX Increases OPEX
The end-user-owner AFN seeks to have a maximum feasible number of competing content, applications, and service providers for selection by the AFN-owner on the basis of competition on the merits, creating open-networks that extend the Internet to gigabit speed dimensions Access to AFN can be Limited Controlled Censored Vertically-tied
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The End-user-owner Model of Deploying the AFN The ILEC Regional Monopoly Model of Deploying the AFN
Peering in flat networks of common technology offers multiple, new opportunities new long distance transport and widespread connectivity true end-to-end networking Can foreclose user free-choice of content, application and service-suppliers creating closed-networks, blocking Internet innovation. Monopoly power can extend into the higher layers that carry content, application and services.
Likely to require extensive deployment of Customer-Empowering Networks thru municipalities to prevent or overcome a looming Digital Grand Canyon Network deployment follows market-based business model 3-year max pay back maximizing monopoly return implies cherry picking, approach to network deployment, large unserved areas
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Outcome of FCC Triennial Review 03-36 Ruling
The recent FCC ruling following its Triennial
Review essentially let existing
telecommunications regulations for narrow band
technologies stand declared that few if any
rules would be established for broadband fiber
technologies.

1. The rulings create additional incentives for
   ILECs to establish regional AFN monopolies
   similar to those owned by MSOs.
2. ILEC decision-makers, as stewards to their
   investors, would have no choice but to fully
   exploit the incentives of their regional
   monopolies
3. Regional monopolies would result in a Digital
   Grand Canyon for citizens residing in areas that
   are not economically attractive

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Realities Dictated by the Technology and
Economics

• D. Impact of (Implicit) Government Approval for
  Regional Monopolies
• Managers as fiduciaries are compelled to exploit
  monopoly strategies
• ILECs have rational regions
• Cable modem areas happenstance, random regions
• Implies eventual price war between ILECs and MSOs

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Realities Dictated by the Technology, Economics
and Regulation

• Question
• How then do we achieve FTTH, leaving no child
  behind?
• Answer
• Leave no town behind!
• Create Junction Points in Flat Networks of Common
  Technology
• Begin with Enterprises, Private Sector and Public
• Enable End-Users to own their own Last Mile
  Infrastructures
• or
• 4. Municipalities awaken act as implicit
  enterprises and deploy AFNs as
  Customer-Empowering-Networks thru taking credit
  for home-owner benefits (in part by 3 above?)

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Examples
A. The Boeing Company, an Enterprise
Boeing owns its own AFN-LAN (Chicago) and
AFN-MANs (Seattle, St. Louis) that connect
multiple LANs to the Legacy Network at 45 (Chi),
155 (St.L), and 155 (Sea) Mbps,
respectively Source www.computerworld.com, July
30, 2001
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B. Verizon-Owned Diffusion GIGE 1-Gigabit
Verizon service to SCT BOCES 8 School Districts
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C. Luminet Infrastructure
Thru IRUs BT-BOCES owns its own fiber and
already deploys multiple (4) gigabits to its
user-school districts
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D. AFN Case Study Quebec/RISQ

• In 2001, 8000 km of AFN networks installed to
  1000 schools
• Network build-out to schools completed by XIT
  Technologies with RISQ, TELUS (Canadas western
  ILEC) latter received 6 fiber strands in
  exchange for know-how, right authorities, etc.
• Other (rural) Schools left out of build-out
  appealed to the Quebec provincial government for
  redress
• Quebec responded by providing additional funding,
  but only if schools and municipalities created
  joint plan for AFN deployment and use
• Municipalities also now building and using AFNs
  achieving cost savings, exploring strategies for
  economic development

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D. AFN Case Study Quebec/RISQ

• Lessons learned
• AFN projects snowball as non-participants
  observe AFN advantages
• This suggests a sequential approach to
  deployment infrastructure built by first-movers
  can be utilized to serve other users as demand is
  created
• Policy-makers can speed the deployment process by
  encouraging cooperation among potential
  owner/users/stakeholders

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Illustrative Representations of Junction Points
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South Koreas Experience Good News/Bad News

• Privatized Korea Telecom in late 90s as KT
  Technologies
• Licensed and facilitated funding for new ILECs to
  compete with KT
• Rabid competition and build-out of facilities
  ensued
• New entrants featured internet access, introduced
  high speed DSL and now VoIP in competition with
  POTS, ISDN
• KTs market share forced below 50

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Macro Outcomes

• South Korea overcame its Asia Crisis, and the
  recession of 1997-8
• South Korea grew rapidly at eight percent
  annually gthalf of GDP growth from IT/Telecom
• South Korea is todays world-technology leader in
  deploying broadband connectivity to Homes and
  offices
• - but-
• South Korea is now in a Telecom price war with
  Increasing casualties, looming consolidation

22
For which there was warning from IEEE-USA
Workshop Report http//www.ieeeusa.org/committees/
CCIP/Broadband03report.pdf and Googins Law
(Roxanne Googin is a leading Telecom Investment
analyst)
The Cook Report states
Consider Googins Law the network transport
mechanism can be operated either as a valuable
monopoly, or a valueless commodity Googin
states that ownership is indeed all or nothing.
Either you own a very valuable monopoly
conduit, or you compete in a total competitive
quagmire. (Bracketed words added.)
The Cook Report, page 98, April-June 2003.
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Validation Googins Law at work in South Korea

• As predicted, South Korea is in a state of
  cut-throat competition
• Korea Thrunet, the countrys number three telecom
  player, is currently (2003) in bankruptcy
• Hanaro Telecom, the number two player, had losses
  (2002-3) so huge that its CEO has resigned in
  disgrace
• Korea Telecom, the number one player, had its
  market share eroded below 50 by new entrants,
  but foresees consolidation as its competitors
  go out of business.
• If this pattern continues, it appears that a
  national monopoly could once again be
  re-established.

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Japan as an Emerging Test Case Japans telecom
industry is following closely on South Koreas
heels

1. Japans NTT, now split in two and privatized, is
   being challenged by others offering competitive
   (12 megabits, VoIP) services at very low prices
   over NTTs own net(s)
2. Yahoo BB (for broadband) already with a 35
   market share is 2, pursuing an aggressive
   build-out of its own parallel AFN, but at the
   risk of a huge debt burden
3. The rise of Yahoo BB and others is being
   facilitated by unusually steep discounts imposed
   on NTT by regulators for sharing its
   infrastructure the jury is still out on whether
   any entrant (ELEC) can break-even or will all
   falter as have south Koreas ELECs
4. Should Yahoo BB and others go out of business
   under the weight of their debt, NTT could well
   re-establish its prior (joint) monopoly position

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Conclusion

• Canadas regulations are approaching their stated
  objective of bringing about fair and open
  broadband competition, but implicitly they now
  see this requires competition among three
  players ILECs, MSOs and EUOs (for end-user-owned
  networks). EUOs are likely to have the most
  sustainable prospects.
• United States regulations currently appear to
  pursue less explicit goals, but may end-up in the
  same place.
• In any case
• The two nations regulators must soon converge in
  recognition of the power of an innovation of
  Schumpeterian dimensions an innovation of
  creative destruction The new paradigm of
• End-user-owned true broadband AFNs!

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• The Process Would Benefit from Creation of an
  Advanced Fiber Institute with
• Strategic Intent To actively promote the
  deployment of Ethernet-based networks over
  Advanced Fiber (gigabit-capable) infrastructures
  and to advocate sound policies required of each
  actor in order to provide economic, high speed
  connectivity to governmental, educational,
  business, and residential users, and
• To be
• A Think Tank dedicated to developing new
  intellectual capital relevant to all aspects of
  AFN deployment such as recent work including
  collaboration with the IEEE-USA on its Entity
  Position Statements and Workshop Reports
  regarding advanced broadband
• An action-oriented Incubator working to launch
  new AFN projects such as to catalyze a pilot
  Emergency First Responder Network in Upstate
  New York
• A repository of information and a training
  Academy for municipal leaders and others
  interested in creating AFNs
• Affiliated with key players and thought leaders
  in the emerging AFN field with many Partners and
  Advisors
• Partnered with international organizations to
  promote AFNs abroad, and to collect case studies
  and best practices for application in the United
  States. These could include organizations in
  Canada, Hungary, Norway, Jordan, etc.