The New Paradigm: End-User Ownership of Advanced Fiber Networks

1. The New Paradigm:End-User Ownership of Advanced Fiber Networks Alan K. McAdams, Ph. D. Senior Member, Institute for Electrical and Electronics Engineers Professor, Managerial Economics, Johnson Graduate School of Management 342 Sage Hall, Cornell University, Ithaca, NY 14853-6201 607-255-6443 akm3@cornell.edu www.communicationplanning.org http://afn.johnson.cornell.edu/

2. Advanced Fiber Network (AFN) technology • AFNs are:  Ethernet networks  capable of gigabit speeds  over fiber infrastructures. • technology: simple  flat  well understood inexpensive  provides an abundance of bandwidth  is the next generation telecommunications infrastructure • economics: • marginal cost of uncongested bandwidth approaches zerosupporting costless transport, but also • results in incipient naturalmonopoly, which can be either • exploited monopolized e.g. by ILECs • or kept dormant end-user ownership e.g. Telecottages End-User Ownership of Advanced Fiber Networks

3. consequences dictated by technology and economics • End-User ownership of AFN • asymmetric pricing (CAPEX, outsourced ; OPEX~zero) • separate provisioning and operation • with no fee for transport over the networkbecause there is “bandwidth to spare” and • incipient natural monopoly is controlled (kept dormant)since end-users do not exploit themselves • Expected, desired result: • provisioning of network through competitive bidding • open network • not vertically tied to Content, Applications and Services End-User Ownership of Advanced Fiber Networks

4. consequences of ILEC (regional) monopoly • ILEC monopoly ownership of AFN • embraces the Incipient Natural Monopoly and maximizes revenues fromend-users, as compelled by fiduciary duty • charges monopoly-fee for transport over network,even though there is “bandwidth to spare” and • follows monopolistic strategies throughout network by permitting transport only of Content, Applications and Services that can be: controlled  vertically-tied  limited  censored • expected result: • closed, monopolized networks • a “Digital Grand Canyon” of unserved regions End-User Ownership of Advanced Fiber Networks

5. consequences of ILEC (regional) monopoly – endgame • expected result: • price wars with prices approaching zero • reconsolidation to form larger (national) monopoly • “Googin’s Law” (Roxanne Googin is a leading Telecom investment analyst) “Consider Googin’s 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.’ ” – The Cook Report, page 98, April-June 2003 • IEEE-USA Workshop Report http://www.ieeeusa.org/committees/CCIP/Broadband03report.pdf • telecommunications sector instability warnings have materialized End-User Ownership of Advanced Fiber Networks

6. ILEC regional monopoly natural monopoly exploited costless transport, but with monopoly pricing requires additional sophistication for billing and profit maximization increases CAPEX increases OPEX ILEC seeks “CAS over network only with its permission”, to control network and vertically tie transport to content, applications and services stifles innovation deployment follows market-based business model: 3-yr payback; maximizing return implies “cherry picking” network deployment sites leaving large, unserved areas End-User ownership natural monopoly controlled costless transportencourages peering requires only basic monitoring and congestion control smaller CAPEX OPEX approaches zero end-user seeks open network, to foster “competition on the merits”among content, application and service (CAS) providers encourages innovation likely to require “customer-enhancing”participation by municipalities (telecottages)to prevent or overcome “Digital Grand Canyon” of the unserved i.e., AFN can be either controlled… or exploited… End-User Ownership of Advanced Fiber Networks

7. implications of proposed U.S. government regulation • FCC Triennial Review and Proposed 03-36 Ruling: The proposed FCC ruling following its Triennial Review essentially would let existing telecommunications regulations for narrow band technologies stand; set few if any rules for broadband “fiber” technologies. • These rulings would effectively require ILECs to follow regional AFN monopoly incentives to match regional cable monopolies of multi-systems operators (MSOs). • ILEC decision-makers, as stewards to their investors, would have no choice but to exploit the incentives of their regional monopolies • Regional monopolies would result in a “Digital Grand Canyon” for citizens residing in areas that are not economically attractive End-User Ownership of Advanced Fiber Networks

8. achieving fiber to the home Question: • How, then, do we achieve Fiber To The Home or to the telecottage and “leave no child behind”? Answer: • Leave no town behind! • begin with enterprises, private sector and public • creates proliferation of network junction points • reduces the barrier to entry for FTTH (next slide) • deploy “micro-conduit” (slide 10) • facilitates end-users owning infrastructures for FTTH-step • or, municipalities emulate telecottages, awaken and act as implicit enterprises: deploy AFNs as customer-empowering networks and “take credit” for benefits to residents End-User Ownership of Advanced Fiber Networks

9. reduce the barrier to entry for FTTH • create a plethora of network junction points End-User Ownership of Advanced Fiber Networks

10. reduce the barrier to entry for FTTH • provide micro-conduit, “blow” fiber from the home to junction point at low cost End-User Ownership of Advanced Fiber Networks

11. conclusion • Quick case studies • Korea and Japan are experiencing price warsamong competing ILECs (predicted, unstable) • can result in reconsolidation into full monopoliesof communications infrastructure (undesirable, unstable) • Instead: neutralize the monopoly with end-user ownership of communication infrastructure • Facilitated by: Telecottages, municipalities, etc. End-User Ownership of Advanced Fiber Networks