The Road to Innovation is Open

The fiber to the premises initiative now being formulated by Lafayette Utilities System (LUS) holds tremendous promise for the Hub City. The prime attraction for many proponents of the idea is the economic and community development benefits that will flow from connecting every business and residence in Lafayette directly to a high-speed fiber optic network.

LUS leader Terry Huval has, in presentations to the Consolidated Government Council and other public forums, made these economic and community benefits a major selling point in his effort to convince the public that this project is a good idea for Lafayette.

But, the decisions being made now out of public view and with no public input could inadvertently undermine the value that this initiative could bring to Lafayette. There is evidence of this, too, in those presentations. The chief piece of evidence is the fact that the business model that LUS has chosen tracks that of cable system operators. The initial revenue projections used for project evaluation purposes rise or fall on the ability of LUS to win customers for its cable television.

The trap inherent in this business model for this LUS operation is that it is apparently leading our utility to adopt a core business strategy of the cable companies; that is the strategy of blocking access to the network by other service providers. This closed network approach will cap the potential of this community investment to unleash the capacity and potential of the individuals, institutions and businesses here to innovate and prosper.

By restricting access to the fiber network solely to the services it decides to deliver, the potential of this network will never exceed LUS’s capacity to innovate. LUS is a solid public utility, but — like the cable and phone companies — they have no record of technological innovation. This closed network strategy runs counter to the entire history of innovation on the Internet, where fierce competition among service providers spurred innovation as a source of market and product differentiation.

The closed approach to network development is the same approach the private sector cable companies are fighting in the courts to preserve. It is a concept that the Regional Bell Operating Companies (RBOCs) have recently won for new network buildouts. That the cable and phone companies have taken this approach should come as no surprise; closed networks are in their respective corporate DNA. But it is difficult to name a single innovation that either a cable or phone company brought to the Internet, while there are numerous instances of those companies, in fact, fighting to prevent companies with innovations from bringing them to market over their networks.

As amply demonstrated by the arguments being made against the LUS initiative by representatives of Cox Communications and BellSouth, private sector companies let their bottom lines guide their corporate investment decision-making. That is why neither Cox nor BellSouth intends to make fiber to the home investments in Lafayette in the foreseeable future and, when they do decide to make those investments, they will not be made to all of Lafayette. Closed networks are consistent with a corporatist perspective that discounts or ignores the impact of network investments on communities. The very process of deciding to deploy a fiber to the premises network in Lafayette sets LUS outside such a corporatist approach — just as the decision over 100 years ago to create a municipally-owned power system set the entity outside the realm of investor-owned utilities.

Closing off this fiber network to other service providers is in direct opposition to the notion of maximizing the value of this investment to the community. The real technological, economic and community development win that this network can deliver to Lafayette is to make this network and this city a hotbed of network service experimentation and innovation. That is, use the huge capacity of the LUS network to attract companies to Lafayette who are developing new approaches to content delivery, new paradigms of producer-to-consumer and consumer-to-consumer relationships using Internet Protocol based systems.

One of the paradigms threatened will be that of the cable system operator business model. An LUS system centered on that business model will have a very tough time letting that model be undermined by services delivered over its own network, but that is exactly what LUS must be willing to do if this network investment is to deliver on its potential to this community.

There is evidence that the cable system business model is already coming under attack. The key to escaping what could become a fiscally driven move to cap the potential of the proposed network is to peer into the future and figure out where this is heading. That is not only possible, it is essential. But, before going forward, let’s look morel closely at the root of the problem of closed networks.

This Wire Is My Wire, It Is Not Your Wire

The core of the claim that phone and cable companies make in favor of closed networks is that this is the only path that affords fiber network builders the revenues needed to recoup the investments in those networks. It is a nice theory, but it is not supported by the facts. This was demonstrated pretty conclusively in a number of studies, prominent among them is "Access and innovation policy for the third-generation internet" (PDF) a multi-authored piece that has appeared in at least two forms in various publications. A new book on the virtues of open networks is edited by Mark Cooper of the Consumer Federation of America and published in July by Stanford University Law School's Center for Internet and Society entitled The Public Interest in Open Communications Networks. These documents go into pretty exhaustive detail about the relative merits of open and closed networks, their impact on innovation, and the economic viability of open networks.

The claim that only closed proprietary networks can pay for themselves does not hold water. As was demonstrated in the earlier, dialup-dominated phase of the Internet, opening networks to other carriers and service providers actually generates more traffic for networks and their owners. Business models that recognize this can tap what amounts to wholesale access sales into significant and rapidly growing revenue streams. That’s how it worked in the dialup era. The economic significance of wholesale bandwidth sales will grow exponentially in the era of accessible, affordable massive bandwidth (as the system being contemplated by LUS will afford customers), where bandwidth demand will be fed by a rapidly expanding array of bandwidth consuming services ranging from interactive gaming to video on demand to services that have not yet been invented.

In the new era of bandwidth availability that LUS will usher into Lafayette, the basic value in these systems will shift from the services themselves to the bandwidth that is used to deliver those services. That is the fundamental unit of value will not be a program or a channel or even phone calls. That value unit will be the packets that will carry those services to business and consumer users. That is where the revenue model for modern networks rests. Even BellSouth gets this!

Internet Protocol: The Ultimate Change Agent

Anyone contemplating entering a mature industry today is obligated to assess the state of technology in that industry. At a conference in Greenville, Mississippi, a three or four years ago, Jim Clinton of the Southern Growth Policies Board, said, “There is no such thing as a low-tech industry. There are companies that have not adapted to using new technology in the industry, but every industry has been touched by technology.” Paraphrasing that statement, I would say that there is no industry that will not be changed by the Internet Protocol; there are only those companies that have not yet adapted to its use or even contemplated it.

The Internet Protocol shifts industry business models. It is shifting the telecommunications industry model. It is shifting the music industry model. It is threatening the movie industry model. It is beginning to change the healthcare industry and will complete that process within a decade.

There is no resisting it. The decentralized approach to network building that the Internet Protocol enables has the tendency to flatten hierarchies and pressure (if not eliminate) middlemen. This is the source of its disruptive power.

Of the three lines of business LUS proposes to enter — cable, telephony and Internet — one is based on the Internet Protocol (that would be the Internet itself) and the other is shifting to an Internet Protocol based model (that would be telephony). LUS will enter telephony as a Voice over Internet Protocol (VoIP) service provider. But, the cable business model has not yet been engulfed by the power of the Internet Protocol. This is part of the fight that cable system operators are putting up against open networks. If their networks are open to other service providers, the cash cow of cable programming fees from consumers is will be jeopardized by the Internet Protocol. Let’s look how the Internet Protocol is changing telephony and cable system.

We have already seen ample evidence of the impact of the Internet Protocol on telephone networks. The emergence of VoIP as a commercial service is perhaps the most dramatic example. But the process of converting telephone networks to Internet Protocol has been underway for quite a while, actually. Long distance calls (remember long distance calls?) were the first high-volume voice traffic to be carried over Internet Protocol-based networks. In tactics that presaged the arguments against the LUS project now being made by Cox and BellSouth now, local phone companies were arguing against the viability of VoIP while they were at the same time paying other companies to use that technology to connect calls between area codes.

Today, that technology has made its way into the hands of consumers and businesses through companies like Vonage, MCI, Sprint and AT&T. Any phone company that sells flat rate service for local and long distance calls is using VoIP extensively in their network.

But, as was the case earlier, the Internet Protocol is intent on smashing even those VoIP Service business models. How can that be? The answer can be found on your nearest computer that has AOL Instant Messenger (AIM) or Apple’s iChat program on it. Using those programs, you can carry on live conversations with other users of those programs no matter where else in the world they may have their Internet connection. This service does not require any fees above and beyond the cost of owning a computer and getting the free programs. AIM comes as a standard piece of Netscape and Mozilla browsers. iChat is a standard piece of the Apple operating system. They are fully compatible with each other.

What is missing from these connections? There is no service provider charging specifically for that service. There are small limitations. For instance, you have to know the moniker of the person you’re trying to contact. And, your computer needs to have a microphone and speakers. But, I’ve take part in these conversations. They’re clear. They’re fun and they’re free.

The point of this is to note that the prediction from about five years ago that was once scorned — that voice would diminish to insignificance as a generator of revenue — is coming to fruition. Think of long distance. Who needs a long-distance carrier when there are cellular nationwide calling plans that don’t charge for long-distance calls — or when there is AIM and iChat?

The companies charging for that VoIP service today make VoIP behave more like traditional phone service with ‘phone numbers’ and other recognizable ‘phone’ elements delivered in the experience. But, as these IM programs demonstrate, those are superfluous bells and whistles put there mainly for the comfort of tech-intimidated adults. Your instant messaging kids will have no use for those services and probably will not tolerate the costs.

There are signs, limited but clear, that the cable industry will soon enter a similarly disruptive phase, unleashed by the Internet Protocol.

One harbinger of what is likely to follow came a couple of months ago when RealNetworks, Inc., and the cable movie network Starz announced a deal which will allow customers to buy up to 100 movies a month from Starz for download onto their computers (or Tivo!) which they can then view whenever they want during that month. What is missing from this picture? A cable system operator like, say, Cox Communications or, one day, LUS.

Companies like Cox and BellSouth are converting their networks to Internet Protocol infrastructure because the protocol reduces the cost of operation of the network, the cost of provisioning services and updating the networks. But, that shift engenders other shifts that rattle through the organizational structure and business model. More drastically, Internet Protocol empowers customers and content producers to connect directly to each other, eliminating some of the intermediaries and their services that happen to produce the revenues on which those intermediaries run their businesses.

Cable companies have not yet reacted to counter the Real/Starz alliance, probably waiting to see if it gains any traction. But, can these companies allow these new kinds of relationships to develop when they bypass the core revenue-generating paradigm of the business?

Another recent occurrence indicates that at least some cable companies have decided that they cannot allow such innovation to take place — at least not without a fight.

News.com reported recently that some cable providers were blocking their customers from using commercial VoIP services over their networks. Those cable companies said the blockages were not intentional, but the ability of the companies to block such services was clearly demonstrated. And, with a growing number of cable companies getting set to roll out VoIP services of their own, their closed network philosophy gives them the logical basis to cut companies like Vonage out of the deal if for no other reason that it would adversely impact the business viability of their own services.

This is precisely the behavior of the pre-breakup, closed network era of AT&T and later it’s RBOC offspring that kept out of the market those technologies that threatened their sacred cash cows.

The disruption of the cable industry business model will likely follow the recognized pattern of tech innovation adoption identified by Everett Rogers, namely a gradually upwardly moving line of those interested in using the new services until a tipping point is reached at which point a massive technological shift driven by customer choice and usage is underway. Business models get tipped right along with the technology.

Like the recording industry, the cable industry will resort to various tactics to attempt to halt this disruption. Can they succeed? Possibly, since the cable companies will have sole control over their networks. But, at what cost will that success come? It will come at the expense of the kind of transformative innovation that was unleashed in the earlier phases of the Internet. And, what was the touchstone in that earlier era which enabled and fed such ferocious innovation? Open access to networks.

So, the price of the cable companies and phone companies successfully defending their business models will be reduced or significantly slowed innovation. If LUS adopts the cable industry approach of restricting access to their network they will build into their operation the very forces that will undermine potential that this community investment in that fiber network holds to vault Lafayette into the forefront of technological innovation and usage. The flip side of that coin is that, by building an Internet Protocol based network, LUS will be unleashing the very forces that will work to disrupt the cable business model that resides at the core of what appears to be its approach to this project.

The basic assumption in the cable business model is that the true value of those systems resides in the services delivered, not in the network itself. This perspective is an artifact of the earlier era of bandwidth scarcity which gripped both the phone and cable industries. But, with LUS delivering Internet Protocol based Ethernet packets over that fiber network to every business and residence in its service area, the value shifts to the packets themselves as the services move towards commoditization.

Open for Business

Could LUS find customers willing to buy enough bandwidth to replace the revenue that it might lose by giving up exclusive rights to access to its network? Without question. That’s because the LUS fiber to the premises initiative would radically lower the cost of entry into the Lafayette market. Rather than have to build their own networks in order to reach Lafayette customers, companies could buy wholesale access to customers via the LUS network and begin rolling out services just about as soon as they could set up shop. Remember, LUS is not shutting down existing wholesale bandwidth operations that sell services to businesses.

If they could set aside their obsessions for a bit, BellSouth might actually find that to be a very attractive offer. Consider the competitive bind in which they now find themselves in Lafayette. Make no mistake about it; the alliance between BellSouth and Cox in opposition to the LUS project is not a natural one. Cox was already poised to take significant market share from BellSouth throughout Louisiana, where Cox is the largest cable system provider. This is particularly true in south Louisiana, where the Cox footprint extends from New Orleans to the Texas state line.

William Oliver, BellSouth’s Louisiana President, has made clear that the company will not be building a fiber to the premises project in Lafayette (or anywhere else in Louisiana for that matter) in the foreseeable future. The company is clearly waiting to see how far its market share here falls before deciding how much it is willing to invest in new infrastructure in Louisiana in general and Lafayette in particular.

But, Alan Blackburn of BellSouth Science said in at the Louisiana Optical Networking Initiative Conference (LONI) in Baton Rouge last week described a network architecture that BellSouth aspires to that matches up pretty much exactly with that which LUS proposes to build in Lafayette.

Now, if BellSouth could gain access to a spanking new network that will deliver them access to every home and business in the LUS service area, that access would come at pennies on the dollar of what it would cost the company to build its own fiber network here. Would they be interested? Who knows! But it could be a compelling business case if they were, in fact, interested in maintaining significant market share in Lafayette. Certainly, other companies (possibly other RBOCs or even cable companies) would be interested in entering the local market under those terms.

The plan presented by LUS to the Consolidated Government Council and to the public relies on cable service sales to drive the business model of the operation. This will work, but only for a while and probably not for as long as most think. It is not a model that will survive for the 20-year life of the bonds LUS intends to sell to finance this system. As the IP services become more widely available across the country, LUS will have to choose between protecting its business model and enabling innovation. The pervasive availability of IP-based content will have the effect of ratcheting up bandwidth usage by businesses and consumers. One can predict with some certainty that revenue from bandwidth sales will outstrip cable system revenue sales within the LUS system well before the bonds sold to finance this system are paid.

Viewing the LUS fiber to the premises as a driver of economic and civic value to the community, it is clear that the closed network model is a bad fit for those broader interests that fall beyond the balance sheet. With encouragement from the community to remain true to the broad vision that inspired this initiative, to observe and analyze current trends, and to ‘looking down field’ where the technology and business models are heading, we can hope that LUS’s leadership will see that the key to maximizing the power of this tremendous community asset is to make their network open for innovation, because that means business.