Horizontal vs. Vertikal

[Heiko Recktenwald <uzs106@ibm.rhrz.uni-bonn.de>]

Abregende Ueberlegungen, ICANN als Staatsanwalt etc.........., Cabel vs.
ISPs, viel Spass, wenn sowas Spass machen kann, wie immer grosse Entwuerfe
und Fallstudien, muessen Schueler sowas wissen ?

---------- Forwarded message ----------
Date: Tue, 5 Oct 1999 01:10:40 -0400
From: Gordon Cook <cook@cookreport.com>
Subject: December 1999 COOK Report - Regulator's Dilemma


Regulator's Dilemma -- Cable versus Internet & Vertical versus 
Horizontal Organizing Paradigms for Equinix, VCs and ICANN

Some Notes from your Editor.  In preparing this issue I have been 
doing much thinking about how to view Internet technology from both a 
business and regulatory model.  Four articles have forced this focus. 
Three, one on Equinix Internet Business Centers, one on venture 
capitalists and one on ICANN are published herein.  The fourth on the 
issue of how Internet Access to cable networks in Canada could become 
the focus of a new regulatory paradigm is by Francois Menard. It 
couldn't be finished in time. I anticipate being able to publish this 
as a part one of the January 2000 COOK Report within a few days after 
I return from Nepal on November 6th.

This article grew out of conversations with Francois Menard who has 
been looking very closely at the dispute between Videotron and 
Canadian ISPs over Open Access to Videotron's cable network in 
Canada.  From the framework outlined in "Netheads versus Bellheads" 
(www.tmtendon.com), Menard has applied his understanding of the 
technology to make some persuasive arguments about the choices facing 
Canadian regulators. As I read his drafts I pressed him to elaborate 
on and generalize the assumptions that he had applied.  The result 
has become a rough draft of a document that I believe carries forward 
the ideas expressed in Netheads versus Bellheads. The conclusions 
that are so well founded that they may become extremely compelling 
basis from which to rethink current regulatory approaches to 
telecommunications.  I want to use this preface to summarize my own 
understanding of the issues involved and to alert my readers to some 
things to think about between now and my publication of his completed 
piece in mid November.

The Impact of the Internet on Technology Development and Regulation

We are looking squarely at a situation where the pace of technology 
development has outstripped the ability of politicians and regulators 
to deal with it.  We need to remind ourselves that - from the 
introduction of the telegraph 150 years ago through radio, telephony, 
and television -  telecommunications technologies have grown and 
prospered as vertically integrated businesses with heavy emphasis on 
infrastructures which to be need regulated as natural monopolies in 
order for them to grow and prosper and to serve thereby the public's 
needs.  Such technologies often included proprietary twists designed 
to give one large corporation's vertical monopoly a competitive edge 
over another's infrastructure.  Significant  economic inefficiency 
was produced by each company having to build its own distribution 
infrastructure. This then led to a situation where companies could 
turn to regulators and plead for protection. They would argue that 
they could only afford to undertake the expense of an upgrade to 
their infrastructure if they were promised that they would not be 
required to share it with competitors.

During the past 25 years Moore's law and the TCP/IP protocol have 
built a very different foundation for telecommunications. 
Astonishing advances in integrated circuitry have created a situation 
where equipment needed to add requisite intelligence to a 
telecommunications network was no longer so terribly expensive that 
it could only be afforded by a vertically integrated monopoly. For 
example a PC having the power of a minicomputer of a decade ago now 
costs as much as a television set.  With the release of the Apple G4 
the computational power of a 1990 supercomputer is yours for $2500.

The second part of the revolutionary wave facing us is the impact of 
the TCP/IP protocol.  IP gave us generic "envelopes" into which 
binary data could be dumped and sent via basic transport protocols 
across a network for processing at ever more intelligent endpoints on 
the desktops of users. This is the essence of the "stupid network" as 
argued by David Isenberg in 1997. Just deliver the bits. For the 
first time a horizontally oriented telecommunications infrastructure 
could be built via inexpensive technologies with companies invited to 
plug into each other tinker toy fashion.

Those operating under this world view merely offer others TCP/IP 
bandwidth into which they may plug their networks.  Bandwidth 
providers can interconnect and, just so long as they use the same 
public domain interoperable protocols, they can focus on an effort of 
interconnecting separate and individually owned infrastructure. 
Because this infrastructure does not have to be vertically 
integrated, it can be plugged together in chunks like building blocks 
of Lego or the Tinker Toys of an earlier generation.

This infrastructure does not need a single central authority point 
since the reliability of the network is governed by the TCP/IP stack 
residing inside each user's machine talking to the TCP/IP protocol 
stack resident within the machine elsewhere within the network with 
which the user communicates.  The value of the resulting inter 
network was enhanced not by any one company's vertical market share 
but rather by the size of the network measured by numbers of 
computers connected.  The costs of interconnection and transportation 
continued to plummet as expensive telephony oriented transport 
equipment such as SONET and ATM could be replaced by generic and 
inexpensive Ethernet.  Ethernet is now reaching speeds of ten 
gigabits per second and threatening to become a universal transport 
protocol from desk top to desk top across the wide area network of 
networks known as the Internet.

Suddenly a structure based on new technology and only partially 
overlaid on the public switched telephone network had developed. 
This technology operated on a fundamentally different business model 
and philosophy from that of the public telephony network.  But by 
late 1999 every one who looked at the new century ahead realized 
that, in less than a decade, TCP/IP had enabled Internet technology 
and, had created an infrastructure which unless it is choked off by 
regulation, will soon overtake the PSTN in traffic and equal it in 
size.

Growing a Stupid Network to Match the Intelligent in Size

The Internet operated from a suite of shared open protocols designed 
to make it easy for any interested company  to inter network and any 
applicable technology to inter operate. This new telecommunications 
model was designed to break down vertical barriers.  By using a 
common protocol that could encapsulate vastly different 
communications media, the Internet enabled a seamless interweaving of 
data, voice and video on its physical transmission media.  A 
continuous flow of statistical multiplexed connectionless traffic 
filled the wireline infrastructure with an efficiency not attainable 
by bursty, connection-oriented traffic that was either voice, video 
or data.  The cost of delivering the bits to intelligent user 
endpoints at the edge of the network was headed downward in a way 
that gave the vertically integrated dinosaurs much heartburn.  Worse 
yet, from the big corporate point of view, was the fact that the 
economies scale behind this new telecom model encouraged horizontal 
cooperation between companies that could serve as specialists for 
outsourcing services desired by end users. For example, EarthLink 
could employ one company to maintain its customers' email services 
and another to do its web hosting. The efficiencies of horizontal 
cooperation also made it possible for end users to compete 
successfully with vertically integrated empires in delivering their 
own content.

The vertically integrated telcos were supposed to be natural 
monopolies because of the vast size of their wireline networks, built 
by billions of dollars investment over several decades. It was 
assumed that such fully connected infrastructures could only be built 
over the course of  decades.  And yet with the flowering of the 
internet paradigm at least four new national fiber networks (Qwest, 
Level 3, Williams and IXC) have blossomed in the past five ears.  A 
concentration on horizontal inter operable inter networked services 
has enabled a previously unimaginable increase in the total size of 
the telecommunications pie.  Qwest has grown from revenues of nothing 
to 2.2 billion in 5 years and is now acquiring US West with revenues 
of 12 billion per year. Internet growth in bandwidth consumption 
continues to double every six months and is moving into entirely new 
areas of human commerce and information sharing .

This growth of the unregulated, horizontally inter-linked Internet 
has enabled an entire new blossoming of telecommunications technology 
where venture capitalists fund entrepreneurs to develop new 
technology which cannibalizes other new technology at maximum speed. 
Given the business model and operational organization of the Internet 
and Internet savvy companies, the continual innovation of Internet 
is desirable in a way that is incomprehensible to those in the older 
more conservative vertically integrated telco structures.  The 
interview with Flat Iron Partners in this issue is designed to give 
readers a taste of how venture capital inter operates to fuel the 
growing Internet.  Given an adequate understanding of the operational 
paradigm described herein VCs will easily come to understand that 
despite the pleas of Vint Cerf and John Patrick, giving money to 
ICANN is contrary to their own interests.

The Equinix interview that is this issues' lead article will help 
readers to understand how the success of the internet's horizontal 
value proposition created an environment where the first vertically 
integrated ISPs found that they could prosper only by outsourcing 
functionality to specialists.  Such functionality runs the gamut from 
web hosting to email hosting, to modem pool provision, to Internet 
telephony settlement services.  Equinix is bringing service providers 
of all kinds together into neutral business centers where customers 
are able to locate and sell their services to ISPs without 
supervision or regulatory interference of any kind.  The purpose of 
the Equinix Exchange is to facilitate all levels of interconnection 
and to make changing one's internet connections as easy and 
inexpensive as possible.  Equinix Exchanges serve as collection 
points for the same unbundled layer 3 services that Menard is 
positing as the foundation of a new regulatory paradigm.

The Equinix business model could not operate within a vertically 
oriented regulatory market.  Furthermore, regulators attuned to such 
a tradition have a vertical frame of reference. To them everything in 
the horizontal plane that intersects their vertical world view looks 
like a point. They simply cannot see the horizontal possibilities. 
To them the intersections in the plane appear like a bunch of 
unrelated dots.  On the other hand to those operating from the 
horizontal Internet perspective voice and data packets look 
absolutely the same and should be treated the same.

However, if one looks at the horizontal plane on which the ISP lives, 
each intersecting intelligent network service also is seen as an 
unrelated unconnected dot.  Each service is merely something that can 
add value at the third or IP layer of the ISP's network more cost 
effectively with its new stupid network technology than it can add 
value as an overlay of a telco "intelligent network." From the ISP 
point of view, entire vertical telco infrastructures may now be 
contained in just a single Dense Wave Division Multiplexing lambda 
(color) set up by the fiber provider with a few clicks on a web site. 
It is also a bit ironic that, in terms of this paradigm, national 
fiber based infrastructure providers are thriving by providing dark 
fiber services, while ILECs feel that their local copper plants are 
their worst liability.

A Single Point of Failure

Unfortunately in the process of  scaling the distributed technology 
of the Internet,  the Domain Name System developed by Paul 
Mockepetris in 1986 was designed in such a way that it  was subject 
to central control. With the rise of the web people accepted as fact 
that DNS was the means for a user friendly form of  address and did 
not debate whether the existence of a single root for the 
hierarchical DNS to point to was risky in that it was a single point 
of control in an otherwise utterly decentralized system.

Those who saw the enormous economy of such a system also saw it  as a 
threat to their vertically integrated empires.  To defend themselves, 
they fashioned a strategy of using the ostensibly neutral Internet 
Society as a magnet around which to organize participants from the 
vertically integrated telecom industry and content -trademark 
industry in an effort to organize ICANN.  Those tied most strongly to 
the old vertically integrated view of technology (IBM, MCI, ATT) came 
together in ICANN.  In doing this they turned ICANN  from an 
allegedly neutral coordination body for internet plumbing into a body 
which in October 1999 is poised on the edge of monopoly control of 
the internet's DNS.  The existence of a single root system for 
resolving internet addresses made it possible for those with the most 
to lose from the success of the internet's continued growth to 
fashion ICANN as a regulatory system which would impose a vertically 
integrated monopoly of control on a system that was beginning to 
threaten an installed base worth hundreds of billions if not 
trillions of dollars. ICANN will use network technology to fashion 
itself as an archaic central authority. This is the lesson of the 
ICANN article to be found on page 13 of this issue.

We must understand first that economic gains in telecommunications 
have always come from new entry into the marketplace and not from 
improved regulation.  As the  is pointed out below, in the Internet 
we have a set of technologies that, if they are not disabled by the 
by the politicians and regulators, can enable affordable broadband to 
the home immediately.

One must recognize that two different platforms based on different 
business and financial models are set to compete for 
telecommunications at the local loop.  One business model would 
appear to be a choice of service from a single vertically integrated 
giant telco on the one hand for cable, telephony, wireless (PCS), 
internet, content on demand all brought to us on a DSL enhanced 
copper or coax based local loop.

A competing business model may be found in Canada.  There as he 
deploys the IP over fiber CANet III, Bill St. Arnaud has concluded 
that, if aggregated horizontal services were brought in to homes in 
urban areas netted as much as $100 per month per house hold, a fiber 
based loop company working as a neutral carrier for various services 
could being fiber to the home.  No one is asking for unbundled layer 
3 services (horizontal plug-ins like IP Telephony, web hosting and 
email) to be given away.  Regulation should encourage the owners of 
the copper plant to stick to a schedule for replacing the copper with 
fiber to which any and all service providers should have equal 
access. In the US perhaps the universal service fund could be used as 
a means of weaning away the operators of the intelligent network from 
their bell headed tools.  In other words owner of the fiber local 
loop should be treated as a common carrier.

Menard writes in a draft of the paper he is preparing: "The layered 
model of the Internet, which has been previously explained by the 
authors in Bellheads vs Netheads (www.tmtendon.com), makes it 
possible for common carrier obligations to be enforced at a higher 
layer than the physical one. Doing so can finally ensure a viable 
regulatory framework that allows facilities-less INTERNET competition 
with horizontally specialized services to compete with 
facilities-based competition with a monopoly on vertically integrated 
services."

How to sum up?  Regulators, given their vertical mindset, seem to 
have let the Internet progress as far as it has almost by 
inadvertence.  Given the state of technology,  Menard believes that 
now they will have to do one of two things.  Either tell Internet 
users they made a big mistake and that since they must will maintain 
their vertical mindset, then users had better prepare for a much more 
centralized marketplace with several orders of magnitude fewer 
providers or that regulators must embrace the concept of level 3 
unbundling. This will force facilities based players like Videotron 
to let ISPs pay appropriately for the privilege of using their 
infrastructure.  The ISPs will be free to compete with Videotron by 
using their knowledge of the capabilities of the technology of the 
internet in  more creative ways than has Videotron.

As Menard is finding (we intend to present his findings in our next 
issue) the onward rush of horizontally based internet technologies is 
running finally headlong into the entrenched interests of the 
vertically integrated telcos which are propped up by many decades of 
entrenched regulatory mindset and political payoffs.  The battle for 
the future of the Internet may well lie in the industry's ability to 
understand its assets and educate both regulators and politicians 
into an understanding of the consequences of moving forward without a 
clue of the nature of the fundamental incompatibilities of these 
different world views.


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