by Dana Blankenhorn
  Volume VI, No. XVIII

 This Week's Clue: The Telecom Crash of 2002

For the Week of May 6, 2002

This may come as news to you, but Worldcom will not be the last big telecomm power to go bankrupt. Bernie Ebbers won't be the last such executive to get the Ken Lay treatment .

The expected bankruptcy of the largest Tier One Internet Service Provider follows the bankruptcy filing of Global Crossing, and the more-recent filing of Williams Communications . Sitting in the bankruptcy waiting room are such companies as Qwest and AT&T .

Do you notice the pattern? All these filings prove the same point, Moore's Law applies to fiber. Because fiber capacity can be expanded exponentially using Wavelength Division Multiplexing, with capacity increasing by a factor of 1,000 , the billions of dollars invested in the 1990s ringing the globe and every major city with fiber can't be recouped. Infinite supply and a finite demand creates a price of near-zero.

Since Internet telephony has also been incorporated into phone switches over the last few years, turning voice into bits, long distance voice prices too are plunging toward zero. The latest estimate I read was that it costs 2/10th of a cent per minute to move a long distance voice call, and 155 Mbps fiber lines were recently leasing for as little as $15,000 per month . Those 10-10-220 calls (run by Worldcom) are a major rip-off.

The billions of dollars invested in fiber throughout the 1990s were invested based on the assumption that the value of fiber bandwidth would rise over time, due to increased demand. But even if phone companies, cable companies, wireless providers and ISPs had managed to convince people to buy broadband, even if sites were free to deliver broadband content, and even if everyone had "last mile" services at affordable prices, Moore's Law would not have kept bandwidth prices level. It's not just a matter of having everyone wired to broadband, but of everyone demanding the services of broadband at once, that fills those fiber pipes.

Moore's Law is putting all of the telecommunication industry's big balance sheets - voice and data, national and international, wired and wireless - in the dumper. Since it's cheaper to buy an "all you can eat" long distance plan from a cellular provider than a wire line carrier, AT&T and Sprint are just as threatened as Worldcom. This competition will eventually put cellular providers under pressure. Moore's Law operates everywhere, meaning such giants as Deutsche Telekom, British Telecom, and Cable & Wireless are all under threat.

I've been warning about this for years. But it doesn't really help to be right.

The question is what will we do about it? In Net Paradox (http://www.netparadox.com/) David Isenberg and David Weinberger propose that governments take major networks out of bankruptcy and run them as public utilities. In his latest "Cook Report" Gordon Cook claims the ILECs, or the "Teleban," are succeeding in getting government policies that force consumers to buy their monopoly services at monopoly prices.

But even a government bailout of the ILECs and re-monopolization on behalf of the "Teleban" would be a short-term fix. Moore's Law is irresistible, and it applies to radios, not just fiber. Other nations are applying this Moore's Law of Radios to their own wireless worlds, so American intransigence could mean Mexico or even South Africa will have better service than Americans within the next five years. In any case, America's monopoly of telecommunications capacity is going to end, because it's so cheap to reproduce it.

Even if you're totally "clued-in," Moore's Law means that billions of dollars in long-term debt, originally rated AAA, won't be repaid. It can't be, because the customer revenue needed to repay it can't come in.

The first point to be made today is we're just at the start of this crash. Enron, which was highly leveraged based on rising bandwidth prices (it tried to make a market in the stuff), was just the tip of the iceberg, the canary in the mine shaft. These early-year bankruptcies are like the recent calving of the Ross Ice Shelf . The actual event is like global warming, only in fast-motion.

The second point is that this doesn't completely sink the telecommunications equipment sector. Moore's Law means that wireless broadband will continue to improve, and thus such "last mile" solutions will find a market. New fiber routing systems and diodes that increase fiber capacity will continue to be sold, to someone, because they do pay for themselves. But a lot of people talked in the 1990s about the idea that "bandwidth is free" and as they get their wish some will find it a nightmare.

How should we deal with this? The first and most important thing to do is go through the grieving process, starting now. We're still in denial - we need to reach acceptance. This is a titanic financial event, and given the inter-relationships between the public sector and telecommunications (financial interdependencies in many developing countries) it's going to pop to the top-of-the-stack for real policymakers, not just elites. Left unmanaged (and it's unmanaged today) we're talking about a reversal of the recent "recovery" by the third quarter, with many of our very-best jobs disappearing. We're talking about a deflationary spiral rivaling that of the 1930s.

What's the solution? Government will have to step in and buy this unused capacity at some point, spinning it out (hopefully at a profit) following a reorganization. That's what the laws of capitalism demand - stock and bondholders made mistakes and must pay. It's funny, though, how many "market conservatives" will be calling for bail-outs in the next few years. When they do, bring a laugh track.

There's another lesson. Connectivity by itself is worthless. Only services, content, and software are meaningful. There must be a market negotiation to value services, content and software, in a world where their delivery costs nothing. Trying to ban technology turns the economy's chief profit-center into nothing but a cost-center. This can't be borne.

There's a lesson for you and I in all this as well. Make something unique, then make something else. This is something folks in the computer business have accepted for decades. It's the only way out of Moore's Law. And it's coming to a telephone near you.


SSP (Shameless Self-Promotion)

It's here! Yes, the PDF version of "Living on the Internet" is finally available for purchase at eBooks.Com , hyperlinks and all. More outlets are being sought, and the November update will go to all buyers who notify me (and other interested members of this list) as soon as it's finished. (Whew!)

You can join the A-Clue.Com discussion at I-Strategy , our shared e-mail digest produced with Adventive.Com. You can also read me at ClickZ , BtoB , and Boardwatch . I'm also on the mast-head at Bottom Line Personal , a great print newsletter. Remember that it's journalism that keeps the Clues coming...


Shameless Promotion

The Great Jerry Pournelle said it best. If you don't know what you're doing find someone who does and pay them what they're worth.

This is as true for Web site design as for anything else. Since 1997 I've been doing a-clue.com myself, as a labor of love. While I love the labor, there are some things I'm just no good at.

Fortunately I not only found someone who is good at those things, named Bill Stocking of WebSiteRevamp.Org , but I'm able to pay him something less than he's worth, because he's priceless. If you're not a Web site designer and you want better results give him a call.

Bill's also the person who re-designed this newsletter and he did it with only a few hours notice.


Shameless Non-Profit Promotion

Would you like to make some money for yourself, and a good cause? Bob Adams, a long-time A-Clue subscriber and friend, heads a very entrepreneurial non-profit humanitarian agency, the Global Development Center (GDC). GDC has set up a new project, Family Message on the Internet. This offers a private, inexpensive alternative to phones and e-mail for maintaining contact with family members and loved ones during a crisis. It's a response to 9/11, but not just another "victims fund". It's a service people will sign up for because they want it.

There's an affiliate program, which I have joined. You can get a 30% increase in your return if you sign up as an affiliate through this ad. Here you'll find his special offer . Everyone can profit from this, including people in real need.


Takes on the News

The Internet City

One of the great mistakes made during the Internet Boom was in assuming that heavier use of the Internet would make people better.

The mistake was made because so many "early adopters" of Internet technology found their lives much improved. Educated, moneyed people from around the world were brought together based on shared interests, in an environment where rules were enforced as in a small town. It was a small town. People who flamed or spammed or hacked were shunned, and an intelligent person can only scream into dead air for so long before getting the message.

As the Internet became a megalopolis these social strictures evaporated. Muggers, molesters and thieves could hide behind their anonymity and prey on the innocent. Most Internet "scandal" stories, even today, are of the small-town boy (or girl) goes to big city and gets mugged variety, and it's much easier to blame the city than the criminal .

In the mass market Internet, people are more themselves than in the small town Internet of the past. They pass their online time in well-trod paths, trying to recreate the small town feel in their old neighborhoods. They do rely on brands, even media brands, to tell them what's worthwhile. Thus traditional "gatekeepers" returned to their roles.

In the wake of the Internet Bust we've seen, not just financial losses, but what appear to be philosophical ones as well. People have adapted the Internet to fit their existing patterns and lifestyles. It's an adjunct to TV viewing, to religious or political faith, or (more and more often) to your job. When it's part of your job, it's not a lot of fun. As unemployment has grown (and it's chronic in most countries) spamming and hacking have been transformed from annoyances into big business (and some allege, government policy but all this is just another form of work.

When recession hits a city, like my home town of Atlanta, taxes go up and services decline just as needs increase. We go from an unsustainable height to a (seemingly) unsustainable low. But the low is sustainable. People re-adjust their expectations downward. U.S. information technology salaries are down this year from last , and people are thrilled to have those jobs. Those who had saved are sustained, those who didn't lose their homes, but the organic process always leaves survivors, waiting for new growth and change.

That's what is happening in the Internet city. We've gone from Tombstone to Los Angeles in five years. What this Internet city needs to get past its present troubles is what the great American cities have, transparency. Transparent governance, transparent markets, and a simple coherent statement of our rights and responsibilities as Netizens. Absent that we'll see mere assertions of authority, and a growing chance of cyber-violence threatening to tear the fabric of this online society. Perhaps it will take a cataclysmic event - a cyber-version of September 11 - to concentrate minds on the needs of this Internet City. I pray that's not the case.


Rendering ISPs Gutless

Whether you're running a server or a client, on a T-3 or a dial-up, there's one thing every user needs more than anything else on today's Internet.

That something is a firewall.

The need for universal firewalling has become evident with the rise of Klez.h and Klez.e , two new worm programs. These are especially nasty creatures, since they attack anti-viral programs, insert new viruses , and appear with random "from" addresses and subject lines in user mailboxes. . They not only are impossible to identify easily in an inbox, they can also be activated when you just mouse-over a message. Even if you have an anti-viral, in other words, you might become infected.

I got dozens of copies of the Klez bugs yet remained uninfected because the personal firewall on this line (it happens to be ZoneAlarm Pro) changes the extension on all incoming attachments. This disables viruses and worms until a user agrees to load or save them. The same thing happens when friends or vendors send any attachments, even simple ones like hyperlinks.

Even dial-up customers can acquire free versions of these firewall programs . If you don't have one, get one now.


The Myth of the Golden Shield

The NetParadox is that the best network is the simplest and least profitable. The same applies to eBooks.

Moore's Law has kept generations of eBooks down. By the time a $300 design, any $300 design, could be mass-produced and sold, it was obsolete. There were things the product couldn't do, there were better parts out there.

What's needed is a format that's cheap, flexible, and disposable. (Maybe Gillette should make them.) The latest design to come down the pike is just one more step along that long road. Samsung's format is more readable than previous versions, it folds shut, it's power requirements are low, but it still has a long way to go. It costs too much, for one thing. We need to get the retail price down to about $20. It also needs to be able to read multiple formats, downloadable from a PC or server (which are becoming the same thing).

A successful eBook must be cheap enough to be given away at a library, as readable as today's best flat screens, small enough to fold into a pocket, rugged enough to be dropped on the floor, or be read on a beach. Some say this can't be done. Maybe it can't be, today. But Moore's Law says it will be done, and probably sooner than the pessimists think.


Clued-in, Clueless

Clued-in is Marketwatch.com buying the Hulbert Digest as the anchor for a new subscription business.

Clueless is Cox Enterprises' latest Internet reorganization . I can make them a success with one word - directories. Journalism organizes markets better than phone companies. If BellSouth won't get out of the way, just license the needed data from InfoUSA, then add content to sell against it.


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