HELLERSTEIN TELECOM & TECHNOLOGY REVIEW—Key to Broadband Success: Know Your Customers
Welcome to the November 2001 issue of the HELLERSTEIN TELECOM & TECHNOLOGY REVIEW, a free semimonthly newsletter covering significant industry, marketing, and regulatory developments in the telecommunications and technology industries. This newsletter is published by Hellerstein & Associates,www.jhellerstein.com, a telecommunications and technology research group which provides its clients with a competitive edge through market research, competitive intelligence, and regulatory analysis of broadband access, competition policy, and wireless issues.
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This month’s issue discusses some of the insights gained on broadband deployment from NARUC’s National Summit on Broadband Deployment. Although the summit focused on issues surrounding rural deployment, many of these issues are the same ones that companies in all areas of the country face—basically how to create a profitable business case for DSL. Many of the presenters spoke about the problems facing the Internet marketplace. Some stated that the root of all problems is the lack of any particular vision of what the future will bring. According to Dave Clark of the MIT Lab for Computer Sciences, there was never any over-arching vision or goal of what the Internet should look like. Instead, different companies came up with different ideas and simply deployed them. As a result the Internet and the network infrastructure that supports it was built in pieces. He argued that this lack of vision and view of the future is what is plaguing the sector today. Clark called for the creation of a new public-private dialogue to create a vision or goal for the future of the network infrastructure. He stated that we cannot continue to apply "Scotch Tape" to the existing public and network infrastructure and expect something to miraculously happen. In many cases, the private sector, if left unchecked, may not create an outcome that people need or want. Instead, he called upon government and industry experts to make serious decisions on new infrastructure investments. One of Clark’s suggestions is for cities to get together with banks and other financial institutions and institute a 15 or 20 year "broadband mortgage," similar to a home mortgage, and then have homeowners, private companies, or the City spread the cost of the fiber buildout over a 15 or 20 year period.
This lack of vision for the future is something I have been hearing over and over again in many different conferences. It is also one of the reasons why we have trouble defining what broadband access is. Without a definition, we will continue to muddle through hoping that some action or innovation will arrive and give us direction.
We cannot wait for some action to point us in the right direction, We must act now!! We also need to have a clearer idea of what we mean when we say broadband access or broadband deployment. The word broadband has been bandied about so frequently, and is taken to mean everything from any speeds greater than 56k to a different type of lifestyle. To be clear, broadband means different things to different people. To some it can be codified as a certain level of speed that is significantly higher than what the majority of people can receive today through a dial-up modem. To others it means fast Internet access as defined by the FCC at 200 MB or above. To still others it is a broad category of services, such as voice, video, data, music that can be offered over a high-speed access network. While to still others it is just a name for an intermediate service or transport medium prior to the creation and deployment of a next generation network. Still others define broadband as a medium for allowing consumers to reach some loftier goal, even if they are not sure of what this goal might be
How many of you have tried to explain to a relative what exactly broadband is and why the Federal Government is involved? While a definition of broadband that all can agree on might be seem to be a difficult task, it should be much easier to explain why the federal government is involved in the deployment of broadband. However people are still arguing about this over five years after the passage of the Telecommunications Act of 1996 The 1996 Telecommunication Act gave the Government a clear role in encouraging the deployment of broadband throughout the US. The goal of the Telecom Act of 1996 was to open up the local exchange market to competition and to bring consumers the resulting benefits—increased innovation, greater choices, higher service quality, and lower prices. Section 706 of the Telecom Act directed the FCC and the State Regulatory Commissions to "encourage the deployment on a reasonably timely basis of advanced telecommunications capability to all Americans." The Congress left it to the FCC to define what these advanced services were and what constituted "deployment on a timely basis". The FCC’s role is to determine whether there is a market failure in the deployment of broadband and if so, what actions it should take to speed up this deployment. Should the government be subsidizing broadband deployment to ensure it reaches all areas of the US and if so, how should this subsidy be deployed, should it be a user subsidy or a vendor or service provider subsidy. Should the subsidy be in the form of price guarantees, equipment purchases, loan guarantees, tax breaks, or other type or form?
The FCC has continually found that no market failure exists and that broadband deployment is occurring in a reasonable and timely fashion, although it did identify some regions of the country where consumers were more vulnerable to not receiving broadband services in a timely manner. The FCC decided that there was no reason for it to intervene in the market, since broadband deployment is not supply or demand constrained and is proceeding at a normal pace.
Many of the presenters at NARUC’s broadband summit and at NTIA’s Broadband Forum, held in October 2001, addressed this issue. In particular, one panel at the NARUC seminar, titled "Facilitating the Business Case for Broadband Deployment"directly addressed this issue. The panel consisted of five speakers, Curt Walzel of Livingston Telephone, Russ Jaskot of Siemens, Michael Balhoff of Legg Mason, and Billy Jack Gregg of the West Virginia Consumer Advocate. I plan on focussing on one of the speakers from this excellent panel; Curt Walzel, CEO of Livingston Telephone, a small independent incumbent telco based in rural Texas.
What made this panel so interesting was the real life business case discussed by Curt Walzel of his experiences in deploying broadband in rural Texas where 5% of his customers still have a party line. I think we all can learn from Walzel how to successfully deploy broadband even under the most difficult conditions. We need to go back to the basics—to create a good and profitable business case for deploying broadband. Throughout the conference there was much talk about the "killer application" and the necessity of finding one to sell broadband access. However, what many people are overlooking and what Curt Walzel and others have discovered is that the key to a successful business plan is knowing your customers wants and desires and building your business plan around these. Instead of waiting for the regulators or government officials to act, Walzel took the initiative and deployed broadband throughout his network.
Walzel correctly stated that the issues boil down to what do you want, how do you want it, how do you want to pay for it and how much will you pay. Walzel took the initiative to rebuild his plant because he saw an opportunity that would help his company grow and continue to provide excellent service to his customers. Walzel stated that if he had waited on legislation, the regulators, or any other branch of government to act, "my market would be gone, dead, and I would lose my opportunity." Walzel as well as all the other 12 or so rural independent operators, who are successfully deploying broadband access, is a firm believer that legislation does not create demand. First you have to create a product and then show the customers the various benefits that this product offers. Hellerstein & Associates applauds this vision since it is the same kind of vision that resulted in the tremendous growth of the US economy since the 1980s. Companies need to focus on their business cases and why their product or service offers consumers high value. Partnering with others who have like-minded ideas and offer complementary services is also critical. Walzel stated that what helped him out the most in selling his product was his willingness to partner with three other local phone companies that border his territory and resell his ISP and broadband services to their customers. Walzel stated that it was this partnership with others that gave him access to a broader base of subscribers and allowed him to add additional value to his business case. This added value allowed him to become successful in his broadband deployment. Walzel stated that the broader your constituency the more value your business case is and thus the more successful you will be. This is especially true in rural America where some customers may be as far as five miles from each other.
The importance and benefits of partnership echo the same sentiments that I heard at the NTIA Forum on Broadband Deployment. At this forum, which included representatives from incumbent LECs, CLECs, cable companies, satellite providers, vendors, and content providers, many carriers echoed this approach. Steve Teplitz, from AOL Time Warner stated that AOL Time Warner continues to look for more companies, such as Earthlink, to partner with. He went on to say that the extra competition for subscribers that Earthlink is bringing helps make AOL Time Warner operate more efficiently and effectively and forces it to continually innovate so as to retain its customers. Teplitz, as does Walzel, clearly understands the benefits to be gained from competition. The more competition created, the larger number of subscribers carried on their respective networks, and thus the more efficient the network can function. An efficiently run network strengthens the business case for providing broadband or cable services. These partnerships with other companies have also allowed Livingston Telephone to better compete in its market, even against the State of Texas’s government services network, and have allowed it to win county business, school districts, and other businesses. As Walzel states "it is a pretty open market out there, so don’t sell it short" If an operator of a rural telephone network finds that the market is pretty open, how much more so for an urban city where population is much more dense and where more than 60% of the population has a personal computer, as opposed to less than 40% in Rural America.
During the Internet boom, many of the companies that created state of the art networks lost sight of the most basic tenet in management—know thy customer, know thy market. It is these companies, who forgot this basic tenet, that have struggled to survive and many have failed. The road to broadband deployment is littered with tons of companies who strayed from their original business goals or who never created profitable and workable business plans to begin with.
Probably what really amazed me most about the entrepreneurship of Walzel is that for an area where 40% of all customers lack computers and where 5% of his customers still use a party line, he thought ahead and had a vision of how he could make the deployment of broadband access be successful. Today, over 95% of all Walzel’s customers/subscribers are covered by his broadband enabled plant. Walzel succeeded because he stuck closely to what he perceived customers in his territory wanted and needed and created products that added a significant amount of value to his consumers. So much so that customers did not complain about these across-the-board rate hikes, they only complained when Livingston Telphone passed along government fees or reductions in the amounts they paid for local service. These customers complained about these fees and reductions because they disliked the government’s ability to watch their actions.
Throughout the past few years we have been hearing that it is the regulations which are preventing the Bell companies from both investing in their networks, creating new services, and also from deploying broadband to all areas. Moreover, if these burdens were lifted than the Bell Companies would be able to deploy broadband to more areas of the country, including rural America, and also invest in their infrastructure. SBC, in its recent conference call with analysts and at numerous industry forums, has stated that creation of a separate subsidiary to deploy broadband and the regulatory burdens of line sharing and unbundling have added "hundreds of millions of dollars" to its costs of deploying broadband and have made it very difficult and costly for the Bells to deploy broadband.
Putting DSL in a separate subsidiary does not add hundreds of millions of costs of deploying DSL as SBC claims. Walzel of Livingston Telephone has showed that the opposite is true. It was the ability to create a separate unregulated subsidiary that allowed Walzel to make the necessary infrastructure investments and to offer cable TV, DSL, and other ancillary services over twisted copper pair. Here, the separate subsidiary allowed for Walzel to execute on his business case, provide better service to his customers, and also to deploy broadband throughout his network.
Hellerstein & Associates is a firm believer along with Curt Walzel, Dave Burstein and others that additional legislation or lifting of some regulatory burdens will not create demand or allow companies to deploy broadband. Only a solid business plan and a product that consumers believe has a lot of value will convince them to purchase it. Walzel gave an example of a project sponsored by the local school district to show how even the easy, evem free, availability of broadband access to all will fail unless the consumer understands the value added by these services. The key to a successful business plan is not to lessen regulations or have no regulations; it is to educate the public about the services that are provided and the benefits to be gained. According to Walzel, regulations have many good points, but often regulators are late in stepping up to the plate. The only sure fire way to be successful is to have a good solid business case and then to market and sell your product or service to others. This is true whether you are in rural American cities or in dense urban American cities.
Walzel is one of 12 rural operators who have stepped up to the plate, made a commitment and thereby made their respective business cases of broadband deployment work. Walzel added all sorts of other services onto his networks from cable TV, DSL, interactive gaming. Walzel designed his network plant to carry speeds in excess of 11 MB by dropping in additional remote terminals so that most people were within 12-15,000 feet from the RT or CO. Walzel’s network can offer consumers who are 18,000 feet from their RT 6-7 Mb and even offer 1.5-Mb to those consumers who are as far out as 21,000 feet from the nearest RT or CO. The ability to resell these services as well as cable TV, and other services from a separate subsidiary is what allowed him to be successful.
Thus we see from this real life example that SBC’s position, that separate subsidiaries add hundred of millions of dollars to overall costs, has little if any support. According to research by Dave Burstein of DSL Prime (www.dslprime.com) only a very small fraction of the costs of SBC’s DSL subsidiary’s $500 million business can be explained by the organizational structure. Whether this subsidiary is part of the parent company or is separate, it still has essentially the same costs, the same equipment, and the same expenses for provisioning, customer acquisition, support billing and other expenses.
The Bell companies are claiming that it is the burdensome regulations that have forced it to stop deploying their networks. SBC stated in industry forums and in its third quarter conference call with analysts that it is the new regulatory environment that has forced them to stop deployment. This is plainly false. The broadband regulations have not significantly changed in more than a year, and are pretty much the same as they were three years ago. Let me repeat broadband regulations have not gotten tougher. Everything I know and everything I read says that the FCC under Michael Powell is less active than under Hundt or Kennard. Under Michael Powell’s leadership, the FCC appears to be much more open to trying new things, which is why people are discussing new approaches to regulations, such as those proposed by Verizon’s Tom Tauke.
As we have seen in all industries, when there is competition and choice in the marketplace, companies are "magically" able to compete. Projects get done and additional services are offered. We saw this in the cable TV industry when DBS first gained prominence, we saw this in the long distance marketplace, we saw this in the mobile industry when the PCS players began building their networks, and lastly, we saw this in the DSL industry when competition was vibrant.
Hellerstein Telecom & Technology Review is interested in hearing what its readers think of these ideas? Do readers think that the government should be subsidizing broadband deployment to ensure it reaches all areas of the US? If so should it be a user subsidy or a vendor or service provider subsidy? Or, should the subsidy be in the form of price guarantees, equipment purchases, loan guarantees, or in the form of a tax break? Is some form of subsidy needed immediately, or possibly not for a couple of years?
Please send all comments directly to Judith Hellerstein at Judith@jhellerstein.com. If you would like more information on this topic please e-mail Judith Hellerstein at Judith@jhellerstein.com.
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Hellerstein & Associates is a telecommunications and technology research group that provides its clients with a competitive edge through market research, competitive intelligence, and regulatory analysis on broadband access, competition policy, and wireless issues. We look forward to hearing from you and will strive to meet all topic requests. Redistribution of this newsletter is encouraged provided it includes this paragraph.
Topics covered in the HELLERSTEIN TELECOM & TECHNOLOGY REVIEW were chosen because of their interest to the work of Hellerstein & Associates. Please send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com.