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November 06, 2005

Don’t Buy DSL From This Man (If You Can Help It)

Ed Whitacre is CEO of SBC, the huge local telecom monopoly which is about to swallow AT&T.  The excitement of the progeny buying the former parent may be going to his head.  Business Week published an interview with him here; it includes this incredibly arrogant and revealing excerpt:

How concerned are you about Internet upstarts like Google (GOOG ), MSN, Vonage, and others?

How do you think they're going to get to customers? Through a broadband pipe. Cable companies have them. We have them. Now what they would like to do is use my pipes free, but I ain't going to let them do that because we have spent this capital and we have to have a return on it. So there's going to have to be some mechanism for these people who use these pipes to pay for the portion they're using. Why should they be allowed to use my pipes?

The Internet can't be free in that sense, because we and the cable companies have made an investment and for a Google or Yahoo! (
YHOO ) or Vonage or anybody to expect to use these pipes [for] free is nuts!”

In plain English, if you buy DSL from SBC, they will someday, if they can, charge you or Google extra if you want to Google over that DSL connection.  But you’re already paying for the DSL connection, aren’t you?  Why should you pay again when you actually make use of it – no matter what that use is?

To a telco this all makes perfect sense.  You pay for your local phone line.  When someone calls you long distance (but not locally) on that phone line, the caller is indirectly charged an access charge for reaching you on YOUR line (more about that here if you care).  This archaic system is left over from the breakup of the Bell System in the 1980s but has been incredibly profitable for the baby Bells so it is not surprising that they’d like to extend it to Internet access.

But, you ask, trying to make some sense of what Ed Whitacre says, shouldn’t Google and Vonage and all the rest pay for their Internet access?  Aren’t they “freeloaders” as he has called them elsewhere?  Of course they should pay.  And, of course, they do.  Google purchases huge pipes from its many ISPs (Internet Service Providers)  to connect it to the Internet.  So does Vonage. These Internet Service Providers (including SBC and AT&T) exchange traffic with each other at peering points – usually without charging each other on the theory that traffic flows are nearly equal.  But there are mechanisms for charging for connections when traffic flows are not even.

The above is probably more detail than you wanted.  The point is no one is “freeloading”.  You and I are paying for our pipes; Google and Yahoo and Vonage are paying for their pipes.  Skype is a slightly different model – they are mainly using the pipes that their users are paying for – but the pipes are still paid for.

This isn’t about freeloaders; it’s about tollbooths.  As local access monopolies, the baby Bells have been able to maintain tollbooths for voice traffic for years.  Voice over IP (VoIP) got much of its original impetus by providing a bypass around those tollbooths. Even though they’ve done better than their long distance rivals (whom they are now buying), it’s getting harder and harder for the baby Bells to increase or even maintain profits.  They could have been leaders in Internet access but they weren’t.  Now they are providing DSL – great.  Now they would like to erect new tollbooths on what used to be called the Information Super Highway – that sucks.

You have to take a threat from the baby Bells seriously.  Their lobbying power – especially in Washington but also at the state level as well – is phenomenal. They were held somewhat at bay by the FCC under the chairmanships of Reed Hundt, Bill Kennard, and Michael Powell.  They appear to be fully in the driver’s seat under current Chairman  Kevin Martin; lately the FCC has been acting as if its sole role is to protect incumbents regardless of the cost to the public of that protection.

To some extent, we can protect ourselves.  If we have a choice, we can buy Internet access from someone other than a baby Bell.  BTW, this threat doesn’t exist in the UK where there are literally hundreds of competitive access providers to choose from.  Yes, the cable companies might also try to erect tollbooths – they certainly haven’t promised not to.  But my guess is that No Tollbooths will become a competitive differentiator for cablecos when selling against the phone companies.

There is a danger that the cable companies and phone companies will maximize the value of their duopoly and both charge tolls or discriminate against services they don’t provide themselves.  So it is important that there be alternatives.  Municipal broadband is one alternative; it would be nice if services like EVDO were offered by somebody other than the telcos and their wireless subsidiaries; IP over power lines may develop as an alternative.  Once we get beyond a duopoly, there isn’t much to fear.

Our greatest protection against being tolled by the Bells is their own arrogance.  “MY (emphasis added) pipes,” says Ed Whitacre.  Not even his stockholders’ pipes.  Certainly not his customers’ pipes.  Choice of words tells you something.

More importantly, Whitacre’s arrogance led him to take on too many opponents at once.  He might have gotten away with considerable pressure on the VoIP providers.  But he chose to take on Google, Microsoft, and Yahoo at the same time.  Although these companies are just learning how to lobby, they have the money to do it successfully.  Jeff Pulver – who has been doing a great job of FCC watch – chronicles some recent successes in Congress here and does a very thoughtful examination of the larger issues here.

When Philadelphia got ready to offer municipal broadband, Verizon almost managed to stop them by getting the service banned at the State level.  Almost but not quite.  Google is rumored to be buying unused broadband capacity and has, of course, offered to provide free WiFi access to most of San Francisco.

Meanwhile, it’s a good idea not to get your broadband hookup from someone who’s already said that they intend to erect a tollbooth on YOUR pipe.  If you have a choice, that is.

I also blogged about the SBC-AT&T merger here and here.

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