What are the real economics of broadband infrastructure? It’s not so simple as market opportunity, investment, and subscribers; Verizon and Comcast have different regulatory histories and see the world differently apotheke-zag.de. Google, as a potential new entrant, has completely different motivations.
Let’s take a look at the regulatory background, and then get a sense of what’s really motivating Verizon, Comcast, and Google.
Regulatory Background
We have gradually come to think of Verizon and Comcast as equals: big, for-profit telecom companies — competitors for TV, Internet, and telephone service. But they got to their current positions through very different routes. Here’s a brief (and rather incomplete) history.
In 1984, the former AT&T was busted up into seven Baby Bells: Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West. Terminator-like, these companies have been spending the last 26 years reconstituting themselves, merging into very large firms. Bell Atlantic changed its name to Verizon in 2000 after acquiring GTE.
Telecommunications regulation in the United States has a long history and reflects theory originally applied to railroads and other public utilities. The idea was that communications was a public good and because the network had to be large and interoperable to be effective, it was best served by a natural monopoly. So, assets like public rights-of-way were made available for the monopoly to use, in exchange for an agreement to provide Universal Service, covering the entire population.
To keep the monopoly from charging unreasonable prices, regulators mandated that their services should be marketed at cost, plus a reasonable and sustaining profit margin. This means that there is no incentive for them to keep costs down; in fact, the higher their costs, the more raw dollars they make.
Verizon today operates under this kind of regulatory background, which was outlined initially in the Communications Act of 1934, and then amended by the Telecommunications Act of 1996 — which has subsequently been eroded and modified by case law and other FCC actions.
The FCC, under Bush-appointed Chairmen Michael Powell and Kevin Martin, tended towards the opinion that the best way to foster competition and innovation would be to empower a small number of well-capitalized firms and let them compete together in the marketplace.
Comcast, for its part, came together very differently. Cable TV franchises were primarily granted by local municipalities, starting in the 1950’s. Comcast acquired dozens of these small firms, each with their own regulatory agreements with cities and counties. By 2000 or so, this aggregation started to resemble the sort of “large firm” that the FCC thought could be an effective competitor to the telephone companies.
So that’s how we got here. Verizon is heir to the top-down, cost-based monopoly regulation subsidized by the Universal Service Fund, which requires that it provide telephone service even in rural areas. Comcast is the product of the roll-up of dozens (if not hundreds) of small cable TV firms. Now let’s take a look at their interests in the current landscape.
Verizon
Verizon, in many ways, is just the current-day incarnation of a big chunk of the original AT&T. It’s still the primary telephone infrastructure provider and the bulk of its physical wiring plant is copper. It operates the same switching facilities that AT&T did back in 1984. In many important ways, nothing has changed.
What about FIOS? Isn’t Verizon innovating there? Aren’t they making this investment to “make money?” It’s complicated.
Verizon made the decision to install FIOS primarily to block competition. The Telecom Act of 1996 required that telcos make copper wireline infrastructure for competitors to run alternative services. This is where alternative telcos like Cavalier, Covad, Adelphia, and many others came into the market. You’ll notice that almost all of those companies are now defunct or severely hamstrung.
This is in part because Verizon (and its peers) set out on a strategy to make a competitive business model all but impossible. FIOS was part of that strategy.
When Verizon installs FIOS, they almost always remove the copper wires that could otherwise have been used by competitors; and this has effectively shut them out.
Verizon has spent over $20 Billion to build out FIOS in its service area. Ostensibly this might look like “investment in innovation” to observers. But in fact, this spending was mostly done to block competitors and to destroy the pro-competition provisions of the Telecom Act of ’96.
It should thus come as no surprise that Verizon has recently announced that they are unlikely to expand their FIOS network further. This isn’t because they can’t get more new subscribers in new areas (like downtown Boston, which is still not served); rather, it’s because they have calculated that the costs of future expansion exceed the downside risk of lost profits caused by competitors in the areas that remain.
They have put FIOS in all the places where it was either easy to do so or where the competition was too strong to ignore. Now that the competitors are mostly defunct or severely weakened, the threat is just not there to justify expansion.
Like feudal warlords, they invested just enough in FIOS to block out competitors, rejigger the regulations, and maintain a status quo of mediocrity. And we’re supposed to think this is innovation?
Comcast
Comcast has different problems. Because all of their regulatory agreements are negotiated with individual municipalities, it’s more difficult for them to make investments across their entire footprint. This is why Comcast often rolls out new products and services in trial communities, and then rolls them out to new areas one at a time.
Comcast does have a very large television service footprint, and their acquisition of NBC and other content providers over the years, like HTS, is an attempt to establish themselves as a vertically integrated entertainment provider. They control the entire stack, from the physical cable, to the viewer, to the content itself. This means that they are protected from threats from content providers who might try to command high rates for popular content. Disney (who controls ESPN and ABC) often finds itself in battles about rates with cable providers. Acquiring NBC/Universal means one less potential threat of rate hikes for Comcast, and higher overall profits.
But Comcast’s physical plant is dominated by aging coaxial cable infrastructure. While local head-ends are fed by fiberoptic backbones, local distribution to the home is through co-axial cable, which can degrade in performance when it rains, is subject to lightning damage, and can only go so fast. Fiber-to-the-home is vastly superior, but it would cost Comcast billions to upgrade its plant. In the absence of competitive pressure (such as that which was faced by Verizon), they have no incentive to do so. Instead they are happy to push their existing plant as hard as it can go, using standards such as DOCSIS 3, and invest in fiber-to-the-home infrastructure only as necessary or convenient.
Google
Google has recently announced that they would like to spawn innovation, and potentially build out gigabit fiberoptic infrastructure in one or more communities in the United States. I helped organize Baltimore’s municipal response to Google’s Request For Information for this project.
Google’s proposing something very different from what Verizon and Comcast offer: an open-access network, over which new entrants could provide Internet or other services. This is exactly the paradigm that Verizon has fought to destroy with FIOS.
Comcast has also fought open access repeatedly; before Verizon settled on FIOS as its primary anti-competitive strategy, Verizon tried to force cable companies to become subject to the same kind of infrastructure-sharing to which it was subject under the Telecom Act of 1996.
And Comcast fought this effort mightily; in 2002, I testified before the Maryland House of Delegates in support of a bill that would force Comcast to open its network, and Comcast’s lobbyists managed to defeat it.
Also in 2002, working alongside Verizon-supplied lobbyists, I testified before the FCC with TCP/IP co-inventor Vint Cerf (now a VP at Google) arguing that cable companies should be forced to provide “open access” to their networks because it would promote competition and entrepreneurship. At that hearing, FCC Commissioner Robert Pepper made it clear that the FCC believed that Verizon and Comcast could provide all the competition we would ever need. We see how that’s turned out.
To date, there has not been any significant open access network deployment in the United States. And with the decline of competitive telco-based services, telecom innovation has now stalled entirely. It’s time for something new.
Net Neutrality
Google has a different potential problem on its radar. In the US, Comcast and Verizon control access to a large percentage of its customers. Currently, the Internet operates under a doctrine of “Net Neutrality,” which is to say that customers and Google all just pay for access to the network, and each can communicate freely with anyone else on the network.
Various telecom executives (most notably former AT&T CEO Ed Whitacre, now CEO of GM) have argued that companies like Google should no longer get free access to their customers. Folks like Whitacre believe that the natural role of a company like Verizon or Comcast is to act as a toll-gate, charging both content providers (Google) as well as customers for access to each other.
As you might imagine, Google heartily opposes this idea: it could dramatically increase their costs and would destroy the “level playing field” which has dominated the Internet from the beginning. Startups could be stifled because they might need to negotiate an agreement with broadband providers to get access to customers. This is a war that Verizon and Comcast appear ready to start, and people like News Corp’s Rupert Murdoch are fanning the flames.
Google’s Fiber Plan
Google’s announcement that it intends to build ultra-fast open access fiber networks is its declaration of war against the threatened end of net-neutrality. Further, this is a productive use of Google’s vast stockpile of cash; it’s something tangible it can do to ensure its market position.
And it’s a move that’s ideologically compatible with its mission. Google genuinely believes that the expansion of a fast, net-neutral Internet has positive effects on society, and it’s also good for its bottom-line. More people online means more ad-views which means more advertising, and more dollars for Google. There’s no downside for them; it’s an expensive proposition to be sure, but it’s less expensive than paying for access to customers in a world without net-neutrality.
By promoting itself as a good citizen, wrapped in the banner of open-access, innovation, and net-neutrality, ideologically-sympathetic regulators such as the FCC’s new Obama-appointed Chairman Julius Genachowski are likely to view Google’s approach favorably. This would allow Google to establish a vertically-integrated, long-term market position which would be hard for Verizon or Comcast to disrupt.
And the kicker? The open-access network Google’s proposing really would promote innovation and entrepreneurship. The United States is ranked 15th in broadband penetration worldwide today. This is a chance to change that.
Don’t believe that Verizon or Comcast will make these investments unless forced to do so. And while Google may also feel it has no choice but to build its own network, Google at least has a vision that goes far beyond just sustaining a mediocre status-quo; they truly believe in the level playing field that has given birth to so much innovation.
It’s time for America’s bandwidth to finally match our ambitions and our talent. Let’s go Google!
Over the last few weeks I’ve been working with Baltimore Mayor Stephanie Rawlings-Blake, a diverse group of volunteers, my friend Tom Loveland (the Google Czar), and other city officials to organize a response to Google’s Request for Information regarding a potential investment of high-speed 1Gbps fiber-to-the-home Internet infrastructure.
Along the way, something remarkable happened.
We laid out a case for Baltimore, and it’s compelling. While other cities have been pulling stunts to try to get Google’s attention, we’ve been assembling a data and fact-driven case for why Baltimore in 2010 is uniquely suited to innovate with the addition of high-speed fiber infrastructure. Google’s corporate culture is famously and relentlessly data-driven. We’ve answered the questions completely, and have highlighted Baltimore’s unique strategic qualifications. We didn’t just stress “how badly we want this,” we built a concise, logical, and detailed case for why Google should want us.
While it’s probably been obvious that we have been working hard and generating press, the public is not aware of our overall strategy, and that’s partly because we have not been able to talk about all of it. Here are some of the reasons why Baltimore can and very likely will win this trial.
Baltimore is unique in that it owns and operates its own expansive conduit system; most cities do not, and this means that Baltimore can deploy a new network faster and less expensively than other cities can.
Baltimore is home to the only philanthropic field office of Open Society Institute, and founder George Soros (the world-famous financier) has pledged to support a Google investment in Baltimore with programs to help alleviate the digital divide. He has urged Google to select Baltimore as the site of this trial, citing the same reasons that Soros selected Baltimore for his philanthropic efforts.
We’re also working with Bob Kahn, co-inventor of TCP/IP to talk about new ways to archive and share municipal data. Mr. Kahn’s counterpart is the other “father of the Internet,” Vint Cerf, who is now a senior executive at Google. And we believe that Cerf will be helping to review these submissions.
We worked with the Economic Alliance of Greater Baltimore, the entity responsible for marketing Baltimore to the business world at large, to shape our messaging and ensure that we had factual economic data. The Greater Baltimore Committee collaborated to align its business members with the effort, securing letters and videos of endorsement from dozens of key large employers.
Last week, the FCC released its National Broadband Plan and one of its authors is a Baltimore City resident. We sought his counsel and advice.
We aligned support of our corporate community, including Under Armour, T. Rowe Price, and dozens of other companies. We received the enthusiastic support of Johns Hopkins University, The University of Maryland System, Loyola University, and a long list of other schools. Gilman School suggested that it could share its K-12 curriculum with the world with the addition of gigabit broadband.
The Space Telescope Institute produced a stunning, compelling video with astronaut John Grunsfeld.
We’re highlighting our burgeoning music and film scenes. In 2008 Baltimore was voted Best Music Scene by Rolling Stone, and the MICA-produced documentary “Music for Prudence” was just awarded an Oscar.
Urban development author James Howard Kunstleraddressed the Downtown Partnership just yesterday, making the case that Baltimore is poised for a population explosion as we enter into an era of urban “redensification.” I share that vision and believe that high speed infrastructure is one of the most important urban design investments we can make today.
In this process, we have articulated a powerful vision for the future of Baltimore, and that vision isn’t going away. We’ve identified our key strategic strengths, and they are the foundations for our shared future. We can’t control whether Google will choose to make an investment here. But that’s not what is most important: we’ve built a case for why we should be investing in ourselves. And that’s a message that resonates with everyone from carriers and broadband providers to prospective residents and businesses.
We have several “aces in the hole,” and our prospects are beyond strong: we’re feeling lucky, as they like to say at Google. But frankly, if Google chooses not to invest here at this time, we should seriously consider making this investment ourselves — the returns would be immense.
I recently wrote an essay about how our educational system is an artifact of the industrial revolution, designed to produce cogs for a machine that no longer exists.
It received wide circulation and a lot of people weighed in with their own ideas about what’s working in education. My mother started a school when I was young, and I’ve also been in the process in the last year of evaluating school choices for my kids (who are entering middle school) so I’ve had a good deal more recent first-hand exposure to the question. And it’s got me thinking.
Play and Exploration
People learn by interacting with the world around them and by following the ideas they are curious about. Think back on your school career and try to name three teachers or three projects that really inspired you and got you excited. You can probably do that, but if I asked you to name four or more, you’d probably be at a loss.
Real learning doesn’t occur through mindless rote tasks or in any context where one is teaching to a test, and it almost certainly can’t occur in huge classes.
Kids grow when they are inspired to inquire into a subject themselves; sometimes that happens by way of a teacher, parent, or role-model, and sometimes it happens through reading or another kind of exposure to an idea. I won’t claim it’s causal, but there is a correlation between the number of books in a home and later success in life. While it is equally probable that the kinds of families that value books are also the same homes most likely to properly nurture a child, there is something wonderful about being surrounded by books and being able to select just the right book at just the right time.
Learning, at its best, should be a kind of just-in-time delivery system for knowledge and discovery.
There has been some debate as to whether schools should make any pretense of having a curriculum at all, or just focus on a kind of resource-rich play. The New York Times recently wrote a piece about how play is at the center of learning. A friend told me about the Sudbury School which has no curriculum and lets kids make up the rules. And if you read the literature, Sudbury “graduates” are as successful as anyone else.
Learning In Spite of the System
If you study the evidence, it becomes clear that the only real learning that happens in our traditional school environment happens by accident — as a side effect of our system, not as a primary result of our system. If this is true, our system is mostly wasted energy – noise and light – and not actually designed to solve the problem it purports to solve.
What do I mean by “learning by accident?” If you can count on one hand the number of teachers you had that inspired you, then your learning was by accident. If you can remember maybe just two projects from your school years that meant something to you, you were learning by accident.
The tragedy is that in our worst schools, those accidents never occur. Students slog zombie-like day after day through halls that threaten their safety, misdirect their higher calling into self-defense and trivial pursuits of one-upmanship, and generally burn them out on life and its possibilities. It’s no wonder that the survivors of this system (it’s hard to use the word “graduates” when many do not, and the process is more a trial than a system) tend towards cynicism and a zero-sum view of the world. There is no time or place for higher thinking when safety is in question.
Our very best schools – the schools in higher income areas, or our private schools – simply are rigged to increase the odds of “good accidents” occurring at a higher rate. These schools typically do not fundamentally alter the design, though, they just increase the odds that something good might happen inside their walls — through parent involvement, better teachers, and a community that is generally more able to support a learning environment.
So even our best schools are only, perhaps, 30% as efficient as they could be. The rest is all noise and heat and light. How can we unleash that untapped 70% of energy that we lose to the inefficient design we currently call school?
Homeschooling or the Sudbury method offer potential answers. However many alternative approaches carry baggage from the culture wars that make them unpalatable to the population at large, or include biases that make them less than effective.
Ideology and Indoctrination
Thanks to Hitler, it is still today illegal to home-school children in Germany. Indoctrination was such an important part of his new totalitarian state that he dared not leave it to chance. We have something similar going on in our country today. Our school system is a kind of indoctrination. We need to ask serious questions about whether we believe in the values it imparts, or whether it is something more sinister.
The extreme left and right get it wrong. This is not about warmed over hippie ideology, and it’s not about right-wing religious nuts opting out to preserve a cult-like bubble around their children. It’s also not about non-religious right-wing people rebelling against the abuses of teacher unions or big government. Education is too often co-opted by these sects and it’s counterproductive.
The real challenge is how to design an approach — which may not look at all like public education as we know it now, so stop reflexively bashing it — that scales up and works for moderates. And by “works” I mean delivers an level of efficiency closer to 90% rather than 30%, and is divorced from ideology.
Design is an opportunity to incorporate, or not to incorporate, ideology. Would you design a right-wing fork? Or a liberal toaster? Is it possible for us to design an educational approach that is simply functional, and light on ideology? We owe it to our kids to do so.
There is an insurance sales office not far from my home with a letterboard sign out front that proclaims, “The real risk is doing nothing.” Of course, they wanted you to think about the risk of not having insurance. But it got me thinking about entrepreneurship and how entrepreneurs change the world through their actions.
And I’m not talking about changing the world in some pie-in-the-sky, abstract kind of way. Recently I’ve been reading the work of entrepreneurship researcher Dr. Saras Sarasvathy, whose theory of “effectuation” states that entrepreneurs actually create the world around them through their actions.
Sarasvathy has interviewed hundreds of entrepreneurs and one common thread she has observed is that entrepreneurs believe that they are called to act when they see an opportunity to create change; they know that if they do nothing, they will achieve nothing, and things will stay the same.
And so entrepreneurs evaluate their options — what and who they know — to take a calculated risk to move a little closer towards a goal. That action might be as simple as putting together a meeting of stakeholders or researching a topic. And with that very first action, they’ve changed the game.
The entrepreneur has widened the opportunity by involving more people, or by knowing more about the subject, or attracting investment. And so in a very real way, she has changed the world around her to make the world more hospitable to attaining the goal. Her actions do not cause the goal to come true directly; it is the compounded effects of the entrepreneur’s actions that lead to a world where the goal becomes possible.
What Really Motivates Entrepreneurs
A purely rational evaluation of entrepreneurship would suggest that it occurs when someone perceives an unmet market opportunity and then proceeds to allocate resources to address this unmet need. Sarasvathy observes that this is almost never how entrepreneurs really operate.
Indeed, most entrepreneurs are haunted by the risk of doing nothing. They might say, “Well, I’ve always wanted to try this idea and I think it might work. How will I feel if I don’t pursue it?” And then they look to limit risk. Often, if someone can craft a scenario where the downside risk is affordable, they go for it. They ask, “What’s the worst that could happen? I lose a year and have to return to my job.” They are not typically motivated by the lure of the upside, but rather the fear of not acting!
Can Entrepreneurship Be Taught?
Are entrepreneurs born risk-takers, or are they just regular people that are applying a particular kind of logic? Sarasvathy suggests the latter. She says that there is nothing about her study of entrepreneurs that would suggest that there are particular personality traits that distinguish entrepreneurs from others propranolol sans ordonnance. The only difference is their use of “effectual logic” and the subsequent learning that comes from its use.
Entrepreneurs ask, “What do I know, and what can I do with it?” They then take steps that help to change the game. Then they ask, “What else can I do with it?” Expert entrepreneurs engage in an iterative process of changing the world and then with each round re-evaluate the opportunities that their previous actions have made possible. Surely it’s possible to teach this process to people in the same way that it’s possible to teach a high-schooler how to think scientifically.
The differences come with experience. First-time entrepreneurs are likely to make mistakes around trust and judgment: they tend to trust people too little or too much, misread the character of a partner, or underestimate the importance of foundational elements like operating agreements. And so while many entrepreneurial enterprises fail, each failure causes the long-term success rate for an individual entrepreneur to increase. Failure helps entrepeneurs to know what pitfalls to avoid and it also teaches him fundamental lessons about his own strengths and weaknesses. This is why it’s so essential for entrepreneurs to pick themselves up and try again! Failure is essential to the creation of the expert entrepreneur.
The Role of Entrepreneurial Action in the World
One of the things that puzzles Dr. Sarasvathy is how effectual logic is used routinely in private sector business but is rarely applied to solving the deep social problems that we face in the world. Some beneficial businesses like micro-lending site Kiva.com got started through effectual thinking (you need $27 to break free from debt? Here’s $27), but for the most part we have consigned the world’s most pressing problems to the work of charitable foundations and non-profits. And because of the way these entities are funded (donations and partnerships), effectual logic cannot often be applied.
Sarasvathy suggests that a wave of social innovation might be unleashed if we were to change the funding model of social enterprises to better enable effectual thinking — primarily because effectual thinking is very efficient and good at minimizing risk at each step. And this goes beyond the current trend of “social entrepreneurship” that suggests that there is a class of problems that is suited to entrepreneurial thinking, and class that is not.
Why shouldn’t all entrepreneurship produce social benefit, and why shouldn’t all social problems be soluble through the application of effectual logic? This is an open set of questions, but certainly they represent the challenge of our time.
The Moral Imperative
If we believe that entrepreneurs literally affect the world to alter their own odds of success then we must also believe that there is a legitimate role for human action in the world.
The theory of effectuation additionally suggests that entrepreneurs are designers: at each stage they are using design thinking to imagine a set of possible solutions using available assets.
If entrepreneurs, through their actions, can help design potential solutions to the world’s most pressing problems, then isn’t the real risk doing nothing?
I am CEO and co-founder at 410Labs, and creator of Mailstrom. I'm a serial entrepreneur, software developer, and community builder in Baltimore, Maryland, USA.
