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Information Velocity Partners, LLC
Michael Elling, @infostack
michael@ivpcapital.com
973-222-0759
AMERICA’S REAL DEFICIT
2
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
3
MODERN DIGITAL INFORMATION REVOLUTION
Rate
Of
Change
Hi
Low
Telco
Monopoly
Wireless Monopoly
And USF
Carterfone
Modems/Fax
Cable licenses
Private
Inventions Equal Access for
Voice, Data, Wireless
1996
Telecom
Act
Special
Access
Deregulation
Broadband
Equal Access
Revoked
WiFi Equal
Access By
Steve Jobs
70-100% competition
30-70% competition
0-30% competition
WE KILLED MOORE & METCALFE 10 YEARS AGO
4
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
HOW TO KILL COMPETITION
• 1996 telecom act: a well intentioned farce
• open access not applied universally
• average cost models (TELRIC) out of touch with technology reality
• baby bells have singular (political) mission
• 2002 deregulate special access
• highly concentrated market
• easy to implement anti-competitive pricing
• mid-mile impact on last-mile margins kills latter
• 2002-05 band-x
• universal death of equal access
• final consolidation of baby bells and IXCs (rebuilding Mama)
5
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
COMPETITORS & CAPITAL MARKETS NOT BLAMELESS
• vertical business models
• that’s the way it was done
• digital fundamentally different from analog (not understood in 80s-90s)
• easiest way to maintain monopoly
• antithesis of smart capital
• classic irrational exuberance
• opex/capex tradeoffs not well understood
• linkages between upper & lower layers & across networks not perceived
• antithesis of good analysis
• price cap and rate of return trained
• rapidly evolving landscape provided few historical markers
• inability to model supply and demand drivers
6
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
• wired vs wireless
• telco vs cable
• video vs voice
• broadcast vs 2-way
• pc vs smartphone
7
WHY? CONFLICTING & CONFUSING FORCES
• mobility/BYOD
• blogging/tweeting
• social networks
• app ecosystems
• 4 screens
• old business models & network/service definitions gone
• end-user wants choice, flexibility and control
• role of corporation, institution, individual all changing
divergence of demandconvergence of supply
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
•fcc: broadband summit: adoption &
usage february 7, 2013
•silicon flatirons: digital broadband
migration february 10-11, 2013
•isen.com: freedom2connect march 4-5,
2013
•fcc: 3.5Ghz workshop march 13, 2013
•fcc: technology transitions policy task
force workshop march 18, 2013
•free state foundation: completing the
transition to digital march 21, 2013
•fcc: gigabit communities workshop
march 27, 2013
•no focus on marginal cost or cost
savings
• it’s all high investment & high growth
• everything is new; revolution, not evolution
• big & confusing challenges ahead
•no focus on changed or changing
network theory
• “its just a technology transition”
• nothing learned from recent past
• perpetuating failures of the pre-1983 past
•no clear consistent path
• lack of good data
• muddle along strategy
• lots of illogical and inconsistent policy
• “less” regulation because of “bad” regulation
8
TODAY: WHAT STAKEHOLDERS AREN’T SAYING
key industry discussions net takeaways
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
HOW DO WE GET FROM A TO D?
9
i. it’s not about
• regulation vs deregulation
• competition vs monopoly
• liberal vs conservative
ii. it is about
• analog vs digital
• closed vs open
• vertical vs horizontal
• average cost vs marginal cost
• moore’s, metcalfe’s AND zipf’s* laws
*--3 major laws behind network theory, moore is processing,
metcalfe is network effect, zipf is congestion management
set priorities determine approach
i. learn from 3 prior digital shifts (WAN, data,
wireless) and role of equal access & pricing
ii. get on same page semantically; stop debating
meaning (like ‘net neutrality’)
iii. rigorous data collection and analysis
(quantitative and qualitative)
iv. develop ex ante marginal cost models clearing
expected supply and demand
v. develop a “communications graph” and
common reference framework
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
MOORE IS ALIVE AND WELL
10
Source: Matthew Komorowski.
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
DIGITAL PRICE REFLECTS MARGINAL COST
analog: 20 cents
digital**: 2 cents
coax: $450
fiber***: $45
11
1996: marginal cost
of wireless minute*
2013: marginal cost
of broadband gigabyte
*--1983: voice digitization, 1990: data digitization
**--imputed from MicroCell 400/$40 bucket
***--imputed from Google KC $70/gig price
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
12
Supply Demand
Cost User-Interface
Coverage Usability
Capacity Ubiquity
Clarity Universality
SUPPLY & DEMAND MODELED “EX ANTE”
DRIVES MARGINAL COST & PRICING
SUPPLY/DEMAND MODELED ACROSS THE STACK
• geographic boundaries
• location and density of demand
• network assets and boundary points
• fixed vs mobile
• traffic type
• service layers
• broadly defined by lower, middle and upper layers
• narrowly defined by: physical, transport, switch, control, session,
billing, application
• vertical completeness vs integration
• horizontal scale counters rapid obsolescence
• application/market clouds
• commercial, institutional, residential
• work, social, play
• text, data, voice, multimedia, video
• every individual uniquely situated
13
y
z
x
infostack™
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
A 3-D COMMUNICATIONS GRAPH & REFERENCE MODEL
14
geography/density
servicelayers
• consistent
• objective
• comprehensive
• common language
• illustrative and graphic
• highlights relationships
• educational
• promotes data collection
• aids supply/demand modeling
• estimate marginal cost at every
layer and boundary point
the infostack™ why?
y
z
x
infostack™
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
IS COMPLEXITY BEST UNDERSTOOD THIS WAY?
15
y
z
x
infostack™
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
OR USING A CONSISTENT GRAPH TO MODEL PAST &
FUTURE?
16
Fiber/Wlx/HetNets
Ethernet/MPLS
IP/Opto-electric
Mediation/SDN/CDN
Session Control/Settlements
Application Billing/Support
Communication/Commerce/Content
Applications
“the past = vertically integrated biz models
bound by geographic & regulatory constraints” “the future = horizontally scaled intranets
serve infinite demand”
infinite market segments,
generative competition, and
virtual economies
silo-ed supply/demand,
non-generative markets
Upper
vs
boundaries vary
by application
& market
segment
across
layers
Middle
Lower
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
A GRAPH TO OBJECTIVELY UNDERSTAND
• the cloud, the smartphone, OTT
• hetnets, technology and business model transitions
• interoperability, device availability, roaming
• USF and rural broadband reform and development
• spectrum allocation, reuse, sharing
• backhaul and mid-mile costing; transport caching and CDNs
• development of balanced settlement solutions
• corporate VPNs and centralized procurement
• equal access, net neutrality and monopoly bottlenecks
• prices, terms and bundles
• marginal cost of operations and investment
• restructuring and repurposing of existing assets & companies
17
y
z
x
infostack™
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
INTERCONNECTION AND OPEN ACCESS WORKS
• Dial 1 equal access
• Computer 2/3
• Wireless A/B/PCS interconnect/roaming
• Number portability
• Must carry
• WiFi/802.11
y
z
x
infostack™
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
18
Applications
Networks
App/Net A
Settlement
Exchanges App/Net B
CLEARING TRAFFIC NORTH-SOUTH & EAST-WEST
y
z
x
infostack™
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
19
LEADING TO FAST INTERNET FREE EVERYWHERE
• huh? but doesn’t someone always pay?
• yes, but remember that 3 digital waves in 80s-90s taught us much about equal
access and marginal cost…
• …& got us to where we are; but few have learned the lessons
• 17 years of competition in the WAN led to 90% of long-distance communication
thought of, perceived as, or actually was, “free”
• despite that industry revenues in 2000 > 1983
• same trends in internet, cloud and wireless (802.11 fully, 1G-4G partly)
• price reflecting marginal cost at every layer and boundary point is highly
generative and stimulative (look at google fiber kc)
• balanced settlements will lead to new services, infrastructure investment and
centralized procurement and subsidization
• competition leads to ubiquitous and universal (free) service: fife
20
y
z
x
infostack™
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
PAST FORMS OF FREE
• 800
• VPN
• Ad sponsored content
• WiFi
• Email
y
z
x
infostack™
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
21
22
FIFE
Efife
Michael Elling
Information Velocity Partners (IVP)
michael@ivpcapital.com
973-222-0759
© I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C

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America's Bandwidth Deficit 2014

  • 1. Information Velocity Partners, LLC Michael Elling, @infostack michael@ivpcapital.com 973-222-0759
  • 2. AMERICA’S REAL DEFICIT 2 © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 3. © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C 3 MODERN DIGITAL INFORMATION REVOLUTION Rate Of Change Hi Low Telco Monopoly Wireless Monopoly And USF Carterfone Modems/Fax Cable licenses Private Inventions Equal Access for Voice, Data, Wireless 1996 Telecom Act Special Access Deregulation Broadband Equal Access Revoked WiFi Equal Access By Steve Jobs 70-100% competition 30-70% competition 0-30% competition
  • 4. WE KILLED MOORE & METCALFE 10 YEARS AGO 4 © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 5. HOW TO KILL COMPETITION • 1996 telecom act: a well intentioned farce • open access not applied universally • average cost models (TELRIC) out of touch with technology reality • baby bells have singular (political) mission • 2002 deregulate special access • highly concentrated market • easy to implement anti-competitive pricing • mid-mile impact on last-mile margins kills latter • 2002-05 band-x • universal death of equal access • final consolidation of baby bells and IXCs (rebuilding Mama) 5 © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 6. COMPETITORS & CAPITAL MARKETS NOT BLAMELESS • vertical business models • that’s the way it was done • digital fundamentally different from analog (not understood in 80s-90s) • easiest way to maintain monopoly • antithesis of smart capital • classic irrational exuberance • opex/capex tradeoffs not well understood • linkages between upper & lower layers & across networks not perceived • antithesis of good analysis • price cap and rate of return trained • rapidly evolving landscape provided few historical markers • inability to model supply and demand drivers 6 © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 7. • wired vs wireless • telco vs cable • video vs voice • broadcast vs 2-way • pc vs smartphone 7 WHY? CONFLICTING & CONFUSING FORCES • mobility/BYOD • blogging/tweeting • social networks • app ecosystems • 4 screens • old business models & network/service definitions gone • end-user wants choice, flexibility and control • role of corporation, institution, individual all changing divergence of demandconvergence of supply © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 8. •fcc: broadband summit: adoption & usage february 7, 2013 •silicon flatirons: digital broadband migration february 10-11, 2013 •isen.com: freedom2connect march 4-5, 2013 •fcc: 3.5Ghz workshop march 13, 2013 •fcc: technology transitions policy task force workshop march 18, 2013 •free state foundation: completing the transition to digital march 21, 2013 •fcc: gigabit communities workshop march 27, 2013 •no focus on marginal cost or cost savings • it’s all high investment & high growth • everything is new; revolution, not evolution • big & confusing challenges ahead •no focus on changed or changing network theory • “its just a technology transition” • nothing learned from recent past • perpetuating failures of the pre-1983 past •no clear consistent path • lack of good data • muddle along strategy • lots of illogical and inconsistent policy • “less” regulation because of “bad” regulation 8 TODAY: WHAT STAKEHOLDERS AREN’T SAYING key industry discussions net takeaways © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 9. HOW DO WE GET FROM A TO D? 9 i. it’s not about • regulation vs deregulation • competition vs monopoly • liberal vs conservative ii. it is about • analog vs digital • closed vs open • vertical vs horizontal • average cost vs marginal cost • moore’s, metcalfe’s AND zipf’s* laws *--3 major laws behind network theory, moore is processing, metcalfe is network effect, zipf is congestion management set priorities determine approach i. learn from 3 prior digital shifts (WAN, data, wireless) and role of equal access & pricing ii. get on same page semantically; stop debating meaning (like ‘net neutrality’) iii. rigorous data collection and analysis (quantitative and qualitative) iv. develop ex ante marginal cost models clearing expected supply and demand v. develop a “communications graph” and common reference framework © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 10. MOORE IS ALIVE AND WELL 10 Source: Matthew Komorowski. © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 11. DIGITAL PRICE REFLECTS MARGINAL COST analog: 20 cents digital**: 2 cents coax: $450 fiber***: $45 11 1996: marginal cost of wireless minute* 2013: marginal cost of broadband gigabyte *--1983: voice digitization, 1990: data digitization **--imputed from MicroCell 400/$40 bucket ***--imputed from Google KC $70/gig price © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 12. © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C 12 Supply Demand Cost User-Interface Coverage Usability Capacity Ubiquity Clarity Universality SUPPLY & DEMAND MODELED “EX ANTE” DRIVES MARGINAL COST & PRICING
  • 13. SUPPLY/DEMAND MODELED ACROSS THE STACK • geographic boundaries • location and density of demand • network assets and boundary points • fixed vs mobile • traffic type • service layers • broadly defined by lower, middle and upper layers • narrowly defined by: physical, transport, switch, control, session, billing, application • vertical completeness vs integration • horizontal scale counters rapid obsolescence • application/market clouds • commercial, institutional, residential • work, social, play • text, data, voice, multimedia, video • every individual uniquely situated 13 y z x infostack™ © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 14. A 3-D COMMUNICATIONS GRAPH & REFERENCE MODEL 14 geography/density servicelayers • consistent • objective • comprehensive • common language • illustrative and graphic • highlights relationships • educational • promotes data collection • aids supply/demand modeling • estimate marginal cost at every layer and boundary point the infostack™ why? y z x infostack™ © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 15. IS COMPLEXITY BEST UNDERSTOOD THIS WAY? 15 y z x infostack™ © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 16. OR USING A CONSISTENT GRAPH TO MODEL PAST & FUTURE? 16 Fiber/Wlx/HetNets Ethernet/MPLS IP/Opto-electric Mediation/SDN/CDN Session Control/Settlements Application Billing/Support Communication/Commerce/Content Applications “the past = vertically integrated biz models bound by geographic & regulatory constraints” “the future = horizontally scaled intranets serve infinite demand” infinite market segments, generative competition, and virtual economies silo-ed supply/demand, non-generative markets Upper vs boundaries vary by application & market segment across layers Middle Lower © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 17. A GRAPH TO OBJECTIVELY UNDERSTAND • the cloud, the smartphone, OTT • hetnets, technology and business model transitions • interoperability, device availability, roaming • USF and rural broadband reform and development • spectrum allocation, reuse, sharing • backhaul and mid-mile costing; transport caching and CDNs • development of balanced settlement solutions • corporate VPNs and centralized procurement • equal access, net neutrality and monopoly bottlenecks • prices, terms and bundles • marginal cost of operations and investment • restructuring and repurposing of existing assets & companies 17 y z x infostack™ © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 18. INTERCONNECTION AND OPEN ACCESS WORKS • Dial 1 equal access • Computer 2/3 • Wireless A/B/PCS interconnect/roaming • Number portability • Must carry • WiFi/802.11 y z x infostack™ © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C 18
  • 19. Applications Networks App/Net A Settlement Exchanges App/Net B CLEARING TRAFFIC NORTH-SOUTH & EAST-WEST y z x infostack™ © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C 19
  • 20. LEADING TO FAST INTERNET FREE EVERYWHERE • huh? but doesn’t someone always pay? • yes, but remember that 3 digital waves in 80s-90s taught us much about equal access and marginal cost… • …& got us to where we are; but few have learned the lessons • 17 years of competition in the WAN led to 90% of long-distance communication thought of, perceived as, or actually was, “free” • despite that industry revenues in 2000 > 1983 • same trends in internet, cloud and wireless (802.11 fully, 1G-4G partly) • price reflecting marginal cost at every layer and boundary point is highly generative and stimulative (look at google fiber kc) • balanced settlements will lead to new services, infrastructure investment and centralized procurement and subsidization • competition leads to ubiquitous and universal (free) service: fife 20 y z x infostack™ © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C
  • 21. PAST FORMS OF FREE • 800 • VPN • Ad sponsored content • WiFi • Email y z x infostack™ © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C 21
  • 22. 22 FIFE Efife Michael Elling Information Velocity Partners (IVP) michael@ivpcapital.com 973-222-0759 © I N F O R M A T I O N V E L O C I T Y P A R T N E R S , L L C