The Paradox Of Commoditization
Trying To Save What Is Inevitably Lost, We Lose What Could Otherwise Be Gained
The monopoly control of customers by Legacy networks is destroying the economic benefits that could be obtained from the on going pervasive and inexorable commoditization of telecom and information technology. We face a paradox. While we have eyes, we cannot see.
We act as though we could wish away what is happening to new products and prices. But the fact is that the on-going commoditization of technology cannot be undone. Products will continue to get better but they will also continue to fall in price. In the face of these dynamics jobs will melt away. The only growth in the industry will be come from a variety of education, customer support, strategic evaluation and consulting positions. The only additional growth can come from use of the technologies in an open architecture that preserves the freedom to innovate.
If we adopt the mind set that commoditized telecom and IT is basic infrastructure, we can struggle to keep the infrastructure open. In doing so we shall also keep open a seedbed of new economic development and new creativity and technology. In addition to a foundation for new business, this course will also support opportunity for further growth in customer support and education. But, if, as seems currently more likely, we follow the course of permitting the legacy industry a closed monopoly in order to save itself, we prolong the current agony and forego what economic development and growth could flourish in an open environment.
The Commoditization of Everything
We are witnessing the commoditization of the entire industry. It is not just telecom. It is telecom and all of information technologies. Both industries are finally maturing across the board. While new products are appearing, they cost less and do more. They bring a different kind of economic value. We are no longer likely to see the creation of any new industry giant like a Cisco or Microsoft. Open in architecture and cheap to produce, the new products are staggering the industry precisely because they are one or more orders of magnitude less expensive than the closed and proprietary systems they replace.
While most new products are still designed in North America, Japan, or Europe, the majority of their components are made and assembled in Asia. There RAM is a commodity endlessly replicated in multi billion dollar "fabs." Around the 'corner' in Taiwan and other areas, commodity disk drives are mass-produced. A terabyte in the pocket is not far off. Commodity open source Linux and open source web services stand ready to do battle against Microsoft's closed systems.
When new software is needed, it may be designed in North America or Europe. But the code is written in Bangalore, or Moscow, or Shanghai. Hua wei is sued by Cisco for doing what is in effect a commodity knock off. Back 'home" a handful of folk do the integration, first of the software, and then of the firmware and prototype hardware. They ship the result back to Bangkok or Kuala Lumpur for replication and assembly. Container ships bring the boxes back to ports like Yokahama, Newark, or Antwerp for sale on the shelves of Best Buy and Comp USA and other warehouse retailers. Prices are driven inexorably downward.
This new, cheap and powerful hardware and software is being installed in networks with fiber cores terminating in monopoly controlled copper local loops. If the network is the Stupid network, in other words if it is an open access end-to-end Internet, boxes running commodity Ethernet can switch and route packetized information as appropriate. With the addition of a VoIP gateway card, the same devices can achieve vast cost savings by turning voice telephony into an application that rides alongside other digitized and commoditized applications such as email, web services, and television.
But most networks are not open Internets. They are copper based networks with last miles subject to a monopoly controlled, content centric approach. They are bastions of legacy technology using an infrastructure far more complex and 10 to 100 times more expensive than that of the Stupid network. The legacy telco network is one where the monopoly must cut its own throat to try to compete with open architecture Internet upstarts that would take away its more profitable business customers. In other words, while the prices it receives for its services plummet, it must write down the value of its plant and equipment to a level where, given its smaller income, it cannot maintain its current cost and employment structure and sustain the ability to pay its debt.
When voice no longer rides on the TDM transport that was especially designed to carry it and is just a packet-encapsulated application on an IP network, the new central office is no longer a building housing five million dollars worth of equipment. It fits on a desktop using SIP, SIP proxy servers, and ENUM databases. It costs well under five thousand dollars and delivers an entire range of services not possible to derive from now obsolete TDM hardware costing a thousand times more.
Commoditization Makes More Job Losses Inevitable
If telecom in the United States has lost 500,000 jobs in the past three years, with the inevitable demise of the LECs, it will lose another 500,000. Attrition in computer hardware and software should cause 500,000 more positions to evaporate. What is left will be administrative, financial product planning and marketing. Unfortunately, in this brave new world the marketers will be figuring out how sell $100 products in Best Buys rather than $100,000 systems to enterprises.
As a result of this upheaval, customers will be left even more on their own. They will need help to figure out how to put the products together and assess what combination of products most effectively meets their needs. Until everything is truly plug-and-play and automatically-configured when attached to the network, education of the customer on product capability and system integration is the remaining critical area of competition. It is also the only bright spot for future industry employment.
Commoditization dictates competition. But now that the companies are in trouble, competition on the part of the legacy, monopoly-owned, circuit-switched side of the telecom business is being allowed to disappear. Until the legacy companies go bankrupt and swap out their obsolete equipment, there can be no benefit to anyone from commoditization.
The innovation and cost performance benefits of commoditization are all on the side of the open access, end-to-end, packet-based inter-networks. So far such networks in competition with each other for market share cannot make a profit.
The mind-set of the political and regulatory system cannot comprehend the resulting paradox where the most productive and advanced networks cannot make money because, founded on commodity technology, they can be cheaply cloned with cookie cutter reliability. Staring into the headlights of the onrushing train wreck, it is blinded by fear of the destruction of shareholder equity and putting people out of work. It is seduced by the complaints of the incumbents who are selling the false premise: "Give us monopoly and we will have incentive to build." Determined to protect legacy interests, it consequently tilts the playing field in the US against the commodity players and against innovation.
The truth is that, even with monopoly, will they not build. They will instead die, unless somehow, they managed to get use of the packet-switched, commodity-based technology successfully outlawed.
To our great misfortune we do not yet understand that Commoditization has turned telecom and information technology into a basic enabling infrastructure like the electric, the water, the sewer and the highway grids. This new commoditized, powerful, and cheap technology can be used to deliver value and new jobs through preserving for everyone the ability to tinker and to innovate. Commoditization has removed the incentive for value creation from the monopoly network and left it with only the incentive to squeeze every penny of return for as long as it can prevent encroachment.
The Legacy networks can and do use the new IP, commodity technology. But they are prevented by their debt obligations from being able to acquire enough of it. Furthermore, even if they could implement it extensively, their business model assumes a monopoly over access to transport. Because they must do it all, they are paradoxically denied its fullest advantage. The find themselves with no choice but to use packet switching and VoIP in an effort to sustain their traditional way of doing things. Protecting what they have, they lose what gains the new inexpensive equipment could offer.
For example they would seek to offer international VoIP over their own dedicated network while a new competitor can dispense with the sunk cost of maintaining a physical network by simply renting access to an Internet that others maintain. Since the competition has only to rent access to transport and run voice as an application on that transport, it can offer service that is unencumbered by legacy costs. The business model of control of both applications and customers prevents productive investment.
The paradox of commoditization leaves us with our uninhibited creativity as our only new source of economic development and growth. If all we do is drive prices down while maintaining the old structures, all we do is drive more people out of work. Failure to understand this leaves the legacy networks in power and able to preserve their obsolete assets by killing creativity, innovation, and experimentation.
The backyard tinkerer has for the past century been the principal source of wealth in the United States. In the inexorable transition to a new commodity-based world, given current policy, we are exporting the freedom to be a tinkerer to Canada, Sweden, Japan and Korea. Having to compete in a global economy, we are sacrificing the viability of our resulting economic infrastructure in a foolish attempt to shore up legacy networks that can no longer serve as adequate means of competition.
These are the lessons we carried home from Spring 2003 Voice on the Network where most were upbeat and pitching in to spread the new application
April 7, 2003