Optical P-LANs: tomorrow's public road system?

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Five years after the Telecom Act became law, the industry is in the midst of a painful contraction that raises serious questions about the regulatory model's viability and spurring healthy competition and market growth.

BY DON GALL AND MITCH SHAPIRO

Let's examine one approach to achieving growth and competitive innovation that proponents claim will bring benefits to optical equipment suppliers, broadband services providers (both new entrants and incumbents), and residential and business customers. At its core is the concept of community-owned optical "public" LANs (P-LANs).

Today's market collapse catches the optical-networking industry at a painful juncture in what had been envisioned as a prolonged and healthy expansion. On one hand, there exists enormous excess capacity (97% by some accounts) and hyper-competition in the long-haul sector and a significant buildout of competitive fiber networks in downtown business districts. But in the residential and small-business space the hoped-for flourishing of competition and optical networking is arguably regressing to a duopoly market dominated by incumbents with large imbedded investments in copper and coaxial distribution networks.

This imbalance between capacity and competitive conditions in long-haul versus local loops puts incumbent local-exchange carriers (ILECs) and cable operators in the enviable position of fattening margins by raising prices for delivery of limited broadband capacity and, at least in some cases, limited service quality. At the same time, players in the long-haul fiber market are seeing their margins hammered by cutthroat price competition driven by massive over-capacity and the expanding entry of ILECs into the long-distance market.

The lack of last-mile broadband access is typically most severe in smaller markets, where densities are low and network upgrades often do not offer sufficient returns to satisfy incumbent cable and telephone companies, which prefer to invest their capital in larger, denser, and more affluent metro markets.

This trend is spurring some public utilities and municipalities to invest in advanced broadband networks (see July 2001 Lightwave, p. 31). And as is the case in Grant County, WA, some are adopting fiber-to-the-premises architectures and wholesale "bit-utility" business models. That contrasts sharply with the incremental-upgrade strategy and vertically integrated gatekeeper business models preferred by cable operators and ILECs.

In a nutshell, the P-LAN concept combines the following elements:

  • Fiber's virtually unlimited capacity.
  • Open-access platform.
  • Converged IP service space.
  • Wholesale-only business model.
  • Public ownership and control of a "natural monopoly" optical P-LAN.

Mike Bookey, a 30-year industry veteran and pioneer in the development of electronic banking systems and networked schools, is one of the more impassioned and eloquent advocates of the P-LAN concept. In recent years, Bookey has founded two companies-ViaLight and FTTX Systems-dedicated to designing and building optical community P-LANs. One such network is already operational at Issaquah Highlands, a 3,350-home residential development 15 miles east of Seattle. Issaquah Highlands is the future home of Microsoft's second major business campus.

According to Bookey, a good metaphor for the Community P-LAN is the existing public-road system. Our nation's road system, which includes a mix of interstate highways, state highways, and community-operated surfaced streets, has mostly been publicly funded. Few would deny that this publicly funded resource has been a powerful enabler of economic development.

According to Bookey, as much as 90% of vehicle trips (and the economic and social interactions they support) occur within the confines of a community's local road system. The same would be true of our expanding digital economy, he suggests, if a public effort were mobilized in each community to build a high-capacity optical P-LAN.

Bookey sees other parallels between our local road systems and Community P-LANs. Both require a comprehensive addressing plan (street addresses vs. IP addresses), active routing technology (smart traffic lights vs. high-speed routers), connectivity rules (rules of the road vs. network protocols), and security and rules enforcement (laws and police vs. network security and privacy protection). And importantly, both are open to the general public on a fair and equal access basis and achieve beneficial "network effects" by interconnecting every location within a community.

And just as a combination of public funding and usage fees (e.g., gasoline taxes and tolls) have fi nanced road construction and maintenance, Bookey believes a similar financial model makes sense for Community P-LANs.

In our public-road system, private industry makes its money by building roads, manufacturing concrete, asphalt, traffic lights, etc., and using roads to deliver goods and services. But the public retains ownership and makes key policy decisions (e.g., when and what roads to build), sets the rules, ensures open access, etc. Bookey argues that a similar set of relationships makes sense for Community P-LANs.

If, as some suggest, the local broadband market is regressing to a private monopoly or duopoly mode of operation, this trend raises serious questions regarding the need for regulation to compensate for the resulting distortions in market function.

A better approach, says Bookey, is for direct public control of the network. Local digital networks, he says, need to be controlled by the community for the same reason local roads are: They are too important to the well being of the community to have decision-making in the hands of remote executives and shareholders.

Bookey's arguments rely on the premise that ubiquitous optical last-mile networks are natural monopolies (or, at most, duopolies). As is the case with roads, he says, it makes most sense economically and logistically for a community to build just one such network and make it available as an open platform for competing service providers.

The recent cutoff of capital and subsequent collapse of competitive local-exchange carrier (CLEC), DLEC, and Internet service-provider sectors suggests that capital markets are coming to view local broadband networks as natural monopolies or duopolies. Even incumbents appear to implicitly confirm this notion in their presentations to investors regarding the market impacts and financial viability of upstart competitors.

Among those likely to benefit from the proliferation of Community P-LANs, says Bookey, are CLECS and IP service providers that would have access to a high-capacity fiber network on a fair and equitable basis. Noting that ILECs now control 96% of the last-mile telephone infrastructure, he believes that eliminating the need for CLECs to either invest in last-mile broadband infrastructure or lease capacity from their largest competitor would lead to lower prices and faster growth of new, innovative services.

An assortment of vendors would also benefit from a P-LAN market, including suppliers of switches, routers, servers, optical cable and components, service providers, information appliance manufacturers, home automation vendors, and software developers.

Last but not least, says Bookey, are the benefits to the local community, starting with lower prices and improved services generated by healthier competition among retail service providers.

One potentially huge impact, he suggests, is the savings in road construction and mass transportation projects if even a modest percentage of car trips could be transferred to the digital-road system. Added to that would be the individual savings in time, money, and quality of life for those able to cut the time they spend in traffic.

Telemedicine is another potential social benefit, especially for communities that lack access to sufficient quantity and quality of health care. Bookey also foresees major public benefits if school systems, power utilities, and city, police, and fire departments all have symmetrical gigabit-per-second dedicated connections to every property in the community.

In addition to claiming that governments are not well suited to manage a telecom business, incumbent cable and telephone companies have argued that a publicly owned network would have unfair competitive advantages, including access to low-cost capital, close ties to local governments and, in some cases, tax-related advantages.

Bookey counters that incumbents could benefit by exploiting the vast capacity of optical Community P-LANs. As incumbents, he says, they are well positioned to retain existing customers, especially if they use P-LANs to deliver new services not readily supported on their existing networks. P-LANs would also allow them to compete for customers outside their traditional franchise service areas, focus investments on high-margin services, and free themselves from costly upgrades and maintenance of legacy copper and coax networks.

And since the transition from telephone and cable last-mile infrastructures to Community P-LANs will be slow, says Bookey, incumbents would have ample time to transition their business services and investments. And to the extent they use P-LANs to deliver services, incumbents would benefit from the latter's access to low-cost capital.

Bookey argues that the real issue is not whether early failures occur, but whether their lessons are learned, whether a business model is fundamentally sound and-if given a chance to take root in reality-can achieve desired goals faster, better, and cheaper than the alternatives.

Given the sharp decline in optical equipment markets and in the ranks of competitive service providers, we encourage industry and government decision-makers to consider Community P-LANs as one possible model for paving the last mile of the emerging digital-road system. We hope this column encourages vendors, service providers, and local communities to think creatively about ways they can work together to more quickly and fully realize the promise of optical-networking and broadband services.Th 70183

Don Gall has been involved with the cable-TV industry for the last 28 years. He was an integral part of the team at Time Warner that developed the first practical applications of analog fiber and hfc networks. He is currently a consultant with Pangrac & Associates (Port Aransas, TX) and can be reached at dongall@pangrac.com.Th 70184

Mitch Shapiro has been tracking and analyzing the broadband industry for more than 12 years. He currently directs the strategic research program of Broadband Markets, which develops and markets proprietary databases, financial modeling tools, and strategic reports focused on the competitive broadband industry. He can be reached at mitch@broadbandmarkets.com.

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