Can we get to the future from here? First we have to get telecom out of the Stone Age.
Wired 9.05 ⎢ May 2001
REED HUNDT IS A FRUSTRATED CONSUMER. As the former head of the Federal Communications Commission and a senior adviser to McKinsey & Company, the global management consulting firm, he likes to think of himself as an early adopter, one of the 5 percent or so who stay ahead of the curve. Yet it took him three years to get a digital subscriber line at his home in the woodsy suburbs of Washington, DC. Designed to give you high-speed Internet access over ordinary phone lines, DSL isn't exactly a black art — but try telling that to Hundt. Never mind that he's on the board of a DSL provider, NorthPoint Communications, or that as FCC chief he was one of the primary architects of the legislation that was supposed to make DSL rollout a snap. "I wasn't asking for special service," he says, lounging in a large wicker chair on the sun porch of his sprawling Mediterranean-style house, "but I thought I might at least be a cutting-edge consumer. I mean, you're sitting here — it's not that far to the street." I glance out through the trees: The curb is maybe 60 feet away. Hundt, sitting next to me, is getting increasingly agitated. "I mean, look — it's right there! I can throw the newspaper to the street, but I couldn't get broadband!"
He's hardly alone. The Wall Street Journal recently reported that Intel cofounder Andy Grove spent weeks trying to get DSL back on in his house after it punked out, taking his fax, voice, and ISDN lines with it. And Grove is lucky — he actually had DSL. Millions of other people are still waiting. It's not much better with broadband cable, which is supposed to turn your analog TV connection into a high-speed, two-way data pipe delivering phone calls, digital TV, and the Internet. These are technologies that were going to transform our lives, turning every living room into a potential broadcasting studio while ending our dependence on Blockbuster and network television programmers.
All this will happen in time. But for now, barely 5 percent of US households have even the most rudimentary form of broadband, according to Jupiter Research, and fewer than half of the 8 million who want it will actually get it this year. Most people are stuck with 56K modems, analog TV, and Web browsers that take forever to download postage stamp-sized videos that are too grainy to make out anyway. The digital future has arrived, but the analog past won't let go. Data flashes across the continent at the speed of light only to end up dribbling out of your wall in the tech version of Chinese water torture. And that's assuming you've got electricity.
What about the companies that were supposed to bring us this bright new era in telecommunications? Great or small, old or new, household name or scrappy upstart, nearly all of them are a disaster area. AT&T, once the largest and stablest corporation on the planet, finds itself staring down the barrel of a $48 billion debt load, most of it taken on to finance the spree of cable acquisitions that was supposed to turn it into a broadband powerhouse. Now that AT&T's stock has dropped by 60 percent, its CEO wants to sell off the cable systems and everything else besides, chopping the company into four wriggling pieces: cable, wireless, business, and consumer long distance. (Strangely, he insists that this is not a reversal of strategy.) A similar dismemberment plan is in the works at WorldCom, one of the hottest stocks of the '90s before the bottom fell out. And that's nothing compared to the fate of DSL startups like Covad Communications, a Silicon Valley company whose stock has fallen from $67 to $1.50 in a year, or NorthPoint, a Bay Area outfit that was delisted from Nasdaq after it filed for bankruptcy in January.
The only apparent winners are the regional phone companies that were carved out of AT&T after its 1984 breakup. The Baby Bells control the local loop — the copper lines that reach every home and business in the country — and therefore have a stranglehold on access to customers. They were granted a monopoly over local service for the same reason AT&T had long enjoyed one on all phone calls: because policymakers wanted to make sure these companies would have the capital to maintain the system. Today the Bells own 88 percent of the 185 million local lines in the US. They're reporting profits, and their stocks are holding their value. But the Bells pay out most of their earnings to investors in the form of dividends instead of pouring their capital into technological upgrades. Guardians of the status quo, locked in a culture in which the number-one goal is stability, they're the force most responsible for holding back the future.
The future was going to be installed by broadband startups like Covad and NorthPoint. But these companies need access to the local loop to reach customers, and the Bells who control that access have been slow to provide it. The Telecommunications Act of 1996, which was intended to end the Bells' monopoly on local lines and transform the industry into a competitive free-for-all, has proved toothless. And so we're still caught in a decades-long war between the Bellheads and the Netheads — between the custodians of the circuit-switched networks that were built in the last century to carry phone calls, and the entrepreneurs who are constructing packet-switched networks to zip little bundles of data around the planet.
Broadband strategies like DSL and cable (which generally have a maximum speed of 1.5 Mbps) are just interim upgrades; ultimately we'll want fiber, ultrathin strands of glass carrying vast quantities of data at light speed, or alternatives like wireless and satellite. But to connect homes and offices around the country with high-speed data pipes as reliable as the old voice network is a staggeringly expensive proposition.
"Billions and billions must be invested," says Robert Atkinson, executive director of Columbia University's Institute for Tele-Information. "And the capital markets need to feel confident they'll get a return — otherwise, it just won't happen." How do you encourage the markets? That's what the industry would like to know. But the entrenched power of the Bells on Wall Street is not a good sign. It says that freewheeling competition may spur innovation, but it won't necessarily reward investors. Monopolies reward investors, but have little incentive to innovate.
And that's what really bothers Reed Hundt, much more than having to wait for DSL. "Your story is no smaller than the global economy," he asserts. "Tech is the number-one driver of the number-one economy in the world. It is not possible to have a growth economy without a growth economy in tech." By tech he means computers and data networks, which have streamlined the operations of mom-and-pop businesses and Fortune 500 corporations alike. "And yet the truth about the Internet is that it hasn't been built. The truth is that the credit crunch is cutting off the building of the Internet."
Telecom policy is not a hot-button issue; it gets hashed out behind the curtain by politicians with mixed motives and companies with big money riding on the outcome. Yet few issues are more critical to our growth and prosperity. Having cut a devil's bargain decades ago to create a monopoly, we now need to find a way out of it. If we can't, we could be thrashing about in the undertow for a lot longer than we can afford.
SO HOW DID THINGS GO WRONG for the Netheads? To the DSL providers and other new ventures set up after the Telecom Act to challenge the Bell companies, the future looked limitless at first. By directing the incumbent carriers to make their connections to homes and businesses available at a reasonable cost to any outfit that asked for them, the Telecom Act unleashed a massive wave of investment in so-called competitive local exchange carriers, or CLECs. Some, like Covad, NorthPoint, and XO Communications, offered DSL. Others, like Teligent, bypassed the local loop with fixed wireless, which uses microwave transmissions to send voice or data from the customer's rooftop antenna to a base station. The Bells offered broadband too, but they were more interested in selling T1 lines for $800 to $1,200 a month to corporate clients than in offering DSL service to consumers for $40 or $50 a month. Thanks to the CLECs, enterprises with as few as 5 or 10 employees — corner groceries, clothing boutiques, neighborhood restaurants — would be able to save time and money doing business over the Internet, just like Pizza Hut and Wal-Mart. So it wasn't just corporate America that stood to benefit from the new economy; it was Main Street as well.
The problem was that in order for their businesses to work, DSL providers had to get the Bells to throw open the local loop — no easy task. "This is like forcing McDonald's to open their restaurants to Burger King and saying, 'They get a third of the grill, a third of the refrigerators, and a third of the checkout counter,'" says Andy Lipman, chief of the telecom group at Swidler Berlin, a Washington, DC, law firm that helped give birth to many of the upstarts. "It required an unusual, some would say unnatural, degree of cooperation."
It might have been possible to force this, but the coercive measures written into the Telecom Act turned out to be ineffective. "It didn't have deadlines and punishments to make people do what they were supposed to do," says Nicholas Economides, a New York University economist who specializes in telecommunications. It promised the incumbent local exchange carriers — the Baby Bells and a host of small, independent local phone companies, collectively known as ILECs — that if they opened the local network, they would be allowed into the long distance market. But the incumbents decided not to cooperate. "Instead," Economides continues, "they would lobby Congress to get into long distance. And the way the act was written, they couldn't get punished for that, because there wasn't any deadline for opening the local network."
And the incumbents also went to court, suing to overturn the FCC's newly issued rules specifying how they were supposed to open the local loop. Within months of the Telecom Act's passage, a federal appeals court ruled in the local carriers' favor, though it let the FCC guidelines stand pending a Supreme Court hearing. So the CLECs were left in a regulatory fog until the Supreme Court finally ruled for the FCC in 1999. In the meantime, hundreds of new companies set up shop. "There were too many CLECs breathing the air," admits Lipman. "Not all of them could get enough oxygen."
There were technical problems as well. The Bell network was not designed to carry data or be accessed by outside companies, and engineering a retrofit was like diving into a vat of spaghetti. Not only did the ILECs have to open their lines, switches, and back offices to the competition, they had to devise new procedures for doing so — support systems, bookkeeping, you name it. It did not go smoothly. "There are hundreds of steps," says Lipman, "and when you multiply that by tens of thousands of requests, the propensity for things getting screwed up is pretty high."
Exactly how high was revealed when the California Public Utilities Commission considered Pacific Bell's 1998 application to offer long distance. To gain approval, Pac Bell had to show it had opened the local loop to competition. Like other Bell companies, it was pretty efficient at switching customers from one long distance carrier to another — possibly because that was profitable. (Local telcos get to collect a government-mandated access charge for every minute their subscribers spend talking long distance, and competition brings down rates and so encourages people to talk longer.) But when customers wanted DSL from other companies, Pac Bell wouldn't process the orders electronically; instead, DSL providers had to fax them in. Pac Bell workers then retyped them, inevitably making a few errors. It was even worse when Pac Bell customers wanted to order local phone service from AT&T, MCI, or Sprint. "They'd send in an order and nothing would happen," says Economides. "AT&T wanted to do 10,000 orders a day, but Pac Bell could only process 500. And Pac Bell was not the worst." The worst was probably Ameritech, the Midwestern Bell, which, ironically, racked up fewer complaints because it never upgraded to the point that DSL was technologically feasible. (Complaints, say industry observers, are actually a sign of progress.) As for Pac Bell, its long distance application was turned down.
But cooperation is only half of it. It costs money to upgrade circuit-switched networks (so called because they hold a circuit open for the duration of a call) to handle digital traffic, and the Bells spend their profits paying dividends. Their shareholders — the proverbial widows and orphans who owned AT&T stock before the breakup — want the money. The Bells could stop paying, of course, but then their shareholders would bail and their stocks would crash. "There's a very strong focus on managing down expenses," says Len Lauer, president of Sprint's global markets group and a Bell Atlantic veteran. "You start to be almost brainwashed by that kind of environment."
Now that he's at Sprint, which offers local phone service and DSL, Lauer is at the mercy of the Bells to upgrade their facilities. "We've had meetings where I've been pounding the table," he says. "'We have a huge backlog!' And they say they're handcuffed — 'We've got to live within our budget! We're only allowed to increase our capital spend by 10 or 15 percent a year!'" If Sprint, with 23 million customers and revenue of $23 billion a year, can't deal with the incumbents, what hope is there for a little outfit like NorthPoint? "We have to come to the ILECs because they are the bottleneck," says Lauer. "But the ultimate fix will not be working with the ILECs. It's like boiled-frog syndrome: After awhile, you just pass out from working with those guys."
And so the Bells plod along, upgrading on their own terms, deferring the future as long as possible. What do they have to lose? They get to roll out broadband when they feel like it — conveniently enough, after most of their competitors have died off.
AT&T WANTED TO GET AROUND THE BOTTLENECK, too: That's why Michael Armstrong spent nearly $110 billion buying cable systems after he became CEO in 1997. Of course, until 1984, AT&T was the bottleneck. But when a federal judge ruled that local phone service should remain a monopoly and long distance must become competitive, AT&T opted for the thrill of competition and bequeathed its humdrum local networks to its progeny, the Baby Bells. Unfortunately, those local networks were what had linked the company to its customers. In effect, AT&T agreed to have its legs chopped off in the mistaken belief that the operation would help it run faster. The company had to get its legs back, and if it couldn't rent its old ones from the Bells, maybe it could buy a new set somewhere else.
Long before Armstrong's arrival, corporate planners had tried to come up with an alternative to the local loop. One possibility was fixed wireless, but that effort never progressed beyond the experimental stage. Another was cable, but the planners didn't think it would work. Meanwhile, AT&T's core long distance business was looking increasingly grim. In the '80s the company had been among the first to replace its long distance lines with high-speed fiber, but it was slow to upgrade as faster equipment came along. Failure to keep pace meant it faced higher costs than its long distance rivals, which could better afford to cut their rates because their lines could carry more traffic. Joe Nacchio, who headed consumer long distance in the mid-'90s, argued that AT&T had to drop its rates if it hoped to hang onto its subscribers, but his colleagues didn't buy it. "People were attacking those high-priced customers every day — they were like fish in a barrel," says an executive who worked with him. "But the other guys said, 'What are you, crazy? This is our cash cow!' We said, 'You're dead in two or three years!' Now it's too late."
No kidding: AT&T's share of the long distance market fell from 90 percent in 1984 — the year of the breakup — to barely 40 percent in 1999. But long distance was hardly the only debacle that occurred under Armstrong's predecessor, Robert Allen. In 1992, inspired by fantasies of a computer-telephone convergence, Allen engineered the $7.5 billion purchase of NCR, the ailing computer and cash-register manufacturer, then pumped $2.8 billion into it before dumping it five years later. In 1994, he paid $12.6 billion for McCaw Cellular, finally putting AT&T into the exploding wireless market, which he could have entered earlier and more cheaply if he had ignored planners who insisted that mobile phones were just a niche business. But Allen's most disastrous mistake was what he didn't do: force AT&T to stop acting like the old Ma Bell, lobbying Washington to protect it from competitors and ignoring disruptive technologies as if they would somehow go away.
Take Internet-enabled phone calls. Sure, the technology was crude in the mid-'90s, but once it was perfected, the cost of long distance calls would be a fraction of what AT&T was spending to send them over its proprietary, circuit-switched networks. "There was no realization that it was going to happen anyway," says Tom Evslin, then head of its WorldNet ISP. "Ultimately, I decided the only way to do it was as an entrepreneur." Which is why he's now CEO of ITXC, a company that routes phone calls over the Internet for major long distance carriers.
Evslin came from Microsoft, but most AT&T execs had spent their entire careers at Ma Bell, where the first commandment was to avoid risk. Risk-taking could lead to mistakes, and mistakes could thwart your climb up the corporate ladder. At corporate headquarters in the rolling hills of New Jersey's hunt country, any discordant sound was muffled by carpeting so deep and all-encompassing that people took to calling the place Carpetland. "You could take a nap in there and nobody would ever disturb you," says a former longtime executive. "It is a scary place."
When discord did break the hush, there was a good chance it was coming from Nacchio, a tough-talking Jersey guy who failed to fit the Bellhead mold. In 1996, with Allen nearing retirement, Nacchio was on the shortlist for his job, along with AT&T president Alex Mandl, a less flamboyant but in some ways equally radical figure. It was Mandl who did the McCaw deal, Mandl who brought in Tom Evslin and moved AT&T onto the Internet. But Allen wouldn't quit, so Mandl left to become CEO of Teligent, the fixed-wireless startup. When Allen brought in John Walter, a printing executive with no telecom experience, to serve as president and heir apparent, Nacchio left to become CEO of Qwest Communications, a go-go fiber company based in Denver. Walter was such a fiasco that AT&T's normally pliant board decided he lacked the "intellectual leadership" to run the company and booted him out within a year.
So by the time Armstrong parachuted in from Hughes Electronics to take charge, AT&T's core long distance business had been eviscerated, billions had been wasted on a witless computer strategy, a year had been lost to a half-baked succession scheme, and the two brightest lieutenants had left for startups. If the company were to have any hope of recovering, Armstrong would have to find a way to offer local phone service and broadband Internet access. When the going gets tough, the tough go shopping: Two months into the job, he agreed to pay $11 billion for Teleport Communications Group, a New York company that offered local service to business customers. In June 1998, he announced a $52 billion deal to buy TCI, the country's second-largest cable operator. Less than a year after that, he outbid Comcast for MediaOne, the number four cable operator, with an offer of $54 billion. That was nearly $5,000 per subscriber — several times the going rate a few years earlier.
Wall Street loved the deals, but what AT&T actually got for its billions were 16 million cable subscribers and the potential to reach one-quarter of America's households through an antiquated network. By its own reckoning, another $2.5 billion would have to be spent rebuilding these cable systems before they would be capable of offering digital TV, broadband Internet access, and phone service. Outside estimates put the cost as high as $9 billion. And the company still needed some way to offer local phone service and broadband to the remaining three-quarters of the country.
But when Armstrong went to other cable companies with a proposal to offer phone service to their customers, he got caught in the crossfire between AOL and the cable industry. AOL was pushing for open access on all cable systems — a demand that cable operators, a notoriously clannish lot, were determined to stonewall. When AOL threatened to try to block AT&T's acquisition of MediaOne, Armstrong panicked. In October 1999, Leo Hindery, the longtime TCI president who'd stayed on as head of AT&T's cable operation, publicly denied that the company was in talks with AOL — only to discover that in fact it was. Hindery promptly quit, taking with him Armstrong's credibility with the cable chieftains and any hope that AT&T would be able to offer phone service on their systems.
By last October, growth was slowing at AT&T's business division, which supplies data services to corporate giants like IBM and Citibank, and the company's stock market value had dropped by nearly $160 billion in 12 months. That's when Armstrong announced his plan to hack up the company, spinning off AT&T Broadband — the cable operation — and AT&T Wireless as independent operations and issuing separate stocks for its business and consumer long distance operations. Wall Street analysts began wondering out loud if the company would survive. Yet Daniel Somers, president of AT&T Broadband, remains upbeat: "We've got a great product and it's doing very well," he says, pointing to 1.1 million customers who buy broadband Internet access through cable and 600,000 who buy local phone service. And the breakup plan? "I see no significant impact on our ability to do business. None at all."
According to David Dorman, AT&T's newly appointed president, the rationale for the breakup was that the parts were worth more individually than together. "We can all do basic math here," he says. But if cable doesn't need long distance, and long distance doesn't need cable, why did Armstrong buy it in the first place? "He got a lot of video subscribers — so fucking what?" cries one departed executive. "If they didn't plan to use their cable properties to develop a local strategy and offset the decline of long distance, they should have just bought hardware stores."
"On some level, cable made sense," says another former executive. "But there were major technological challenges. And they didn't have five years to pull it off — they had 24 months at most. They couldn't make the shift quickly enough, and the market imploded on them." He falls silent for a moment. "What's happened to that company is just obscene. I don't see how they can get out of it."
IF YOU WERE TO DESIGN A NEW AT&T for the 21st century, you could do worse than to follow the example of Joe Nacchio at Qwest. Founded five years ago as an Internet backbone provider, Qwest is now a hybrid — the only company that combines the entrepreneurial spirit of a startup with the heft and profitability of a Bell company. How much difference this will make to consumers who want broadband remains to be seen.
When Nacchio arrived in 1996, Qwest was so small it held its employee meetings at Denny's. But telecom technology, which had been gathering momentum since the introduction of fiber optics in the early '80s, had just hit warp speed with the advent of dense wave division multiplexing (DWDM), which allowed long-haul carriers to radically expand the capacity of their networks without digging up the planet to lay new fiber. DWDM made the post-'95 explosion in data traffic possible. Subsequent advances — superfast optical switches, more powerful signal amplifiers — increased the capacity of fiber networks even more. In 1997, when AT&T and other companies were laying fiber that carried data at 2.5 gigabits per second, Nortel Networks sold Qwest the first system that ran at 10 Gbps. It was a deal that catapulted both companies to the front ranks of the industry.
"We cede nothing to anybody in terms of having the best, lowest-cost, state-of-the-art network," says Nacchio. "But that's not the whole game. You look at being in a fast-moving industry — it's like managing a large differential equation where technology is one variable, politics is another variable, finance is another variable, and you're looking at the rate of change. The trick is to see them all and understand the relationships."
And so Nacchio, on the lookout for new revenue, spent $4 billion in 1998 to buy the long distance voice carrier LCI International — a deal that made Qwest number four in that business practically overnight. Next he started to establish hosting farms — buildings full of servers set up to manage the computer systems and Web operations of small and midsize businesses. But Qwest still faced the local loop problem: It could lay fiber to the doorstep for its biggest business customers, but how was it going to get to anyone else? In the summer of 1999, Nacchio shocked the industry by launching a $59 billion takeover of US West, the Denver-based Baby Bell. As Reed Hundt puts it, "He seized one of the enemy's castles."
And what a castle it was. US West's 52-story steel-and-glass tower was the command post for a telecom empire — 61,000 employees providing local phone service to 29 million customers from Minnesota to Washington to Arizona. Of all the telcos carved out of the old AT&T, US West may well have been the most abysmal, with a backlog of service complaints dating to 1993 and class-action lawsuits against it in seven states. Still, the purchase quickly transformed Qwest into a $19 billion-a-year behemoth.
Because Qwest was so aggressive and US West so stodgy, the FCC, which has to pass on these things, waved the deal through without delay. Its biggest worry was that US West, being so much larger, would actually end up taking over Qwest. But US West CEO Sol Trujillo was promptly shown the door, followed by 11,000 other employees, most of them middle managers. "We don't ever talk about US West around here," says Steve Jacobsen, who heads Qwest's business-markets unit. "We take risks, and when things don't work out, we cut our losses. Every day you bet your job. If you don't come to work semi-nervous in your gut, you don't belong here." And although the 52nd floor executive suite hasn't changed since Trujillo's day — it's still a country club in the sky, with rich, tobacco-colored paneling framing head-on views of the Rockies' front range — visitors are now greeted by a hand-lettered sign:
THIS FLOOR WAS DESIGNED FOR ANOTHER ERA.
WE'RE ENTREPRENEURS AND WE SAVE OUR CASH
BY NOT REMODELING.
"We could have spent a million dollars to dumb this floor down," Nacchio quips. Instead, Qwest focused on getting local phone service up to snuff. So far, 750 new line technicians have been hired, DSL has been introduced in 12 cities, customer complaints to state utility commissions are down 15 percent, and the class-action suits have been settled in all seven states. Because Qwest had to stop offering long distance service in US West's 14-state territory, where it suddenly became the incumbent local carrier, it also focused on showing regulators that its local lines are open to competitors. Though US West was among the least cooperative of the Bell companies, Qwest last year signed the first permanent agreements in the industry to share its lines with competing DSL providers. Still, whether it's doing enough depends on who you ask. Bob Rowe, a member of the Montana Public Service Commission and past president of the National Association of Regulatory Utility Commissioners, gives Qwest high marks for working with the CLECs: "It's not as if everyone sits around holding hands, but a lot of good work is being done." Russell Frisby, president of the CLEC trade association CompTel, is less enthusiastic. "They're no better or worse than any of the others," he says. Their performance will be judged this summer, when Qwest applies for permission to offer long distance service in one of the US West states.
To Netheads like Jim Crowe, CEO of Level 3 Communications — a rival fiber provider based in a Denver suburb — the takeover of US West means Nacchio has gone over to the other side. "Joe still believes the world is going to consolidate down to a handful of huge communications companies that will do everything for everyone everywhere," says Crowe. To Crowe, this is the mark of a closet Bellhead.
"I was roundly criticized when we made the move on US West," Nacchio admits. "'It's all about broadband and the new world and being a visionary!' And I said, 'Yeah, but it's also good to have customers, cash flow, and local access lines.' Now we look like the smartest guys on the planet. All my peer group? Down 60 to 70 percent in market cap. Running out of cash. The game is to skate to where the puck's going, not where the puck is. When we did that on US West everybody said, 'What are you, crazy? We're over here!' Well, 12 months later they've figured out where the puck was going."
THE PUCK HAS BEEN GOING straight toward the Bells. None of the other players in the business can match the steady customer base, revenue stream, and profits of the plain-Jane regional telcos. None can match the Bells' clout, either. Instead of throwing themselves open to competition, the Bells have strengthened their monopoly position with a series of mergers. Bell Atlantic merged with NYNEX and then GTE to form Verizon; Southwestern Bell bought Pacific Bell and Ameritech to create SBC Communications. Now they're ready for action. "The incumbents have finally scripted the movie," says Reed Hundt, "and it's called The Empire Strikes Back.
At the moment, the Netheads are in as much trouble in Washington as they are on Wall Street. The conservative fiscal policies of the Clinton years — a budget surplus going toward paying down the national debt, countering inflation and allowing the Federal Reserve to keep interests rates low — are being abandoned in the rush to cut taxes. If the Bush tax cuts fuel inflation, as the Reagan tax cuts did in the early '80s, the Fed will have no choice but to raise interest rates, making it even more expensive for companies to get capital. At the same time, the pro-competition approach of the Telecom Act, flawed as it may be, is being questioned by a more laissez-faire administration and attacked by a bipartisan coalition in Congress that's openly pulling for the Bells.
The Bells' goal is to satisfy all their customers' telecom needs in one package. But so far, they've been allowed to offer long distance in only four states — Kansas, New York, Oklahoma, and Texas — because they haven't met the criteria set out in the Telecom Act. So while they stall on the local loop, the Bells have lobbied Congress to give them long distance anyway — not long distance voice, which is no longer a fast-growing market, but long distance data services, which are exploding.
Because the Telecom Act was written before most in Congress had heard of the Internet, it doesn't actually say whether it applies only to voice calls or to data as well. The FCC determined that it means both — and the subsequent development of voice-over-Internet technology has erased the distinction anyway: Voice is now just another form of data. Even so, the Bells argue that the rules keeping them out of long distance shouldn't apply to data transmissions — that they should be able to offer data services anywhere (broadband Internet access in rural areas, for example), without having to open the local loop to competition. The head of the House Energy and Commerce Committee, Billy Tauzin of Louisiana, is pushing a bill that would write this into law. He calls it the Internet Freedom and Broadband Deployment Act.
A flamboyant populist who has represented the Louisiana bayou area in Congress since 1980, Tauzin is touting his measure as a boon for the little guy, bringing broadband to the hinterlands and freeing the Bells to compete with cable giants like AT&T. He paints the Bells as the victims, not the bottleneck, and he has plenty of support. One of his most fervent cosponsors is John Dingell of Michigan, the ranking Democrat on the Energy and Commerce Committee. Their vision may be a little skewed: Verizon was Tauzin's top contributor in last fall's election, in which he ran unopposed; SBC was number three. Both companies were big contributors to Dingell's campaign as well. With Tauzin and Dingell pushing for a change, this could be the year the Bells break through in the House — though the bill's outlook in the Senate, where opponents include majority leader Trent Lott, are far less rosy.
Billy Tauzin is right about one thing: The Telecom Act should be revisited. In an ideal world, the Bells would be given strict deadlines for opening the local loop — or they'd have to stop retailing local service and act simply as wholesalers, selling their lines to other companies that would compete for customers. But given the Bells' money and political clout, the chances of fixing the Telecom Act in the short term are nil. "It's Pandora's box," says David Farber, former chief technologist at the FCC and now director of the Penn Initiative in Telecom and Internet Policy at the University of Pennsylvania. "You open up the '96 act and everybody wants a piece of the action." The best that can be hoped for is that Congress will do nothing.
In the meantime, we're dependent on the FCC to police the market. The Clinton administration was adamantly against giving the Bells any kind of unconditional long distance approval. "That's a prescription for disaster," says William Kennard, who succeeded Reed Hundt as FCC chief under Clinton. "You'd be telling most Americans, 'Forget about having competitive choice for DSL service — we're gonna give it to the incumbent monopolists.'" Compared to this, the new FCC chief, Michael Powell, sounds like God's gift to the Bells. Speaking in March before the US Telecom Association, a Bell trade group, Powell said the commission had been "overaggressive" in its interpretation of the law and voiced his support for a free-market approach. "The public interest works with letting the market work its magic," he declared.
But free market solutions only work when the market is actually free; an entrenched monopoly can stifle competition for years. Few doubt that the triumph of the Bells will slow the rollout of broadband, except in the few places where the Bells — Verizon, for example — are rolling out their own DSL service. "It'll happen," says ITXC's Tom Evslin. "But it won't happen at light speed, because the companies that operate at light speed don't have money, and the companies that have money don't operate at light speed — and they're no longer afraid of those that do."
WHAT ARE THESE NEW TECHNOLOGIES that are going to bypass the Bells? Fixed wireless already offers a good alternative in many locations, but it's expensive to install and, because it relies on microwave transmissions, requires a clear line of sight from the customer to the operator's base station. New equipment that can bend waves around buildings is being tested. Yet the need for capital is acute at fixed-wireless providers like Teligent, a company that lost 98 percent of its market cap last year. "The last few months have not been particularly pleasant," admits CEO Alex Mandl. "But we have some additional financing under way, and assuming it all comes together, we'll have a pretty decent cushion."
Geosynchronous satellites are more promising. StarBand, a joint venture of EchoStar, Microsoft, and Israel's Gilat Satellite Networks, offers a two-way Internet connection at speeds up to 500 Kbps. And unlike DSL and cable, satellites can reach locations that have minimal infrastructure. "For the first time, my mom in northern Idaho will have the opportunity to get a broadband connection," says Lew Wilks, Qwest's executive VP in charge of Internet strategy. "Satellites are going to open up not just North and South America but emerging economies in the Middle East, in Africa, and in Eastern Europe. Let's open up the Internet to the 80 percent of the world that doesn't have it! This is about to get real rock 'n' roll."
For urban areas in the developed world, however, the ultimate replacement for the local loop is fiber — not only the glass strands used in long-haul networks but plastic, which transports light waves almost as efficiently as glass and is tough enough to bend or even crimp with pliers. Fiber has virtually limitless capacity, and while satellite transmissions are subject to a slight delay — they have to travel to and from a point some 22,000 miles above the equator — fiber transmissions are instantaneous enough even for voice calls.
The question is, who's going to install it? David Farber thinks the impetus will come from cities trying to gain a technological edge. Like telcos, they already have a pipeline into every building: the sewers. In Albuquerque, a company called CityNet Telecommunications is using a robot called SAM (for sewer access module) to scoot through the pipes, unspooling fiber along the way. Chicago recently announced a project called CivicNet that's intended to do the same thing. In Palo Alto, a city-owned power company is planning to launch a fiber-to-the-home trial this summer that will offer speeds as high as 1 Gbps. All these efforts are well behind Stockholm, where a government owned company started laying fiber through the city seven years ago. Cities build streets, why not fiber networks? The irony is that municipal governments could end up jump-starting the free market and spurring the Bells to upgrade their own networks. "You have to create a threat," says Farber. "The cities may be that threat."
Because the performance capacity of optical technology is doubling about every nine months — twice the rate predicted by Moore's law — the long-term possibilities of fiber networks read like science fiction. In about 30 years, Jim Crowe calculates, we'll have networks that, for the cost of a dialup connection today, will be able to deliver a believable telepresence — a visual communication so convincing you'll feel like you're in the same room with someone who's actually on another continent. "What we now call the Web is a halting, Model-T version of the next Internet," Crowe says. "The first network" — the circuit-switched one that was built for voice — "had to do with extending our ears around the world. The next is about extending our eyes. It's decades to the development of a network that matches up to the power of our eyes — but the good news is that once it's out of the barn, the power of market-based technology is unstoppable."
No one is pretending the coming months will be pretty. Leo Hindery, the former AT&T Broadband president, has counted some 1,700 US telecom providers — CLECS, ILECs, national network providers, regional network providers, what have you. "Never in the history of the industry have more participants showed up in such a short period of time," he says. "There's no lack of capacity. There is an evolving definition of who's going to do what to whom and how it's going to shake out." But while the Bells may have the upper hand today, the one clear lesson they can draw from the past is this: Counting on Washington to protect them from new technologies is a recipe for disaster. "If DSL continues to drag," says Farber, "who knows what will happen to the telephone business?" No one knows — but the possibilities are delicious to contemplate. ■
Contributing editor Frank Rose wrote about the European Commission in Wired 9.04.