The fourth and final wave

Three digital waves generated by long-distance, datacomm and mobility competition crashed over the info-media landscape in the past 20 years. Digitization was a mechanism by which service providers balanced cost, coverage, capacity and clarity with ubiquity, usability and unit cost. Competitive service providers and the capital markets learned that getting, keeping and stimulating demand on rapidly obsoleting capital bases drives income statements and balance sheets.

In the aftermath of these market-driven waves, the 100-year-old, heavily regulated PSTN and the 80-year-old, moderately regulated media segments were joined by the entirely new, relatively unregulated, two-way datacomm and wireless segments. The result was growing chaos, which the Telecom and Cable Acts were meant — but failed — to resolve.

To rationalize and counter this chaos, the markets embraced the concept of convergence, epitomizing the “all in one” approach in vertically integrated CLECs (PSTN) and horizontally oriented application service providers (Internet). Unfortunately, vertically integrated service providers could not scale all layers of their operations and investment effectively across a demand environment where everyone and every organization wanted its converged bundle put together differently. And while ASPs appeared to scale more effectively along those lines, IP, as a four-layer protocol, was prone to poor QOS and costs that actually snowballed in a world of distributed processing. In the end, more than $250 billion of promise and hype got washed out to sea.

Since then, all four segments have followed the immutable laws of Moore and Metcalf in their supply evolution, while demand has continued to evolve at a rapid and varied pace. At the same time, IP has grown up as a ready-for-prime-time, scalable seven-layer protocol stack and represents the foundation for the fourth and final digital wave.

We see that wave developing rapidly, but believe it will come from a different direction. Most expect it to start in the migration from TDM to IP at the customer premises and in the Class 5-to-softswitch conversion process. In reality, IP and VoIP have scaled in the WAN and across horizontal layers of the stack over the last five years.

The growing wave will crash against vertically integrated service providers and undo monopoly bandwidth bottlenecks. Today, one megabyte of synchronous, high-QOS MAN bandwidth for commercial applications costs about $200 a month in developed countries and $500 a month in less competitive markets. When contrasted with actual hardware, software and operating costs in the LAN and WAN today, those numbers should be closer to $10 and $20, respectively. Furthermore, the bulk of the monopoly cash flow actually derives from the terminating, not originating, side of calls or sessions.

In subsequent columns we will break down the likely developments that will lead to a final and precipitous collapse in access pricing and develop the revenue and demand upside. Our crystal ball says it's a pretty good outcome, notwithstanding a lot of wrenching change. Didn't that happen three times previously?

DOSSIER MICHAEL ELLING

Occupation: Founding partner of Information Velocity Partners, an investment banking and strategic advisory firm

e-mail: michael@ivpcapital.com

Location: New Jersey

Favorite Destination: Anywhere with decent wireless coverage — particularly Wi-Fi

Device inventory: Wi-Fi equipped notebook, cell phone, memory stick, digital camera (I gave up staying current three years ago)

What's on your iPod? David Bowie (always)

What's next: Disintermediation of telco industry