Twisted telecom wires-2002-09-01-Unless we enable strong competition, the future is bleak for U.S. telecom.-James Mathewson

As I sit down in the office of Bill Rich, CEO of Aravox Technologies, I sense that I will finally get a scoop about the telecommunications business. I've tried to get straight answers from the telcos themselves, but they're too guarded about their businesses to tell the whole truth. But if I can talk to one of their key suppliers, perhaps I can get the inside story on why telecom companies no longer invest in new Internet infrastructure. That's my idea, anyway, as I gaze at the whiteboard filled with the thoughts of a recently minted CEO.

Based in Minneapolis, Aravox makes software that enables telecom companies to offer advanced IP services--voice over IP (VoIP), videoconferencing, unified messaging, etc.--all the stuff our cover story talks about in this issue. Technically, Aravox's software wraps data packets into a package so that the packets are not scattered willy-nilly all over the Net and recollected piecemeal on the other end. This enables VoIP services to rival standard phone conversations in terms of speed and quality. The software also wraps the data packages in secure firewalls and gives them quality of service (QoS) priority. QoS enables packages to trump other activities on the Net, such as Web browsing, further speeding the IP services.

Rich has been on the job for seven weeks when I sit down in his office. In that time, he has found out a lot about the telecom market: Who's ready to invest in IP services and who's playing wait-and-see. Suffice to say the majority of his company's sales efforts are focused abroad-that's where most new telecom investment is going. "As far as telecom health goes, Asia is first, Europe is second, and the United States is third," he says matter-of-factly. Our conversation focuses on why the United States is falling further and further behind the world in this vital area.

Before I delve into the conversation itself, let me explain why this fact should raise the hair on the back of your neck. Key reasons the United States has been so strong economically in the last 100 years or so include a healthy power industry, advanced shipping systems, and a relatively strong telecommunication system. In other parts of the world, commerce moves more slowly because of inadequate critical infrastructure in these areas. As more business depends on the Internet, without the medium to carry it in this country, it will move abroad. If I had to pick the primary reason for the economic downturn of the last couple of years, I would say a sudden drop-off in telecom investment in this country. Without an improvement in this area, our economy will continue to struggle relative to the rest of the world.

Rich explains that all new telecom investment is in IP-related systems. The old circuit-switched systems date back to the '70s and are getting more and more expensive and cumbersome to maintain. Still, Regional Bell operating companies (RBOCs, or Baby Bells) make most of their money offering circuit-switched phone calls. "The only way the Bells will invest in new stuff is if they can prove a quick return on investment or if they have competition," Rich says.

While there are enhanced revenue opportunities for RBOCs to add IP-based services, they won't get fast return on investment by ripping out profitable circuit-switched infrastructure and replacing it with new packet-switched stuff. As for competition, there are a few smaller telephone companies investing, but most of the hundreds of small start-up competitive local exchange carriers (CLECs) are in or near bankruptcy. "We started out serving these companies, but we eventually realized that if we want to get paid, we will need to sell to established companies," Rich says. "And, except for a small upgrade here or there for products beyond their profitable lifecycle, the Bells are not buying."

Why are we so different from the rest of the world on telecom investment? "In Asia, you see a lot of state-sponsored telecom investment," Rich says. He nods when I say that China has built the equivalent of an RBOC every year for the past seven years. At this rate, China's telecom infrastructure will be unrivaled in the rest of world in a few years. "In Europe, they don't have a hundred weak competitors," Rich says. "They have a few strong competitors, which forces the primary telecom companies to upgrade or lose business." An example is British Telecom, which has a strong competitor in Cable and Wireless (C&W). In this country, the only companies that rival C&W are AT&T and Sprint. Neither is in a position to influence the Baby Bells where it counts-in the local loop. The two were rumored to be on the verge of rolling out DSL service in several large U.S. markets in our cover story last September, but that never materialized. Our feature on DSL in this issue shows a few glimmers of hope for the beleaguered sector. But at this rate, it will be years before 80 percent of Americans have DSL access, as many European countries can now boast. By that time, both Europe and Asia will have the economic upper hand.

As I drove home from Rich's office, I thought long and hard about the problem we face in the telecom sector. How do we get out of this mess? Since state-sponsored telecom investment went out with the New Deal, the only way it will happen is through competition. The 1996 Telecom Act was supposed to foster competition. The problem is, it did too good a job in some respects and was too weak in others. Every midsized ISP got into the telecom biz, and many of them were not prepared to do a good job with telecom. Fewer still were prepared to deal with the wily Baby Bells when they squashed competitors through loopholes in the act or through out-and-out violations of the law (they have paid billions of dollars in fines since 1996). Even the act's authors admit it has been a huge failure. We don't have competition and the act won't enable it any time soon.

The so-called Tauzin-Dingell bill is supposed to improve the situation by enabling the Baby Bells to invest in underserved areas, if you talk to lobbyists for the Bells. I'm not so sure. From my point of view, if it passes the Senate and is signed by the president, all it will do is reduce competition by removing the threat of fines for anticompetitive behavior. It might give the Bells investment opportunities, but they are not inclined to invest anyway, as my interview with Rich demonstrates.

The only solution I can see is to allow the RBOCs to compete with each other. Remove the local monopolies by enabling the Bells to go into whatever markets they choose. Throw Sprint and AT&T in the local loop, and you have six strong companies competing for every market in the country on telecom (omitting Qwest from my list of strong companies). I welcome your suggestions as to how better to boost competition. If we had strong competition for local telecom, it would put us on par with Europe. It would not only boost prospects for companies like Aravox, but also every company that uses telecommunications to do business-in other words, our entire economy.

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