The Baby Bell game of monopoly

Given the current state of the US economy and emerging technology trends, the once and future kings of the internet would appear to be local US exchange carriers, otherwise known as the local Baby Bell monopolies.

Given the current state of the US economy and emerging technology trends, the once and future kings of the internet would appear to be local US exchange carriers, otherwise known as the local Baby Bell monopolies.

Whether this is a good or bad thing is a matter of intense industry debate, and for a while, it looked like some serious competition would emerge to challenge Baby Bell control over the local markets.

Recently, however, it has become apparent that CLECs (competitive local exchange carriers) just don’t have the financial resources needed to compete effectively against Baby Bell companies. After all, the majority of the CLEC companies were doing little more than reselling bandwidth licensed from the Baby Bell companies. This government-mandated situation gave the Baby Bells little incentive to push broadband to each and every home, and without a broad market to deliver value-added services, the CLEC companies couldn’t generate enough profit to cover their infrastructure costs.

This situation is at the root of much of the financial straits that most network hardware companies find themselves in today. Without a vibrant CLEC market to buy equipment, network hardware vendors are once again dependent on Baby Bells as a major source of revenue.

The problem with that is the Baby Bells tend to adopt new technology and equipment at a fairly slow, evolutionary pace. In fact, most of these companies won’t even look at a new technology solution unless it promises at least an 80% gain in price/performance because the soft costs associated with upgrading large-scale networks is much greater than the actual cost of buying the network hardware.

A large segment of the networking industry is beginning to support the so-called Tauzin Act, the Internet Freedom and Broadband Deployment Act (HR 1542) sponsored by WJ “Billy” Tauzin, Republican chairman of the House Committee on Energy and Commerce. The legislation theoretically would give Baby Bells the incentive they need to deliver broadband to every home by guaranteeing they would not have to share that network access with other carriers. The general theory is that this will motivate the Baby Bells to more aggressively deploy broadband to the home, which in turn would increase demand for new applications and the network hardware needed to deliver them.

If one assumes Baby Bells could actually deliver broadband access if they were allowed to compete in an unfettered manner, the dilemma this act engenders is that it increases, rather than decreases, the dominance of the Baby Bells. Given the present economy and political climate, the odds are good that the Tauzin bill will pass. And all things considered, that’s probably a necessary evil until other technology options become more viable, such as wireless or fibre-optic links to the home.

Naturally, broadband access is not the only trend favouring the Baby Bells. As we’ve seen in recent weeks, telecommunications companies are acquiring hosting companies and building their own data centre facilities at record rates. In the not-too-distant future, these data centre facilities will be used to host a wide range of web services, many of which will be available on either a subscription basis or, worse yet, for a shared percentage of the revenue these services generate. Because web services is really a network-resident application built on top of an application server, the emergence of this trend plays perfectly to the core competency of the Baby Bells, who own the network infrastructure that drives the internet.

Everybody in the computer industry likes to say the Baby Bells are run by stupid people who don’t get the internet. But it seems to me just about every major long term trend in this industry is going their way. So you have to ask yourself who is really driving this industry and who works for who. A few months ago, the conventional wisdom was that Cisco was the king of network computing. Today, it looks like Cisco is just another vassal of companies such as Verizon, Qwest and SBC Communications.

Vizard is the editor-in-chief of InfoWorld. He can be contacted at michael_vizard@infoworld.com.

Join the newsletter!

Error: Please check your email address.

More about CiscoQwestVerizonVerizon

Show Comments
[]