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Wednesday, February 08, 2006

News from the incompetent

Well, I planned to write something different today, but then I read the thread on this at slashdot entitled Verizon threatens Google's "free Lunch" and read the comments and a few things struck me.

The first was the absolutely stunning audacity of the statement in the Washington Post article that Google "...is enjoying a free lunch that should, by any rational account, be the lunch of the facilities providers."

Wow. I mean wow.

I didn't realize that all of the money that the poor "facilities providers" (for those of you not familiar with the language of the industry, this means telcos, since they own the facilities and provide them for use) spent on the network infrastructure was forced on them by the government. Nor did I realize that the government was forcing them to sell their services at a price at which they couldn't make money. Oh wait, neither of those is true.

What is true is that the telcos spent a lot of money on deploying DSL services to customers, and are spending even more money installing fiber to the home. The problem that they had with DSL and are probably going to have with fiber is that the business case used to justify the investment assumed a higher price point than they could get for the service. For instance, I happen to know that in 2000/2001 a lot of people thought that you couldn't make money on DSL services unless you charged $75 a month.

That's fine and all, but the fact is that telcos couldn't sell it to consumers at that price for three main reasons:

  • The first is the existence of a substitute-- cable access-- that could be purchased for less or equal money.
  • The second was the venomous hatred of the phone company in many areas. I know that it may be a surprise, but if you overcharge and mistreat your customers for a century, you can't fix it with a few radio spots. Pretty much no one loves the cable company, but they don't have a century of ill will to sell through.
  • The third reason is that telcos have no idea how to sell to customers. For a century, they took orders for phone service. The sales function was answering a phone, taking the order from the customer, including a very few overpriced options, and telling them how many weeks it would take for a technician to show up sometime during the day to hook up your service. Well, that sales method doesn't really work anymore for phone service, but it's a model that is heavily embedded in the phone world.

In addition, has there ever been an industry with worse marketing? Just look at the company names-- AT&T, SBC (gone now, unloved and unmourned), BellSouth-- ugh. Even when they threw out the old and came up with new names, ugh-- Verizon?!? Level(3)?!?!? Terrible. The product names-- DSL is bad until you find out what it stands for-- Digital Subscriber Line?!? A former colleague told me that he was talking to the head of sales at a telco (he'd come from outside of telecomm) who said that the industry was so bad at naming and marketing if they took over KFC they'd change the name of the main product to "Hot Dead Chicken."

The only way that they have found to sell the products (especially DSL) to customers is to discount heavily and for a long time. Current thinking is that they have to offer a year of service at $15/month for people to get DSL (or switch from cable, which has been able to maintain a better price point). That's a far cry from the $75/month that people in the industry thought that they'd have to charge to "make money."

So after much "thought" (and no doubt millions spent on consulting services), the telcos have realized that they can't sell DSL at a high enough price to make a decent profit, have started to spend money hand over fist to put fiber into homes, where they may have the same problem (and probably will, since they haven't addressed any of the three problems that they had with DSL-- competition, ill-will, and inability to sell).

The approach that they have turned to now is to claim that Google, Microsoft, and other money making companies should pay them more, ostensibly because the money that Microsoft, Google, and the rest make my creating content (I am defining software as content here, mostly because it makes this paragraph easy) should belong to them since it happens to traverse "their" network.

Look, Google, Microsoft, and the rest pay for Internet access, probably a lot more than any of us imagines, and if AT&T, Verizon, and the rest set the prices for their service at a level that is too low, they need to reexamine and reopen the contracts that they have with Google or with whoever is providing them access to AT&T's network (i.e., if Level3 is providing access to Google, then Verizon needs to talk to Level3 about their contract). But at the end of the day, if they paid too much to build a network that they couldn't profitably sell, then that is primarily their problem.

The sad game that they are playing now is a familiar one to them (noted in the Post article): go to the government and rent seek! Maybe we can get some sort of exclusive arrangement from the government for providing a commodity service that many companies can provide! What they would like is a legal cover to do what they want-- charge the sender of a packet every time that packet is delivered to one of their customers-- instead of paying by the call/minute, we can pay by the packet. And they want the "right," which they have already, to deny access to those who don't pay the packet fee. The problem is that there are alternatives, alternatives for which we are already paying more and which will become more valuable if the telcos follow their current path.

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