Alan K. McAdams, Ph. D. Senior Member, Institute for Electronic and Electrical Engineers

1. The New Paradigm: End-User Ownership of Advanced Fiber Networks RuralTeleCon 03 September 30, 2003 Alan K. McAdams, Ph. D. Senior Member, Institute for Electronic and Electrical Engineers Professor, Managerial Economics, Johnson Graduate School of Management 342 Sage Hall, Cornell University, Ithaca, NY 14853-6201 607-255-6443 akm3@cornell.edu http://afn.johnson.cornell.edu/

2. Overview • Advanced Fiber Network Technology • Incipient Natural Monopolies • Economic Consequences of AFN Technology: • With End-User Ownership • With Third Party Service Providers’ Monopolies • Implications of Government Implicit Support • FTTH Scenarios Including End-User-Ownership • Lessons From Korea and Japan • Rough comparison of the United States and Canada • Conclusion

3. Advanced Fiber Network (AFN) Technology • AFNs: Ethernet networks capable of gigabit speeds over fiber infrastructures • They are: • Simple • Flat • Well Understood

4. The Economics Dictated by Uncongested AFN Technology • Results in an: • Incipient Natural Monopoly • (Explain) • That can be: • controlled • or • exploited

5. Realities Dictated by the Technology and Economics: • End-User-Ownership of Infrastructure of an Uncongested AFN Allows for: • “No-fee” transport over the network • (By having “bandwidth to spare”) (Explain) • 2. So Requires “Asymmetric” Pricing (Explain) • But also • 3. Controls the Incipient Natural Monopoly • (end-users don’t exploit themselves)

6. Realities Dictated by the Technology and Economics: • B. ILEC-Ownership of Infrastructure of the AFN Allows for • Embracing the Incipient Natural Monopoly (monopolists do exploit their end-users) • “Monopoly-fee” transport over the network (despite “bandwidth to spare”) • and • Monopoly Strategies throughout network decision making

7. Realities Dictated by the Technology and Economics: • C. Exploitation of the Natural Monopoly by Service Providers has many potential consequences: • Monopoly-Fee Pricing for Transport, as above • Content, Applications and Services that can be • Controlled • Censored • Vertically-tied • Limited • So: Likely Closed Networks • Will Result in “Digital Grand Canyon”

11. Outcome of FCC Triennial Review; 03-36 Ruling The recent FCC ruling following its Triennial Review essentially let existing telecommunications regulations for narrow band technologies stand; declared that few if any rules would be established for broadband “fiber” technologies. • The rulings create additional incentives for ILECs to establish regional AFN monopolies similar to those owned by MSOs. • ILEC decision-makers, as stewards to their investors, would have no choice but to fully exploit the incentives of their regional monopolies • Regional monopolies would result in a “Digital Grand Canyon” for citizens residing in areas that are not economically attractive

12. Realities Dictated by the Technology and Economics: • D. Impact of (Implicit) Government Approval for Regional Monopolies • Managers as fiduciaries are compelled to exploit monopoly strategies • ILECs have “rational” regions • Cable modem areas: happenstance, random regions • Implies eventual price war between ILECs and MSOs

13. Realities Dictated by the Technology, Economics and Regulation: • Question: • How then do we achieve FTTH, “leaving no child behind”? • Answer: • Leave no town behind! • Create Junction Points in Flat Networks of Common Technology • Begin with Enterprises, Private Sector and Public • Enable End-Users to own their own Last Mile Infrastructures • or • 4. Municipalities “awaken;” act as “implicit enterprises” and deploy AFNs as Customer-Empowering-Networks thru “taking credit for” home-owner benefits (in part by #3 above?)

14. Examples: A. The Boeing Company, an Enterprise Boeing owns its own AFN-LAN (Chicago) and AFN-MANs (Seattle, St. Louis) that connect multiple LANs to the Legacy Network at 45, 155, and 155 Mbps, respectively Source: www.computerworld.com, July 30, 2001

15. B. Verizon-Owned Diffusion GIGE: 1-Gigabit Verizon service to SCT BOCES’ 8 School Districts

16. C. Luminet Infrastructure Thru IRUs BT-BOCES “owns” its own fiber and already deploys multiple (4) gigabits to its user-school districts

17. D. AFN Case Study: Quebec/RISQ In 2001, 8000 km of AFN networks installed to 1000 schools • Network build-out to schools completed by XIT Technologies with RISQ, TELUS (Canada’s western ILEC); latter received 6 fiber strands in exchange for know-how, ”right authorities”, etc. • Other Schools “left out” of build-out appealed to the Quebec provincial government for redress • Quebec responded by providing additional funding, but only if schools and municipalities created joint plan for AFN deployment and use • Municipalities also now building and using AFNs; achieving cost savings, exploring strategies for economic development

18. D. AFN Case Study: Quebec/RISQ Lessons learned: • AFN projects “snowball” as non-participants observe AFN advantages • This suggests a sequential approach to deployment; infrastructure built by first-movers can be utilized to serve other users as demand is created • Policy-makers can speed the deployment process by encouraging cooperation among potential owner/users/stakeholders

19. Illustrative Representations of Junction Points

20. South Korea’s Experience: Good News/Bad News • Privatized Korea Telecom in late ’90s as KT Technologies • Licensed and facilitated funding for new ILECs to compete with KT • Rabid competition and build-out of facilities ensued • New entrants featured internet access, introduced high speed DSL and now VoIP in competition with POTS, ISDN • KT’s market share forced below 50%

21. Macro Outcomes • South Korea overcame its “Asia Crisis,” and the recession of 1997-8 • South Korea grew rapidly at eight percent annually; >half of GDP growth from IT/Telecom • South Korea is today’s world-technology leader in deploying broadband connectivity to Homes and offices - but- • South Korea is now in a Telecom price war with Increasing “casualties,” looming consolidation

22. For which there was warning from IEEE-USA Workshop Report and “Googin’s Law” (Roxanne Googin is a leading Telecom Investment analyst) The Cook Report states: Consider Googin’s Law: the network transport mechanism can be operated either as a valuable monopoly, or a valueless commodity… Googin states that ‘ownership is indeed all or nothing. Either you own a very valuable [monopoly] conduit, or you compete in a total [competitive] quagmire.’… (Bracketed words added.) The Cook Report, page 98, April-June 2003.

23. Validation: Googin’s Law at work in South Korea • As predicted, South Korea is in a state of cut-throat competition • Korea Thrunet, the country’s number three telecom player, is currently (2003) in bankruptcy • Hanaro Telecom, the number two player, had losses (2002-3) so huge that its CEO has resigned in disgrace • Korea Telecom, the number one player, had its market share eroded below 50% by new entrants, but foresees “consolidation” as its competitors go out of business. • If this pattern continues, it appears that a national monopoly could once again be re-established.

24. Japan as an Emerging Test Case Japan’s telecom industry is following closely on South Korea’s heels • Japan’s NTT, now split in two and privatized, is being challenged by others offering competitive (12 megabits, VoIP) services at very low prices over NTT’s own net(s) • Yahoo BB (for broadband) already with a 35% market share is #2, pursuing an aggressive build-out of its own parallel AFN, but at the risk of a huge debt burden • The rise of Yahoo BB and others is being facilitated by unusually steep discounts imposed on NTT by regulators for sharing its infrastructure; the jury is still out on whether any entrant (ELEC) can break-even or will all falter as have south Korea’s ELECs • Should Yahoo BB and others go out of business under the weight of their debt, NTT could well re-establish its prior (joint) monopoly position

25. Conclusion • Canada’s regulations are approaching their stated objective of bringing about fair and open “broadband” competition, but implicitly they now see this requires competition among three players: ILECs, MSOs and EUOs (for network end-user-owners) • United States regulations currently appear to pursue less explicit goals, but may end-up in the same place • In any case: • The two nations’ regulators must soon converge in recognition of the implicit power of an innovation of “Schumpeterian” dimensions: the new paradigm of • End-user-ownership of true broadband AFNs!

26. Strategic Intent:To actively promote the deployment of Ethernet-based networks over Advanced Fiber (gigabit-capable) infrastructures and to advocate sound policies required of each actor in order to provide economic, high speed connectivity to governmental, educational, business, and residential users We are: • A “Think Tank” dedicated to developing new intellectual capital relevant to all aspects of AFN deployment. Recent work includes collaboration with the IEEE-USA on its “Entity Position Statement” and “Report from the Workshop” regarding advanced broadband • An action-oriented Incubator working to launch new AFN projects. Currently working to catalyze a pilot “Emergency First Responder Network” in Upstate New York • A repository of information and a training “Academy” for municipal leaders and others interested in creating AFNs • Affiliated with key players and thought leaders in the emerging AFN field. Partners and Advisors are many • Partnered with international organizations to promote AFNs abroad, and to collect case studies and best practices for application in the United States. These include organizations in Canada, Hungary, Norway, Jordan