Here Comes Trouble: Saving Big Iron in Telecom

The migration of value from hardware to software transformed startup Micro-Soft into monopoly Microsoft between 1975 and 2000. A similar transformation continues to gain momentum in telecom, with software innovation displacing big iron as the primary source of competitive advantage. The telephone network operates in a manner quite analogous to the time-share model displaced by the PC, which means communication may soon only require Internet access and a communication device, not the permission of AT&T.

The most recent quarterly results from the telcos starkly demonstrate this reality, with year-over-year declines in access lines of roughly 10 percent. Displacement by cell phones, cable VoIP, and the waning need for second lines (e.g. fax, dialup Internet, etc.) are driving this decline — in other words, a collapse in usage. It should come as no surprise to anyone paying attention to how many times they pick up a telephone that the FCC’s annual trends in telephony service statistics show a 40 percent drop in telephone network minutes since 2000.

Telecom represents an anomaly among technology-driven industries. There exists no equivalent to Moore’s Law. The quality of a telephone call between neighbors in 2008 differs very little from the same call in 1958. Reliability, audio quality, and even the telephone itself remain largely unchanged. This makes the industry even more vulnerable than the computing time-share business, where companies like Digital Equipment delivered annual cost performance improvements when the PC arrived on the scene.

Verizon’s VoIP patent lawsuits only accelerate these trends. The telcos enjoy very high margins on the $7-to-$10 per subscriber that comes via the likes of Vonage, Cox and Charter; legal successes hasten the pace of work to shut off this revenue. The cable companies can pursue settlement-free peering of voice traffic between each other. People with SIP-based broadband phones get voice functionality without touching the telephone network. The telcos have still not recovered lost revenue from the last group of competitors (i.e CLEC’s) defeated in the courtroom.

The to-do list for telco-free communication nirvana parallels the developments that broke the grip of time-share computing. The wannabe infocom industry needs compelling applications that accelerate adoption a la the spreadsheet and desktop publishing. These compelling applications seem unlikely without a communication operating system analog to MS-DOS that simplifies the task of hardware interaction and resource allocation. The infocom industry needs to produce compelling devices that go beyond features and functionality already available from the telcos.

The telephone companies still control key inputs in Internet access and backbone capacity, but discouraging new communication applications gets problematic as dependence on data revenue grows. A more enlightened approach may prove more successful. FM did not entirely eliminate AM radio. TV did not entirely obsolete radio. Mainframe computing remained important for applications requiring high reliability, and the telephone network seems likely to remain the most reliable means of delivering E911 functionality. Consider the example of IBM’s contribution to the demise of time-share computing with the introduction of the IBM PC. But beware of the Harvard dropout with new ideas about software.