The Paradox of Commoditization

Thu Apr 10 03:53:19 UTC 2003

The Paradox Of Commoditization

Trying To Save What Is Inevitably Lost, We Lose What Could Otherwise Be Gained

Introduction

The monopoly control of customers by Legacy networks is destroying 
the economic benefits that could be obtained from the on going 
pervasive and inexorable commoditization of telecom and information 
technology. We face a paradox. While we have eyes, we cannot see.

We act as though we could wish away what is happening to new products 
and prices. But the fact is that the on-going commoditization of 
technology cannot be undone. Products will continue to get better but 
they will also continue to fall in price. In the face of these 
dynamics jobs will melt away. The only growth in the industry will be 
come from a variety of education, customer support, strategic 
evaluation and consulting positions. The only additional growth can 
come from use of the technologies in an open architecture that 
preserves the freedom to innovate.

If we adopt the mind set that commoditized telecom and IT is basic 
infrastructure, we can struggle to keep the infrastructure open. In 
doing so we shall also keep open a seedbed of new economic 
development and new creativity and technology. In addition to a 
foundation for new business, this course will also support 
opportunity for further growth in customer support and education. 
But, if, as seems currently more likely, we follow the course of 
permitting the legacy industry a closed monopoly in order to save 
itself, we prolong the current agony and forego what economic 
development and growth could flourish in an open environment.

The Commoditization of Everything

We are witnessing the commoditization of the entire industry. It is 
not just telecom. It is telecom and all of information technologies. 
Both industries are finally maturing across the board. While new 
products are appearing, they cost less and do more. They bring a 
different kind of economic value. We are no longer likely to see the 
creation of any new industry giant like a Cisco or Microsoft. Open in 
architecture and cheap to produce, the new products are staggering 
the industry precisely because they are one or more orders of 
magnitude less expensive than the closed and proprietary systems they 
replace.

While most new products are still designed in North America, Japan, 
or Europe, the majority of their components are made and assembled in 
Asia. There RAM is a commodity endlessly replicated in multi billion 
dollar "fabs." Around the 'corner' in Taiwan and other areas, 
commodity disk drives are mass-produced. A terabyte in the pocket is 
not far off. Commodity open source Linux and open source web services 
stand ready to do battle against Microsoft's closed systems.

When new software is needed, it may be designed in North America or 
Europe. But the code is written in Bangalore, or Moscow, or Shanghai. 
Hua wei is sued by Cisco for doing what is in effect a commodity 
knock off. Back 'home" a handful of folk do the integration, first of 
the software, and then of the firmware and prototype hardware. They 
ship the result back to Bangkok or Kuala Lumpur for replication and 
assembly. Container ships bring the boxes back to ports like 
Yokahama, Newark, or Antwerp for sale on the shelves of Best Buy and 
Comp USA and other warehouse retailers. Prices are driven inexorably 
downward.

This new, cheap and powerful hardware and software is being installed 
in networks with fiber cores terminating in monopoly controlled 
copper local loops. If the network is the Stupid network, in other 
words if it is an open access end-to-end Internet, boxes running 
commodity Ethernet can switch and route packetized information as 
appropriate. With the addition of a VoIP gateway card, the same 
devices can achieve vast cost savings by turning voice telephony into 
an application that rides alongside other digitized and commoditized 
applications such as email, web services, and television.

But most networks are not open Internets. They are copper based 
networks with last miles subject to a monopoly controlled, content 
centric approach. They are bastions of legacy technology using an 
infrastructure far more complex and 10 to 100 times more expensive 
than that of the Stupid network. The legacy telco network is one 
where the monopoly must cut its own throat to try to compete with 
open architecture Internet upstarts that would take away its more 
profitable business customers. In other words, while the prices it 
receives for its services plummet, it must write down the value of 
its plant and equipment to a level where, given its smaller income, 
it cannot maintain its current cost and employment structure and 
sustain the ability to pay its debt.

When voice no longer rides on the TDM transport that was especially 
designed to carry it and is just a packet-encapsulated application on 
an IP network, the new central office is no longer a building housing 
five million dollars worth of equipment. It fits on a desktop using 
SIP, SIP proxy servers, and ENUM databases. It costs well under five 
thousand dollars and delivers an entire range of services not 
possible to derive from now obsolete TDM hardware costing a thousand 
times more.

Commoditization Makes More Job Losses Inevitable

If telecom in the United States has lost 500,000 jobs in the past 
three years, with the inevitable demise of the LECs, it will lose 
another 500,000. Attrition in computer hardware and software should 
cause 500,000 more positions to evaporate. What is left will be 
administrative, financial product planning and marketing. 
Unfortunately, in this brave new world the marketers will be figuring 
out how sell $100 products in Best Buys rather than $100,000 systems 
to enterprises.

As a result of this upheaval, customers will be left even more on 
their own. They will need help to figure out how to put the products 
together and assess what combination of products most effectively 
meets their needs. Until everything is truly plug-and-play and 
automatically-configured when attached to the network, education of 
the customer on product capability and system integration is the 
remaining critical area of competition. It is also the only bright 
spot for future industry employment.

Commoditization dictates competition. But now that the companies are 
in trouble, competition on the part of the legacy, monopoly-owned, 
circuit-switched side of the telecom business is being allowed to 
disappear. Until the legacy companies go bankrupt and swap out their 
obsolete equipment, there can be no benefit to anyone from 
commoditization.

The innovation and cost performance benefits of commoditization are 
all on the side of the open access, end-to-end, packet-based 
inter-networks. So far such networks in competition with each other 
for market share cannot make a profit.

The mind-set of the political and regulatory system cannot comprehend 
the resulting paradox where the most productive and advanced networks 
cannot make money because, founded on commodity technology, they can 
be cheaply cloned with cookie cutter reliability. Staring into the 
headlights of the onrushing train wreck, it is blinded by fear of the 
destruction of shareholder equity and putting people out of work. It 
is seduced by the complaints of the incumbents who are selling the 
false premise: "Give us monopoly and we will have incentive to 
build." Determined to protect legacy interests, it consequently tilts 
the playing field in the US against the commodity players and against 
innovation.

The truth is that, even with monopoly, will they not build. They will 
instead die, unless somehow, they managed to get use of the 
packet-switched, commodity-based technology successfully outlawed.

To our great misfortune we do not yet understand that Commoditization 
has turned telecom and information technology into a basic enabling 
infrastructure like the electric, the water, the sewer and the 
highway grids. This new commoditized, powerful, and cheap technology 
can be used to deliver value and new jobs through preserving for 
everyone the ability to tinker and to innovate. Commoditization has 
removed the incentive for value creation from the monopoly network 
and left it with only the incentive to squeeze every penny of return 
for as long as it can prevent encroachment.

The Legacy networks can and do use the new IP, commodity technology. 
But they are prevented by their debt obligations from being able to 
acquire enough of it. Furthermore, even if they could implement it 
extensively, their business model assumes a monopoly over access to 
transport. Because they must do it all, they are paradoxically denied 
its fullest advantage. The find themselves with no choice but to use 
packet switching and VoIP in an effort to sustain their traditional 
way of doing things. Protecting what they have, they lose what gains 
the new inexpensive equipment could offer.

For example they would seek to offer international VoIP over their 
own dedicated network while a new competitor can dispense with the 
sunk cost of maintaining a physical network by simply renting access 
to an Internet that others maintain. Since the competition has only 
to rent access to transport and run voice as an application on that 
transport, it can offer service that is unencumbered by legacy costs. 
The business model of control of both applications and customers 
prevents productive investment.

The paradox of commoditization leaves us with our uninhibited 
creativity as our only new source of economic development and growth. 
If all we do is drive prices down while maintaining the old 
structures, all we do is drive more people out of work. Failure to 
understand this leaves the legacy networks in power and able to 
preserve their obsolete assets by killing creativity, innovation, and 
experimentation.

The backyard tinkerer has for the past century been the principal 
source of wealth in the United States. In the inexorable transition 
to a new commodity-based world, given current policy, we are 
exporting the freedom to be a tinkerer to Canada, Sweden, Japan and 
Korea. Having to compete in a global economy, we are sacrificing the 
viability of our resulting economic infrastructure in a foolish 
attempt to shore up legacy networks that can no longer serve as 
adequate means of competition.

These are the lessons we carried home from Spring 2003 Voice on the 
Network where most were upbeat and pitching in to spread the new 
application

April 7, 2003

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