The Paradox of Commoditization

Thu Apr 10 14:19:51 UTC 2003

Isenberg writes along similar lines:

Rise of the Stupid Network 
http://www.isen.com/stupid.html

Chairman Power, Let 'em Fail Fast 
http://netparadox.com/

Paradox of the Best Network 
http://www.netparadox.com/netparadox.html

How to Monopolize the New Network
http://www.isen.com/archives/030304.html

Pete.

On Wed, 9 Apr 2003, Gordon Cook wrote:

> Date: Wed, 09 Apr 2003 23:53:19 -0400
> From: Gordon Cook <cook at cookreport.com>
> To: nanog at merit.edu
> Subject: The Paradox of Commoditization
> 
> 
> 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
> 
> 
> 