Telcos versus Google - a big fight in the making
"Be not deceived; God is not mocked: for whatsoever a man soweth, that shall he also reap."
Galations 6:7
Dear Vorticians,
In this first missive of 2006, I want to wish you all a happy, healthy and prosperous new year. Thanks for your reading loyalty as Vortex Digest enters its seventh year of publication. (Now that really makes me feel old.)
I wanted to devote this issue to an emerging battle shaping up between the telcos and the big companies that rely on the Internet to make their livings - companies like Google, on-line gaming outfits and anyone who'd like to purvey video, IP telephony and other wares that consume a great deal of bandwidth. As chronicled in an excellent piece in Friday's Wall Street Journal, big carriers like BellSouth and Verizon want to start charging these companies in order to ensure that their traffic gets "priority treatment." As the telcos go so also will the cable companies that provide Internet access, or at least that's the theory. (I'd link you to the story, but the Journal has a paid site. If you're a customer, enjoy. If not, try to get someone to email it to you or grab a copy of the print edition.)
Naturally, the big companies that live on the 'Net aren't crazy about the plan. As Jeffrey Citron, the CEO of Vonage says, end users are already paying for Internet access so why should Vonage also have to pay the carriers something?
For their part, the big carriers say these Internet giants are consuming huge amounts of bandwidth and aren't sharing in the costs of keeping the 'Net up and healthy. As a BellSouth mouthpiece said: "During the hurricanes, Google didn't pay money to have the DSL restored."
Anyone could have seen this coming. In fact, we've discussed it in this very newsletter. We've got a classic duopoly in the Internet business: The cable companies and telcos control the market and they're going to start squeezing the people who rely on their facilities, particularly those who are offering services that compete with their bread-and-butter offerings like voice or video. That's the natural behavior of the monopolist or near-monopolist (haul out your old college Economics text by Samuelson for a refresher).
That's why this quote from the same WSJ article is so fascinating. "We need a watchful eye to ensure that network providers do not become Internet gatekeepers, with the ability to dictate who can use the Internet and for what purposes," said Commissioner Michael Copps of the Federal Communications Commission.
Sounds reasonable, no? But what's fascinating is that it was the policies and the decisions of that very same FCC that created this duopoly.
As the marketplace sorted through the death and destruction of the many companies that sprang up from the deeply flawed '96 Telecom Act, the FCC, under former Chairman Michael Powell, actively steered the industry toward a two-provider reality. In Powell's view, a couple of big, strong competitors were plenty to ensure a robust Internet market. (Well, maybe the power companies will wade in and offer high-speed access over those buzzing wires.) In addition, the FCC has made decisions stripping away protection for small telco competitors and freeing the big service providers from regulation of their Internet offerings.
Instead of acting to ensure a robust market with an array of healthy competitors, the nation's primary communications overseer has created this duopoly. Is it any surprise that we are beginning to reap exactly what the FCC has sown?
And believe me, we're only seeing the tip of this particular iceberg. Does anyone really believe that Verizon's Ivan Seidenberg, SBC's Ed Whitacre and Comcast's Brian Roberts are going to sit back and let VoIP, gaming and other content companies get fatter and richer while their own stock prices languish? Not a chance.
Empowered by the FCC and under pressure from shareholders, you can count on telcos and cable - the two big Internet gatekeepers - to demand bigger and bigger tolls and getting tougher and tougher about who's allowed to go through the gate. Both the cable companies and the telcos are in familiar territory when it comes to throwing their weight around and they are better at playing politics than any of the big companies that rely on them. Who would you put your money on?
Your bets? Send 'em here.
Bye for now.
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