Basics of Telecommunications: Networks and Technologies

Telecom: Economics, Structure and
Regulation
Joseph Gillan
[email protected]
Institute of Public Utilities - Regulatory Studies Program
Summer 2014
Overview
 History
 Market Structure
 Network Evolution
100 years in 2 hours
Bell Device
Sound
Wave
Electrical
Wave
Bell Device
In the beginning …what did Bell invent?
Sound
Wave
Network Design – Choice 1
Network Design: Choice 2
Local
Switch
Basic Exchange Network
Local Competition – First Try
(1894-1907)
 Bell patents expire – the patent on the
telephone was the basis for the first monopoly.
 Independent (i.e., not Bell) Companies form in
rural areas.
 Competition develops in cities with multiple
networks.
 Bell controls long distance patents and refuses
to interconnect with competitors.
Outcome: Settle with DOJ
1913 Kingsbury Commitment
Sell Western Union
Allow interconnection
Quit buying independents
Monopoly and Stability: 1913-1949
AT&T
Local Operating
Companies
Western Electric
Long Lines
Simplified View of Network
Long
Distance Network
The Tandem
Switch
Local
Switch
Local
Switch
AT&T Organization Follows Network
AT&T Long Lines Division
The Tandem
Switch
Local
Switch
AT&T Long
Lines Switch
Everything built by
Western Electric and
invented by Bell Labs.
Local
Switch
Local Bell Company
AT&T Organization Matches Regulation
AT&T
Local Bell
Companies
(Intrastate)
Western Electric
(not regulated)
Long Lines
(Interstate)
Why Important?
AT&T
Local Bell
Companies
(Intrastate)
$$
Western Electric
(not regulated)
Long Lines
(Interstate)
$$
Independent
Companies
Why Important?
AT&T
Separations – FCC/States
Local Bell
Companies
(Intrastate)
$$
Division of Revenues
Long Lines
(Interstate)
Settlements
Independent
Companies
$$
Basic Trend on Cost
AT&T
Separations – FCC/States
Local Bell
Companies
(Intrastate)
Long Lines
(Interstate)
The Cracks Appear – 1950s
The Tandem
Switch
Local
Switch
Local
Switch
AT&T Long
Lines
Timeline of “CPE” Competition
1948
1955 1956
Hush a Phone
Complaint
1968
1975
Court
CarterPhone
Overturns
Extends
FCC Interconnection
FCC Decides
Device Reduces
Quality
1982
CPE Deregulated
AT&T Requires
Protective
Devices
FCC Adopts
Certification
The Cracks Appear
AT&T Long
Lines
The Tandem
Switch
Local
Switch
Local
Switch
Timeline of Long Distance Competition
1959
Above 890
“opens”
microwave
1963
1969
FCC
Approves
MCI for
Private Line
MCI Applies
for Chi-St Louis
1973
1975
1977
1982
MCI offers
“Execunet”
Court rules
FCC must
conclude monopoly
is better than
competition to deny MCI
MCI gets local
interconnection
The Fundamental Problem
Long Distance – Potentially Competitive
AT&T Long
Lines
The Tandem
Switch
Local – Still Monopoly
Local
Switch
Local
Switch
CPE – Potentially Competitive
1984 Solution – Local Divestiture
AT&T
RBOC Must Share
Bell Network
Operating
Local
with
Companies
Long
Distance
Companies
Western Electric
Long Lines
Other Implications
AT&T
Local Bell
Companies
$$
Long Lines
Access Charges
Replace Profit Sharing
$$
Independent
Companies
The Pressures for Grand Bargain – 1996
 CLECs want to enter local markets.
 Bell Companies want to offer long distance
service.
 Long distance companies fear pre-divestiture
problems.
 Politicians want to keep local rates low.
Basic Structure of the 1996 Act
 CLECs get federal preemption of “barriers to
entry.”
 RBOCs path to long distance authority and
universal service reform.
 IXCs/CLECs get access to ILEC network to offer
services -- in part to promote local competition,
and in part to protect long distance competition.
Basic Structure of the Act
 Section 251
Resale, UNEs and Interconnection
 Section 252
Negotiation, Arbitration and Opt-In Provisions
 Section 254
Universal service reform.
 Section 271
Establishes conditions for long distance entry by
the RBOCs (the “competitive checklist.”)
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Resale Volumes (millions of lines)
6.0
2.8% Share
5.0
4.0
3.0
2.0
1.0
0.0
Why Resale Didn’t Work (Reason 1)
Retail Costs
Competitive Cost
Monopoly Cost
Value of Discount
≈100%
Market
Share
Why Resale Didn’t Work (Reason 1)
Retail Costs
Competitive Cost
Offsetting
Cost
Monopoly Cost
Value of Discount
≈100%
Market
Share
Why Resale Didn’t Work (Reason 2)
Revenue/Costs
Revenue
Cost
Resale Discount
“Stuff’
1
6.0
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Resale Volumes (millions of lines)
2.9% Share
2.8% Share
5.0
4.0
3.0
2.0
1.0
0.0
Local Strategy – UNEs
 Lease Network at Cost Based Rates (Unbundled
Network Elements)
Option 1: Lease a loop to customer (UNE-L)
Option 2: Lease loop/switch together (UNE-P)
UNE-L and UNE-P
CLEC
Switch
Local
Switch
UNE-Platform
UNE-Loop
Why Resale Didn’t Work (Reason 2)
Revenue/Costs
Revenue
Cost
Resale Discount
“Stuff’
UNE-P and UNE-L (basic equation)
Revenue/Costs
Revenue
Cost
“Stuff’
Market Share of UNE-P and UNE-L
12.0%
10.0%
UNE-P Share
8.0%
6.0%
4.0%
UNE-L Share
2.0%
0.0%
Dec
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98
Dec
99
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Dec
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03
Dec
04
Dec
05
Dec
06
Cert Decision
Dec07
Dec08
Dec09
Market Share of UNE-P and UNE-L
12.0%
10.0%
UNE-P Share
8.0%
6.0%
4.0%
UNE-L Share
2.0%
0.0%
Dec
97
Dec
98
Dec
99
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02
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03
Dec
04
Dec
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Dec
06
Cert Decision
Dec07
Dec08
Dec09
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Revenues ($ Billions - Year End 2010)
Traditional Wireline/Cable/Wireless
$140
$120
$100
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Wireless
Technology Adoption
Estimated Subscribers - CTIA
Est. US Population over 9
years of age. (256 million)
250
200
150
100
50
0
1996
1998
2000
2002
2004
2006
Wireless Only Households by Age
Network Evolution: Circuit to Packet
Bell Device
Sound
Wave
Electrical
Wave
Bell Device
Back to basics …what did Bell invent?
Sound
Wave
Analog Transmission Limited by Noise
AMP
AMP
AMP
OUTPUT
INPUT
Analog Amplification: Noise Accumulates
Consequences
 Loops limited in length
 Switches are centrally located nodes housing
network intelligence
 ILEC networks evolve with large numbers of wire
centers, each aggregating relatively low numbers
of subscribers.
Analog to Digital Conversion
Original Signal
one
zero
Regeneration v. Amplification
Original Signal
After some distance
Regenerated Signal
Multiplexing
time
One conversation
time
Another Conversation
time
Multiplexed
Packet vs. Traditional (Circuit-Based)
 Packet routes individual information
independently of prior/subsequent packets.
 Traditional uses pre-established time assignments
(called time division multiplexing) to route info.
 The “airport security” example.
Packet vs. Traditional TDM-Based
 Standardized time slot vs. standard packet
 The tyranny of 64 kbps
Voice
Data
Information Rate
Constant
“Bursty”
Delay/Latency
Intolerant
Tolerant
Noise
Tolerant
Intolerant
Symmetry
Symmetrical
Asymmetrical
Transitioning PSTN to a Data Network
 Growth of data is primary driver of network design.
 Voice is a specialized use of a data network.
 Preserving voice quality within a (managed) packet network is
commonplace.
 Preserving voice quality across packet networks is the central
challenge of IP interconnection.
 What is meant by quality?
 Data – all the information arrives intact.
 Voice – more subjective: enough information arrives without
delay to replicate the human voice to the human ear.
©2012 Gillan Associates – ETC Group, LLC
Quality Assurance
Network Type
Method(s) to Assure Quality
Circuit-Switched Network
SS7 provides busy-signal if
capacity unavailable
Internet
(Over-the-Top VoIP or Nomadic
VoIP)
Focus is on arrival of all
information.
“Best-efforts” approach relies on
“buffering,” either at its source or in
the network.
Managed IP
(Managed VoIP or Facilities-Based
VoIP)
Packet prioritization
Traffic Segmentation
The Layers
Physical Layer -- Fiber/Copper
Structure Layer – Poles, Conduit, and
Rights-of-Way
Small/Medium
Business
Fiber/Conduit
The Full Layers
Layers in Each
Individual Packet
IP Layer
Application Layer
(i.e., “The Payload”)
Transport
Layer
Data Link
Layer
Physical Layer -- Fiber/Copper
Structure Layer – Poles, Conduit, and
Rights-of-Way
Small/Medium
Business
Fiber/Conduit
“Due to technological advances, changes in
consumer preference, and market forces, the
question is when, not if, POTS service and the
PSTN over which it is provided will become
obsolete…..”
AT&T 12/09
The First Lesson
NOT ALL IP IS THE
INTERNET!
Managed vs. OTT VoIP
Over-the-Top VoIP
Managed
VoIP
Sources: USTELECOM, “Evidence of Voice Competition and ILEC Non-Dominance Mounts,” April 2, 2013, at 8.
An Overview of the Transition
Telephone
Service
Internet
Service
CircuitSwitched
Network
Open
Best-Efforts
Packet
Network
Telephony
Internet
Video
Other
Next Generation Network
(Packet Network with Managed Traffic
Flows)
Note: At the physical layer, new facilities are being interwoven into the existing network.
Residential Share in US
Wireless Only
Incumbent
Share
Cable Share
All Other
Source: USTELECOM, “Evidence of Voice Competition and ILEC Non-Dominance Mounts,” April 2, 2013.
Business Share in US
Cable Share
Traditional CLEC
Share
ILEC Share
Source: USTELECOM, “Evidence of Voice Competition and ILEC Non-Dominance Mounts,” April 2, 2013.
AT&T’s Many Hats
 Retail
Retail Provider
Residential Market
Business Market
 Wholesale Provider
 Co-carrier
AT&T’s Many Hats
 Retail
Retail Provider
Residential Market
Business Market
 Wholesale Provider
 Co-carrier