History repeating itself

It has been said that two things in life are constant: death and taxes. Well, there’s another: history repeating itself. Specifically, we are in the midst of returning to private networks – again.

When the AT&T/Bell System broke up in 1984, companies began building private T-1 networks because the economics justified doing so. A company could connect offices in New York and Chicago and save a boatload of money. The cost justification was on the voice traffic, and data rode free.

Fast forward 10 years, and we start to see the shift to public networking, as companies began moving their voice networks to outsourced public VPN-based networks. If you’ve been in the business long enough, you may remember Tariff 12s – public network-based special tariffs for large users of voice-based VPNs. On the data front, the Internet became the public network. A company just needed a premises router connected to the giant carrier-based network of owned and hosted routers in the sky.

Fast forward a few more years to the U.S. Telecommunications Act of 1996, which was supposed to usher in local and intrastate long-distance competition for public-based networks. Competition could only happen if all carriers were on a level playing field. They weren’t – the incumbents owned the local loop and thus had the advantage. The real or perceived threat of some sort of carrier-based competition, in the form of competitive local exchange carriers or ISPs, was short-lived. We moved to where voice services were pennies on the minute, data was virtually free to flow, and the limitation was the price you were willing to pay and the size of your access pipe.

Fast forward to today, and we see the flaws in the telecom act. First, it did not provide any real local competition in last-mile connectivity services. Second, it let incumbent local exchange carriers provide intrastate long-distance service, thus driving the price of a long-distance call so low that no one could make money or invest in next-generation technologies. Third, the act did not free up the wireless spectrum to provide any real alternative for last-mile delivery or open up the cable operators’ networks. Instead, it let local exchange carriers and cable TV monopolies crush competition through the many legal and public utility commission channels.

Two constants are always present in monopolies: Price goes up, and service goes down. As regional monopolies take further hold through carrier consolidation, these two constants will become ever more apparent. In addition, carriers have done a poor job of adding new, enhanced services to their networks. As service levels degrade and price starts to creep up, the most demanding and innovative companies will start to build private networks – though these new networks will be built entirely on IP-based services for voice, data and video. History does repeat itself.

Tim Kraskey is managing director at YankeeTek Ventures, a Cambridge, Mass., incubator. He can be reached attim@yankeetek.com.