Lucent Technologies
Ruminations on Lucent

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By etherdude
April 25, 2001

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I found the NY Times article "Sitting Pretty: How Baby Bells May Conquer Their World," by Seth Schiesel, a fascinating MUST read. It led me to some "CTO-ish" thoughts about the near term future of the Telecommunications industry.
Mr. Schiesel dramatizes (only a little) the likely end-point result for the American telecommunications marketplace (circa 2004) due to the effects of the 1996 Telecommunications Act. This article points out why I personally think that cocktail conversation in the next few years will again revert to that topic of yore: "How much we hate the phone company!"

I agree completely with Mr. Schiesel that the "Baby Bells" have won the competition that began in 1984 with the break up of Ma Bell. Game, Set and Match! Or Qwest, SBC and Verizon (in alphabetical order)! As Mr. Schiesel points out, the only REAL long term competition for the three or so Baby Bells are the one or two large cable companies (AOL/Time Warner, AT&T?) who are just now focused on finishing the conversion of their older 6MHz analog RF networks to digital services. Unfortunately, in my opinion, the result in the public network will be a much slowed pace of technology adoption, poorer residential services for DSL based broadband Internet, higher telecommunications prices for consumers, and FAR less competition.

The view amongst the cable providers has its own bleak side. The inability of the entertainment industry to come to grips with the Internet assures us that the digital IP network over cable will be parallel to the digital video network over the same cable. There is no great incentive for AOL/TimeWarner to integrate its Internet services with its video distribution, as that would open up the opportunity for the phone companies to distribute the same videos over the DSL networks. In addition, every day brings more stories about unresolved issues with Internet distribution of audio and video entertainment sources, radio stations, and licensing and royalty associated with artists, actors, and authors. As I write, hundreds of radio stations have been pulled off of the Internet due to licensing issues of "ADVERTISEMENT" royalty payments.

This all bodes ill for the consumer. And anything that bodes ill for consumer Internet consumption will bode ill for shareholders of networking companies such as LU, CSCO, and NT.

If Mr. Schiesel's view of the world is sustained (and I believe it will be), then over the next three years (by 2004) I think we will see the following:

1. Long Distance carriers (Worldcom and Sprint) will wither until gobbled by Baby Bells. Whither AT&T?

2. CLECs will wither further. With apologies to Shakespeare and poor Yorrick..."Alas, poor Winstar! Ye' never had a chance! Give it up!"

3. Cable and Baby Bells will compete fiercely for broadband residential Internet services. No clear winner will emerge.

4. 3G wireless Internet services will be a STRONG business network play. 3G wireless, however, will not be a factor for the North American consumer. It is too expensive (per bit), and the demands for bandwidth consumption on a vast scale will exceed wireless' ability to supply. Further, it will take too long for the "hand-held" device wars to settle out between PDAs and cell phones for this segment to matter to the home consumer.

5. Baby Bells will win buyer allegiance when the buyer views Internet communications as part of a "business requirement" akin to home use of the telephone. Or when good cable based service is unavailable.

6. Cable companies will win buyer allegiance amongst those who view entertainment as the driver for their Internet experience. Or when good DSL service is unavailable.

7. Cable companies will focus on digital and HD TV. Ownership of the entertainment media by cable companies (AOL/TimeWarner) and recent experiences with Blockbuster Video's failed attempts at Internet based streaming video rental suggest that Internet video distribution will be limited (i.e., the Internet will not be a primary mechanism for replacing the Video Rental store!).

8. The cable companies have been MORE aggressive with cable modem based Internet service and have higher installed base and installation percentages than have LEC's with DSL. I expect that given the choice, many consumers will prefer to get their Internet service as part of their video entertainment. This consumer has a higher tolerance for "ability to pay" than a pure telephone-only consumer, and is more attuned with the up front "flat rate payment" methods of cable than the "pay by usage" of the phone company. HOWEVER, cable modem technology may be ultimately more limiting than DSL. Further, the cable company's desire to control video distribution by means of a parallel network consumes MOST of the bandwidth of the cable, leaving little for the fast growing IP portion of the network.

9. What will LEC's do to combat cable companies? LEC's have a winner if they take advantage of DSL's potential for MUCH better dedicated "price/performance" than the cable companies can provide. LEC's COULD attach themselves to a bandwidth consuming "killer-app" and offer much higher performance than current DSL (at least 1.5Mbps bi-directional) at killer prices ($30-40/month or less). This would be about 2X downstream and 10X upstream of today's typical 768K/128K DSL service. It may well be that current developments in IEEE 802.3 "Last Mile" Ethernet will be the technology lynchpin.

10. My belief is that the key to DSL growth will be in consumer electronics, and SONY is king. While multi-player video gaming is not particularly bandwidth intensive, sending videos and still photos to Grandma IS! If LECs embrace personal "digi-cams" (video and still) for both real-time and stored distribution applications, they will create capacity demand that could wipe out the capabilities of the cable-based broadband Internet.

11. This all bodes ill for Microsoft and Intel, since consumer electronics -- not computers -- may hold the key to rapid development of the digital infrastructure. Cisco's position in this is also suspect, since their best technology bet, public IP routing infrastructure, and their strongest technical competitor (JNPR) are in just this area. NT, LU, and ALA are somewhat different in that they have stronger transmission businesses (DSL and optical) and public switching knowledge that can be leveraged.

What does this mean to the Lucent shareholder?

The marketplace for networking equipment (LU, CSCO, NT, etc.) for the public network will be MUCH less interesting over the next few years. It will likely be a more highly controlled "buyers market" with many fewer but more financially stable customers.

The good news is that LU is doing well with Verizon, one of the "big three" LECs. LU has also made inroads into AOL/TimeWarner's optical backbone. If LU can insure its longevity with Verizon and AOL/TimeWarner and increase its participation with SBC and Qwest, then LU could actually roar back and make CSCO look puny!

This also says to me that the "innovation cycle" will move away from service providers and towards the enterprise customer. Look out AV! You JUST may end up in the higher growth marketplace after all!