WAVE Report

The Broadband Economy
The Revolution that Wasn't: Broadband to the Home

By James Sneeringer
WAVE Issue #0148 10/26/01

One of the most intriguing presentations we saw at the recent CITI Broadband Economy conference in New York (WAVE0147), was Ken Zita's talk entitled "Reviving the Revolution that Wasn't: Reassessing Broadband." While almost every other presenter at this conference focused on the failures and delays in the development of the broadband market, Zita proposed that, in fact, the broadband economy was upon us already--but based on broadband to enterprise rather than to consumers.

Zita offered three arguments:

1) Residential access is the not the critical measure of the broadband revolution.

2) The broadband economy is already here, and has been for a while.

3) Managing complexity is more important, and more difficult, than increasing speed.

The Wave spoke with Zita recently about his presentation, and its background. Zita bases his views on his experience in the telecommunications and networking fields as a former journalist and industry analyst, management consultant and entrepreneur who has worked on telecom projects in over 30 countries since the early 80's. He recently co-founded Nupremis, a managed services provider that helped broadband providers deliver content and services. Ken is currently the president of Network Dynamics Associates, LLC, in New York.

1) Residential Access

In his talk Zita called it "the fascination with penetration"-- the focus on the percentage of homes subscribing to a broadband service. But, he asked, do consumers really need broadband? Broadband to the home, he asserts, is a social objective--a noble one. During our conversation he stated he absolutely believes universal broadband will positively affect the human condition. But, he stressed, it is important to draw the distinction between social objective and economic reality. A key concept he noted is that of revenue migration versus speculation--preserving cash flow while introducing new services gradually, rather than investing all-or-nothing in new technologies. In telecom, he pointed out, it is often the innovators who fail, while more conservative approaches succeed. Broadband to the home may be a societal goal, but that does not necessarily mean it is the health gauge for the broadband market as a whole.

A continual theme during the conference was that of the chicken and the egg--which needs to come first, bandwidth to the home, or the services that will use it? A recurring statement was that without broadband to the home, the applications that will create value would never develop. During our conversation, Zita expressed skepticism. He believes many of the applications for broadband have been and are being developed by businesses for businesses. He acknowledged that certain applications will likely only come into play after broadband has hit a certain penetration, but he was skeptical that this level of penetration was the limiting factor on the success of consumer broadband applications as a whole.

He stressed, though, that in his opinion the "denied promise" of broadband to the home (and its ensuing applications) is a powerful political argument with which to battle the influence of the ILECs (Incumbent Local Exchange Carriers). Zita left no doubt that he was unhappy with the way in which the 1996 Telecomm Act was enforced, and the resulting behavior of the ILECs. He stated that the ILECs' lobbying power in Washington prevented fair interpretation and enforcement of the 1996 Act by obscuring its pro-competitive spirit, and that the ILECs deftly managed the ideological rift on Capitol Hill to preserve the market status quo.

2) Broadband Economy Is Already Here

Is there a market based on broadband? Yes, said Zita during his talk, it exists today in the enterprise, where broadband deployment is nearly ubiquitous, and has transformed how networks are used. He pointed to the collapse of transport pricing in the early 1990's as the starting point. Some examples he gave of the transformation included that fact that now being on the network is equal to being local; the end of the switched paradigm; and outsourcing and network diversification. In his words, "the next wave of network computing and economic transformation does not depend on local broadband." He believes it starts with enterprise broadband, and the key is not bandwidth, it is managing complexity.

3) Managing Complexity Is Most Important Now

Zita stated flatly in his talk that bandwidth does not create value-applications - services do. High speed IP connectivity, in his opinion, is relatively easy to do. Managing complexity, on the other hand, represents the great technical challenge of broadband applications. He cited as an example of its importance, IBM's recent statement that the goal of the world's computer scientists should no longer be faster chips and processing speeds, but managing complexity in systems.

Examples of this complexity include application provisioning, application and resources management, billing, and security. In technical terms, transport companies are familiar with the first three layers of the OSI stack, but in Zita's opinion, it is in the higher layers, four through seven, that companies will build value in the future. These higher layers are where services like applications monitoring and security take place, and the transport companies that can integrate and provide these services-Zita called it a "smart pipe"-will succeed. In his opinion the development of higher-layer services still represents credible investment opportunities.

In the near future, businesses will be the core customers of these services. Zita outlined a trickle-down effect, where business-to-business broadband serves as a development ground for higher-layer services and systems of managing complexity, which then become available for consumer applications later. He offered a Jupiter Media Metrix quote of 41% broadband penetration of the home by 2006, and said he basically agrees with that. In his view the first wave of the broadband economy is over, and it happened among businesses, not consumers. The next wave is building in the business market and will spill over to consumers, but it will not happen quickly.

Zita finished his presentation by pointing out that broadband carriers are not prepared for the complicated application environment the bandwidth enables. In his view corporate usage and networked computing, not consumer applications, will drive the development of broadband architectures, and the needs will evolve slowly.