March 29 - 31
Santa Clara, California

Dave Burnstein has done another excellent job with FastNet Futures. He brings some of the best together and lets them talk. As a result there are many rich insights. As usual at the WAVE Report we are on the continual lookout for the market dynamics. In particular, what are the applications thzt will drive Broadband Adoption? FastNet Futures provided another reality check that this is neither obvious nor coming soon.

Realities of Broadband Home Market Sink In

This marks the first time that we have heard executives in the broadband industries openly discuss the problems that lie ahead. These include:

Increasing bandwidth availability does not solve the lack of broadband applications;

Triple play is a bolt on which aggregates services for a customer but does little to enhance the value of broadband services;

FTTH is a long ways in the future and, in the current environment, it is unlikely to get capital; and

The incumbent carriers are in a difficult environment seeking to raise ARPU while the market is forcing pricing in the opposite direction.

Technology is its Own Engine

Speed sells or at least the hope is that it will. There were talks on:

Telephone line bonding;

VDSL;

DSM; and

MIMO Vectored Transmission.

These are technologies to

The improve the utilization of the twisted copper distribution plant,

Increase range, or

Increase the bandwidth.

Underlying all of these presentations is a stress on either the use of the existing DSL infrastructure or the payback time of an investment. One spoke of payback in only a few months, which we regard a measure of the difficult environment that the carriers are in.

Part of the competitive equation is cable competition in the US. As the cable companies see to raise the bandwidth of their offering, the telephone providers are seeking to have a like response. Again, it is best to look to Asia for the competitive dynamics that is driving the deployment of higher rates.

Much has been written about the rapid ramp in Asia for high-speed service. For example, in Korea $11b has been invested for VDSL upgrades. The speed ramp was fast: 13Mb/s (6/02); 20Mb/s (3/03) to 50Mb/s (1/04).

It is estimated there are 1.5m VDSL lines installed in Korea. In Japan the rate went from 1Mb/s to 45Mb/s in 3 years. It is estimated that 100Mb/s will be reached, as a service offering over copper, in the next 12 months. A key factor in Japan is that the loop distance is only 300m.

The ILECs are faced with a problem at the core of their business. For the first full year since the 1930's the cash cow of the business, installed phone lines, fell in 2002. It is estimated that those lines used for just phone service could fall from a peak of 180m lines in 2001 to only 40m by 2010. On the other hand the demand for VDSL could rise to 85m lines by 2014.

The most interesting element in this parade of presentations is that no one described an end game for higher bandwidth. If anything it was observed that the higher penetration in Korea and Japan has its own set of problems when there is not a value element in the bandwidth demand. Alcatel sheepishly said that given the consumer desire for content they might like to take to transmitted holograms.

Here is a summary of those presentations that we found most interesting.

Siemens – Efficient Networks – Network Complexity is a Business

Patrick Fitzgerald, VP of Marketing, Siemens Subscriber Networks, a.k.a. Efficient Networks, had interesting comments.

We are now entering the 3rd phase of broadband deployment. In this phase the carriers must deliver more value to the customers. This means increased functionality and more value added services to end-users.

"Bolted on Convergence," that is video via satellite, Internet and voice, with some offering cellular voice, is NOT a long-term strategy to maintain happy customers for the ILECs.

One of the problems consumers face is the proliferation of devices that use the network in the home and the complexity this brings. Examples of this include home security, virus protection, content filtering and the wireless issues.

Siemens described the concept of "Converged Customer Care." The tag lines used were: Speed Kills, the consumers need air bags and the service providers need to provide the equivalent of OnStar.

The WAVE Report spoke with Patrick.

Complexity is a solution proposition.

Bolt on services is not a long-term proposition. At SBC, which has a satellite video offering, customers are leaving cable because the hate the service from the cable companies. In spite of offering satellite video, this is not a long term offering by the ILECs, they must do more.

We have installed software for home networks called Tango. Over 15m copies have been sold. This is one element of our competitive offering.

Three of the US ILECs recently released an RPF for a high end set top box for DSL. The problem is that consumer CPE for broadband is free and it is unclear how these STBs will be sold.

The movement of CE into the home which is wireless is a real problem. Incompatibility between wireless products is an issue.

"I would hate to be a carrier in today's environment. They have nothing to offer outside of the services. It is good to only have to sell hardware [at Siemens]."

China is not a Piece of Cake

Shin-Jou Fang, CEO of Trendchip Technologies, from Taiwan, gave an interesting talk. His company went into business 5/01 and now has 90 employees with 20 in China. They claim to be only Asian DSL chip company. Its primary target market is China.

The catch phrase is "The DSL action is in Asia." Yet, there was a healthy dose of reality. Some of the statistics cited today included.

It is estimated that China will have 75m DSL lines by 2008

Huawei is #2 in the DSL port market. It has 18% of the DSL ports and 11% of the revenues. This share is due almost exclusively to the role of the China market. The #2 position is compared to #1, Alcatel with 35% of the ports and 44% of the revenue.

The position of NA as the demand agent for DSL ports is fading. In 4Q03 51% of the ports went to Asia, while 29% to EMEA and only 16% to NA.

Due to its rapid growth, China has become the most important DSL market.

Today China is #1 in three DSL statistics:

#1 in total DSL Lines
#2 newly added DSL Lines
#3 in phone lines

DSL penetration is only 5%. If it reaches 20% another 32m DSL lines will get added

20% penetration, in terms of population, represents a critical milestone in broadband penetration. When this happened in Japan the DSL IC vendors suffered.

China represents a unique opportunity in that the DSP penetration is low, 5.1%/100 population while the number of phone lines installed exceeds that of the US.

But what is missing from this assessment is the low per capita income. This is only $1,126/ year while the US and Japan are at $38,000 per year.

If China adds 10m lines in 2004, as some estimate, then in 2 years the country will saturate at the 20% level.

The top 10 DSL countries have per capita incomes > $10,000. In these countries the DSL pricing is affordable. This implies much in terms of the product that includes convergence with voice and video.

However, these assumptions may not hold in China:

It is unlikely that the Triple Play will work in China. SPs will not provide video or voice due to law and cannibalization of the business.

There are only single PC homes in China – thus the notion of bandwidth sharing does not apply.

The trend of adding features to the DSL modem ASIC will not work in China. We do not need WLAN or MPEG support. This has the impact of driving the ASP of the chip up. Our view at Trendchip is that we must implement simpler chips that are Simple, Economical and Practical for Everyone.

We see the price of the DSL chip approaching that of the chip in a 56k modem. That is our goal.

The bottom line is that China does not need nor can it afford DSL as defined in the US or Europe. Localization of the technology to China is key to its success.

The WAVE Report asked how much this analysis would change if it was restricted to just the high-income areas, i.e., in the southern provinces? Basically the 20% penetration represents the adoption of broadband in those areas at a higher rate due to the higher income levels in these areas.

The Network Bandwidth Problem – Here Comes Grid

Wintegra presented an interesting chart on the downstream bandwidths required by the newer DSL technologies. Examples include:

A 64 line DSLAM card will require 1.28Gb/s of downstream bandwidth for ADSL2+

A 64 line DSLAM card will require 3.2Gb/s of downstream bandwidth for VDSL.

Note that there are 64m DSL lines installed today. As the data rates continue to climb, especially in NA and Europe, it could well be that only a grid like infrastructure can manage this.

100Mb/s Arrives but has Nowhere to Go GDSL (Gigabit) Proposed

Two demos were shown by Ikanos and Metalink Broadband that supported 100Mb/s downstream and 36Mb/s upstream of actual payload. Both stated that these systems would be installed in Japan in 3 – 4 months. Later a session was held asking what applications would use 100Mb/s? The responses were incoherent. For example, it was suggested that such high-speed connections would enable pirated movie sharing because the movie could move between sites at faster than real time.

1Gb/sec on the Horizon

John Cioffi, Professor, Stanford University, presented an overview of DSL technology to improve performance and reach. John showed that one bottleneck for higher performance is distance. Using fiber to the pedestal and 4 line pairs it is possible to achieve 1Gb/s up to 300m. (Note that this is the distance being quoted for the 100Mb/s service in Japan above.)

Build it and They Will Come - Maybe

We heard that:

100Mb/s DSL is here now;

100Mb/s performance in cable is being held back by the gross spectrum inefficiency of analog televisions but in spite of this, 100Mb/s is readily achievable;

2.6Gb/s data service, symmetrical, is possible with the HFC plant and

1Gb/s is possible with DSL using a fiber to the pedestal approach.

The argument was made that bandwidth alone will drive usage and innovation. Unfortunately the era of invest first and seek customers later has passed. Cable has invested $84b improving its infrastructure. In the discussion on high-speed cable it was readily admitted that there are no incentives to significantly raise cable bandwidth. The only factor that will drive this is competition. Given the current economic climate, the cable MSOs will not invest in any upgrades unless forced to do so.

Content is Not King – Going Against the Grain

Andrew Odlyzko, Digital Technology Center, University of Minnesota, bashed many of the notions prevalent about bandwidth consumption. Andrew argued that:

Content is not king;

Value of Broadband is Misunderstood and

Real-Time Streaming Multimedia will not dominate.

What matters most is:

Volume;
Transaction time (round trip interaction)
Reach and
Price.

His view was a part of a thread here that personal media will increasingly have a role in the value of broadband. When this happens our present views of broadcast media are dated.

Threats to the Open Internet

Dan Gillmor of the San Jose Mercury News looked at the directions of the Internet and the impacts on consumers. Some of his points spurred discussion.

Hollywood hates and fears the movement of consumers into the role of producers of information and entertainment. Enabling tools cited include GarageBand and iMovie.

We are seeing the end of "end to end" Internet service. Examples include:

Asymmetric broadband services;

Hollywood is seeking to ban P2P including the recent bill which if passed would have the FBI investigate IP thefts;

Government interference with the Internet to construct geographic zones such as what happened with Yahoo in France;

Cisco "QOS" in its routers allows carriers to restrict flows; and

Restrictions on broadband use by the carriers and cable companies.

Pac Bell will stop service when the symmetry is 15 down to 1 up and Comcast will cancel subscriber when usage is too great (level not defined.)

GASP – Globally Accepted Service Principles – Jeff Pulver Pushing Again

Jeff Pulver is passionate about these beliefs. He pushed the agenda at the FCC on VoIP. In the opening keynote Jeff described his experiences in Washington with the FCC and Capitol Hill. This exposure highlighted the risks to the Internet. In response, Jeff has proposed an independent group, similar to GAAP for the accounting profession, to support Internet access. This has close parallels with FCC Chairman Powell's Four Internet Freedoms. At VON the first meeting of GASP was held to help develop a MoU, Memorandum of Understanding. This will be global not-of-profit and important to watch.

Does the Lack of Content Diversity Threaten the Open Internet?

At FastNet Futures we have heard more about threats to the open Internet than in prior conferences. A keynote by Jonathan Taplin, Professor, Annenberg School for Communications, USC, was a scathing indictment on the impact of media consolidation. He was formerly Chairman and CEO of Intertainer which was a VoD movie service on the Internet that has since ceased operations. Intertainer sued Time Warner, Sony and Vivendi Universal for anti-trust violations that are alleged to have taken place to protect a competing service, MovieLink, known earlier as Moviefly. More.

Jonathan Taplin began by contrasting the diversity of media content, from radio to film to television, in 1974 to what exists today. His premise is that media consolidation has extracted a major toll on the range and quality of media available to the public. To support his argument he cited:

Clear Channel has eliminated radio diversity with its consolidation of 1,200 radio stations;

The six major studios control 98% of the film screens that create films for the lowest common denominator;

He described television as being 300 channels with nothing on.

Media is now consolidated in the hands of: Viacom, News Corp, Walt Disney, GE, Time Warner and Sony.

The US has had a history against such consolidation. There have been 17 antitrust suits, from 1914 to 1980, brought to preserve the separation of production and exhibition, and the government has won all of these. Yet, the consolidation of the production and media industries has moved rapidly. This was under Mark Fowler, FCC Chairman during the Presidency of Ronald Reagan. This included the end of the Fairness Doctrine, the end of the Fin-Syn Rules that supported separation of production from distribution and an increase in the caps of media ownership. The result is that over the last 4 years the following has happened:

66% of the Independent newspaper owners have been eliminated;

40% of the Independent radio station owners have been eliminated;

43% of the Independent TV stations have been eliminated; and

73% of the Independent record labels have been eliminated.

Further.

The amount of shows for television that are produced by the networks for their own broadcast has risen from 16% to 78%.

A premise, Jonathan suggests, is that large scale does not foster creativity but kills it. Three examples he cited are the media, software and pharmaceuticals. Where there is no creativity markets head to "creative destruction." Two examples in such a state are cable networks and cell phone companies. In the case of the cable companies Big Cable is seeking to make "Broadband their Walled Garden."

Cable is forcing on consumers bundles with content the public does not want. While cable systems push 100+ channels the average consumer only watches 17 while the forced bundles have 4X than amount. According to Jonathan 80% of the cable subscribers would not want ESPN if given the option.

As a result, there is a 500-channel train wreck, as he calls it. In linear media, i.e., cable, the costs of production has risen dramatically with very little additional revenue. This is a Supply/Demand disaster. While on the Interactive side it is just the opposite that is a Demand/Supply disaster. There is a 200% growth in the number of broadband subscribers but the major content owners are very slow to deliver content for the medium.

It is Jonathan's premise that rather than put the niche programming on cable this should be put on a server for distribution over broadband. This should be available over the Internet when I want it. But to market this there must be network neutrality – that is no Walled Gardens.

We are at a crossroads. Cable companies to upgrade their networks have spent billions and this only reinforces the role of the Walled Garden. Yet, what is needed is an open Internet with no restrictions on access. Jonathan even went so far as to embrace the restoration of FCC regulation of cable rates. This would allow for the a la carte pricing of cable services and put more flexibility in the hands of consumers.