The New Telephony: Convergence of the Telephone and Internet Businesses
The Internet and its technologies have intruded on the telecommunications scene like a dragon flying from the sky, invading a sleepy little hamlet. In the hamlet, all was well before the dragon came. Everyone understood their purpose and the village functioned well. There was enough to eat, there was order, and even though there was an occasional conflict between villagers, competition had its boundaries that were implicitly observed. The dragon changed all that. At first, the dragon lived apart from the village and there was no problem. Villagers rarely saw it, and when they did, it was easily ignored. But as the dragon's haunt encroached on the village, problems arose. Now and then one of the workers would fail to return from the fields. At times, the dragon would swoop down on the village and devour everything in sight. Peasants were unwilling to go into the fields to harvest crops, conflicts between villagers increased, and everyone wanted to kill the dragon. Wizards and sorcerers gave all manner of advice on dealing with the dragon and offered to destroy it or run it away. But all these things proved impossible: the dragon was there to stay.
The Telephone Business
Like the villagers in the hamlet, the former Bell System understood its objectives and the engineering means for achieving them. The Bell System was never in a hurry. It chose excellence over time-to-market and reliability over low cost. The well-understood concept of Universal Service was an overriding requirement for everything done. No expense was spared to achieve the highest quality system. No stone was left unturned in the quest for high reliability. These were admirable objectives for the engineering community. And the proof is in the pudding: the U.S. network today is the best anywhere. The scope, sophistication, reliability, and performance of the U.S. network are unmatched by any network in the world.
But today, the divestiture of the Bell System, deregulation of telephone service, and the rapid success of the Internet are causing everyone to reconsider their business objectives and engineering means. And why not, the Internet is the king of telecommunications. We can go anywhere and communicate with anyone with the click of a mouse. The rise of the World Wide Web (WWW) and electronic commerce has proven the value of the Internet, and it appears to have no end in sight. And, as all telecommunications engineers know, the Internet is nothing like the telephone network.
Yet the attitudes towards quality, time-to-market, and engineering means of most carriers remain much as it was prior to 1984. And while the business model for telephony has seen some innovation, it is much the same as it always was. Most of this is due to the long-standing success of the large carriers. Their culture is steeped in decades-long traditions, regulations, union practices, and a century of financial success. In his book The Innovator's Dilemma, Clayton Christensen shows clearly the difficulty of maintaining market success when faced with the innovation of a disruptive technology. The most successful corporations who follow their established market needs can be overwhelmed by technical innovations in niche markets, which could suddenly be applied to their market or which can redefine the value proposition for the market. As Christensen shows, this is nearly impossible to predict and to avoid.
Besides the problems of the market, it is very hard to change a corporation's culture, even if it wants to change. Even when senior management mandates a change in corporate direction, it can prove impossible to get responses from the employees who have spent years, possibly decades, working in the way they know best. And besides, these can be enormous organizations with tens of thousands of people. Like the proverbial aircraft carrier, such large corporations cannot turn on a dime. This does not mean they are stupid organizations or that they are dinosaurs marching to extinction. It is just that making changes in an organization of 100,000 employees is far more difficult than changing the culture of an operation that has 100 people.
Because the telecommunications industry comes from a heritage of regulation, there are concepts and business practices that have been driven largely into a state of irrationality. Taken one by one, each new regulatory step seemed more or less logical. But after an eternity of incremental small changes in regulation, the current morass of price control, depreciation rules, and cross-business restrictions are surrealistic. This creates an artificial environment for competition, which in the long run cannot be maintained. Of course, regulators realize this, but it is difficult to decide what actions to take that will increase competition fairly while maintaining a service base for the public. These are not easy steps, and there is no certain way to accomplish this. For quite some time, regulators will play a key role in the outcome we are contemplating.
Because the large successful carrier has a business base with millions of customers and an investment measured in tens of billions of dollars, rapid technological change is not likely. The financing, manpower, and planning needed to change such an enormous embedded base quickly would overwhelm the financial strength of even the largest of corporations in this business. And if such investment is simply a way of retaining current market share, it will be very hard to convince management and investors to take the plunge. Even if the investments will produce new services and some growth in revenues, it may prove impossible to get the funding to "tune up" the core business.
A key facet of the technology in the public switched telephone network (PSTN) is that it is built on the "circuit" concept. This comes from the most basic origins of telephony, where a pair of wires formed a circuit from the user to the operator and the operator would complete the circuit between a pair of users based on the caller's request. Later, the operator was replaced by switching systems and the analog circuits were replaced by digital channels. But the overall operation of the network has not really changed in overall concept. Based on indications from a caller, a digital circuit is established between users that carries the bits of information they wish conveyed. The circuit is present for the duration of the call; whether or not the users want, it is continuously conveying bits between them. This concept of "circuit" permeates the engineering and operation of today's telephone network. As will be explained later, this is both the strength and the weakness of the telephone network. On the one hand, circuits are easy to engineer and maintain. On the other hand, they are not always the best choice for transporting information.
As time went on and more services were introduced, the telephone network added increased intelligence and processing to the core of the network. Services such as call forwarding were based inside the network. Users would interact with the network systems using their simple telephone and would control these functions using schemes that reused the signaling systems within the network. This allowed these services to work pretty much the same way everywhere and to be extremely reliable. Usually, these were modest incremental changes to software operating in the switching systems. Today, these features are very tightly bound together, and making changes to the call control systems requires great expertise and careful testing to ensure that the features do not interact badly.
Those companies that provide the basis for the PSTN are the Local Exchange Carriers who provide local phone service and the Interexchange Carriers who provide long-distance services. Collectively, these are the "telcos." They currently have high revenues, but there is little if any growth likely in the telephone business. Because it has existed for a long time, the current phone business within the United States has already expanded to its maximum market size, and growth is quite limited. Most growth is in the area of wireless and second-line service for Internet access.
For all of these reasons, the PSTN and its carriers are not going to make any massive overnight change in direction. While they might begin moving in a new direction, the core business and networks of these carriers is too large, too complex, too successful, too inflexible, and too regulated to "turn on a dime."