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Weekly Column

When Elephants Dance: Get ready (finally) for faster Internet speeds at lower prices

Status: [CLOSED] comments (91)
By Robert X. Cringely
bob@cringely.com

My friend Ira, who lives in Yokohama, Japan, has 100-megabit-per-second fiber-optic Internet service in his home. This costs Ira less than $30 per month. What the heck is up with that? Ten years ago, the United States had the fastest and cheapest residential Internet service in the world. Today U.S. residential Internet service, especially broadband, is among the slowest and most expensive. I'll explain next week how I believe we came to be in this bandwidth mess, but this week I get to predict that the situation may (finally) be changing. Get ready for a substantially faster and somewhat cheaper Internet.

While your broadband service may be labeled as faster than it used to be, there has been very little that is really new happening in Layer 2 Internet services. Cellular G3 data has been dormant. For all the talk of G4, G2.5 is still the standard. Cable modems with Data Over Cable Service Interface Specifications version 2 (DOCSIS-2) have been standard for years. DSL has s-l-o-w-l-y moved to 6mbps/768kbps IF you are lucky to live close to the DSLAM. For businesses the big technology has been Multi Protocol Label Switching (MPLS) over T-1 service, which is not really a Layer 2 improvement at all. Metro Ethernet is coming along but too slowly for most. And Internet rates for businesses are still around $500 per month for a 1.5 megabit-per-second T-1, which is lousy compared to many parts of the world, some of them supposedly a lot less developed than the U.S.

Here are some clues to what has just started happening to change the Internet service status quo.

Alltel, a national mobile phone company, was acquired by Silverlake and TPG Capital, two private equity funds. Avaya, a maker of IP telephony systems for business, was also acquired by the same Silverlake and TPG Capital. T-Mobile now offers in the U.S. a pair of mobile phones from different vendors that will allow free calls from WiFi hotspots. Apple's iPhone has WiFi support. DOCSIS-3 cable modems have been demonstrated operating at 150 mbps with deployment to begin next year. Verizon is rolling out fiber service to homes and businesses. For customers who can't get fiber, Verizon recently increased DSL speeds with no price change. Sprint is becoming the dominant wireless Internet service for businesses through aggressive pricing, which is especially hurting AT&T (formerly Cingular). And AT&T has taken 30 percent of MCI's (now Verizon's) business customers through aggressive T-1 pricing. In short, everyone is poaching from everyone else in the business market, which points to a looming price war for business Internet service starting this fall.

Here is the first shot -- Verizon's FiOS Business Internet prices to be rolled out this fall in the northeast U.S., bypassing Metro Ethernet, Frame Relay, and point-to-point T-1's with asymmetrical fiber service:

Dynamic 5M/2M $ 40/mo.
Dynamic 10M/2M $ 40/mo.
Dynamic 15M/2M $ 60/mo.
Dynamic 20M/5M $ 60/mo.
Static 15M/2M $ 100/mo.
Static 20M/5M $ 100/mo.
Dynamic 5M/5M $ 170/mo.
Static 5M/5M $ 210/mo.
Dynamic 30M/5M $ 350/mo.
Static 30M/5M $ 390/mo.
Dynamic 35M/10M $ 170/mo.
Static 35M/10M $ 210/mo.
Dynamic 50M/10M $ 350/mo.
Static 50M/10M $ 390/mo.

So business Internet prices will drop in the northeast, where Verizon is king, but the impact will be felt nationally because Verizon will have established pricing levels that other competitors will have to meet.

Now let's get back to Silverlake and TPG Capital. Their Alltel mobile phone network will provide VoIP to Avaya PBX's, effectively creating for businesses (at first) a PSTN bypass. Then the same people will provide Vonage-type phone service over local broadband using Avaya PBX's, creating yet another PSTN bypass. WiFi will become standard for the cellphone industry after years of being blocked by cellular providers. Verizon fiber pricing will force AT&T and others to lower prices in the northeast, but AT&T can't have two national pricing plans so costs will fall everywhere. Part of this will be driven by Comcast's pending roll out of DOCSIS-3 cable modem services. AT&T's response will be to try and lock in clients for multiple years BEFORE the DOCSIS-3 deployment, causing even more downward pressure on prices. By now we're talking about not just business prices but also residential.

At this point expect the state utility commissions to push for rate normalization between fiber and non-fiber territories, meaning more downward pressure.

Business model changes involve so-called "triple play" services where ISPs hope to make money from providing not just Internet service, but also telephone and television. The cable TV companies want to steal from the telcos basic phone service while the telcos want to steal television service from the cable companies. Since either possibility requires advanced data services and more bandwidth, users benefit.

U.S. telcos, notably AT&T and Verizon, are aggressively building out their fiber plants, though AT&T is taking its fiber only as far as the curb while Verizon is taking fiber directly into the home. This ostensibly limits AT&T to XDSL speed limits, though the company can use channel bonding (more than one pair of copper wires per service) to increase speeds if forced to do so by competition. Verizon is rolling out residential fiber service from 30-50 megabits per second but its equipment can jump to 100 megabits per second if needed without requiring another truck roll.

An important secondary motivation for this fiber roll-out is that telcos are not required to share such facilities with competitors as they have been required to share copper infrastructure under the Telecommunications Act of 1996. So while there may be competition in the neighborhood from cable modems, once the fiber is in and the copper is out the telcos need never again fear competition from Competitive Local Exchange Carriers (CLECs).

While the number of U.S. residential broadband users is continuing to increase, the rate of that increase is slowing according to several surveys by the Pew Internet & American Life Project. Extrapolating these numbers suggests that ultimate broadband penetration will be comparable to cable TV or around 85 percent absent some total coverage solution like BPL. This slowing of growth may be inspiration for the growing telco vs. cable battle over triple play digital services, with the idea that some telephone users (where market penetration is already 97+ percent) will be induced to buy broadband service to lower their telephone costs.

Who is the big winner here? Well I'll count myself a winner if my Internet pricing comes down a bit (I pay $168 for 8/1 cable service with five static IPs) but the REAL winner is Cisco Systems, whose largest market is service providers. With Comcast and Verizon pushing AT&T toward offering new technologies at lower prices, EVERYONE is going to need a new router.

Comments from the Tribe

Status: [CLOSED] read all comments (91)

Hong Kong and Japan are a much smaller area, Verizon is running fiber right now, but we're talking a continent not a postage stamp. Already fiber is being used, so I won't get it for a year, big deal. I am so scared we are behind, since we invented the technology and designed it, HK are just testing labs for new products anyway. The world is integrated and it's not US versus China versus Mid-east we are all inevitibly intertwined. Thanks for testing it for the rest of us. Wireless is the future anyway but what the heck, I am getting too much information anyway and have over 100 channels on basic cable with 99% commercials, just watch a video. Maybe I am one of the Sloskies. I am a tortoise. Do they have the iPhone, way cool device. Made in Taiwan, thanks Taiwan!

knighotf | Jul 27, 2007 | 10:39AM

July 27, 2007 - 5:15pm EDT

Faster??? ...for the blogs, the popups, the viruses and spyware, or the insipid content?

This is headed down the same road that radio and TV have already blazed. It's a road to nowhere.

Bob Guzauskas | Jul 27, 2007 | 5:16PM

I predict service won't get better anytime soon here in the states. The telcos got everything where they want and they'll only roll out 'faster' connections if they have to - and that won't be for the good of the nation or from regulation (unfortunately). But whatever I guess. Keep voting for all the politicians that line their pockets with contribs from these industry lobbyists if you think your service is great and that you don't feel these same politicians and companies are digging a deep hole for us.

As for virii, spyware, and popups; that what unix and content/ad/popup/flash blockers are for. :) And why even have cable if it's mostly commercials (which it is) and garbage?! That's what downloads and digital tv - as in free - are for.

JL | Aug 02, 2007 | 2:28AM