From The Street...
Saturday, February 28, 2004
"We no more need a phone company...
"...than we need a text company"
Clay Shirley offers his unique insights here:Networks, Economics and Culture
Excerpt from Today's email -
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VoIP - Plan A vs Plan B
2003 was a remarkable year in the US for voice over the internet
(VoIP). If you needed a label for the events of the year, "Collapse of
Denial" would be a good one -- after a long period of relative
inaction, the FCC and the state regulators are suddenly pushing hard
for a regulatory framework. The question is no longer whether voice is
going to become an internet application, but when.
"When" could still be a very long time, however. The incumbent local
phone companies -- Verizon, SBC, BellSouth and Qwest -- have various
degrees of interest in VoIP, but are loathe to embrace it quickly or
completely, because doing so means admitting to everyone --
shareholders, regulators, customers -- that both monopoly control and
artificially high voice revenues are going away. (The fact that this
is true does not much lessen the pain of saying so.) As a result, they
will likely try to convince regulatory agencies, both the FCC and the
states', to burden competitive VoIP firms like Vonage with additional
costs and rules, while delaying their own offerings.
Complicating this de facto Plan A, however, is the fact that VoIP
isn't a service, it's just a set of protocols, meaning that
competitors don't have to set themselves up as upstart phone companies
to deploy VoIP. If Plan A is "Replace the phone system slowly and from
within," Plan B is far more radical: "Replace the phone system.
Period."
Where Vonage and a number of the other VoIP startups present
themselves to the customer as phone companies, emulating the
incumbents they are challenging, you can think of Plan B as the Skype
plan. Skype isn't taking on the trappings of a phone company; instead,
it offers free two-way voice conversations over the internet (they
aren't phone calls, for the obvious reason) between users who have
downloaded and installed software onto their computer. (Other versions
of Plan B include instant messaging clients that let users talk, not
just type, and software like shtoom, a set of VoIP tools for the
Python programming language.)
The Plan B strategy is simple: "Familiarity is the enemy of progress.
Forget backwards compatibility, and concentrate on offering services
the traditional phone companies can't touch." For example, Skype
recently added user-defined conference calling, a kind of cross
between call waiting and conference calling, so that when someone
calls while you're on the phone, you can simply turn it into a
three-way call, a pattern more like joining a conversation at a party
than today's cumbersome conference calling.
Where Plan A is a fight between incumbent and upstart phone companies,
Plan B says that we no more need a phone company than we need a text
company. Email and weblogs and IM all use text -- why not use voice in
a similar variety of applications, and with a similar lack of
commercial bottleneck?
Plan A and Plan B are caricatures, of course. Vonage is experimenting
with un-phone-like features like mailing out voicemail messages as
audio file attachments, while Skype is talking about ways of
interfacing with the traditional phone network. Nevertheless, the
tension between the two plans is real: modification or replacement of
the current phone system. The litmus test is emphasis -- Plan A
emphasizes for-fee calls to ordinary telephones, with free
computer-to-computer calls presented as a bonus, while Plan B
emphasizes free calls as the main event. And much of how VoIP unfolds
will have to do with regulations written in 2004.
- The End of the Three-Part Deal
The official tradeoff in current telecom regulation is service
guarantees in return for monopoly control. Over the decades, though, a
third part of the bargain has arisen. Phone companies tolerated high
taxation as well, in part because it guaranteed continued freedom from
competition. As a result, telephony is treated as a vice instead of an
essential service -- the taxes and surcharges on a phone bill are more
in line with the markup on alcohol and tobacco than with gas or air
travel.
However, monopoly control, essential for the current bargain, is
ending. The cumulative threats of competitive local phone companies,
the decrease of second lines due to DSL and cellphone use, and now
VoIP have made the old deal unsustainable. The rise of a competitive
market seems conceptually simple, but most parts of the US have had a
phone monopoly for longer than they've had indoor plumbing, so the
possibility of phone service without the incumbent phone company is
hard for man observers to understand.
Even now, 20 years after the breakup of Ma Bell, some commentators
have criticized VoIP by noting that the phone company often provides
the high-speed DSL service that carries the VoIP traffic. "Isn't VoIP
simply a parasite technology?" goes this line of thought, on the
assumption that by undermining inflated voice revenues, VoIP will
destroy the DSL business as well.
This question makes no sense in a market economy. With railroad
bankruptcies in the 1940s, no one thought that the tracks would be
ripped up and sold for scrap. Similarly, the question of whether the
incumbent phone companies can survive if VoIP pops the bubble of voice
revenues is separate from the question of whether the wires in the
ground will continue to exist. Someone will sell data transmission
over copper wires, but there's no reason it has to be the existing
phone companies, in the same way that someone still runs trains from
St. Louis to Chicago, but it isn't the B&O Railroad anymore.
- Plan B: Saving Plan A?
With their monopoly ending, incumbents have no choice but to embrace
VoIP someday, because of the cost savings and the superior
flexibility. However, they may succeed in significantly delaying that
someday with the strategy of attacking their competitors through the
regulatory system, while slowing their own deployment of the
technology.
Plan B, however, is resistant to this strategy, because while it
creates the same value as a phone call, it does so without any of the
mechanics that regulation attaches to. No dialing, no phone numbers,
no _phones_ even, and, most ominously for the incumbents, no charge to
the end user. Vonage may be competition, but they don't undermine the
idea of charging the user the way Skype or Yahoo Instant Messenger do.
If you had to bet on the impulses of the phone companies and state
regulators, your bookie wouldn't raise an eyebrow if you put
everything on their trying to kill every Plan A company in sight.
We've seen this story before, as when the music industry, unable to
grasp the profundity of a technological change, killed Napster rather
than trying to bargain. This in turn sent the users to Kazaa and
Gnutella. The RIAA has now spent far more time, energy and money going
after these services than they ever did on Napster, with distinctly
less decisive results.
Similarly, the phone companies are overestimating the threat of Vonage
(which also wants to charge users to talk to one another) and
underestimating the threat of Skype (which doesn't.) And yet if they
succeed in killing off their Plan A competitors, they will strengthen
the far more radical challenge from Plan B.
This is the big wild card of 2004. It's clear what the consumers want
-- the maximum amount of experimentation with all sorts of models, and
not being forced to choose between new features and backwards
compatibility. However, telephony regulation is notoriously resistant
to user demands -- neither the FCC nor state regulators are elected,
and neither group is very responsive to citizen action.
The only thing that might save Plan A from death by delay is evidence
that users are adopting Plan B in large numbers, using the internet
for voice applications completely outside the framework of telephony
as we've known it for more than a century. We should all hope that
happens, because if wide adoption of Plan B convinces the regulators
and incumbents to acclerate their VoIP offerings, the users
benefit. And if it doesn't, Plan B will be all we get, so we may as
well start experimenting with it now.
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Thursday, February 19, 2004
Chicken on India
From The Daily Reckoning....
Stomaching India
Karim Rahemtulla
About 125 years ago my family left India and made its way to the East Coast of Africa. They were traders and soon built up an array of businesses ranging from retail stores to commodities like oil. My father was one of the largest distributors for Mobil on the East Coast of Africa. We were based in Mombasa (the name probably rings a bell as one of the recent targets of Middle Eastern terrorists.) Prior to 1997, I had never visited India nor paid much attention to the region. After all, the Indians that I knew were all fleeing the country for better opportunities abroad. But, Asia was in vogue in the early to mid-nineties, and I felt the need to make a trip over there and to other parts of Asia to check it out in person.
I set up several appointments with investment firms, bourse officials and investors. I was fully expecting to come back with strong, positive feelings about the region and the potential for investing. But as with China, the results were less than favorable.
Let me digress for a minute. I am not opposed to investing in India, China or Asia in general. I am opposed to investing without a darn good guide who knows what is happening on the ground. There are too many "me too" investments that pop up from these countries with nothing more than a trumped-up story of gold in them thar' hills. So, please, invest away, but do so with eyes wide open and ears to the ground.
Sh** happens
After a late night arrival in Delhi, I woke up the next day for a walk around. I wore new white sneakers, a pair of walkers bought just for the trip. I got my first take on Indian capitalism very soon after leaving the hotel. A street urchin approached me and told me my sneakers needed cleaning. I was wearing shorts and a polo shirt - I guess I stood out as a tourist from a mile. I didn't have to look down - after all, the sneaks were new. I said no and began walking away. He persisted and so I finally looked down, and lo and behold... something gross was smeared all over one of my sneakers. There were few cows walking around on the streets, so I know I did not step in a cow patty. To this day I know the little guy had intentionally pitched something on my sneakers just to make a sale.
"Ok. Go ahead, clean it up." It took him about 20 seconds of mixing some concoction from his little box to come up with a cleanser to miraculously make my shoes look like new again ( I wonder if Proctor and Gamble gets its formulas from some backstreet chemist in Delhi.) His price - $3 dollars. I gave him a dime and told him to take a hike. He did while firing off expletives in hindi in my direction. Hey, I may be a tourist, but I do know the value of a good hosing. I guess in a country where 80% of the population (at least 1 billion out of 1.3 billion) are poor, the art of making something out of nothing has been perfected!
Efficiency in numbers
I was visiting several cities in India before heading off to Bombay to visit the Stock Exchange and meet with some investor types. I hired a driver, Kumar was his name, to drive me all over the place. It cost about $20 a day including gas and tolls. Yes, there are tolls in India. Let me tell you how it works. As we entered Jaipur, I believe (it has been a long time), we stopped at a toll booth. About three toll collectors stuck their heads out of the small window. Kumar handed over a small bill to pay the toll, about 3 cents U.S.. The toll collectors looked at the crumpled note and did not like what they saw. I could see that there were at least another seven or eight people in the small building. They passed the note around some more and finally pronounced their edict. The note was a fake. They would not accept it. It had too many holes in it, too. Meanwhile about three hundred multicolored trucks were lined up waiting to pay their toll. Kumar asked me to help out. I gave him another note. Mine were a little fresher. The toll boothies looked it over and a few minutes later let us pass. This model of Indian efficiency took us about 15 minutes - all for a 3 cent note.
Currying favor
As much as I would like to share the daily adventures of this 3-week trip, I will get right to the point. That point can only be illustrated by my visit to Bombay and the Bombay Stock Exchange. Just before my trip, the BSE had made new all-time highs. Everybody was fat and happy. Even the "Big Bull," as he was fondly nick-named by the press, had predicted even more good times ahead. The Big Bull was more bull than big. His name was Hershad Mehta. He was a big broker on the BSE and had made a lot of people very excited.
Mr. Mehta, as it turns out, was the king of Indian financial chicanery, doing lots of stuff that was not very legal. He was arrested in 1992 and charged with financial fraud. Turns out he was borrowing money from some large State banks and funneling the money to the tune of millions into the illiquid Bombay Stock Exchange. At the time of my visit, he was out of jail and back as a bullish financial prognosticator. The stage was set. The last piece of confirmation that the Indian market was one big scambubble waiting to pop was an admission by one of the head honchos that I met. I can't recall now whether he was the CFO or COO of the exchange. Anyway, he had an air-conditioned office - placing him pretty high up on the food chain. He told me to my face that the markets were rigged. They entire exchange was controlled by a small group of large brokers who dictated every move of every stock. I did not need to hear much more.
A queer incident
Upon my return to the U.S. in August of 1997, I wrote an article. It ended with me saying in no uncertain terms that I would not invest a dime in India. Later that year, in October, I spoke at the Blanchard Conference in New Orleans. I spent half an hour of my speaking slot explaining to the audience why they should not invest in either India or China - opinions based on my visits to both countries. Unbeknownst to me, the following speaker, I will not mention his name, began his speech by pounding home why everyone in the audience should be investing in India right now. Call it luck or fortuitous timing, but the whole of the Asian markets, including India and China, collapsed soon after as a result of the Asian Financial Crisis. Now that WAS an opportunity!
The trip of a lifetime (again)
I can't wait to go back to India and China to see what is really going on. Both countries have truly magnificent scenery and history. The people on the whole are terrific, but that is not why I invest. If I listened to the financial press today, I would be fully invested in the next economic miracle. But, I think I owe myself the real scoop before I get on the bandwagon.
Both countries, and the region in general, could be spectacular stories. But, I have been there and done that several times with emerging markets in Asia, South America, Russia, Turkey - you name it. The recurring theme is this: Buy when blood is running in the streets, not when the chicken in every pot is ready for consumption. That chicken could be you.
Right Wing Wacko...
"The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn't want to go bankrupt. People must again learn to work, instead of living on public assistance."
The quote is attributed to Marcus Tullius Cicero, circa 55 B.C.
Sunday, February 15, 2004
Krauthammer's Speech
Dr. of Psychiatry, brilliant, insightful Charles K gave a speech recently. As usual, he is right no target...
JMW
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Democratic Realism
Wednesday, February 11, 2004
More Hitchens...
http://www.opinionjournal.com/forms/printThis.html?id=110004680
Monday, February 09, 2004
Personality, Not Issues....
Christopher Hitchens - principled liberal and wonderful writer:
"I'm a single-issue person at present, and the single issue in case you are wondering is the tenacious and unapologetic defense of civilized societies against the intensifying menace of clerical barbarism."
More, including his take on all the major candidates is here:
All Against Bush
Sunday, February 08, 2004
Can you walk and chew gum? Try this...
Interesting Mind Hack.
Works with most people...not sure why...
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An amazing testimony to the incredibly complex neurology in your nervous system. You have to try this out to believe it. While sitting in your chair, lift your right foot slightly off the ground and move it in clockwise circles. Now draw the numeral "6" in the air with your right hand. Your foot will involuntarily reverse direction.
Making Light February 3, 2004
