Verizon CEO Lowell McAdam just took us on a tour of the next-generation internet: telco-style

Verizon’s CEO Lowell McAdam presides over the nation’s largest wireless provider and one of the fastest wireline broadband networks in the U.S. In the last few days he’s perfectly exemplified the type of ISP thinking that we’re likely to see now that the FCC has capitulated on the concept of network neutrality and regulating ISPs like utilities.
Earlier this week over at The Verge, Nilay Patel wrote that “The internet is fucked,” but a less inflammatory way of phrasing it is that the internet is changing. For years we have been entertained by and built companies on an internet whose core values involved consistently lowering the cost of doing business through continual innovation, brutal competition for users and a sense that while openness might lower margins, it increased the overall economic opportunity.

Lowell McAdam (right) with Google's former CEO Eric Schmidt

Lowell McAdam (right) with Google’s Eric Schmidt

Web companies from Amazon to Facebook designed businesses that prided themselves on their data, their network effects and their ability to cut costs to the bone by designing their own hardware, building their own software or optimizing around other platforms and focusing on a more strategic part of their business. These businesses tend to operate in a relentlessly competitive environment where the switching costs for consumers isn’t terribly high (that’s not to say that these companies don’t embrace network effects or other strategies to raise those switching costs).
But since 2005 they’ve been reminded again and again that all of this was playing out on someone else’s investment. Ever since Ed Whitacre (the former CEO of AT&T) famously told BusinessWeek that companies were getting rich off his pipes (and likely before) the internet service providers have been waging a subtle and constant war on the original internet ethos.
Their idea is to turn it into what I think of as the telco model of the internet — one where the end user buys the service, but the company sending traffic pays a bit too. In this model bandwidth isn’t an abundant resource, but a metered one. In short, one that matches the values of the incumbent ISPs as opposed to the web.

A telco mindset for all the incumbent ISPs

Image courtesy of Corbis.

Image courtesy of Corbis.

The values of the incumbent telcos and cable providers are very different from Silicon Valley’s. These are local monopolies, snug in their geographic area and protected by multibillion investments in fiber and copper wire made over decades. Their core goals are consistency and making as much money as possible off the investment they made in their networks. This means they are slow to upgrade services, meaning network speeds lag far behind the boosts we’ve seen in storage and computer processing. The more people use the service, the sooner you have to dig up the streets again or invest more in electronics to upgrade.
And like Ed Whitacre before him, Verizon’s CEO Lowell McAdam this week showcased exactly this sort of thinking across three different statements. Guys, here’s a tour of the telco internet that’s heading your way.

Heavy users will pay per bit

“It’s only natural that the heavy users help contribute to the investment to keep the Web healthy,” McAdam said on Monday, according to IDG News Service. “That is the most important concept of net neutrality.”

I think the most important concept of net neutrality is that ISPs shouldn’t discriminate against the traffic flowing across their networks. Never do proponents of network neutrality discuss paying more for heavy usage. But thanks to Verizon’s lawsuit against the FCC, network neutrality is dead anyway; so why not let the CEO of the company that killed it rewrite the definition?
What’s more disconcerting here is the idea that heavy users of the internet should pay more. It runs counter to the Silicon Valley culture symbolized by Google or even Intel, where you push costs down to drive adoption and use of your services, because the more you can scale, the greater your profits. Folks might argue this isn’t true on telecommunications networks, but with fiber capacity it’s becoming more so. Once a network is upgraded to fiber, it means that you can boost capacity by swapping out line cards and switches in the core and edge gear — a relatively cheap upgrade compared to digging up the ground. But this is a hard mindset shift for an industry that thinks in decades-long asset-depreciation cycles.

Broadband caps have grown to cover more Americans. They often come with meters.

Broadband caps have grown to cover more Americans. They often come with meters.

So instead of enticing people to use more broadband with all-you-can-eat plans, the telco mindset is to implement caps or boost rates for heavy users, ultimately influencing people to use less bandwidth and fewer services. Today’s heavy users are typically tomorrow’s normal users, so preventing them from becoming heavy users with caps and higher prices seems like an awesome way to keep the web stuck in today’s status quo. Hope you like Facebook and other apps that are popular today.

Both consumers and content providers should pay us

“If you see someone come in with a lot of load on the internet, the video, you’ve got to get that in an efficient place. Making the connections far out in the network is a good thing and frankly paying for it, the commercial model, I think will work pretty well. To me that shows that you don’t necessarily need a lot of regulation in a dynamic market here. By doing these commercial deals, we’ll get good investments and good returns for both parties.”

When he shared the above statement, McAdam was talking on CNBC Monday about the Netflix-Comcast peering agreement. While paid peering has been a feature of the internet for the last two decades, the agreements have historically been struck between last mile (AT&T, Comcast) and middle mile companies (Level 3, Telia). As more of the large content companies like Netflix, Google and Amazon pay up and directly with ISPs, there’s a worry that we’re moving to the settlement model of the telco marketplace, where the sender also pays for sending traffic over the network.
This is good for ISPs, because in addition to the advantage they have as a local monopoly or duopoly provider of an essential service, they also now get to take a cut of the success of those who build services that use their pipes without taking the risks that the Silicon Valley companies do. Why innovate yourself if you can simply take a cut of the proceeds raised by successful examples of that innovation? This wouldn’t be problematic if the market for broadband were more competitive.

We sell broadband, but don’t know how to drive demand

“What I’m hopeful of is that [Google CEO Larry Page will] come up with some applications that really show the need for fiber,” McAdam said. “We see great uptake of our broadband now, we’re seeing 300 and 500 speeds [in Mbps], we can go up to a gigabit easily if we needed to. The question is, ‘is the consumer demand there’? I’m very happy they’re making those investments because it helps us prove the overall case for fiber.”

Image courtesy of Google

Image courtesy of Google

Nothing crystallized the telco mindset better than this quote given to CNBC. This is the CEO of a network company asking some other company to come up with reasons to upgrade or boost the value of that network. What if Intel had decided to focus only on making chips, instead of starting a venture capital arm that helps find new ways to use those chips? Or worse, what if Intel had decided that the 486 DX was good enough, and that if Microsoft wanted to do something cool, it would have to build it first before Intel would be willing to commit the processing power?
McAdam is seemingly unaware or willfully ignoring the contradiction inherent in charging users more for using a lot of broadband while trying to build demand for faster services. While Google is trying to push the envelope on new services and faster networks, the companies that own most of these networks are concerned with keeping the envelope full of cash.
Again, this behavior makes sense given that telcos have a duopoly situation in most parts of the country. There’s no need to focus on making a service better, or to drive demand for a product, when you’re the only company that sells that product; especially if greater demand has historically meant that you need to then lay out more money for spectrum or digging new trenches. Culture is crucial to understanding people, corporations and even social movements. What’s happening here is the culture that has influenced the internet is shifting.
I’m not sure we’re going to like where this new culture leads us.
Featured image adapted from Thinkstock/Mon5ter