Tuesday, July 23, 2002

Isenberg's "SMART" letter is dumb Rob Isenberg is some telco industry pundit who runs an industry newsletter called "SMART" which is pretty funny, because it's pretty dumb. His latest edition rambles on about bad debt, overcapacity, and a change in telco business model.

First of all he makes the mistake of thinking that financing a five year investment with 30 year bonds is somehow a problem. It's not, the finance structure has zero effect on whether or not the equipment investment was profitable. I will repeat: the duration of financing for equipment is unrelated to its expected longevity, and the decision to invest in equipment is unrelated to the longevity of its financing.

Then Isenberg goes on about why telco has too much overcapacity, apparently without realizing that this is the real reason investment in infrastructure has dried up. If he engaged brain, it would be clear that investing in more when there's already too much is stupid, but instead he talks about "glut" and "profit" as if the two were unlinked. Entry is only sensible when there is scarcity allowing the industry to charge supra-competitive prices, otherwise investor money should go elsewhere.

And finally, Isenberg means goes on about telco business model. Before deregulation, the government set rates, business subsidized commercial service, and urban subsidized rural users, but things became unclear because deregulators could not (and still cannot) decide whether they want competition at the infrastructure level or services level (Isenberg illustratively wants both and neither). This regulatory environment determines business model, because with telco you can either get competition at the service level or the equipment level, not both. The telecom act of 96 set competition at the service level by letting entrants pay marginal cost for infrastructure access, and people like Isenberg complained that phone companies are trying to add services and weren't investing enough in equipment.Tauzen-Dingell legislation tries to undo TA96 and shift competition back to the infrastructure level, but people like Isenberg then complain incumbents block entrants by demanding outrageous access charges.

Telco executives in years past have wanted to avoid becoming "dumb pipes" but I suspect this is because the hanker after glamour only content business can provide. But shareholders care about profits (just ask Time Warner - AOL) and ultimately a nice local dumb pipe monopoly can generate those with no problem.

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