Belus?

Curiouser and curiouser.  Looks like the Bell Canada-Telus merger speculators are making their case. I had also hinted at this possibility, though admittedly not too seriously, in an article last week.

In my article I drew attention to the gutting of the more forward-looking technology teams at Bell Canada and how that might very well signal a merger with another large telecom company; it's difficult to remain independent once you've significantly impaired your future options.

If this Belus speculation has any validity I now have to wonder if George Cope and the board already came to the conclusion months ago that the privatization deal would fail given the historically poor credit market. That could explain some odd tactics on Bell's part.

Before you jump to this conclusion and rush out and buy BCE shares, think very carefully. Consider the possibility that BCE's share price will not budge even if the offer price is far above the $25 or so its shares are trading for today. Look at what happened to Teck Cominco when the market came to understand the implications of the debt they needed to take on to acquire Fording Coal. Then there is HudBay Minerals' offer for Lundin Mining. Teck and HudBay stock crashed and burned; Lundin stayed put at first, then continued to fall in the commodity meltdown.

Telecom and mining are hardly similar businesses yet these mergers require the same thing - debt, and lots of it. Investors, having been burned once are turning shy. This may be a poor time to speculate on a Bell Canada-Telus merger.

MPAC and Property Assessment - Solving the Wrong Problem

When you have a hammer everything looks like a nail. That old truism comes to mind when I read about MPAC property assessments, property taxes and fairness.

The latest news in this morass is a proposal to decrease volatility in property assessments. As described in the article it doesn't sound half bad. Unfortunately it isn't likely to be implemented any more than so many other schemes that have come and gone over the years. Putting "fairness" into the system is hardly a novelty; it isn't all that hard to do, and has been a feature of earlier proposals.

Every new idea that comes up is attacked, often with great vehemence, by those who feel disadvantaged by the proposal. The political outcome is stasis since governments are loathe to stir up controversy; no matter the proposal they are sure to come up losers. They would also quite rightly note that it isn't that terrible an issue since folks are indeed still paying their taxes, which is a type of confirmation that the system is working. Sure it's imperfect, but it does work.

In my view this is all a pointless distraction from the bigger issue. That issue is Ottawa city council's inability and lack of motivation to rein in spending. The best way to reduce property taxes is to cut spending, not by inventing new property assessment algorithms. It's also eminently fair since every homeowner benefits from reduced city spending.

My advice for property tax activists is to focus on council's unwillingness to tackle a budget that is spiralling out of control. Even the province is helping out, at least a little, by starting to reverse the Harris government's program downloads. Council should be under our control, if we hold them to account for their budgetary philandering. So call your councillor and tell them just how they can lower your property taxes. Or else.

Telecom Decision CRTC 2008-108

I have now read the CRTC decision on throttling. It is a most interesting read for those (like me) who find these regulatory processes intriguing. I am also a not totally disinterested party since I get my home DSL service from an ISP that relies on the GAS tariff. Neither am I unfamiliar with regulatory processes since I have participated in them earlier in my career.

While the proceeding was ongoing I wrote a series of articles (parts 1, 2 and 3) regarding my take on what might be going on under the hood, both on the technology argument and on the business drivers. More recently I  wrote about failing VoIP providers which have similar challenges. In particular, ISPs that exploit Bell Canada DSL are "utterly dependent on their fiercest competitor[s]." Without GAS there is no 3rd party DSL business; Bell Canada was mandated by the CRTC to submit the tariff and they don't like it one bit.

Now before I provide a detailed review let's understand GAS. It's a tariff, which is a sort of contract between the government regulator (CRTC) and the carrier (Bell Canada). Neither end users nor ISPs are parties to the tariff. The ISPs have service contracts with Bell Canada which include the GAS tariffed service. The ISPs then bundle GAS-enabled services as part of their retail services. Despite its role as an enabler, the tariff is distinct from the contracts. The tariff and the law provide mechanisms whereby customers of the tariffed service can appeal for redress where they feel the carrier is not performing as mandated. The CRTC may also act on its own if it chooses.

The upshot of this gobbledygook is that the tariff can change without violating the contract and, most importantly, if the carrier interprets the tariff in a manner that is to the disadvantage of its customers it is up to the regulator to intervene, if they choose to, and rule according to the law and (more loosely) policy. This isn't much different from ordinary phone service, including mobile, where the underlying tariffs are associated with but are not determined by service contracts with individual subscribers. Now on to the decision.

As expected the decision is clearly written and structured, focusing on the key points of law under which they needed to make their decision. Nothing wrong with that so I'll only talk about what I feel are key points in the decision. I will mostly pass over the large part of the document that summarizes the evidence they received from the parties and focus primarily on the commentary and decision text.

6. Bell Canada submitted that it is engaged in traffic shaping on its network, which consists of slowing down the transfer rates of all peer-to-peer (P2P) file-sharing applications during peak periods, which it defined as between 4:30 p.m. and 2:00 a.m., daily.

I am surprised the CRTC didn't question this in their decision. Is 1:00 a.m. a peak period? Not a chance. Right here I am beginning to smell which way the signs are pointing.

15. ...Bell Canada submitted that its GAS tariff specifies maximum upstream and downstream speeds, which are offered on a best-effort basis and are not guaranteed at all times.

Ah, this is very like the Llap Goch defence in which a footnote to the wild benefits promised for this secret Welsh art of self-defense said something to the effect of "where it is understood that 'up to any number' includes the number nought." This is sting of the 'best-effort' phrase that is tied to pretty much all broadband services. The GAS tariff is no different since the DSL portion of the service is identical to retail DSL.

23. ...Cisco Systems, Inc., in support of Bell Canada, stated that even if more bandwidth were added to the network, P2P file-sharing applications are designed to use up that bandwidth.

This is wrong. No user can utilize more bandwidth than that available on the DSL link. Adding more capacity in the network behind the DSL access portion does not increase any user's available bandwidth. The error is either on Cisco's part or in CRTC's summary of Cisco's position. In paragraph 25 they note that CAIP made this very point.

29. In the Commission's view, CAIP has not demonstrated that Bell Canada's methodology for determining congestion in the network is inappropriate. The Commission notes that Bell Canada, as a network operator, is responsible for ensuring that its network is operated effectively and efficiently, and considers that Bell Canada should be able to take measures in this regard. Furthermore, the Commission is satisfied that Bell Canada has established that there is congestion in its network during peak periods.

There are good reasons why details of a carrier's network operations and economics are not available to 3rd parties, including complainants. The primary reason is that it would publicly expose trade secrets that competitors could exploit. Whether that is true in this case we'll likely never know. Enforcing privacy of this Bell Canada data will no doubt aggravate those involved in this proceeding. That they must trust CRTC to have made a correct assessment of the privileged disclosure doesn't sit well, yet CRTC has most likely made the right choice.

However, the CRTC does not provide this assurance in their very next paragraph.

30. ...The Commission considers that intensive use of such applications could, during periods of high Internet traffic, result in network congestion and degrade the performance of Internet services for other end-users.

32. The Commission considers that, in the circumstances of this proceeding, Bell Canada has established that the use of P2P file-sharing applications by the end-users of GAS customers during peak periods would contribute to the network congestion that exists in Bell Canada's network...

So now, in paragraph 30 they say "could" when they ought to have been able to say "did". This gives the impression they accepted Bell's conclusion about congestion without studying the network data itself. This is further supported by their choice of words in paragraph 32 where they say "would contribute to the network congestion that exists." CRTC says there is network congestion but can only offer that P2P is a contributing factor. Sure it is, but so is playing videos from YouTube.

33. The Commission notes Bell Canada's submission that the traffic-shaping approach it has implemented is the only practical option that is technologically and economically suitable, at this time, for addressing congestion in its DSL network. The Commission further notes that while CAIP and others suggested alternative traffic management approaches for Bell Canada, there is no evidence on the record regarding the availability, feasibility, or utility of any such alternative solutions.

I have to agree with this. The CRTC will not and should not order a carrier to develop new technology; at most they would request an economic analysis based on technology that is already available in the form of vendor products. I think it would be useful to compare what Comcast is doing to implement usage caps. The products are coming but are not yet sufficiently mature for the CRTC to order that they be purchased and installed by Bell Canada.

42. Bell Canada submitted that it had not introduced traffic shaping to give itself a preference in the retail market when it launched usage-based billing, IPTV service, its "Max" DSL service, and the Bell Video Store. Bell Canada submitted that it had not commercially launched IPTV service. In response to CIPPIC's questions, Bell Canada submitted that high-speed DSL users were throttled in the same way as other users. Bell Canada submitted that any allegations of an ulterior motive connected with the launch of the Bell Video Store...

The CRTC seems to have avoided the implication of paragraph 42 in their decision. While it is true they throttle P2P for both retail DSL and GAS, they do not throttle IPTV. Therefore if you get your video entertainment via P2P, for which there was evidence submitted that legal content providers do distribute programming via P2P, there is discrimation that will benefit the Bell Video Store when it does go commercial. However this is only the potential for future discrimination, not actual discrimination, and is therefore perhaps not relevant in this decision.

45. ...the Commission considers that there is no evidence on the record to establish that Bell Canada has benefited from the implementation of traffic-shaping measures with respect to GAS in the manner alleged by CAIP.

It's one thing to claim discrimination and another to demonstrate it. The CRTC appears to have made the right choice here. I am not surprised because throttling is done for both retail DSL and GAS, which would weigh strongly in Bell Canada's favour.

58. ...The Commission considers that, in the context of a P2P file-sharing application, the fact that the transmission of a file is delayed does not alter its meaning or its purpose.

Another point that I believe is well argued by the CRTC in the text leading up the quoted passage. Of course the delay is annoying but the material is not edited.

65. The Commission notes CIPPIC's submission to the OPCC regarding Bell Canada's alleged violation of several principles of PIPEDA through its implementation of DPI technology for traffic shaping. The Commission considers that issues regarding compliance with PIPEDA are outside the scope of this proceeding, and they are therefore not addressed in this Decision.

Nice deflection, yet one that appears to be legitimate. Perhaps CAIP should launch a privacy complaint even if the evidence for a violation is weak.

70. Bell Canada submitted that it would provide one day's advance notice in the future.

74. The Commission notes, however, that Bell Canada's actions have had significant impact on the performance of its GAS...The Commission considers that the notification period should be at least 30 days...should provide clear and meaningful information...

Here we have a clear violation by Bell Canada, and outright impertinence about it. Yet the CRTC lets them off the hook. While they do make a suitable order on future notifications they have forgiven Bell Canada's past transgressions. This is despite their own conclusion that the ISPs were harmed.

78. ...the Commission directs Bell Canada to file a report on the resolution of complaints related to affected non-P2P file-sharing applications by 9 January 2009.

This is weak but not surprising. To demand resolution might require technology that is either not in Bell Canada's possession or that is not even available. Asking for a report is however insufficient when the CRTC recognizes that perfectly ordinary subscriber activity is being impaired. One could argue, as noted earlier, that P2P is also ordinary subscriber activity since it is used for legal content distribution, but the CRTC has carefully drawn a fuzzy line around P2P by accepting the contention that P2P is unique by its ability to cause network congestion.

There is in this point of the decision an unstated but implicit value judgement by the CRTC. They are in effect stating that Bell Canada's claimed network congestion by P2P users is a sufficient justification to impair, even though unintentional, the service of non-P2P users, which includes VPN and other uses of encryption. This does not sit comfortably with me. It would be better I believe for the CRTC to assign a higher value to the damage done to those innocent bystanders, of which there are many, and a lower value to the weakly-demonstrated incidence of congestion. But then that's just my opinion based on my values.

As should be apparent, the CRTC is quite skilled at performing this sort of juggling act.

In closing I draw attention to a CBC interview with CRTC Vice Chairman Leonard Katz. In it he comes across as surprisingly clueless about what CRTC staff has done in this proceeding. If this is representative of the attitude of the Commissioners it does not bode well for any appeals of this decision or of the coming proceeding on network neutrality. His attitude indicates to me that despite the howls from the ISPs and their subscribers this matter is neither interesting nor important to the CRTC. Or perhaps it's only Katz.

If Teksavvy's CEO is any indication this issue will not go away quietly.

Mark Cuban vs. SEC

I doubt that most people know or care about this issue, or more specifically the eventual fate of Mark Cuban. While I am among that number I do find the surrounding issues interesting. I certainly do not know or particularly care whether he is guilty of insider trading, which is itself a slippery subject; it is the reasoning behind the charges that fascinate me. There is also a loose Canadian connection due to the origin of the public company involved, mamma.com. If you want to read more about it I recommend this article which looks at the case from an informed and disinterested perspective.

Corporate governance laws and regulations are not strongly enforced by the SEC in the US, and even less so here by the OSC. They seem to pick a few high-profile cases to create the impression they are active and doing their jobs. The Cuban case may fall into this category. There is also some reported animosity between Cuban and SEC that may have contributed to the action.

One argument against the SEC action is that at present there are far worse securities violations that are now coming to light due to the financial crisis. So why does the SEC go after an alleged $750,000 of illegal profit when billions and trillions are at stake elsewhere? Does it even matter. Let's imagine an analogous situation where a driver is stopped for speeding.

Officer: I have you on radar going 60 which is 10 over the 50 limit.
Driver: Didn't you see that guy blow by me at 120? Why don't you go after him?
O: Sir, that isn't your concern. Would you like to see your speed reading?
D: No! I want you to go after that scumbag! Someone could get killed.
O: I'm writing you a citation. You can of course challenge it in court.
D: This is ridiculous! I wasn't hurting anyone. That guy is the one you want.
O: Here you go, sir. Take it easy and have a nice day.

We have two separable issues here. One, the behaviour of the stopped driver and, two, the officer's failure to act on what is arguably a greater violation. The error is in conflating the two. The driver is guilty since the standard to which he is being held is the law; guilt is not relative to the behavior of other violators. The second issue of the officer's performance is valid. Citizens might well wonder if their police force is spending its effort most fruitfully.

Looking at this analogy we see the SEC in the role of the officer, Cuban as the driver, and financial executives and directors in the car up the road. Everyone has dirty hands. It would be better in my opinion to deal with that fact rather than stand around having an argument about whose hands are the dirtiest.

Laws. Regulations. Tariffs. Politics.

I have not read in detail the CRTC ruling on Bell Canada DSL throttling though I intend to do so. It is already evident there is a lot of discontent out there as can be seen in the comments on this CBC article and this one in DSL Reports.

Here is a prime example of why it is important to dig into the specifics rather than responding on the basis of emotion. It doesn't matter how we feel about the ruling. What matters are the reasons given by the CRTC. Any cogent action that may follow will have to address specific points made by the CRTC. Rants achieve nothing except, perhaps, the ranter may derive some enjoyment from doing the ranting, and getting affirmative feedback from other ranters.

Whether or not the ruling is well-founded in law, regulations and tariffs, there is the political climate to be considered since the CRTC would certainly be sensitive to that. Even among the ranters there is a sad recognition that those most unhappy with the ruling are in the minority among the general population. That is not helpful if politics is at play; in politics numbers matter. It would be easy to speculate that the political winds would blow in favour of large corporations since they are large employers and taxpayers. This is particularly pertinent in a recession. If assessed on politics alone, had the CRTC ruled against Bell Canada I believe their public relations machine would have been given free rein to turn public opinion against the government on this issue. I also believe it would succeed since the majority don't understand the issue and can be swayed to accept an implication that the vocal minority are mostly illegal file sharers. Politics can be vicious. It can also operate effectively without regard to the facts, whatever those facts may be.

Now to find an hour or two to read through those documents and see what's what.

Where, or If, to Invest Public Money

The auto companies' request for help from taxpayers is an interesting question that immediately polarizes people. There are those that see it as a must-do, to save jobs and the manufacturing sector, and those on the must-not side, seeing it as throwing good money after bad.

As a consumer and taxpayer I am in the latter camp. My thinking is as follows. They tried to get my money by selling me their products and services. Having failed at that they now want to get my money via the government, who got it through taxation. That back door tactic does not sit well with me. However, apart from my personal feelings on the matter does their request have any broader economic appeal?

Government already invests our tax dollars. This is primarily via holdings of equities and other instruments as part of the national pension fund. Of course these holdings have melted down recently along with the overall market decline but that's a separate issue. There is always new money to invest as long as they take those CPP contributions out of paycheques. The feds also invest in new technology ventures. In all cases the objective is a positive return on investment.

Is investing in the auto sector a good bet? That is, is there a positive return for investors? Of course there is an immediate benefit for the companies' employees, investors, creditors and suppliers, but what about us, the prospective new investors? It depends on how the money is applied.

If the money goes into the existing businesses as they are currently structured and operating, I see it as a dreadful investment. It will only delay the day these companies really hit the skids. The money in this case is little more than a temporary replacement for EI, and perhaps a way for other investors and debtors to reduce their losses somewhat.

If the money goes into structurally segregated new automotive technology enterprises, that is a risky but more interesting bet. However it does nothing to help the existing businesses and all those dependent on them for their livings.

Standing back a bit further for a broader perspective, the better question to ask is, assuming we as taxpayers are willing to allow the government to invest more of our money in selected economic sectors to build future prosperity, is the auto sector, whether the existing one or new businesses, the right one? Here I am doubtful since there are some attractive competitive alternatives for our investment dollars. Two examples are alternative energy and software/internet ventures that could make a strong case to attract that same pool of funds.

On balance I am opposed to the government investing further in the auto sector. I say this knowing full well that there will be more tales of personal and social hardships as this sector continues its decline. I also believe that new opportunities can arise from the ashes of the old. It is just not a certain outcome.

High Mobile Data Pricing - They Can Until They Can't

It isn't news that mobile phone service is more expensive in Canada than it is in the larger and more competitive US market. This is true of both voice minutes and data volume. It get much worse when you roam, leading a small fraction of users taking aggressive measures. Unfortunately these measures are beyond the ken of the wider population and are therefore no threat to the Canadian operators. As to the reasoning behind these high wireless prices, and data in particular, it goes something like this:

Question: Why do they charge such ridiculously high prices?
Answer: Because they can.

Some time ago I put forward some thoughts on how wireless competition might evolve in Canada due to the granting of new spectrum licenses. It's still much too soon to know if my predictions are right or wrong, though I can speculate how pricing pressures may come to bear in the next couple of years.

First, while more wireless competition is coming, it isn't here quite yet. The new guys will be spending scarce capital to build their networks for some time before service can be turned up. When they do it is likely they will offer better pricing than the incumbents. However it is not certain. The reason is they want to maximize revenue while also inducing people to switch over to them. To best achieve this they will price data to undercut the incumbent, but not by too much. Lowering the price further will have to wait until the incumbents respond with their own price reductions, which, as I explain below, could take awhile.

Second, since the networks of the new entrants will be built out in stages, or in some cases will be regional according to their license terms, true pressure on the incumbents will only rise slowly. Should a new guy offer a great price in the early days the incumbents may not respond at all. They could simply advertise that their service is national and so commands a premium. It would even be true. The response to that by the new guys should be to form partnerships whereby they can offer seamless roaming among their combined coverage areas with no roaming charges. That may induce price reductions by the incumbents.

Here it's worthwhile to distinguish the data pricing for local, national roaming and international roaming. Saunder's article correctly threw the focus on international roaming charges. To bring those down we would have to see roaming agreements between our new wireless operators and those in the US, and that the US operators consent to low mutual roaming charges. Except they would feel no strong business inducement to offer better terms than in their arrangements with the Canadian incumbents from whom they earn the bulk of their roaming revenue. This could prove to be a barrier to lowering international data roaming prices.

Third, until the new guys are up and running and have a credibly ubiquitous service, and a track record of reliability, we should expect some shifts among the incumbents. In my previous article I mentioned how Bell Canada is decimating the ranks of their technology groups among other wholesale workforce reductions. This goes far beyond the needs of closing the sale of the company since it leaves the remnant weakly positioned to respond to emerging competition. As one acquaintance opined to me, he believes this means it's more likely that Bell Canada will be acquired (or merged, depending on your perspective) with Telus. That makes some sense. What this means is that until the new providers are fully operational there could be even less competition in the Canadian market. Prices could therefore rise further before falling, increasing the time until we see prices lower than today's.

A briefer summary of the scenario I've laid out here might be this rephrasing of the Q/A exchange I posited at the beginning of this article.

Question: How much longer will they charge such ridiculously high prices?
Answer: Until they can't.

It Isn't Just Nortel

Nortel's woes are front-page news both locally and internationally. However Nortel is not the only local Ottawa technology outfit cutting back, even if they are the largest. There's Mitel making the headlines for similar reasons and, occasionally, other smaller companies in the same boat make the headlines. Seemingly overnight the recession has arrived and business has dried up.

There are many small, local technology companies that are cutting back. Most of these fly under the radar since the media either aren't aware of what's happening or choose not to report about these high-percentage cuts that are low in absolute numbers. I suspect the truth is more the former case since the investors and management of these companies do not want these cuts to become generally known. The most likely reason for the companies' silence is to avoid a loss of confidence among their few current and prospective customers. There is little that can kill a startup faster than a prevailing belief that it will not survive; businesses can't risk purchasing goods from or becoming even modestly dependent on a company that is soon to be no more.

But talk to people and the stories come out. Sometimes they are told loudly and sometimes merely whispered. Those companies that haven't cut head count are freezing hiring and getting ready to squeeze the layoff trigger if they get a whiff of revenue drying up. Business confidence is running very low.

One important company that is making cuts to their local technology staff is Bell Canada. While it isn't a secret I am surprised that it appears to be largely escaping the notice of the media. I don't know why that is. When the majority of the technical staff studying and planning new product initiatives is let go you would think that is newsworthy. Yet the cuts go further, cutting across many technology groups in the company.

I am both surprised and not surprised by this development. On the not surprised front, it makes little sense to spend money developing new services if they are not being pushed out to the market. The company's stance for the past few years has frozen many initiatives to get new technology out to customers. How much of this is due to the long-duration process of selling the company, I do not know. Perhaps management just doesn't believe that technology, and the new services it can enable, will get them out of the competitive hole they are slowly sliding into. What surprises me is how a company like Bell Canada which is so dependent on technology could sit on it collective hands for years, knowing that competition from cable and new wireless providers is increasing in scope and intensity.

Cutbacks like those described above are likely to continue in the local high-tech scene. VC's are sitting out the downturn so their investments must do so as well. Unfunded startups must continue without capital injections. Public companies are scrutinized by their public investors and must try to defend share price by reducing expenses at this difficult time. It isn't just about investor relations; they have to do it.

2009 is going to be very difficult for many technology firms in this town and elsewhere.

Mouse-over Madness

One of the innovations on the web is that of the mouse-over. This is where you position the mouse pointer over some image or other widget on a web page and then, without needing to click, some action is performed. The action may be to display an ad, provide the first lines of text of another page, open a new service, and so on.

If it's done well it can greatly improve the web browsing experience. If done poorly it can be hell. By hell I don't mean irritating the user with mouse-over ads; these are easily avoided by going elsewhere. Here I'm referring to intentional behaviour of otherwise reputable sites in delivering desirable content and services.

In my view, a properly-implemented mouse-over should wait before launching any complex action. That is, provide the minimum guard time, even a quarter second, to have some assurance that the user is intending to activate the service. There are web sites out there that will go nuts with activity if the widget so much as gets a hint that the pointer is moving in its general direction from the opposite side of the window.

Those little text boxes with introductions to news stories are not the biggest problem since they minimally interfere with the user's view of the page. Rather it's mouse-overs that launch entirely new content pages or switch you over to a different site or service. It's like I've been arbitrarily transported to a peculiar video game, something like the old Minesweeper game on Windows, where I have to thread among the hidden widgets to get to my real objective without setting them off. Hit one of those mines and you have to waste time shutting down unwanted pop-ups or finding my way back to the original page, and then trying again to do what I want.

Some web designers seem to think this is good practice. It isn't. The objective is not to exercise every new Web 2.0 innovation but to use them sparingly and prudently to improve the user's experience. Please.

Nortel is Now CTO-less

To no one's surprise Nortel's quarterly results stunk. Now there are more cuts. Is it enough? I have no idea, though I see that there many out there in the investment community who think not or have otherwise moved on from the likes of Nortel. From the tone of quotes in the media even their own employees seem to have lost hope, and interest.

I wrote about the past and future prospects for Nortel back in September, and I was not hopeful. I predicted then that Nortel would not survive the decade, and I still feel the same. Long time Nortel and technology watcher Duncan Stewart tells it like it is in this CBC article (an article which also happens to include quotes from a couple of employees):

"Every industry watcher is saying this a company that is almost certainly going to be broken up or sold entirely in the next 12 to 24 months."

Several top executives are also departing. Most distressing to my thinking is CTO John Roese, or, more specifically, the reason he gives in his blog for why his role is no longer required:

"Each of those BU's will be lean, focused and autonomous..."

From the few people I know who have had dealings with him he is reported to be intelligent, knowledgable, honest and competent. So what he says in his blog is worthy of scrutiny. I picked those few words out of a long blog post since it seems to support the view that Nortel will be dismantled.

If the business units (BU's) are to be independent that does two things. First, it declares that Nortel will no longer seek to be a system integrator and prime vendor to their large customers. This is one of the roles to which a revitalized Nortel might aspire, as I described in my September article. Second, a business unit that is disentangled structurally, financially and operationally from the others is the ideal preparation for selling it off.

Looked at this way, selling the successful MEN group makes sense; it would be the first of the reorganized three business units to be sold off in this fashion. This isn't entirely new ground for Nortel since they have in the past sold off 'non-strategic' product lines to other companies, including much of their access business.

So the final question I find myself asking is this: is Nortel a good investment? On the basis of the rest of this article the question may seem preposterous, but is nonetheless valid. We have to distinguish the company from the stock. If the company is in distress and is being sold off in pieces, and those pieces are worth more than the whole, or at least more than the current market price, it can be a good investment.

Unfortunately I don't know the answer to my own question. The stock may get much cheaper since their business is in decline, the telecom sector is in a funk, and their debt and pension obligations loom darkly. With the fear about Nortel's survival now motivating more commentators to tell people to stay away from the stock an attractive share price could come sooner rather than later.

Measuring Gigabytes

Just how much is a gigabyte (GB)? This question is becoming very popular among those debating ISP monthly usage caps. More to the point, those in the know, or at least those most concerned about it, are wondering whether the hypothetical average broadband user knows what it is.

It's a good question. Unfortunately the discussion tends to generate more heat than light (see commentary under various posts in DSL Reports for some examples). However the marketing tactics of the ISPs is very questionable, and is responsible for much of the anger.

Just how many emails or web pages make up a GB? Silly question; it's silly because if all you do is email and browsing you are very unlikely to have reason to care - you'll never hit the usage cap even in a lower-tier service with caps of 5 GB or even less. Advertising that a cap of several GB is supposedly equivalent to some millions of emails, SMS messages or web pages can only be intended to make the majority complacent, confused, or both, without giving a true measure of what can in fact be accommodated within the cap.

There is an analogous situation with electrical power consumption. I am always surprised when I quiz people who are confused about power usage to find they have a poor understanding of how much is consumed by everyday devices. One popular choice for biggest power consumer in the home is the television (wrong!).

I have found it helpful to make a brief, ordered list of power consumption to help them improve their understanding:

1. Heating (kettle, stove, microwave, refrigerator, space heater, clothes dryer)
2. Motors (lawnmower, washing machine, power saw)
3. Lights and electronics
   

Of course this is an incomplete picture since it doesn't take into account how many and how much of each is used. Still, it does help to communicate the abstract concept of power consumption to those with little technical knowledge.

If we were to do the same with data consumption the list might look like this:

1. HD-DVD
2. YouTube, MP3/music/podcast
   
3. Photos
4. Browsing and email
   

Again, this presentation is incomplete but able to communicate an abstract concept.

Yet the ISPs are proposing a measure using the least burdensome applications. This is dishonest since it misleads the majority who are not technologically knowledgable; sort of like focusing on compact fluourescent lights rather than home insulation. As to why they do this, a popular hypothesis is that this is part of their campaign to impugn the reputations of those who use a lot of rich media, including P2P users. The subliminal argument being along the lines of: "you can do more stuff with your broadband service than you could possibly consume, so obviously those who find 2M emails/month inadequate are abusing the service and it is justified for us to put limits on them. Sure you, too, have the same limits, but you aren't one of them. You are a responsible, law-abiding consumer."

Of course they aren't actually saying this, so perhaps I am unfairly tarring them when their intentions are only the very best. Time will tell if they are being fair or are merely buttressing their existing desire to impair any and all rich media services other than their own, whether absolutely legal or in the nebulous regions inhabited by P2P.

Should the fight against this ISP strategy depend on the average user becoming knowledgable about gigabytes, then I am not confident of success.

Sun and Their Servers

I was reminded of the time in my career when I found myself making server technology choices when I came across this article today. It's been a long time since the glory days for Sun Microsystems, and about as long since I was choosing servers. Much has changed since then.

Sun built an enviable reputation for server technology at a time when the market for servers was growing explosively. It was driven by the web boom and also by a shift in the telecom equipment sector from custom processors to standard processors and then complete hardware systems. Sun's servers were of high quality for the intended applications, used an operating system (Solaris) that was Unix based but extended to handle real-time and high-volume transaction processing. Like IBM and other industry leaders, Sun invested heavily in technology research and for their pains has ample intellectual property (patents) on high-availability software and hardware methods which are so important to commerce and telecommunications.

Then the industry changed. As the telecom business became more competitive and with the low cost of entry to participation in web services, there was a drive to lower equipment costs. Sun was slow to respond. This created an opening for Linux (OS software) and Intel, Dell and all the rest of the component and system players. Yet Sun held the technology advantage for quite some time. Linux, for example, was not well-suited to real-time applications in the early days, though that has long since changed.

While costs were coming out of their competitors' products (and quality was improving), Sun was held back by their custom hardware and software; because they were the only users of it, they did not achieve the volumes and thus lower-costs of the competition. In time they did change, though by then competition was full blown. It would have happened anyway though it is arguable that shifting strategy earlier would have left Sun in a more dominant position.

An important factor that further harmed them was that they misread the changing market. The focus shifted from high-reliability servers to racks full of less reliable but very cheap servers. While Sun built more and more expensive and fully-redundant servers in their Netra line, culminating in the ft-1800, customers were opting for alternatives. Cheap servers could be discarded when they failed and distributed over multiple networks and locations for superior service availability. Google has perhaps taken this to an extreme with their buildings full of ultra-cheap servers, and the transaction distribution technology to make it all work. Those expensive Netra servers did not fit the changed requirements.

I made a similar decision at one point to switch product strategy from internally redundant servers to redundancy over multiple servers. My decision was driven by customer feedback. They all loved Sun but laughed at the price tag of the ft-1800 and similar technology. These servers were nevertheless an impressive engineering achievement.

Now, as the author of the referenced article states, Sun appears to be drifting into irrelevance. What a shame.

Why VoIP Providers Fail

Considering how long internet voice services (VoIP) have been around I found it surprising how often folks, including those in the business, misunderstand the business of VoIP. When I read this recent article in GigaOM by Ian Andrew Bell I was motivated make a few points.

First the obvious - VoIP is not a business model, it is a technology. The technology has been used by many startups to offer a telephone service that undercuts the prices of conventional service, especially where distance is involved. This is better known as price arbitrage, where the new kids on the block are unencumbered with the regulation-mandated fees between carriers and the cost structure of the incumbents. There is nothing inherent in VoIP that makes it low cost; it's just arbitrage.

These VoIP providers became viable when always-on broadband reached significant penetration levels early in this decade. That was needed since utility VoIP service that mimics conventional telephony requires that it be in place - it's a prerequisite. The early players knew full well that if their consumer pitch was something like, "$9.99 per month for all you can eat telephony, and, um, you also need to sign up for $40/month broadband," it would not fly. However once the consumer has eaten that cost the pitch became very attractive.

So now they're failing. Vonage is perhaps the poster boy for struggling VoIP providers since it was the biggest pure-play out there. Nevertheless they are all in trouble, as the GigaOM article states. But why? VoIP is more popular than ever.

Let me describe what I feel are the true reasons for the failures before I come back to what Bell suggests are the reasons.

• Low barriers to entry - Anyone with a few bucks can get into the business. All of them use the same equipment and applications from the same vendors, interconnect via the same set of conventional telephony carriers and are poorly differentiated from each other on both price and features. It is not surprising that Vonage has spent hundreds of millions of dollars on advertising to sustain and grow their business. And it was all for nought.
• Utterly dependent on their fiercest competitors - Every one of these VoIP providers depends on reaching their customers via the services offered by the telephone and cable companies, who are larger, meaner and wilier than they are, and are not at all pleased to see customers drop their high-margin services to switch to these pesky new guys. But rather than compete solely on price, which guts their profits, they have successfully impeded their competitors by various means. These include application filters, lobbying for regulations that force VoIP providers to incur higher costs, refusing interconnection, patent suits, and, perhaps more ethically pure, lowering prices by marketing bundles that the pure play VoIP providers cannot offer. Like them or not, these tactics work.

There are no other reasons of similar significance that are shredding the pure-play VoIP providers. This is not to say they haven't tried.

Years ago Vonage and others tried to offer white label VoIP services to cable companies, all of whom were well behind in the VoIP game. Instead the cable companies chose to forego the service for a few years while the technology improved and they were better placed financially and technologically to deploy, in volume, competitive telephony services. They did not want to share revenue with the upstarts, or dependent on them.

Others have built VoIP apps for mobile handsets only to find the devices and networks turned against them. Sometimes it works, sometimes it doesn't, making it very risky for consumers. One of the biggest surprises to me was how undifferentiated all these companies have been. There are a few innovative players out there, like Grandcentral (Google) and Skype (EBay), but they are noteworthy by their rarity.

Enough of that. Now I'll address a few points I disagree with in Bell's article.

Evolution vs. Revolution: Companies like Nortel, Siemens and Ericsson rank among the top VoIP equipment vendors today, not startups. Technologists completely underestimated the sway and leverage that the traditional vendors held over their customers.

This is wrong. The real reason is that big companies prefer to do business with other big companies. Smart startups, if they can swing it, distribute via the large vendors or, better for the investors, get acquired by them. The others die, as they should - this is the startup game.

SIP in a Box: SIP might be an open protocol, but networks were built proprietarily and have not been bridged together. Most telecom services still communicate with each other via public switching, meaning that the wonderful possibilities that SIP might enable are limited by the capabilities of the plain old telephone system.

This is partly right, partly wrong. Interconnection of VoIP (SIP) islands is moving at a glacial pace because there is no compelling business reason to do so. We should not confuse fancy slideware from the vendors and service providers with customer willingness to buy. All these fancy SIP services have been used, to date, within these islands, with little customer desire to have them work outside their enterprises or, on the consumer side, outside small groups of family and friends.

Landline Decline: Even as networks were evolving, the number of landlines around the globe was shrinking. People found more convenient ways to communicate via wireless, SMS, instant messaging or pervasive email.

This is an odd statement. Wireless is still telephony, and people are talking to each other more than ever before. Sure communications is evolving, but this has not done in the VoIP providers any more than it has the conventional telephony providers.

In closing, I would fervently agree with Bell that there is a race to the bottom in telephony, but that it is happening regardless of the technology. Basic voice telephony, both wireline and wireless, VoIP or PSTN is getting cheaper and there is no end in sight. This is why all service providers, regardless of technology, are struggling, clumsily at times, to find the elements of value that can replace the lost revenue. We are still in the middle innings of this game.

Market Timing: October Sucked

Now that October is over the media is going nuts over how bad the markets have been for that one month. I won't bore you with the details, though they are spectacular, since it has been covered and summarized so well elsewhere. The more important question is, does it matter?

In my previous post I made a statement about market timing that is equally applicable here:

You are only impacted by short-term volatility if you are investing with money you can't afford to lose. You will therefore find yourself compelled to sell at prices the market chooses rather than at the prices you choose. No matter how you cut it, that is the essence of bad timing.

My point, again, is that it doesn't matter how bad October was unless you have to sell to raise cash to run your life.

It does make great headlines though. The media frequently tend toward emphasizing the extremes. Like in politics, fear, uncertainty and doubt (FUD) guarantees attention. For example, let's look at our precious loonie. Here is an article in the Globe that talks ad nauseum about how much the dollar fell during October, and at the right is a chart (from Google) of the loonie versus the US dollar during the month.

Well fine; it did drop a lot. But why focus on this particular set of start and end dates. Why not compare against a start date when the loonie was at $1.10 or $0.63? Why October 1, 2008? Further, notice how the trend line is increasingly looking as if it is turning back up, promising further gains in November. Is that not worthy of consideration? So why an end date of October 31?

These choices of start and end dates by media and market commentators are entirely arbitrary. The only start and end dates that truly matter are those on which you buy and sell. Or, if you can, you may defer purchasing goods and services priced in US dollars to a later date. Or as one businessman I know is doing, hold on to a US dollar cheque from a customer to cash it when the loonie is lower.

The one element of arbitrariness in this matter that is pertinent is another with similar arbitrary timing - investment statements. Investors who receive monthly statements from their brokers or funds see the market value of their holdings pegged to month or quarter end. This is purely a paper exercise except if it should sway the investor's confidence enough to sell or, less likely, buy. It is one reason markets swoon after a poor month, thus extending the pain for everyone. The same happens in bull markets, compelling these same folks to hold or buy rather than sell to lock in profits.

However if you are not in this boat the value of these scary headlines is merely entertaining. So read it all if you must, and enjoy it if you can. Like a bad ice storm, despite the damage caused it does sustain a lot of enjoyable conversations and a kind of self-affirmation as in "I lived through October 2008" emblazoned on a t-shirt.