I’ve commented several times recently on broadband issues, many arising out of what it has become increasingly clear are misleading or bad numbers about broadband deployment. It’s not surprising that broadband would become a political football in this most political of all recent election years, but it’s bad for the industry because it’s pulling everyone’s eyes off of the ball. Despite continuous evidence that economic density is the most decisive factor in broadband market effectiveness, we continue to ignore it. Despite the fact that there’s no clear indication that broadband has any societal value whatsoever, we continue to assert that it does. A real plan, based on exploiting what we know and objectively studying what we don’t, could get the market moving.

Meanwhile, the mobile space is showing us the shape of the future.

4G is going to bring usage pricing to mobile, and it will leak back into 3G and into wireline eventually, at least in markets where economic density and access profits are low. Smartphones are reported by one analyst firm to be creating a mobile market owned by handset giants like Apple and Google rather than the operators. While that’s clearly an exaggeration, it’s true that smartphones are disintermediating operators in the mobile space, just as the over the top (OTT) players disintermediated them in wireline.

Operators fled wireline into mobile to flee low return on investment (ROI). If mobile gives them the same low ROI, can they then flee to telepathy or something? They’ll simply have to accept that revenues will tail off, which means that capex will tail off. Big telco Verizon and the cable industry overall both showed us that Wall Street will punish those that let capex rise as a percent of sales.

Enterprises have had their own challenges. We’ve seen that spending on some hardware and software has been strong throughout the year, but that strength has been created in large part by the suppression of orderly upgrades of baseline IT infrastructure by the past economic crisis. You can only catch up for so long; after that, growth will depend on exploiting new productivity paradigms, and the market hasn’t been very good at doing that since 2001.

I’m not playing Chicken Little here. The industry isn’t going to crash. In fact, it’s likely that by 2012, it’s going to prosper, because any time demand overwhelms the insight of the sellers, a new crop of leaders are going to be created. Incumbents in all areas of tech have gotten too comfortable with old paradigms, and new players are the ones agile enough to seize the opportunities.

Those “new players” aren’t likely to be startups, considering VCs have fled the equipment space in favor of social networking and other areas with more potential for bubble-creation economics. Instead, they’ll be smaller vendors, often public companies. Watch F5 and some of the deep packet inspection companies; they are looking to skim the networking cream. In IT, watch Oracle; software has the most direct link to productivity, and so software companies can transform to build new cost/benefit paradigms most easily.

What is interesting to me is that all of this is coming to a head right now, and why might be the most interesting thing of all.

The reason is mobile 4G services and the fact that these services are being driven by appliances – smartphones, tablets and even e-readers. Mobile disintermediation via appliances is a real risk, and 4G bandwidth levels mean that there is truly an opportunity to create a new model of the user’s relationship to the network. The risk that the new model might end up being a reprise of the over the top (OTT)-dominated wireline broadband market is very real now. Further, 4G deployment offers operators a chance to reset the pricing and service relationships, to a point. Operators either have to take the opportunity and level-set 4G differently, or they have to avoid 4G investment, regarding it as something unlikely to pay off for them in terms of return on investment (ROI).

This is Alcatel-Lucent’s issue here. Companies like Alcatel-Lucent have arguably been most successful in the wireless arena, and an operator trend toward stagnation of wireless investment would be a major barrier to Alcatel-Lucent’s future profitability. But the truth is, the company isn’t the only one with a stake in the 4G game. With the exception of Cisco, whose ambitions for revenue growth are spreading to markets adjacent to networking, every one of the major network vendors is a slave to wireless capex growth because wireline growth will not sustain even their current numbers.

It is clear to me is that everyone in the broadband game realizes that 4G is the watershed issue — the place where we either get control of network evolution in an economic sense, or admit we can never control it. In the latter case, it’s clear that we’ll see sharp capex declines beginning in 2012 (according to our model), as ROI pressure on operators constrains network investment. In the former case, we could see the very thing that Carter says we need — immersive broadband that touches all of us in all aspects of our lives because it can profitably be made to do so. It’s not a glamorous vision for the U.S. market because we want to believe everything is free. It’s not simplistic, like Cisco’s vision of driving infrastructure investment simply by forcing more traffic onto the network, regardless of the ROI. But it’s a true vision, and Alcatel-Lucent is perhaps the best in the industry in articulating it.

But can they deliver it? The principles of application enablement are surely relevant to creating what Carter hopes for, but they’re not a sufficient condition as they stand. There are too many holes in the story of the “European way” when the rubber actually meets the road. In a way, the potholes are a bigger threat to ROI than the current disorder, because without a clear path to invest, everyone will hunker down and look ahead to when that path becomes clear, which could hurt capex even earlier.

Four vendors (Alcatel-Lucent, Ericsson, Juniper and NSN) have the assets to build the kind of future Carter talks about, and not just for Europe. Which one will come through? We’ll likely know by spring. Carter’s speech is proof that the issue is too acute to be ignored any longer.

Telstra would get a total of $11 billion Australian for infrastructure assets and management of structural separation issues like universal service. Since the deal still needs both regulatory approval and a shareholder vote, it’s not in the bag, but it appears likely that something very similar to this package will eventually be accepted by all. If that’s true, then Australia will have taken perhaps the most radical step of any major industrial nation in creating a new broadband deployment model.

Since the FCC is tackling the issue of broadband regulation here in the U.S., it’s not out of the question that a model like the Australian one would be proposed here as well. In our view, however, there are issues with such an approach.

First, whether there’s payment or not, there was at least in the Oz case a threat that makes the move just a sanitized form of nationalization. Second, we believe that the process won’t accomplish the titular goal of “competition.” There is still only one supplier — in this case, NBN. Competitive local exchange carriers (CLECs) didn’t work in the U.S. because you don’t create competition by having one producer and a number of middlemen. That’s still the problem in Australia, unless the government can make “retail” players compete at the service layer.

Will they? Would the FCC? Neither Australia nor the latest Notice of Inquiry advance any specifics there. Therefore, we’re skeptical, to say the least.

There’s obviously no end to the pressure on ROI, and so far no vendor (including Alcatel-Lucent) has managed to develop a real strategy for lowering opex broadly. The result is that operators are pinching their capital budgets.

We noted in our spring survey that operators who had already selected either Huawei or ZTE tended to believe they had the best ROI option in hand and proceeded with their projects, while those who’d selected other vendors were still sharpening pencils. That means more non-China capital spending is likely to slip into 2H10.

Three proposals are in play:

• The first restricts foreign ownership on companies with more than 10% market share;
• The second limits ownership to non-controlling interest;
• And the third lifts all restrictions.

The averred purpose of the change is to improve competition, which in our view is a fancy way of saying the country will allow offshore interests that would be willing to enter a low ROI market. To us, the issue is clearly one of creating the kind of broadband the public wants at prices the public is willing to pay, and that means a low ROI in any market but one with a high demand density—which Canada certainly is not.

The U.S. also has ownership rules, as do many countries, and it will be interesting to see if this is a trend. So far, we’re getting indications that U.S. policy isn’t likely to change any time soon, but a Canadian example could provide some stimulus for change even here. The U.S. has the same ROI problem, for sure.

Everyone knows that smartphone users generate between five-to-seven times more traffic than other wireless users, but AT&T says that 3% of iPhone users consume 40% of its network bandwidth. This shows the situation that all-you-can-eat pricing can get you into.

AT&T doesn’t plan to go there, according to its statements to the media. The company says it’s “inevitable” that heavy users at least pay for their usage. The decision to provide no-cap iPhone data use is out of sync with the rest of the world, where it’s routine to have data plans with specific cap-and-cover-charge policies. In fact, our model says that usage-free pricing will always increase over-the-top (OTT) competition and reduce return on investment (ROI), no matter what technology is used and no matter what services the telcos try to introduce in addition to their basic broadband.

We agree that heavy users have to pay for their usage, but we also think AT&T clearly must have known what would happen here and accepted the risk in exchange for the marketing coup it scored with the iPhone. That means regulators may have to consider whether carriers initiate pricing plans for competitive reasons with full intentions of later claiming overuse of the network and using that to justify usage caps, price increases, etc. Since most wireline network operators will move to usage-price plans (likely starting with high caps for heavy users only), this whole issue may provide an entry point for usage pricing to creep into broadband. None of this can happen quickly, though, so AT&T is also planning to upgrade its wireless services in San Francisco and New York, where problems with performance have been most severe.

We are of the view that separation like this is not likely to succeed at its objectives and in fact is more likely to compromise them. In addition, it would clearly undermine the value of Telstra’s shares, which have been sold off to the public for some time through yet another government program. To take steps to devalue them now is not likely to create confidence in any new government process, including NBN.

Then there’s a very important truth, which is that competition always lowers price and always creates overbuild and thus always lowers net industry ROI. There are situations where that is reasonable; some geographies have ample demand density. Australia doesn’t appear to be one of them, according to our model.

If the government’s goal is to create competition in the interior or service portion of the network by making the access network into a shared utility, it should have clear indicators that the ROI in that service portion is sufficient to create real opportunity. Without that, there could be a lot of future failures in the center, which would undermine the profitability and sustainability of the new edge—whatever it turns out to be.

With 4G deployment there is a need to manage total first-cost and at the same time give users a reasonable experience. Femtocells in each 4G home would give users an in-home experience with 4G as a baseline even if their own home area wasn’t yet covered by 4G cells, or was covered sparsely. If we see more with femtocells in 2009, we’ll also have a chance to see how carriers propose to price femtocell airtime: Will they discount it or make it free given that their network isn’t really being used? That will tell us a lot about whether femtocells will be a means of encouraging high-bit-rate applications at home where traffic won’t hurt the provider network, or whether providers will try to use femtocells only to get a better ROI by reducing the demand for true 4G cells.

Another issue is more complex and potentially even more important. Open handset policy has become a major target of many since the AT&T iPhone 3GS upgrade plan was announced. There is little question that consumers would like an open handset ruling, but given the role that smartphones have played in mobile service evolution, it would be a major setback for operators to lose the ability to link a hot phone to their data service.

Could a 4G initiative be promoted without any captive handsets to ensure some quick ROI? Again, we’re not going to know at the hearings, though we may catch a hint of Congress’s own position; they can always pass legislation to overrule the FCC. The Senate is looking at exclusive deals between handsets and providers now.

The process began with realization that competitive long-distance providers were never going to be fully competitive as long as AT&T had local exchange control, and so the MFJ broke that monopoly, which was OK in a policy sense. It did reduce long-distance pricing steadily. It also created an undesirable stratification of the industry that separated access cost from interexchange revenue and so stalled broadband deployment.

The Telecom Act of 1996 was designed to again reorient the industry to create vertical competitors and to keep from restarting the old Bell monopoly. Lawmakers imposed a wholesale requirement on the RBOCs that shared their access with the IXCs. But long-distance pricing was doomed and so only increased subsidies could have kept the IXCs alive, and that was not the goal of the Act. Neither was the CLEC craze that venture capitalists started.

The IXCs got bought, the CLECs died, and the federal courts finally clarified things—by which time it was all moot. In this decade, the Powell policy of cross-modal competition between cable and RBOC was the only sensible play all along, and it’s actually working pretty well. Those who lament the death of the small CLEC or the lack of hundreds of healthy competitors should just take a look at the ROI on access investment; it’s poisonous for any new entrant.

Consolidation is already going on in telecom worldwide, and that’s a sure indicator that the problem isn’t a lack of competition, it’s a lack of price stability. The past should be a lesson for us: Regulatory policy can’t easily cope with fast, fundamental changes.