Welcome to the first issue of 1999 of the HELLERSTEIN TELECOM & TECHNOLOGY REVIEW, a monthlyfree newsletter covering significant industry and regulatory developments in the telecommunications andtechnology industries. We have changed the newsletter's name to better reflect the stories and topics that will becovered this year. The newsletter is published by Hellerstein & Associates, a telecommunications and technologyresearch group that provides its clients with a competitive edge through market research, competitive intelligence,and regulatory analysis.

NOTE: The Hellerstein & Associates Website is located at www.jhellerstein.com. Please keep the suggestionscoming and send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com.

This issue will focus on some of the insight gained at the Economic Strategy Institute'S BROADBAND CONFERENCE held on February 4, 1999. Although many of the panelists at this conferencediscussed the impact that current regulations will have on their attempts to deploy broadband access in the US, Iwas particularly intrigued by the panelists who focussed on European broadband issues. Glenn Davidson of Viatelspoke about the serious lack of broadband infrastructure in Europe as well as the lack of reliable and high qualitycross border switches and services. The paucity of the current broadband architecture and the high costs of leasingE-1 (the European equivalent for T-1) lines and of purchasing cross border transportation has forced somecompanies to adopt into creative bypass approaches to keep down costs. Many companies often route much of theirEuropean traffic through the US and then back out to Europe because of lower costs and the need for high qualityservice.

Moreover, the increasing demand for broadband applications and high speed bandwidth has made this need moreacute. Broadband access and demand for higher bandwidth will continue to increase dramatically as Internet usagegrows. As was mentioned in my September newsletter, most carriers are no longer content to haul all theirinternational traffic through one termination point in a country and are insisting that they be able to terminate theirtraffic directly at a city-by-city level, rather than a country-by-country level. Combined with the deregulation ofEuropean telecommunications networks, the creation of intracity networks linking cities rather than countries hasbegun to sprout up. MCI WorldCom was the first US company to build such a network and its Ulysses network isnow almost complete. Viatel is also building an intra-city network, called Circe. Viatel's Circe network will connectover 30 major business centers in five countries (Belgium, France, Germany, the Netherlands, and the UnitedKingdom), and will be built as a 160 Gigabit self-healing, set of three interlocking SONET rings. Viatel expects tolight the first part of its network at the end of March 1999. While, MCI Worldcom targets large customers, Viatel istargeting small and medium-sized enterprises that previously could not afford this bandwidth. Viatel expects to beable to offer its clients a significant savings over the Ulysses and over present day leased lines from the PTTs.According to Glenn Davidson, prices for Viatel's Circe network are expected to be only $330 a month incomparison to the $40,000 the incumbent PTTs charge, and the $4,000 that Ulysses charges.

If Viatel's prices include all provisioning and equipment charges, they will result in a dramatic shakeup of thebroadband marketplace. Demand at this price will likely skyrocket as it is far below what other companies arecharging. Another interesting fact is that Viatel plans on selling Indefeasible Rights-of-Use (IRUs) for its network. Viatel hopes to capture this pent-up demand for broadband access by marketing IRUs to companies. In the past,most companies leased their lines on a contract basis because demand for bandwidth was unknown. Companiespurchasing these IRUs are forward -hinking companies focused on long term growth. They are fully confident thatthey will be able to fully utilize their share of the bandwidth capabilities of the network as consumer and businessdemand for bandwidth continues to rise increase. Electronic commerce has taken off and we have not evenscratched the surface of the different types of multimedia applications, Internet telephony, and other broadbandapplications that businesses will depend upon, both to increase their efficiency and to improve their productivity.Once the cost of access becomes affordable for most of the companies in Europe, there will be no shortage ofapplications that are created to take advantage of this access.

Viatel's new broadband city network should to be able to capitalize on these changes. Viatel's low prices will allowsmall and mid-sized companies to be able to gain access to broadband infrastructure without having to pay the highcosts that had prevented them from obtaining this access. The prices charged by Viatel, provided they are inclusiveall charges, will result in a skyrocketing of demand as there is much pent-up demand for broadband access. Thisincrease in demand will result in a significant expansion of European business activity among the small andmedium firms that Viatel and others are beginning to target. Moreover, as companies begin deploying broadband intheir network's new uses for broadband applications will develop. The increasing penetration of the Internet inEurope, combined with the increasing power and penetration of PCs as well as the skyrocketing number of Internethosts all serve as drivers for demand for broadband access.

Broadband demand will be fed by new multimedia applications, broadcast quality video, Internet Telephony, videoconferencing, and new and expanded E-Commerce initiatives. Broadband access demand in the US is growing byover than 100% and is likely to continue on this growth path for the near future. The creation of city networks suchas Ulysses and now Circe will also lead to the introduction of flat rate pricing for Internet access. Currently Internetaccess in Europe is extremely expensive and no company offers a cheap all-you-can-eat price as is common in theUS. Just as flat rate pricing in the US has led to a skyrocketing increase in Internet usage and in online penetration,the same increases will occur in Europe. In the US, the Internet has entered the mainstream as can be witnessed byits increasing popularity and by the significant jumps in online commerce. In 1998, online sales almost quadrupledfrom an average of $3 billion in 1997 to an average of $11 billion in 1998. Moreover, the US Commerce Department expects online retailing to reach $30 billion by the year 2000. As demand for broadband accessincreases, so will the applications that utilize it. New applications and new technological developments will spurdemand further necessitating even more bandwidth. Deregulation in Europe is occurring fast and furious, new independent regulators are encouraging this growth by adopting competitive open market policies and regulationsthat force incumbents to create an equal playing field. Hellerstein & Associates believes that as deregulation andprivatization of previous state-owned companies and infrastructures continues at a rapid pace, hundreds, even thousands of new carriers will enter the marketplace, most with business plans centered around bandwidth intensive services and applications. All this makes for an exciting time in Europe as competition is resulting in moreinnovative services, better quality, and the lower prices.

INTERNET ACCESS OVER CABLE

Larry Strickling, Chief of the Common Carrier Bureau of the FCC, gave some hints to how the FCC views thecurrent problems of Internet access over cable that was mentioned in my fifth newsletter. As Hellerstein &Associates noted in October 1998, it is untenable to have Internet access regulated differently depending on themedium used, and will become even more so in the upcoming years as the communications, broadcasting,computer, satellite, and cable industries converge on each other. Strickling stated that although he viewed thepresent system unsustainable, the FCC did not have many options open to it. He stated that carriers are mistaken ifthey believe that the issue will be resolved by insisting that cable operators unbundle their networks. Unbundlingthe cable network will not solve any problems as the issue is not about unbundling, but about creating the rightregulatory framework for this new Internet economy. The FCC, he stated, does not have the proper tools at itsdisposal to correct this. Strickling stated that carriers who insist that State Commissions get involved and forcecommon carrier regulations on the cable network will likely find this approach to backfire, as it might very wellproduce 50 different regulations of Internet access over cable. If this indeed does occur, broadband deploymentwill likely slow to a crawl. Internet access has spread so rapidly because it was not regulated, creating 50 differentregulations will surely hinder the deployment of broadband access to all Americans.

Hellerstein & Associates is interested in learning what its readers think of these issues. Please send all commentsdirectly to Judith Hellerstein at Judith@jhellerstein.com. If you would like more information on this topic please e-mail Judith Hellerstein at Judith@jhellerstein.com.
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Hellerstein & Associates is a telecommunications and technology research group that provides its clients with acompetitive edge through market research, competitive intelligence, and regulatory analysis on market access andcompetition policy issues. We look forward to hearing from you and will strive to meet all topic requests. Redistribution of this newsletter is encouraged provided it includes this paragraph.

Topics covered in the HELLERSTEIN TELECOM & TECHNOLOGY REVIEW were chosen because of theirinterest to the work of Hellerstein & Associates. Please send all comments or suggestions to Judith Hellerstein at Judith@jhellerstein.com.