On LinkedIn there was a question in the Telecom Executives Business Network group: "How can a Telco Service Provider value chain defend itself from the attack by the emerging "Cloud" services? My understanding is that the emerging "cloud" services remove value-add and differentiation from the Telco service providers which are cornered to act just as the bit-stream providers (especially for the retail market)."

My answer to that was as follows:

Most telco carriers worry about becoming a Dumb Pipe. Isenberg told them this would happen. They fired him instead of listening. All the value is in Layer 1 or Layer 7.

Layer 1 in owning the network and delivering fast Internet bandwidth. The value there is if you can also deliver it with Quality. The value for the Telco is to deliver it via as many ways as possible to maximize ARPU - wireline, wireless, Wi-Fi, WiMax, cellular.

The value at Layer 7 is the apps - Web 2.0, social networks, SAAS, ASP, virtualization, The Cloud. People have to get to their data. However, Telcos are horrible at implementing and selling managed services. Why?

When you are a cost-cutting organization you will not hire the right people, train your sales staff, provide the necessary customer care, and design a suitable user interface.

The RBOC's can barely keep their copper up and running. If you have a lousy experience with them in wireline or cellular, why would you move to them as your App Provider?

Remember that RBOC's couldn't even sell Centrex, which essentially the first hosted phone system type of service. Their E-Commerce initiatives have been failures. RBOC's partnered with Yahoo! on their ISP DSL service.

This also falls under my rant that Telcos don't innovate. There was a time when AT&T Labs was the promised land for PhD's. It is a shadow of what it was in the 80's. Some of that is due to the fact it was spun-off with Lucent. Some of it is that the US doesn't graduate nearly enough PhD students. Some of it is that the R&D budget is shrinking fast. (We even cut the NASA budget). We need pure research. It leads to innovation. If the US is going to be the knowledge center in the future we need to continue to be the leader in research, innovation and patents. I see that shrinking. And it scares me.

When I think about the CEO's of Ma and Pa Bell, my take-away is that the customer is a number, an ARPU figure to be manipulated. Erik says it's the regulatory environment, but I think it is the Bell-head mindset. When you can't get billing right - either because the BSS is too clunky or it is a revenue source - why would someone trust you with their DATA? Fortune 5000 companies probably will because they play it safe and buy by the Brand, but the rest of the 8 million companies in the SMB space don't buy that way. They buy from who they like and trust.

In a twitter exchange with Erik Cecil, former regulatory counsel at Level3, we were dialoging about the Fairpoint bankruptcy. (FairPoint aims to cut debt by two-thirds).

My reply stated, "Just 2 years after the deal w/VZ to create an unstable Fairpoint despite opposition, Fairpoint screws everyone." By everyone, I mean the customers, the economy, the state, the PUC who approved the deal despite being against it (And Erik, you think there is regulation?), the workers, the Union, shareholders and the debt holders. I actually don't care about the last two, because both should have known it was going to go POOF!

The only winner in this mess was Verizon, who got out of the rural assets and pocketed some tax credits while eliminating debt.

Oh, the cable company and a couple of WISP's also gained - because frustrated customers left Fairpoint.

Erik's reply was that I "have to appreciate how impossible it is to innovate in todays' regulatory envirnoment." I almost fell out of my chair. What Regulatory Envirnment? Since 2005, ILEC's have been steady been granted not deregulation, but UnRegulation -- even over voice lines (in Florida at least).

Lobbying & Litigation is the new R&D. Especially patent litigation.

Erik replies, "(1) lobbying & litigation = R&D since 1934;(2) next gen killed by LATA, LCA http://www.telecomabc.com/l/lac.html, intercarrier comp warfare; state PUCs; (3) examine network, business units, systems, call flows, gear, not screaming politicians/regulators; (4) solve not blame."

I don't see LATA, LCA or Inter-Carrier Comp as issues that get in the way of Innovation. I think the Bellhead monopoly mentality coupled with an executive suite that only worries about the stock value is what has crippled telecom.

How does any of this apply to the Fairpoint BK? Fairpoint didn't have Innovation issues. It had Integration issues. And ego issues thinking it took take on that project without collapsing.

"What got you here won't get you there" means that the Executive suite at Fairpoint has to go along with two-thirds the debt. They are not capable of pulling this company together and delivering on any merger promises. You need fresh thinking. No more Bell-heads!

Back to Erik's saying that it's regulatory: when have they tried Innovation? DSL was brought to us by 3 start-ups - Covad, Northpoint and Rhythms. Ethernet was brought to the market by start-ups like Yipes, expedient and Cogent. ILEC's had to be dragged into offering Ethernet because they had so many sunk costs in TDM. TDM was practically free for them. Only a few even tried EoC (Ethernet over Copper). What's regulatory about that?

It's painful to think that these companies are too-big-to-fail, yet have failed time and again to deliver the promises made for rate hikes - namely real broadband to every home in America.

The real pain is coming though. Windstream was downgraded. Landline loss without a cellular replacement or a FTTx project means EarthLink planning. Hunker down, cut costs, ride it out. VZ is spending billions on every front: payroll, retiree benefits and layoffs; international network upgrades; cellular upgrades from 2.5G to 3G to LTE; and FiOS build out. Plus the $22B of debt from the Alltel merger. That's a lot of zeroes.

AT&T is in a similar boat. Debt from massive layoffs due to mergers, retiree benefits, international network, cellular network upgrades (2.5G to 3G to 4G), domestic network (as it moves more and more to all-IP), and the U-Verse project. Think about this: the triple-play is just $99. They used to make more profit on just a phone line -- DSL was gravy. Even cellular ARPU is stalled. How do you pay it all back?

Qwest is stuck too. Large debt. No buyer. Layoffs. Stagnant revenues.

Cable is in a similar boat: $100B in combined debt to upgrade to DOCSIS 2.0 and now another $100B to go to DOCSIS 3.0 without calculating wireless projects, massive fiber network builds (especially for tower backhaul), set-top boxes and acquisitions.

Where do you think this will all lead? And none of this has anything to do with regulations.