Government shouldn’t compete with industry, ban technology, add new taxes to digital goods or allow interest groups to blackmail companies. Instead, policy leaders should save money by making use of new tech like VoIP and fuel competition by removing regulatory barriers to video market entry.

The words “California” and “technology innovation” often occur in the same sentence — a happy reality that makes the Golden State shine. With only eight days left in the year, it’s worth looking back and evaluating how the state’s tech policy could improve.

Overall, 2005 was a good year — unemployment rates are low and Silicon Valley has started buzzing again. But while entrepreneurs were getting back on track, the state’s lawmakers were busy with other tasks that were not so helpful. The push for a government-controlled Internet Get Linux or Windows Managed Hosting Services with Industry Leading Fanatical Support. is a prime example.

It’s ironic that in the same year that the federal government opposed foreign meddling with the Internet at a United Nations meeting, local governments around the country, particularly San Francisco, lurched in a different direction. Government control of the Internet at any level is something to be avoided, and San Francisco Mayor Gavin Newsom’s support for socialized communications infrastructure Conquer I.T. complexities. Simplify and save, with IBM Express. was disappointing.

California’s fiscal well-being depends a great deal on businesses having the flexibility to operate in a competitive market free of government interference, but when the public purse competes with local cafes offering free Internet access, everything goes off kilter. Another big mistake was pandering to rent-a-mob activists during the recent telecommunications mergers.

The mergers of SBC/AT&T and Verizon/MCI were good for consumers as they add two strong new competitors to the communications landscape. Providers that distribute Internet services over cable, wireless Save $30 on two great walkie-talkie phones at Sprint.com, satellite, and broadband over powerlines now have serious competition from the DSL market. But getting those mergers to completion wasn’t easy and resulted in a deal where the Public Utilities Commission (PUC) basically forced the telcos to buy off sham “consumer” groups to the tune of US$67 million dollars.

That money could have been used for investment, and its misplacement will likely be borne by consumers in the form of higher prices and slower innovation. At least the PUC’s actions weren’t a direct ban on technology like the attempted legislation from Senator Joe Simitian, a Palo Alto Democrat.

Inventors in Silicon Valley tend to go absolutely crazy when anyone talks about banning technology, so it was interesting to see the senator propose a ban on Radio Frequency Identification Tags (RFID) in government identification documents. RFID tags are an updated version of bar codes and the wave of the future for organizing and managing inventory and identities. Indeed, anyone who’s visited Microsoft’s (Nasdaq: MSFT) Latest News about Microsoft “home of the future” can see how the technology can be used to automate mundane tasks like grocery shopping.
Privacy Implications

Of course, Senator Simitian is worried about the potential privacy Latest News about privacy implications of the identity tags, but there are two responses to that issue. First, the data on an RFID tag can be limited or encrypted to ensure the safety of government employees. Second, taxpayers deserve a well-organized and managed public service. The proposal to ban RFID in government documents seems downright Luddite in a state like California. Then again, this is also the same state that failed to adopt voice over Internet protocol (VoIP).

At the end of 2004, a state reform commission recommended replacing costly landline telephone service with VoIP for government offices. The potential savings was calculated at up to US$6 million per month, yet Governor Schwarzenegger and the Legislature made no changes to state telephone service in 2005. This inaction follows on the heels of other stalled initiatives that could have boosted California’s tech sector. Perhaps most disturbing is the passiveness of California’s political leaders on the collection of an “iPod tax.”

Under the guise of “simplifying” tax systems, state bureaucrats are working to reform tax codes to force digital goods vendors to collect and remit sales taxes for other jurisdictions. If implemented, this tax will harm both the content and hardware industries, creating an issue where Hollywood and Silicon Valley can actually agree. Then there’s the cable franchise issue.
Changing the Marketplace

California likes to think it’s the leader when it comes to new gadgets and services, but on the issue of video competition, Texas got there first. Cable franchise laws, which were put in place at a time when cable was pretty much the only game in town, are standing in the way of competition from the telcos.

Internet Protocol Television (IPTV) is set to do to the video market what VoIP did to the phone market: reduce prices and increase choice. But unlike the phone market, government regulations make it difficult for competitors to offer services to consumers. In 2006, California will need to fix its franchise system so that all players compete on a level playing field.

As Californians gear up to ring in the New Year, they may want to send a wish list to the California legislature. The state’s tech sector is taking off again, but things could be better.

Government shouldn’t compete with industry, ban technology, add new taxes to digital goods or allow interest groups to blackmail companies. Instead, policy leaders should save money by making use of new tech like VoIP and fuel competition by removing regulatory barriers to video market entry.

Level 3 Communications, Inc. (Nasdaq: LVLT) today announced that it has completed its
acquisition of WilTel Communications Group, LLC. As consideration, Level 3 has paid Leucadia National Corporation (NYSE: LUK) 115 million shares of Level
3 common stock and $386 million in cash.Pursuant to the purchase agreement signed by Level 3 and Leucadia on
October 30, 2005, Level 3’s cash consideration at closing was increased from
the previously announced amount of $370 million, to reflect an improvement in
WilTel’s working capital and is subject to adjustment based on the subsequent
calculation of actual closing date working capital. Level 3 paid an additional
$100 million in consideration for $100 million in cash held by WilTel at the
time of closing.
“There is a unique and compelling fit between WilTel and Level 3,” said
James Q. Crowe, chief executive officer of Level 3. “Because of this and hard
work by all involved, we have been able to close this transaction ahead of
schedule. Through this process, we have continued our analysis of the WilTel
business and are confident in the overall financial projections we provided at
the time we announced the definitive agreement. We have also continued our
integration planning and we are extremely pleased with the progress we have
made leading up to today’s announcement.”

Financial projections
“We are reiterating our previously announced overall revenue and cash flow
projections for the acquisition,” said Sunit S. Patel, chief financial officer
of Level 3. “This transaction adds substantial new revenue from high quality
customers and creates value from significant synergies resulting from
elimination of duplicative common resources and network infrastructure. We
continue to expect the acquisition to add $1.5-1.6 billion in revenue to our
2006 communications revenue which approximately doubles the size of our
existing communications business.
“While we recognize that the contribution from the AT&T (formerly SBC)
contract will diminish over time in accordance with their contract with
WilTel, we continue to expect that this transaction will contribute
approximately $50-90 million of incremental cash flow in 2006 and $125-150
million of incremental cash flow annually from 2007 onward. We expect to
provide more detail when we announce our 2005 fourth quarter results in
February 2006.” Integration costs are expected to be $100-150 million.

Integration planning and execution
“The combination of Level 3 and WilTel unites two leading providers of
communications backbone services to create what we believe is the premier
wholesale communications services provider in the industry,” said Kevin
O’Hara, president and chief operating officer of Level 3.
“Due to the unique strategic fit between the two companies and Level 3’s
past integration experience, we remain confident in our ability to
successfully combine the businesses and conclude a smooth transition for
customers,” continued O’Hara. “We commenced integration planning immediately
after signing the definitive agreement in October, and we believe we are well
positioned for a smooth integration process in keeping with our projected
schedule.
“The transaction will significantly increase the size of Level 3’s
communications business by increasing the scale of the company’s transport, IP
and voice business. In addition, broadening our network capabilities will
facilitate increased network reach by adding 3000 additional route miles,
access to 50 new markets and improved responsiveness on high demand routes.”

Vyvx
As a part of the transaction, Level 3 acquired the WilTel subsidiary,
Vyvx, LLC, the industry leader in gathering and distributing broadcast quality
live and non-live video for the media and entertainment industry.
“We recognize the importance of Vyvx’s customers and are committed to
ensuring they receive the highest quality service without disruption,” said
O’Hara.
“We believe that Vyvx’s expertise in transporting video combined with its
strong brand and customer relationships may create some additional
opportunities for Level 3 as the video transport market evolves.”

About Level 3 Communications
Level 3 (Nasdaq: LVLT) is an international communications and information
services company. The company operates one of the largest Internet backbones
in the world, is one of the largest providers of wholesale dial-up service to
ISPs in North America and is the primary provider of Internet connectivity for
millions of broadband subscribers, through its cable and DSL partners. The
company offers a wide range of communications services over its 23,000-mile
broadband fiber optic network including Internet Protocol (IP) services,
broadband transport and infrastructure services, colocation services, and
patented softswitch managed modem and voice services. Level 3 is an industry
leader in IP and VoIP services, which it provides to cable operators, ISPs,
carriers and others. Level 3’s E-911 service offering includes both fixed
location and nomadic VoIP E-911 capabilities, supporting an FCC-compliant E-
911 solution for interconnected VoIP providers.
The company offers information services through its subsidiary, Software
Spectrum, and fiber-optic and satellite video delivery solutions through its
subsidiary, Vyvx. For additional information, visit their respective Web
sites at http://www.softwarespectrum.com and http://www.vyvx.com.

The Level 3 logo is a registered service mark of Level 3 Communications,
Inc. in the United States and/or other countries. Level 3 services are
provided by a wholly owned subsidiary of Level 3 Communications, Inc.

Forward-Looking Statement
Some of the statements made by Level 3 in this press release are
forward-looking in nature. Actual results may differ materially from those
projected in forward-looking statements. Level 3 believes that its primary
risk factors include, but are not limited to: developing new products and
services that meet customer demands and generate acceptable margins;
increasing the volume of traffic on Level 3’s network; overcoming the softness
in the economy given its disproportionate effect on the telecommunications
industry; integrating strategic acquisitions; attracting and retaining
qualified management and other personnel; successfully completing commercial
testing of new technology and information systems to support new products and
services, including voice transmission services; ability to meet all of the
terms and conditions of our debt obligations; overcoming Software Spectrum’s
reliance on financial incentives, volume discounts and marketing funds from
software publishers; reducing downward pressure of Software Spectrum’s margins
as a result of the use of volume licensing and maintenance agreements; and
reducing rate of price compression on certain of the Company’s existing
transport and IP services. Additional information concerning these and other
important factors can be found within Level 3’s filings with the Securities
and Exchange Commission. Statements in this release should be evaluated in
light of these important factors.

A Whale of a Cable Phone Concept

At about the same time the cable industry developed high-speed data services over HFC (HSDoHFC if you need yet another acronym to fill your Christmas stocking)—and CableLabs stepped up with the roll-off-the-tongue DOCSIS—marketers said they would target the small-medium sized business (SMB) customer.

In the ensuing decade or thereabouts since, HSDoHFC has surpassed even the maddest scientist’s wildest dreams; VoIP has developed into a nice niche residential business, and marketers still talk about targeting SMBs. Not to overly abuse the marketing guys, but the SMB is a pretty viable market, and HSDoHFC is a pretty viable technology, so .…

“The business customer wants to buy something. They’re a very underserved market,” said Ken Stess, vice president of corporate business development at Whaleback Systems.

Low hanging fruit

Not only is SMB underserved, it is, to coin a phrase, low hanging fruit. They’re too small for the telcos and too much bother for the residentially focused cable industry. And they’re getting antsy, which is why you find fixed broadband wireless WiMAX and even some satellite plays creeping into a space where the doors should be barred and padlocked.

SMBs “have antiquated equipment; the buttons don’t work on all the phones, and the person that installed the system is no longer with the firm,” Stess said.

Whaleback’s idea is to serve these SMBs, most of whom already have broadband connections, with phone equipment that interfaces into a cable operation. Neither the cable operator nor the end user has to do much more than a Philadelphia Eagles running back, which is to say, just stand around and watch Whaleback throw the ball.

Pitched and branded

“We are pitching it and branding it as Whaleback,” said Stess, broadly hinting he wouldn’t object if an MSO decided to step in and help. “The discussions with the cable companies are that most likely it will be a co-branded piece.”

The Whaleback model—a flat price, managed service with a centralized monitoring system that watches the health and configuration of the network—could almost be called your father’s telephone system.

“We’re delivering an all-inclusive service very similar to what was delivered 40 years ago by AT&T and Western Electric where you signed up for the phone, it got delivered by Western Electric, and AT&T supplied the dialing plan and access. We’re providing all the things you need for a business phone solution including the handsets, the server, the set-up and configuration, and the maintenance and monitoring, along with the local/long distance calling for a flat monthly rate,” Stess said.

While fully managed, Whaleback’s offering not a hosted Centrex, said Ray West, Whaleback’s vice president of engineering, who co-founded the company with Mark Galvin after leaving Cedar Point.

“The Centrex solution wants to fight with what the cable operators are trying to deliver where they’re building their own backbone infrastructure and have Cedar Point or Siemens or somebody building a phone system for them,” said West. “A Centrex puts a strain on those resources and complicates their network.”

IP PBX model

Whaleback uses the IP PBX model by putting its equipment on the premises and letting the cable operator leverage its existing back-end gear.

“All the headend equipment they’ve invested in they re-use and utilize to connect into us, and then we put the PBX on the customer premises. The customer owns that,” he said.

The idea is to feed typical commercial services—phone and data—to small customers with perhaps dozens, not thousands, of end users. Whaleback provides the end points or phones, the server, the software, and configuration. While the company’s cable heritage makes it MSO-friendly, it “can work with anything that can provide an Internet connection,” West said.

The residential inverse

Each phone call requires about 100 kb of bandwidth, which, West continued, is not a problem because cable systems were modeled for residential voice, and the commercial usage is the “inverse” in terms of contention. More advanced DOCSIS 1.1 and 2.0 specifications also help because “the cable modems can be provisioned to have a certain amount of pre-provisioned bandwidth … providing the phone trunks with adequate bandwidth for the number of concurrent calls that it would require,” he said.

Most importantly, the idea makes financial sense for everyone: Whaleback, the SMB and, if interested, the cable operator.

“There’s some good margin here,” West said. “A number of people have been trying to market voice-over-IP as opposed to a good solid phone system. We’re installing a good, solid phone system that offers features … that people are used to having on their traditional phone system. When they start looking at their existing phone system bill vs. our bill, there’s a lot of room in there for them to save money and for us to make a good margin on what we’re delivering.”