All Things Digital

Vonage’s slow death is … well, it’s slowing.The financially struggling Internet-phone company reported today a smaller first-quarter loss thanks largely to prudent cost cuts.

Great news for Vonage (VG), which has been tormented by a barrage of costly legal battles and set upon by new and powerful rivals. The company’s net loss shrank to $8.96 million, or 6 cents a share, from a loss of $72.3 million, or 47 cents, in the year-earlier quarter.

Sadly for Vonage, the company’s Q1 loss isn’t the only thing that shrank. Subscriber growth did as well. The company signed up just 30,000 new subscribers in the quarter, a big decline from a year earlier when it added nearly 166,000 subscribers. Worse, turnover rate increased to 3.3% from 3% in the fourth quarter.

Still, Vonage is a bit healthier than it’s been for some time now. So while it may not exactly be on the road to recovery, it’s at least crawling in its general direction. To that end, the company’s inked a deal to resell Covad’s DSL service under the Vonage Broadband name. An interesting idea, in that it will allow Vonage to bundle a broadband offering with its Internet telephony services like most other phone and cable companies on the planet. But DSL? Really? At a time when Verizon (VZ) is expanding its FiOS fiber-optic service and Comcast (CMCSA) is boosting the speed of its high-tier cable broadband?

The economy may be slowing, the traditional wireline phone business deterioriating, but Verizon (VZ), as director Michael Bay says in one of the company’s new commercials (see below), is doing “awesome.”

The company’s first-quarter earnings met Wall Street expectations today thanks to strong growth in its wireless and FIOS home fiber-optic services businesses. With a 10% increase in first-quarter profit, and revenues that rose 5.5% to $23.83 billion, Verizon’s business would appear to be more recession-proof than others. “We’re really not seeing a change in trends,” Chief Financial Officer Doreen Toben said in an interview. “How many people are really going to drop their wireless phone?”

Not very many. Verizon added 1.5 million subscribers to its mobile business during the quarter. That said, there are plenty of folks willing to drop their landlines. Verizon wire-line subscribers declined 8.2% to 40.52 million from 44.15 million in the first quarter of 2007.

Sen. Ted Stevens was right: The Internet is not a big truck. It’s “a series of tubes”–tubes that can be filled to capacity by “enormous amounts of material.” And, according to AT&T, that’s going to happen about two years from now.

In remarks at the Westminster eForum on Web 2.0 this week in London, Jim Cicconi, vice president of legislative affairs for AT&T (T), said the Internet will hit its capacity in 2010. “The surge in online content is at the center of the most dramatic changes affecting the Internet today,” Cicconi said. “In three years’ time, 20 typical households will generate more traffic than the entire Internet today. We are going to be butting up against the physical capacity of the Internet by 2010.”

Clearly, some bigger tubes are in order here–$55 billion worth of them, according to Cicconi, who was quick to note that it will be companies like AT&T footing the bill for them. “There is nothing magic or ethereal about the Internet–it is no more ethereal than the highway system,” he said. “It is not created by an act of God, but upgraded and maintained by private investors.”

Ah yes, private investors. Like the ones who promised in the mid-1990s to provide fiber-optic connections to millions of households across the country in exchange for some $200 billion in tax cuts? The ones who never delivered on that promise, content to pocket direct tax credits of, on average, $2,000 per subscriber, without fulfilling their end of the bargain? Those investors?

It’s still 10 to 12 years away from market, but when it arrives IBM’s new silicon photonics technology could transform even the lowliest Dell laptop into a portable Blue Gene.

The so-called Mach-Zehnder electro-optic modulator transmits data between between multiple cores on a chip using pulses of light through silicon, instead of electrical signals on wires. It’s 100 to 1,000 times smaller than previously demonstrated modulators, and it transmits data 100 times faster than traditional copper wires while using 10 times less power.

If IBM’s able to replicate it commercially–and the company insists it can–it could inspire a vast array of new highly portable supercomputers that expend as little energy as a lightbulb. “Just like fiber-optic networks have enabled the rapid expansion of the Internet by enabling users to exchange huge amounts of data from anywhere in the world, IBM’s technology is bringing similar capabilities to the computer chip,” Will Green, IBM’s lead scientist on the project, told Reuters. “You immediately can envision the mobile applications that that would allow you to do. Remote laboratory instruments for medical applications, screening for diseases or even complicated DNA analysis.”

In 2010, it could take as long as two minutes to download an episode of “Chad Vader–Day Shift Manager” from YouTube, instead of the few seconds it takes today. This according to a new study from Nemertes Research Group, which claims that the Internet could be approaching its capacity. “Our findings indicate that core fiber and switching/routing resources will scale nicely to support virtually any conceivable user demand,” Nemertes explains in “The Internet Singularity, Delayed: Why Limits in Internet Capacity Will Stifle Innovation on the Web.” “But Internet access infrastructure, specifically in North America, will cease to be adequate for supporting demand within the next three to five years.”

And what does that mean in lay terms? “Users will experience a slow, subtle degradation, so it’s back to the bad old days of dial-up,” said Nemertes President Johna Till Johnson. “The cool stuff that you’ll want to do will be such a pain in the rear that you won’t do it.”

To avoid such a scenario, Nemertes says backbone providers need to invest up to $137 billion in Internet infrastructure capacity–more than double what they’d planned. If they fail to do so, we may see that slow degradation to which Johnson referred and a stifling of innovation. “It’s important to stress that failing to make that investment will not cause the Internet to collapse,” Nemertes explains in its paper. “Instead, the primary impact of the lack of investment will be to throttle innovation–both the technical innovation that leads to increasingly newer and better applications, and the business innovation that relies on those technical innovations and applications to generate value. The next Google, YouTube or Amazon might not arise, not because of a lack of demand, but due to an inability to fulfill that demand. Rather like osteoporosis, the underinvestment in infrastructure will painlessly and invisibly leach competitiveness out of the economy.”

Nemertes’s last point about underinvestment in infrastructure is one worth noting. Because in the run-up to the Telecommunications Act of 1996 the incumbent telecoms promised to provide fiber-optic connections to millions of households across the country. In exchange, they were given some $200 billion in tax cuts and higher service rates to pay for it. But the telecoms didn’t spend that money on fiber upgrades–they spent it on long distance, wireless and inferior DSL services. “By 2005, if the Bell companies had actually delivered on their broadband promises, approximately 86 million households would have had fiber-optic-based services,” Bruce Kushnick, executive director of New Networks Institute, explains in “The $200 Billion Broadband Scandal.” “These state commitments also would have rewired schools and libraries, hospitals and government offices. And in most states, the plan called for ALL customers to be rewired equally, whether they were in rural or urban areas, rich or poor. Universal broadband was to be accomplished state-by-state because customers were, in essence, de facto investors funding these network upgrades.”

Something to think about when the Nemertes’s study begins popping up in telecom arguments against Net neutrality, as it almost certainly will.