June 28, 2001
[INTRODUCTORY ACKNOWLEDGEMENTS.] Thanks, John [Fund], for those kind words—and my thanks to all of you here at the Manhattan Institute, an organization dedicated to the notion that ideas matter, and that informed ideas must shape our public policy. I want to use this opportunity today to share with you my views on what I see as a critical matter—not simply to the telecommunications sector or even to state of American technology—but ultimately to the strength of our economy and shape of our society for decades to come.
I’m talking about the broadband buildout: The new world coming to you through fat pipes and fast-access hook-ups.
Now, the world I live in has a language all its own: CLECS and ILECS, UNEs [etc.]. But I want to spare you the jargon today, and demystify broadband…
…Even if I leave you mystified about the FCC’s machinations in regulating this nascent and naturally competitive market.
But I’m skipping ahead in the story. Let me start the demystification process by looking at how we’ve used technology to communicate—up ‘til recently.
In the past, we’ve had a separate notion of telecom, as a conduit for sending one-to-one content: You call me, I answer, and we talk. Telecom provides the dial tone—the callers provide the content. The idea is clear enough: Before the telephone, it was the telegraph—and before that, the carrier pigeon.
That notion of content-sharing contrasted sharply with the idea of broadcasting: First over-the-air television, then cable and later satellite put content out on a broadcast basis—to be received by anyone with the right kind of set—one-way, no interaction.
Even the newspaper fits this broadcast paradigm: One-way content, no interaction—delivered to your doorstep each morning.
In the old world, telecom was transport—the pipe, pure and simple. Broadband was content: Two offerings, separate and distinct.
Today’s communications marketplace—the evolving broadband market—is a hybrid of both. The broadband offering is a highly-integrated, content-rich service that brings together not only access to content—text, audio and video—but also integrates applications that permit interactivity, that help you organize, navigate and manipulate content, as well as applications such as self-activating calendars and databases that draw on content to make our lives easier. Within the framework of this offering, telecom becomes an embedded functionality—tightly integrated into the broadband package.
The result: the boundary between conduit and content is now blurred.
This is not a market that’s changing at the margin. This is a huge new market that supercedes the others—that will ultimately incorporate them. And that’s a key notion, a critical notion, in understanding how regulators ought to match mind-set to market in reacting to the developments I’ll talk about today.
There’s another factor I want to focus on now—and that’s the way this convergence of communications technologies is changing the competitive landscape.
We now see three potential networks, converging on the same competitive market:
— Wire or spectrum networks—like cable, telecom, and satellite.
— Desktop networks—like Microsoft’s operation system and the functionality built into it, which is moving the operating system closer to a subscriber ISP.
— And third, existing ISP networks like AOL—content networks supported by subscriber-eyeballs.
Those networks are now straining our carrying capacity to users. As astonishing as the emergence of the public Internet has been these past half-dozen years, the fact is that the Internet up ‘til now has been basically in its Beta Phase. When you look at what we’ve seen—the surge in websurfing, emailing, networking and the like—it’s remarkable that we’ve managed to push all that through a copper wire. But today, our Internet evolution is getting to the natural break-point. The Internet as we’ve known it is like a series of dirt roads suddenly being asked to support interstate traffic.
The marketplace saw this coming. That’s why we’ve seen the building of a new Internet backbone: The equivalent of replacing dirt roads with not just a 2 or 3 or 4 lane highway—but a 100-lane highway, capable of carrying infinitely more traffic.
Which is where broadband comes in. Broadband has the speed and the scope to take us to the next level—a new launch-point: A chance to break the bottleneck, and turn the Internet’s trickle of information into a firehose.
To be sure, the Internet isn’t an unalloyed good. Like any truly revolutionary change, there is potential for both good and bad in it. The same tool that gives our children online access to the collected works of the Library of Congress gives predators online access to our children.
And yet the medium is so in keeping with our national character because it is so profoundly democratic: In a free society, the Internet gives us access to a much more vibrant marketplace of ideas, breaking the grip of the media giants to control and filter public debate. And the Internet is also the great equalizer in economic matters as well—offering a tool entrepreneurial individuals can use to extend and expand their free-market reach, and making markets far more efficient, by helping buyers and sellers find one another.
Consider the implications for our economy: We know that Information Technology was the driving force behind the boom in the second half of the 1990s—accounting for about 30% of the total annual increase in U.S. GDP, and as much as 70 percent of total U.S. productivity growth, which increased GDP without sparking inflation. In an economy that shows so many signs of sluggishness, broadband could be the jump-start we’re looking for. A new economic study notes that a reasonable figure for the total annual benefits to the U.S. economy of the widespread adoption of broadband access in all its forms - ADSL, cable modems, satellites, 3G wireless, and others - is $400 billion per year.
But dollars alone can’t measure the impact we’ll see.
Consider the implications in healthcare and medical science—as broadband becomes the means and medium for specialists to virtually consult physicians in the field, to diagnose patients thousands of miles away, and a tool that makes today’s cost-intensive medical monitoring more effective—and efficient.
Consider the implications for education—making the dream of distance learning a reality, connecting students from kindergarten through college to a community of learning global in scope.
Consider the implications for energy use and the environment—as telecommuting becomes a real possibility, changing the work patterns for tens of millions of Americans who idle away so many hours today in traffic.
Now, to put this potential in perspective, let’s take a step back, and ask: what is broadband?
It’s spectrum. A means of carrying a message. The challenge is carrying it to the home.
The fact is, there are lots of places where spectrum exists—or can be created. The broadband market is naturally competitive, if left alone. There’s spectrum on cable pipes, spectrum on telecom pipes, spectrum available to water or utility companies with some retro-fitting. There’s wireless spectrum, fixed and mobile, and satellite spectrum—a whole host of competing technologies, alternative pipelines into the home, if you will—all vying to bring the broadband link to the customer.
In that effort, two things are necessary—one having to do with public policy, the other with private investment:
First, on the public policy front, the government has to resist the temptation to help—by picking winners and losers. Public policy toward the broadband buildout should be technology-neutral.
Second, on the private sector side—what’s needed to realize the promise of broadband?
In a word: Investment…
…The huge, tens-of-billions-of-dollars investment it will take to make a broadband buildout a reality in this country.
And as this audience well knows, investment is all about risk—and reward. It’s a story as old as Adam—Smith, that is:
Without reward, people will not incur risk.
Without incentive, people will not invest.
And that is where the regulators come in.
It would be nice if the challenge we faced in effecting the broadband buildout was keeping federal regulators’ hands off, and letting competition run its course. But that is not the case. Regulators’ hands are already all over this sector—and they’re already throttling the investment necessary to make the broadband buildout a reality.
Worse still, the FCC has saddled this sector with different rules for different players—seriously undercutting the incentive for investment.
Instead of promoting competition—the FCC is curtailing it: Its rules have the perverse effect of protecting the cable industry’s early advantage into precisely the monopoly position the FCC claims to fear most, putting true competition in doubt.
And it’s clear that cable companies find themselves in a very commanding situation at this point:
They largely control the video and audio content which is key to this market.
They own facilities that are capable of passing about 95% of all homes, nationwide.
They are the only ones who can provide service on their own line.
They’re their own ISP, able to control access to content sent over their network, and get a piece of the upstream action.
And finally, they are wholly deregulated—and vertically integrated, with all the advantages that implies.
In short, cable enjoys the right to engage in normal business practices, with the full range of economic incentives: When they make the huge investment and take the real risks of building complex facilities, they are able to recover their investment and make a commercial profit.
Given this freedom, it is no surprise that cable commands 70% of the broadband market today.
Cable’s primary competitor at this stage is telephone. Both of us have found a way to retro-fit our existing systems to free up spectrum for broadband use.
But that’s where the similarity ends. In contrast to cable, the FCC is forcing us to carry over the heavy regulatory regime imposed on our local voice operations.
Where cable reaps the reward from its investment, we have to manage our network as a broadband commons, allowing competitors—competitors who aren’t even willing to provide phone service—to cream-skim the broadband spectrum we’ve created, and to do it at bargain-basement prices set by the FCC.
If we want to upgrade our system, change from copper to fiber wire, for instance, and a competitor uses our old wire system, we have to maintain and manage it for them.
Add to that the fact the FCC has forcibly dis-integrated our business—in the strict sense of that term—prohibiting us from vertically integrating our operations, as cable does. If you have a problem with high-speed cable, you call your cable company. If you have a difficulty with DSL, since we’re forced to deal with so many parties, as a subscriber it’s hard to know who to call to get the problem fixed—but it’s easy to blame your telephone company.
Now I know I promised you a jargon-free experience today—but there is one piece of lingo I simply must inflict on you, a made-up word that reflects the made-up quality of what passes for FCC regulation.
I’m talking about TELRIC: Total Element Long-Run Incremental Cost—a mythic beast the FCC invented to put a price on access to the network we build. TELRIC’s not based on how much we actually have to invest. It’s not based on actual, going-forward costs. In effect, the FCC has tried to predict the end-state of a competitive market—and move back the price from that end-state to today, as the maximum return we can get on our investment.
What the FCC has done, essentially, is to commoditize this market—and to commoditize it preemptively, before the natural progression of market development allows early entrants to build-out the system and reap the rewards for doing so. It’s worth remembering what Econ 101 tells us: Where there is no market incentive—there will be no market entry.
And to compound the problem, the FCC applies those rules only to us—allowing cable complete freedom of action.
What was the government’s rationale for applying old rules to this new market? After all, it was not a fait accompli. This was a segregable, discreet, easily-defined market. It was no more necessary to apply the old rules to telecom than it was to give municipalities control over cable’s use of broadband spectrum.
In fact, when you look at cable’s commanding lead, telecom is the broadband insurgent.
Why is it dangerous that telecom is coming at broadband from its network, when cable is coming at it from its network, and AOL and other ISPs are coming at it from their platforms? What’s wrong with open competition, and public policy that reflects that fact?
Of course, the FCC’s stated basis for regulating telecom was motherhood and apple pie: To bring competition to broadband.
But the reality is regulatory hubris—the FCC knows best. It’s as if the FCC insists on identifying a danger in order to assure its regulatory relevance.
In the instance of broadband—competition is the best regulator. //
Now, so far today, I’ve been speaking as if the race is between cable and telephone. But there’s a parallel to where we stand today, in our early experience with the wireless industry.
In wireless, when they discovered more spectrum, two chief competitors emerged—a duopoly, each with ownership over their slice of spectrum, and the ability to extract rewards that comes with that. That duopoly reigned until 1994, when new entrants got their own share of wireless spectrum—and now you have 4 or 5 major national players in a very competitive wireless market. We’ve seen a huge price drop—rapid market penetration - and a cornucopia of new products.
But that happy result came only because the FCC’s hands were tied—only because it could not regulate the wireless industry. The situation is analogous to broadband today—with the exception that the stakes are bigger. //
The bright future for broadband I sketched out at the beginning of my talk today is in jeopardy—in jeopardy because the FCC is saddling this forward-looking market with backward-looking regulations.
Like the Big Bang, the slightest, smallest perturbation—projected outward—can have a huge and lasting impact. Remember: Just last year, analysts were projecting that telecom would catch up to cable, and reach a 50-50 position in broadband in just 12 months’ time. Today, given the regulatory regime that exists, they’re predicting cable’s 70-30 advantage will persist indefinitely.
Clearly, if we want to see true competition—the time for change is now.
While there are people on Capitol Hill who understand this market—people like Congressmen Tauzin, Dingell, Goodlatte and Boucher—it’s disheartening to see some claim there is a need to constrain telecom to preserve competition in the broadband sector. Let me say clearly: Telecom is not in danger of dominating the Internet. Acting as if it is would be like regulating IBM’s OS-2, while giving Microsoft’s MS-DOS free reign.
As is often the case with regulatory issues, there are strong forces pushing against us, who aren’t anxious to give up their artificial advantage. So as this effort unfolds, we’re looking for a strong sign from the Bush Administration that the government’s approach to broadband ought to be based on two principles:
One—that the right way to encourage the broadband buildout is to be technology-neutral.
And two—to recognize explicitly that if we expect private enterprise to assume risk, they’re entitled to reap a reward.
We have a new and exceptionally able chairman at the FCC. He was not a part of the problem, but he can be part of the solution. There is a lot that can be done by the FCC itself—without legislation—to correct its past follies.
If we tear down these regulatory barriers, I promise you will see a surge in pent-up growth, starting with a rapid acceleration of the “big dig” that will lay the broadband conduit—but extending much farther, in ways and wonders we cannot now even anticipate, as broadband itself awakens the entrepreneurs among us to invent new applications that use this new medium to maximum advantage. //
Thank you—and now, I’d be happy to hear your comments and questions.
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