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Re: Broadband competition: Is this as good as it gets?
From: David Farber <dave () farber net>
Date: Tue, 26 Aug 2008 17:47:34 -0400

Begin forwarded message:

From: Brett Glass <brett () lariat net>
Date: August 26, 2008 1:45:31 PM EDT
To: dave () farber net, "ip" <ip () v2 listbox com>
Subject: Re: [IP] Broadband competition: Is this as good as it gets?

Competition in the broadband space is currently about as good as it's
going to get for the foreseeable future, and could even backslide,
according to Blair Levin, an analyst with Stifel Nicolaus. "Prospects
for the long-heralded 'third pipe' appear dim and dimming," Levin
said, referring to the notion of a hypothetical major competitor to
both telco and cable companies. "In terms of wireless and broadband
buildouts, there's unlikely to be another new national buildout, other
than Clearwire, in the foreseeable future," Levin said.

The problem with this statement is that it assumes -- fallaciously --
that a "third pipe" must be created by a national buildout by a single

In fact, as my customers remind me nearly daily, consumers prefer their
third option to be not another faceless, nationwide corporation but
rather a local provider. One that provides personal service. One that
answers the phone instead of sending calls to India or the Philippines.
One that can make house calls. One that can provide general computer
support. In short, consumers already have KMart and a Wal-Mart in the
form of the cable and telephone companies. What they need is not another
"big box" but rather a specialty store. One whose primary business is
broadband, not video or telephony. One that isn't going to be Big Brother
but rather a reliable, ethical, friendly local merchant.

A local third pipe solves many of the problems that would be inherent
in the creation of a large, nationwide provider. Firstly, there's the
matter of capital. While stock markets are unlikely to lend much
support to a "third pipe," small businesses control, collectively, more
capital than the market caps of all public companies combined. If 10,000
small broadband providers each build a business worth $1.5 million, that's
$15 billion of capital invested in the deployment of new broadband.
Secondly, there's the matter of innovation. While large companies commit
to technologies and business models and are loathe to change them, small
businesses are much more nimble. They'll develop new technologies and be
early adopters of those developed by others. And thirdly, there's the
matter of serving areas with uncertain ROI. Small providers -- far more
than big ones -- have a track record of covering sparsely populated areas and of being willing to accept a smaller ROI, or a longer payback period,
when doing so. While subsidies for rural broadband can and should be
provided, the notion of expanding the USF -- already a highly dysfunctional
program -- to cover them is ludicrous. Instead, subsidies in the form of
direct grants to consumers -- perhaps via vouchers given directly to the
customers, who could give them to the provider in lieu of cash -- would
allow providers to compete without burying them in mountains of undue

While there are approximately 4,000 small, competitive, independent ISPs
in existence today, their progress in realizing this vision of a "local
third pipe" has been hobbled by anticompetitive practices and by government policies which favor large providers. Spectrum, for example, is auctioned
off in nationwide slices 5 to 20 MHz wide -- fine for cell phones but
inadequate to provide 100 Mbps to multiple homes simultaneously -- rather
than 100 or 200 MHz slices over the area of a county. What's more, the
auction rules and the auction process itself favor large entities with
access to public capital markets. They allow incumbents with deep pockets to foreclose competition by denying new entrants access to spectrum. They require payment in full immediately at the close of the auction, preventing smaller businesses and startups from "paying as they go" as they build their
businesses. They hobble innovation, and destroy opportunities for new
entrants, by locking out anyone who arrives with a great idea even one day
after the auction is over. And because spectrum is not fungible and is
subject to warehousing, no market can be made in it once it is sold.

In short, auctions are the worst possible mechanism for awarding spectrum. A nonexclusively licensed regime (a la 3660 MHz, but with a single mandatory spectrum etiquette to ensure coexistence) would be far superior and would
ultimately raise in far more in income taxes than the auctions raise in
one-time fees.

Government also fails to support the development of a "third pipe" by
failing to mandate that small providers have access to essential facilities -- including local loops and DSL systems, leased lines to the backbone, and the backbones themselves. Currently, the issue of backhaul -- erroneously labeled "special access" in DC by folks who do not understand that it is not "special" but rather vital -- is dormant both in the FCC and in Congress. The very poor decision in Trinko has allowed anticompetitive practices to fall into the "crack" between antitrust law and FCC regulations, escaping
action or even scrutiny. And a decision against LinkLine by the Supreme
Court would essentially reverse what was left of the pro-competitive
measures of the Telecommunications Act of 1996, paving the way for the
duopoly to crush competition.

If we don't want today's competition to be "as good as it gets," we must
do an about-face in all of these areas. Thousands of willing, able
local businesspeople and entrepreneurs are here to take the helm and
provide broadband to their communities. All we need to do is give them
a fair shake, and we'll have so much bandwidth we won't know what to
do with it.

--Brett Glass, LARIAT

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