Politech: FC: Cato's Adam Thierer on ""Solving the Broadband Paradox"

[Declan McCullagh <declan () well com>]

---

Subject: Cato article:
From: tpearson () cato org
Date: Fri, 11 Oct 2002 12:16:06 -0700
To: declan () well com

    My article, "Solving the Broadband Paradox," from the Spring 2002 
edition of Issues in Science and Technology is finally online at:
http://www.nap.edu/issues/18.3/thierer.html
    Just thought you'd be interested.  - - Adam Thierer


Article

ADAM D. THIERER

Solving the Broadband Paradox

The technology is ready, but the market is not. Deregulation, not 
subsidies, will speed adoption.
If The Graduate were being filmed today, the one-word piece of advice that 
young Benjamin Braddock would hear is "broadband." Most simply defined as a 
high-speed communications connection to the home or office, broadband 
offers Americans the promise of faster Internet access, rapid data 
downloads, instantaneous video on demand, and a more secure connection to a 
variety of other cutting-edge technologies and services.
If it were to become ubiquitously available throughout the United States, 
broadband communications services might finally make possible some 
long-dreamed-of commercial applications, including telecommuting, video 
conferencing, telemedicine, and distance learning. Beyond transforming the 
workplace, broadband could open new opportunities in the home for 
activities such as electronic banking, online gaming, digital television, 
music swapping, and faster Web surfing in general.
For these reasons, a growing number of pundits and policymakers are saying 
that Americans need broadband and they need it now. Moreover, assorted 
telecom, entertainment, and computer sector leaders are also proclaiming 
that the future of their industries depends on the rapid spread of 
broadband access throughout the economy and society. For example, 
Technology Network (Tech Net), one of the leading tech sector lobbying 
groups, is asking policymakers to commit to a JFK-esque "man on the moon" 
promise of guaranteeing 100 megabits per second (Mbps) connections for 100 
million U.S. homes and small businesses by the end of this decade. This 
represents a bold--some would say unrealistic--vision for the future, 
considering that most Americans today are using a 56K narrowband modem 
connection and balking at paying the additional fee for a 1.5-Mbps 
broadband hookup.
What exactly is holding back the expansion of broadband services in 
America? Is a 100-Mbps vision within 10 years just a quixotic dream? What 
effect has regulation had on this sector in the past, and what role should 
public policy play in the future?
A digital white elephant?

As interesting as these questions are, the most important and sometimes 
forgotten question we should be asking first is: Do consumers really want 
this stuff? In the minds of many industry analysts, consumer demand for 
broadband services is simply taken for granted. Many policymakers see an 
inevitable march toward broadband and want to put themselves at the head of 
the parade. They have adopted the Field of Dreams philosophy: "If you 
deploy it, they will subscribe."
But is this really the case? Are Americans clamoring for broadband? Are the 
benefits really there, and if so, do citizens understand them?
The answers to these questions remain surprisingly elusive for numerous 
reasons. This market is still in its infancy, and statistical measures are 
still being developed to accurately gauge potential consumer demand. Thus 
far, the most-quoted surveys have been conducted by private consulting and 
financial analysis firms. The cited results are all over the board, and 
critical evaluation is difficult because the full detailed analysis is 
available only to those who pay the hefty subscription fees. However, when 
one looks at government statistics about actual broadband use, it seems 
clear that the public has not yet caught broadband fever. According to the 
Federal Communications Commission (FCC), only 7 percent of U.S. homes 
subscribe to a high-speed access service connection, even though broadband 
access is available to roughly 75 to 80 percent of U.S. households. A clear 
paradox seems to exist in the current debate over this issue: Everyone is 
saying the public demands more broadband, yet the numbers don't yet suggest 
they really do. What gives?
The FCC's recently issued Third Report on the Availability of High Speed 
and Advanced Telecommunications Capability concluded that broadband was 
being made available to Americans in a "reasonable and timely fashion." The 
report noted that over 70 percent of homes have cable modem service 
available to them, 45 percent have telco-provided digital subscriber line 
(DSL) service available, 55 percent of Americans have terrestrial fixed 
wireless broadband options, and almost every American household can 
purchase satellite-delivered broadband today.
Importantly, however, the FCC concluded that although broadband was within 
reach of most U.S. homes, most households were not yet subscribing. The FCC 
report notes that, "cost appears to be closely associated with the number 
of consumers willing to subscribe to advanced services." It cites one 
private-sector survey that revealed that 30 percent of online customers 
were willing to pay $25 per month for broadband, but only 12 percent were 
willing to pay $40. Broadband service currently costs $40 to $50 per month 
on top of installation costs. This is a lot of money for the average 
household, especially when compared to other monthly utility bills.
And therein lies the real reason why broadband subscribership remains so 
sluggish: Most Americans still view broadband as the luxury good it really 
is instead of the life necessity that some policymakers paint it to be. Not 
every American needs, or even necessarily wants, a home computer or a 
connection to the Internet. This is especially the case for elderly 
households and households without children. In fact, children are a 
critical source of demand for the Internet and for broadband.
The National Telecommunications and Information Administration (NTIA) 
recently issued a report, A Nation Online: How Americans Are Expanding 
Their Use of the Internet, which found that a stunning 90 percent of 
children between the ages of 5 and 17 now use computers and that 75 percent 
of 14-to-17-year-olds and 65 percent of 10-to-13-year-olds use the 
Internet. Moreover, households with kids under 18 are more likely to access 
the Internet (62 percent) than are households with no children (53 percent).
The moral of the story is that to the extent that there is any sort of 
"digital divide" in this country, it is between the old and the young. We 
may just need to wait for the younger generation to grow up and acquire 
wallets and purses before broadband demand really intensifies.
But beyond the generation gap issue, other demand-side factors are holding 
down broadband adoption rates. For example, residential penetration rates 
are being held down by the fact that broadband access in the workplace is 
often viewed as a substitute for household access. If I can get online at 
work for a few minutes during the lunch hour each day and order goods from 
bandwidth-intensive sites such as Amazon.com, JCrew.com, or E-Bay, why do I 
really need an expensive broadband hookup at home at all? A narrowband 
dialup connection at home will give me easy access to e-mail and even allow 
me to get around most Web sites without much of a headache. I'll just have 
to be patient when I hit the sites with lots of bells and whistles.
Most Americans still view broadband as the luxury good it really is instead 
of the life necessity that some policymakers paint it to be.
Another important demand-side factor that must be taken into account is the 
lack of so-called "killer aps," or broadband applications that would 
encourage or even require consumers to purchase high-speed hookups for 
their homes. Although it makes many people (especially policymakers) 
uncomfortable to talk about it, the two most successful killer aps so far 
have been Napster and pornography. Like it or not, the illegal swapping of 
copyrighted music and the downloading of nudie pics has probably done more 
to encourage broadband subscription than any other online application thus 
far. While politicians work hard to rid the world of online file sharing 
and porn, they may actually be eliminating the only two services with 
enough appeal to convince consumers to take the broadband plunge.
But this certainly doesn't count as the most serious obstacle policymakers 
have created to the growth of broadband markets. Regulation has played, and 
continues to play, a very important role in how service providers deploy 
broadband.
Regulatory roulette

Beyond the question of how much demand for broadband services really exists 
in the present marketplace, important supply-side questions remain the 
subject of intense debate as well. Many policymakers and members of the 
consuming public are asking why current providers are not doing more to 
roll out broadband service to the masses.
Regulation is certainly a big part of the supply-side problem. The primary 
problem that policymakers face in terms of stimulating increased broadband 
deployment is that the major service providers have decidedly different 
regulatory histories. Consider the radically different regulatory paradigms 
governing today's major broadband providers.
Telephone companies have traditionally been designated as common carriers 
by federal, state, and local regulators. As common carriers, they have been 
expected to carry any and all traffic over their networks on a 
nondiscriminatory basis at uniform, publicly announced rates. At the 
federal level, the regulation of telephone companies generally falls under 
Title II of the Communications Act, and this regulation is carried out by 
the Common Carrier Bureau at the FCC. Today, telephone companies provide 
broadband service to Americans through DSL technologies that operate over 
the same copper cables that carry ordinary phone traffic. Telephone 
companies account for almost 30 percent of the current marketplace.
Cable companies have traditionally been more heavily regulated at the 
municipal level, because each cable company was quarantined to a local 
franchise area. Although they gained the exclusive right to serve these 
territories, many rate controls and programming requirements were 
traditionally required as well. But cable has not been treated as a common 
carrier. Rather, the industry has been free to make private (sometimes 
exclusive) deals with content providers on terms not announced to the 
public beforehand. At the federal level, cable regulations fall under Title 
VI of the Communications Act and are usually managed by the Cable Services 
Bureau at the FCC. Cable companies provide broadband service to Americans 
through cable modem technologies and are the leading provider of broadband, 
accounting for just under 70 percent of current users.
Satellite and wireless providers have been less heavily regulated than 
telephone and cable carriers, but many rules still govern the way this 
industry does business. The federal regulations these carriers face are 
found in various provisions of the Communications Act and subsequent 
statutes, but most oversight responsibilities fall to the Cable Services 
Bureau, which is ironic given the wire-free nature of satellite 
transmissions. The FCC's Wireless Bureau also has a hand in the action. 
Like cable providers, satellite companies are considered private carriers 
rather than common carriers. Unlike cable and telephone companies, wireless 
carriers have not encountered as much direct regulation by state or local 
officials, given the more obvious interstate nature of the medium. (The 
exception to this is municipal zoning ordinances governing tower antenna 
placement, which continue to burden the industry.) Today, wireless 
providers offer broadband service to the public through a special satellite 
dish or receiving antenna and set-top box technologies. With the highest 
monthly subscription fees and the most expensive installation and equipment 
charges, satellite companies have captured less than 2 percent of the market.

These three industry sectors--telephony, cable, and satellite--are the 
primary providers of broadband connections to the home and business today. 
Although they use different transmission methods and technologies, they all 
essentially want to provide consumers with the same service: high-speed 
communications and data connectivity. And yet these providers are currently 
governed under completely different regulatory methodologies. FCC 
regulations are stuck in a regulatory time warp that lags behind current 
market realities by several decades, and regrettably the much-heralded 
Telecommunications Act of 1996 did nothing to alter the fundamental nature 
of these increasingly irrelevant and artificial legal distinctions.
The current regulatory arrangement means that firms attempting to offer 
comparable services are being regulated under dissimilar legal standards. 
It betrays the cardinal tenet of U.S. jurisprudence that everyone deserves 
equal treatment under the law, and the danger is that it could produce 
distorted market outcomes. Can these contradictory regulatory traditions be 
reconciled in such a way that no one player or industry segment has an 
unfair advantage over another? In theory, the answer is obviously yes, but 
in practice it will be quite difficult to implement.
Most favored nation

The public policy solution is to end this regulatory asymmetry not by 
"regulating up" to put everyone on equally difficult footing but rather by 
"deregulating down." That is, to the extent legislators and regulators 
continue to set up ground rules for the industry at all, they should 
consider borrowing a page from trade law by adopting the equivalent of a 
"most favored nation" (MFN) clause for telecommunications. In a nutshell, 
this policy would state that: "Any communications carrier seeking to offer 
a new service or entering a new line of business should be regulated no 
more stringently than its least-regulated competitor."
Such an MFN for telecommunications would ensure that regulatory parity 
exists within the telecommunications market as the lines between existing 
technologies and industry sectors continue to blur. Placing everyone on the 
same deregulated level playing field should be at the heart of 
telecommunications policy to ensure nondiscriminatory regulatory treatment 
of competing providers and technologies at all levels of government.
So much for theory. In practice, the difficulty is that deregulation of 
this industry is not popular with policymakers these days. In fact, the 
recent debate over broadband deregulation in Congress has been an 
incredibly heated affair, with all the industry players and special 
interests squaring off over the Internet Freedom and Broadband Deployment 
Act of 2001 (H.R. 1542). Sponsored by House Energy and Commerce Chairman 
Billy Tauzin (R-La.) and ranking member John Dingell, (D-Mich.), the 
Tauzin-Dingell bill would allow the Baby Bell companies, which offer local 
phone service, to provide customers with broadband services in the same way 
that cable and satellite companies are currently allowed to, free of the 
infrastructure-sharing provisions of the Telecom Act of 1996.
The Baby Bells are reluctant to make a large investment in broadband 
infrastructure if they will be forced to let their competitors use that 
infrastructure. In addition, under the current regulatory regime the Baby 
Bells are not certain whether or not they can offer broadband services to 
customers outside their local service areas. (They are clearly forbidden to 
offer phone services outside these areas.) Passage of the Tauzin-Dingell 
bill would resolve both of these questions and clear the way for the Baby 
Bells to make a major commitment to broadband service.
Cable companies, the large long-distance telephone companies, and small 
telecom resellers vociferously oppose the Tauzin-Dingell measure, arguing 
that it would represent the end of the road for them. These companies would 
prefer not to have to compete head-to-head with the Baby Bells or to have 
to invest in their own infrastructure. An intense lobbying, public 
relations, and advertising campaign was initiated to halt the measure, and 
the Bell forces responded in kind with stepped-up lobbying and ads of their 
own. On February 27, after months of acrimonious debate, the House of 
Representatives passed the Tauzin-Dingell measure with some last-minute 
modifications. But it will likely prove to be a Pyrrhic victory for the 
Bells, because of the bill's limited support in the Senate. Sen. Ernest 
Hollings (D-S.C.), a longtime enemy of the Baby Bells and deregulation in 
general, has vowed to kill the bill when it enters the Senate Commerce 
Committee, which he rules with an iron hand.
The bottom line is that deregulation has a very limited constituency in 
today's Congress. Even proposals aimed at leveling the playing field for 
all providers, which is essentially what the Tauzin-Dingell bill does, have 
very limited chances of achieving final passage in today's legislative 
environment. This is especially the case given that carriers seem unwilling 
to forgo the insatiable urge to lobby for old and new rules that hinder 
their competitors at every turn. Remember Cold War-era "MAD" policy? The 
escalating lobbying and public relations battles have become the telecom 
industry's equivalent of Mutually Assured Destruction: If you screw us, 
we'll screw you.
What Congress might do

Although it appears increasingly unlikely that Congress will take the steps 
needed to clean up the confusing and contradictory legal quagmire the 
industry finds itself stuck in, a new class of broadband bills is 
simultaneously being considered that would authorize a variety of 
promotional efforts to spur broadband deployment. For example, Senate 
Majority Leader Tom Daschle (D-S.D.) has argued that government "should 
create tax credits, grants, and loans to make broadband service as 
universal tomorrow as telephone access is today." And even though recent 
government reports such as the NTIA and FCC studies cited above illustrate 
that computer and broadband usage rates have been increasing, Sen. Patrick 
Leahy (D-Vt.) reacted to this news by noting, "I suspect we have to add 
money in the Congress" to boost the availability of these technologies.
Daschle and Leahy are not along in calling for government to take a more 
active role in promoting broadband use. In fact, one bill, the Broadband 
Internet Access Act (S. 88, H.R. 267) has attracted almost 200 sponsors in 
the House and over 60 in the Senate. The bill would create a tax incentive 
regime to encourage communications companies to deploy broadband services 
more rapidly and broadly throughout the United States. The measure would 
offer a 10 to 20 percent tax credit to companies that roll out broadband 
services to rural communities and "underserved" areas.
Policymakers need to undertake some much-needed regulatory housecleaning by 
removing outmoded rules and service designations from the books.
Whereas the Broadband Internet Access Act would represent an indirect 
government subsidy, more direct subsidization efforts are also on the 
table. Last fall, the bipartisan duo of Rep. Leonard Boswell (D-Iowa) and 
Rep. Tom Osborne (R-Neb.) introduced the Rural America Technology 
Enhancement (RATE) Act (H.R. 2847), which would authorize $3 billion in 
loans and credits for rural broadband deployment programs and establish an 
Office of Rural Technology within the Department of Agriculture to 
coordinate technology grants and programs. And these bills are just the tip 
of the iceberg; there are dozens more like them in Congress.
Welcome to the beginning of what might best be dubbed the "Digital New 
Deal." In recent years, legislators and regulators have been promoting a 
veritable alphabet soup of government programs aimed at jump-starting the 
provision of broadband, especially in rural areas. Although only a handful 
of such programs have been implemented thus far, many of these proposals 
could eventually see the light of day, because so many policymakers seem 
eager to do something to put themselves at the front of a technological 
development that they see as inevitable. Deregulating the market so that 
this development can follow its own course apparently will not enable them 
to take credit for what happens.
The problem, however, is that Washington could end up spending a lot of 
taxpayer money with little gain to show for it, because it is unlikely that 
tax credits or subsidies would catalyze as much deployment as policymakers 
imagine. In the absence of fundamental regulatory reform, many providers 
are unlikely to increase deployment efforts significantly. Although a 10 to 
20 percent tax credit may help offset some of the capital costs associated 
with network expansion, many carriers will still be reluctant to deploy new 
services unless a simple and level legal playing field exists.
If legislators sweetened the deal by offering industry a 30 to 50 percent 
credit to offset deployment costs, it might make a difference. But if 
subsidy proposals reached that level, it would beg the question: Why not 
just let government build the broadband infrastructure in rural areas 
itself? Ironically, that is exactly what a number of small rural municipal 
governments are proposing to do today. Frustrated with the slow pace of 
rollout by private companies, some local authorities are proposing to turn 
broadband into yet another lackluster public utility. Private companies are 
fighting the proposal, of course, but consumers should also be skeptical of 
efforts by city hall to model their broadband company after the local 
garbage or sewage service. Is that really a good model for such a dynamic 
industry? Fortunately, these broadband municipalization efforts have not 
made much progress. Most legislators still want to begin by jump-starting 
private-sector deployment through promotional efforts.
In the end, perhaps the most damning argument against a tax credit and 
subsidy regime for broadband is the threat of politicizing this industry by 
allowing legislators and regulators to become more involved in how 
broadband services are provided. By inviting government in to act as a 
market facilitator, the industry runs the risk of being subjected to 
greater bureaucratic micromanagement. Experience teaches us that what 
government subsidizes, it often ends up regulating as well. It is not hard 
to imagine that such tinkering with the daily affairs of industry might 
become more commonplace if Washington starts subsidizing broadband 
deployment. That explains why T. J. Rodgers, president and CEO of Cypress 
Semiconductor, has cautioned the high-tech industry about "normalizing 
relations" with Washington, D.C. As Rodgers says, "The political scene in 
Washington is antithetical to the core values that drive our success in the 
international marketplace and risks converting entrepreneurs into statist 
businessmen."
Solving the broadband paradox will require steps by policymakers, industry 
providers, and consumers alike if the dream of ubiquitous high-speed access 
is to become a reality. Policymakers need to undertake some much-needed 
regulatory housecleaning by removing outmoded rules and service 
designations from the books. New spending initiatives or subsidization 
efforts are unlikely to stimulate much broadband deployment. What 
companies, innovators, and investors really need is legal clarity: an 
uncluttered, level playing field for all players that does not attempt to 
micromanage this complicated sector or its many current and emerging 
technologies.
Industry players will need to undertake additional educational efforts to 
make consumers aware of what broadband can do for them. Ultimately, 
however, as important as such educational efforts are, there is no 
substitute for intense facilities-based investment and competition to help 
drive down cost, which still seems to be the biggest sticking point for 
most consumers. New killer aps will hopefully also come along soon that can 
help drive consumer demand in the same way that Napster and the brief 
file-sharing craze did before litigation shut down this practice.
Finally, consumers will need to be patient and understand that there is no 
such thing as a free broadband lunch. It will take time for these 
technologies to spread to everyone, and even as they become more 
ubiquitously available, they will be fairly expensive to obtain at first. 
Cost will come down with the passage of time (if demand is really there), 
but you'll still need to shell out a fair chunk of change to satisfy your 
need for speed online.
Recommended reading

A Nation Online: How Americans Are Expanding Their Use of the Internet 
(Washington, D.C.: National Telecommunications and Information 
Administration, U.S. Department of Commerce, February 2002).
A National Imperative: Universal Availability of Broadband by 2010 
(TechNet, January 15, 2002).
Computer Science and Telecommunications Board, National Research Council, 
Broadband: Bringing Home the Bits (Washington, D.C.: National Academy 
Press, 2001).
Federal Communications Commission, Third Report Concerning the Deployment 
of Advanced Telecommunications Capability, CC Docket 98-146, February 6, 2002.
Adam Thierer (athierer () cato org) is the director of telecommunications 
studies at the Cato Institute in Washington, D.C.


Cato Institute's Sixth Annual Technology and Society Conference
    Join us on November 14 for Telecom and Broadband Policy: After the 
Market Meltdown
Speakers include Rep. Billy Tauzin, Hon. Kathleen Abernathy, James K. 
Glassman, and Robert W. Crandall.



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