Copyright 2002 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
October 1, 2002 Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2911 words
COMMITTEE:
SENATE COMMERCE, SCIENCE, AND TRANSPORTATION
HEADLINE: GOVERNMENT PROMOTION OF BROADBAND
TESTIMONY-BY: PETER W. HUBER, SENIOR FELLOW,
AFFILIATION: MANHATTAN INSTITUTE FOR POLICY RESEARCH;
BODY: Prepared Statement of Peter W. Huber Senior
Fellow, Manhattan Institute for Policy Research;
Committee on Senate
Commerce, Science, and Transportation
October 1, 2002
"Broadband" is a horizon that keeps receding. Microprocessors, computer
buses, local area networks, and Web connections all run much faster today than
they did five years ago. There is no reason to expect that our pursuit of higher
speed in the processing and delivery of bits will ever end. Modem speeds on
ordinary dial-up phone lines increased more than a hundred-fold over the last
two decades. Broadcasting bandwidth progressed from radio to analog television
to cable and digital satellite; the new digital television standard provides
effective transmission speeds (with compression) of almost 20
megabits-per-second (Mbps).
Speeds of 10 Mbps used to be quite adequate
for office LANs, but 100 Mbps is now commonplace. Intel CEO Craig Barrett has
remarked that "broadband" only "get[s ] exciting when you get to 5 megabits per
second or even 100 mbps." By the time those connection speeds become widely
available, however, they will no longer be exciting. New applications will
inevitably emerge to push the threshold of excitement out further still. Demand
for broadband isn't uniform across users, either. Businesses, universities,
schools, and residences have different needs. Some require full two-way
capabilities, others require mobility, others need far more bandwidth in one
direction than in the other. Sound policy must start with a clear understanding
of how dynamic and varied broadband markets really are. Demand for broadband
connectivity, and the technologies that supply it, evolve quickly and
continuously. Connection speeds and the aggregate bit-miles of deployed capacity
will continue to double and redouble every few years, indefinitely into the
future. New applications will spur new demand for bandwidth, and new bandwidth
will attract new applications. Most of the applications that will generate data
traffic five years hence aren't running today, at least not in any way
comparable to what they will become. Most of today's users aren't yet using
broadband for what they'll be using it for in five years. Most of today's
broadband infrastructure, both wired and wireless, will have to be upgraded
again and again to meet the continuous rise in demand.
In such
circumstances, policies must be shaped to promote dynamic and adaptable
competition, nothing more or less. Whether by design or otherwise, regulations
that favor some providers or technologies over others will do far more harm than
good. So will fixed "universal service" targets, or sweeping plans to subsidize
or "jump start" broadband service, because there is no start or finish to the
broadband enterprise. At their least harmful, such policies will simply be
overtaken by the market before bureaucracies can be set up to implement them.
At worst - as is in fact happening today - such policies will impede
investment, stifle innovation and penalize creative effort industry-wide. The
broadband market does not need more help from Washington. It needs considerably
less.
Competition
Cable modem service is currently available to
between two-thirds and three-quarters of U.S. households; DSL service is
available to between half and two-thirds. Approximately one- third of all U.S.
households have access to both cable modem and DSL service. Approximately 20
percent of online households are broadband subscribers. Cable and DSL providers
are now adding five million new broadband connections a year - an annual growth
rate of nearly 50 percent.
One way to look at these numbers is
complacently: the infrastructure is basically there now; the demand hasn't yet
caught up; and the customers will come when the online games, music, and videos
arrive to drive demand for broadband connections. But this is quite the wrong
way to look at things. Sound policy must promote a dynamic competitive process -
one that will keep pushing the boundaries for decades to come.
Most
cable networks have been upgraded at great expense, but they still rely on
shared bandwidth at the end of the line; they will have to be upgraded further,
and then further still, as bandwidth requirements continue rise. Substantial
parts of the legacy telephone network are now capable of providing DSL, but
phone companies will have to make huge investments in remote terminals and
fiber-optic glass to keep pace with cable, or to forge ahead of it - DSL can't
be provided at all over certain older loops, nor over loops that run further
than 18,000 feet, nor can the bandwidth in ordinary copper loops be pushed much
higher than where it's at now. So telephone and cable companies alike will have
to extend fiber deeper and deeper into the local exchange, until it finally
reaches the home.
Comparable levels of new investment will be required
to develop broadband wireless networks. DBS companies have, in the last year,
deployed a two-way high-speed Internet service capable of competing on equal
footing with cable modems and DSL; other terrestrial and satellite technologies
(MMDS, 3G, Digital SMR, 2 GHz MSS satellite systems, L-Band satellites, and Big
LEO satellites) are also under development. The television set is now morphing
into a personal computer, and the radio into a mobile digital receiver, both
linked to high-speed digital wireless networks. DVDs, digital games like
Microsoft's Xbox, and high-end digital video recorders like TiVo and ReplayTV
already feed their content into analog televisions; in due course, the
transition to digital TV sets and digital broadcasting will propel a new
constellation of high-speed digital terminals and connections into the average
American home.
When broadband wireless services do come of age, they are
likely to expand very fast, just as satellite and wireless telephony did after
their early years of incubation. Wireline services generally get rolled out
incrementally, but wireless services tend to get turned on abruptly, to serve an
entire geographic area. That wireless providers currently lag behind wireline
providers in serving broadband customers reflects the none-to-all dynamic of
wireless roll out, more than anything else.
The broadband market, in
short, ought to be experiencing the kind of leap-frog competition that has
characterized competition in many other sectors of the high-tech industry.
No one network provider should be securing an overwhelming market share;
the fastest and most affordable option today should always face the risk being
overtaken by a faster, cheaper, or better alternative. Wireline networks should
compete on both raw speed and quality of service; wireless networks will offer
mobility as well. Broadband content should be adding yet another important
dimension to competition: the demand for the digital bandwidth depends on the
supply of digital content, which should depend, in turn, on how successfully
broadband suppliers package, promote, and protect the content that their
networks distribute. All of this should be happening, but much of it isn't. A
legacy of botched regulation is largely to blame.
Regulation
The
regulation of broadband has been split into two separate and unequal parts. One
regime promotes a get-it-built objective: it is deregulatory, it leaves
planning, investment, price, and profit with the cable and wireless companies
that deploy real facilities, and it is working - the facilities are indeed
getting built. The other regime requires phone company competitors who do build
networks to unbundle and interconnect, at cut-rate prices prescribed by
regulators, with free-riders who don't. This share- it-cheap regulation is
intensely intrusive, it empowers the FCC and state commissions to control
planning, investment, price, and profit, and if it has forced sharing, it has
done so at the expense of investment and innovation.
To its credit, the
FCC has recently begun to take the steps necessary to classify both cable modem
and DSL as "information services" under Title I of the Communications Act. The
logical culmination of that process, if the Commission sees it through, will be
complete deregulation of both services, with no further unbundling,
interconnection, or wholesale price regulation imposed on either service, by
either federal or state regulators. To get to that point, however, the
Commission must completely eliminate all sharing obligations in new, mixed-use
facilities, that are deployed to provide broadband service but that can be used,
as well, to provide traditional voice service. The continued regulation of
legacy voice services cannot be permitted to continue depressing investment in
the new facilities required for high-speed data.
Until the Commission
finishes its job - if it finishes it - phone companies must continue to
"unbundle" the wireline spectrum they use to provide broadband; cable companies
don't. Phone companies must permit their broadband competitors to "collocate"
equipment in telephone company premises to make it easier to use that
"unbundled" broadband capacity; cable companies don't. Phone companies still
remain largely locked-out of the multi-billion dollar market for Internet
backbone service; cable companies aren't. Phone companies must offer their
retail broadband transmission services to competitors at a federally mandated
discount; cable companies have no such obligation. Phone companies have to pay
into universal service funds when they provide
broadband
access; cable companies don't.
The unbundling mandates of the
1996 Telecom Act should never have been extended to broadband services at all;
Congress created those mandates to open up competition in the legacy voice
markets, which incumbent phone companies had long dominated, not in broadband
markets, which were traditionally dominated by analog cable. Almost four years
ago, the Supreme Court made clear that - as Congress itself specified in the
1996 Act - unbundling is to be extended only to network elements that can't be
provided competitively. It is, of course, preposterous to maintain - as the FCC
has in fact maintained for almost six years - that competition in broadband
markets would be impaired absent access to the unbundled elements the phone
company's network, when the phone company itself is scrambling to catch up with
the dominant provider of broadband service, the cable company.
Costs
A few years ago, one incumbent phone company concluded it would have to
deploy new "remote terminals" and optical concentration devices (OCDs) to
upgrade its broadband capabilities and extend them out to rural and other users
located far from end offices. After the better part of a full year of
painstaking discussion, regulators decided that the phone company would have to
undertake various obligations for the "right" to complete this upgrade,
including deployment of more capacious facilities to make sure there would be
sufficient capacity to share with potential competitors. The phone company
reluctantly complied with regulators' demands, at a total cost of approximately
$
300 million dollars. Two years have since passed, but no
competitor has arrived to lease any part of the new facilities.
This
kind of experience is not the exception, it is the rule. The current regulatory
regime imposes massive uncertainty and delay on new investment. Sharing
regulation assumes that the network is already in place, and focuses entirely on
how to divvy up access. This form of regulation does not promote innovation or
investment; it assumes that the innovation and investment have already happened,
or are inevitable regardless of what regulators do. Sharing regulation operates
entirely for the benefit of competitors that don't build facilities, and its
costs are shouldered by competitors that do. It is retrospective in that it
kicks in only after facilities get built - but everyone knows that it will kick
in, nobody knows on just what terms, and this uncertainty alone slows and
depresses investment. In the worst circumstances, new investment doesn't happen
at all because would- be investors fear that the benefits of good investment are
destined to be shared with competitors, while the costs of bad ones are
shouldered by shareholders. That is exactly what has happened wherever the
prices set for shared elements have been set ruinously low, as they now have
been in many major markets.
In an environment as dynamic as the market
for broadband services, the forced sharing of innovation and new facilities has
done little good even for the intended beneficiaries and their investors.
Between 1998 and early 2000, more than twenty "data local exchange carriers"
(DLECs) threw together business plans, raised large sums of money on the public
market, and launched preposterously ambitious marketing campaigns. With an
average of fewer than 300 employees each, and at a point when they were serving
an average of fewer than 2,000 lines, nine DLECs completed successful IPOs. But
as they and their customers soon learned, most of the new challenge and value in
the broadband market lay in getting the broadband loop up and running, and that
was especially difficult on copper wire that had been deployed, originally, only
to carry voice. Counting on regulation to solve all their problems, the DLECs
simply ignored the engineering and economic realities. When the Internet bubble
burst, many of the DLECs burst with it.
Up to a point, and in the short
term, cable and wireless operators benefited from all this turmoil on the DSL
side of the house; roughly two out of three residential broadband subscribers
are now with cable. But the development of broadband as whole was seriously
delayed, and that has harmed cable broadband as much as anyone. Some critical
threshold size of broadband connectivity has to be reached to attract broadband
content and software; the content and the software then propel further growth in
broadband connectivity. In the early stages of the evolution of markets like
these, competitors benefit much more from fast growth of the market as a whole,
than they do from regulations that suppress competitive rivalry.
Finally, the competition-suppressing regulation has certainly harmed
consumers, equipment manufactures, and providers of broadband content. Robust
competition between cable and DSL would have pushed up demand and pushed down
prices; instead, however, unregulated cable has opened up a wide lead while
phone companies have sunk deeper and deeper into the regulatory quagmire. In a
true free-for-all, each major advance in one network will spur a comparable
advance, and then some, in a rival's. The one sure way to kill innovation and
new investment is to regulate in ways that allow a single provider to become so
dominant that it no longer has to worry seriously about being overtaken by
anyone else.
The delays in the synergistic development of broadband
content are especially worrisome. As content providers have correctly
recognized, broadband networks represent a huge new opportunity for distributing
their products - and an equally huge threat if networks evolve in ways that
facilitate theft. The potential downside has spawned many different proposals
for mandatory new technology standards or legal liabilities for network
providers.
Standards and copyright laws do have important roles to play,
but experience teaches that the best defense of intellectual property will be
found in collaborative agreements hammered out privately between providers of
content and conduit. The best way to protect the economic interests of content
providers is to have different broadband service providers vie for the right to
distribute the content. Cable already distributes significant amounts of digital
content in ways that provide acceptable assurances against theft. Providers of
broadband service know that content is what ultimately sells the broadband
connection to the consumer. Robust competition among broadband providers is what
will deliver the innovative technologies to protect - and thus attract - the
valuable content.
Policies
Congress should urge - or direct -
the FCC to complete the deregulation of broadband immediately. This means
placing broadband service - in its entirety, including all underlying broadband
transport components - under Title I of the Communications Act. Broadband
Internet access service is an "information service," not a "telecommunications
service." Wireline broadband service should not be regulated at all; wireless
broadband service should be regulated only as needed for the normal allocation
and assignment of underlying spectrum. Sharing obligations must be confined to
legacy voice service, provided on legacy networks, and even then, must extend
only to network elements that are competitively essential to new entrants.
State and local authorities cannot be permitted to regulate broadband
services in ways that undermine implementation of a uniform national broadband
policy; patchwork regulation creates a serious impediment to the development of
broadband services. Effective protection of content is essential to the
long-term development of digital broadband networks, but it won't come through
technology prescriptions issued from Washington. The best long-term protection
for providers of content lies in robust competition among providers of broadband
connectivity.
LOAD-DATE: October 1, 2002