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Industry Viewpoint Archive
Broadband: A problem without a solution?
David Molony, editor of CWI, reports on American thinking about broadband's current rollout woes
12 November 2001

Like the Europeans, North Americans are beginning to realise the scale of the broadband rollout disaster for their economy. But unlike the Europeans, those in the U.S. have quickly determined three things that could give them a potential springboard to launch a new wave of competitive telecoms.

First: regulation matters a lot in the telecoms business, and they have some figures to prove it. But second: the existing framework for telecoms competition in the U.S., enshrined in the Telecom Act of 1996, is not bringing businesses and residential customers the broadband connectivity they had been promised. There's a lot of argument about why this has happened. But the debate has moved quickly on to consider how to improve the situation.

Third, they recognise that broadband is a telecoms problem after all; it's a myth to blame the standstill on the Internet. "The crash was incidental to what has happened to the [broadband] industry," said Bruce Kushnick, director of the New Networks Institute, speaking at a recent conference on the Broadband Economy, hosted by the Columbia Institute for Tele-Information in New York.

In fact, regional Bell telephone operating companies in the U.S. were announcing plans for broadband access network rollout before anyone had dreamed of intranets and extranets.

Kushnick reminded conference attendees that back in 1993 Bell Atlantic (now Verizon) had promised to connect 8.75 million homes directly to its fiber network by 2000, and in the same year Pacific Telesis (now part of Qwest Communications) said it would run broadband straight into 1.5 million homes by 1996.

The cost of the 'no-networked' economy
Kushnick and others say the 'no-networked economy' has cost businesses and consumers at least US$58 billion - and that's just if you tot up what Bells have levied in additional call charges, with the approval of states commissions - to build the broadband systems they never delivered.

Even the Bells' defenders assert that broadband's non-appearance is a massive opportunity cost. Potentially, it would have provided the filip the U.S. needed to avoid the current recession, now heading into its fifth successive quarter.

According to the Brookings Institute, a think-tank part-sponsored by incumbent telcos, a national broadband system could be generating $500 billion a year for the U.S. economy alone. That's if half the premises in the country had broadband: The current rate of penetration by cable modems and digital subscriber lines will likely see less than 10% of households and small and medium-sized businesses connected at the end of this year.

The Brookings report was cited by three of the speakers at last week's one-day conference. To say the least, it has made telecoms people sit up. Many are asking what has gone wrong with the deregulation program that was supposed to produce the competition in network services to ensure a widespread and rapid deployment of broadband.

A prime culprit is the federal system of disguising access charges as "free" local dial-up services and forcing operators to settle the billing between themselves.

"Regulation matters," said Larry Darby, director of Washington DC-based Darby Associates. "But [1996-style] price caps protected incumbents from risk and... assured them of earnings. If we had subsidised long distance [telecoms services] out of local rates instead of the other way around, we would now have many more local access technologies invested and deployed."

Darby said that overall, regulation was discouraging investment and that what is needed is a new competition policy for telecoms that recognises that impact on investment.

No problem
Of course, his wasn't the only opinion on that. Several people said there was too much heat being generated about something that wasn't actually a problem. "Broadband has already happened," said Ken Zita, president of New York-based Network Dynamic Associates. "But nobody noticed."

For example, IP virtual private networks (IP VPNs), one of the touchstone service innovations for business broadband, is worth maybe $400 million in the U.S., according to Zita. But data networking based on old-fashioned frame relay and other high-speed transmission platforms, is already "a $25 billion business."

"The big driver of broadband is going to come from sophisticated machine-to-machine processing," said Zita. "You don't need local access for that."

The question might be: What's everyone waiting for? Not much, according to Craig Hall, networks business development director at Nortel Networks, who professed he was a bit bemused about definitions. He pointed out that his household shared as many as 16 lines, wireless included.

"We are probably a broadband family on aggregate lines," said Hall. "We just don't show up in surveys."

Hall said the biggest issue for most people in the telecoms industry was what was happening to investment. But that did not cut much ice with some delegates, who lamented bitrate offerings in the U.S., compared with true broadband in some European countries.

"In Milan you can get 10 megabits per second symmetrical access to your apartment in a gigabit Ethernet system," said David Waks, principal of System Dynamics Inc., of Morris Plains, New Jersey. "In the U.S., we are talking 200 kilobits per second."

Waks said afterwards he was referring to the multi-dwelling system operated by Fastweb, which he had seen for himself on a summer tour of Europe's broadband hotspots. He also cited Bredbandsbolaget in Stockholm, and the $165 million public investment in infrastructure in Sweden, as models for broadband policy.

In Europe, the debate on what to do about broadband telecoms may have started earlier, but it seems to have slowed to a halt by comparison with the U.S. The European Commission still hasn't completed the review of its framework legislation started nearly two years ago. And national regulators are increasingly absorbed with making sure they are chosen to head planned new converged telecoms and media industry regulatory authorities.

Ironically, these are some of the same things that Americans blame themselves for. But the U.S. had its argument about media industry consolidation and convergence five years ago and proponents of diversity lost, so everybody's free to spend some time on telecoms now.

U.S. reactions
The response to the broadband debacle in the U.S. is different in other key practical ways, too. Incumbents don't pretend they want to work within the new regulatory framework; they say frankly that they would rather have no regulation at all. That helps at least to make the situation more transparent.

Many of the top-flight lawyers who staff the firms representing Bells and competitive service providers, and who usually take a turn at the Federal Communications Commission in Washington DC, also have a powerful hand in forming the numerous public policy organisations (like Kushnick's) which lobby both, and which don't have many equivalents in Europe.

And the U.S. business and technology consultancies that drive business are not ready to give up on the broadband project. Some are stepping up as investors themselves.

"It's not a big scale project," said David Allen, co-principal of World Collaboration for Communications Policy Research, of Concord, Massachusetts, who has bought a DSL wholesale business in the town. "We have two and a half dozen customers." Allen said his local authority has funds for new area services, and is considering how to allocate them. Effectively, Allen is pitching to make broadband infrastructure a part of those local services. He hopes to persuade the authority that broadband is a facility for the local economy because it will attract relocating businesses.

But for the most economically conservative, public investment is no cure for the spreading disease of regulation, which should simply be done away with.

"Korea, the number one country for broadband, is completely and utterly unregulated," said Jerry Hausman, of the Massachussetts Institute of Technology. "There's no pricing controls. Government has stayed out of it... Canada [number two] has much less restrictive regulations than the U.S."

Way ahead for U.S. and Europe
But what then is the way ahead for the U.S. and Europe if neither has got it right so far?

One man who might know is Alfred Kahn, professor of economics at Cornell University and keynote speaker at the CITI. Kahn deregulated trucking and airlines for the Carter Administration. And he suggested that telecoms - which he's had a go at, too - is more complicated than either.

"No industry, with the possible exception of electric power, more clearly poses the dilemmas of reconciling regulatory interventions - necessary to ensure equal competitive opportunities - with genuine, unregulated competition," he said.

His own suggestion is that if it has proved impossible for the FCC to manage the regulatory process, then perhaps the responsibility should be handed back to the states. "State-by-state regulation was clearly meant in the [Telecom] Act," said Kahn.

This, he went on, would have meant some states opting to promote network access by requiring incumbents to unbundle network elements [UNE], others for full unbundling, and others wholesaling based on total element long run incremental cost (TELRIC.) "The follies of some states would quickly have become apparent," he said.

The idea of devolved regulation excited some but alarmed others.

"There are drawbacks" said Phil Weiser, of Princeton University and the University of Colorado. "The FCC needs to set minimum standards on a range of things. And not all states have the resources to experiment as, say, New York can."

Not surprisingly, the incumbent telcos are particularly unhappy at the prospect of a regulatory web stretched across every state boundary.

"Is it better to go from one to 50, or from one to zero?" said Dennis Weller, the Irving, Texas-based chief economist of Verizon Inc. "I would say the latter."

David Molony is the editor of respected telecoms newspaper CommunicationsWeek International.

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