Think tanks explore broadband issues

By CHRISTIAN BOURGE, UPI Think Tank Correspondent  |  March 28, 2002 at 1:14 PM
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WASHINGTON, March 28 (UPI) -- Although technical issues usually overwhelm the discussion, disagreements over whether to regulate the technologies underlying broadband Internet access have their basis in long standing beliefs about the government's role in the marketplace, according to policy experts on both sides of the debate.

Some say government regulation is impeding the rapid growth of broadband, others say existing cable and telephone monopolies are the culprit, and must be curtailed with more government strictures so the service can proliferate.

"There are always specifics and the specifics are important, but unfortunately people get bogged down in the them to the extent that they lose sight of the bigger picture," Thomas Hazlett, senior fellow at the Manhattan Institute for Public Policy Research, told United Press International.

The most important questions, he said, lay beyond the distracting debates over which technologies are better, or how to control telephone and cable monopolies. The key issue, said Hazlett, is the question of how government can best encourage investment and development in the broadband sector.

Pundits have long predicted that given the phenomenal growth of narrow bandwidth dial-up access to the Internet, consumers would be quick to switch to the better performing, higher speed technologies such as broadband. The increasing availability of dedicated high speed Internet access is believed by some to have placed the world on the precipice of a new age in which Internet-ready kitchen appliances linked to the grocery store via the Web, and the computer-based delivery of movies, could change how people shop, entertain themselves, and even live.

But although the latest Federal Communication Commission figures show that use of high-speed access technologies increased 36 percent during the first half of 2001, the adoption of broadband has not been nearly as quick as many had hoped.

The FCC has estimated that as of June, subscribership to higher bandwidth technologies like Digital Subscriber Lines and cable-based broadband access stands at only 9.6 million lines. This represents broadband use by just 10 percent of the 85 percent of Americans who can potentially access such technologies.

Hazlett and other free-market proponents believe that existing government regulations are inhibiting the natural role of the marketplace in promoting the innovation that drives consumer demand.

Others, however, contend that the monopolies held by the providers of the two competing top technologies -- regional telephone companies in the DSL sector and the cable companies in the cable modem-based access arena -- ensure slowed innovation and diminished public demand. They attribute this to the historical unwillingness of monopolies to fully or properly adopt new technologies, and say it demonstrates the need for regulations aimed at facilitating competition.

Harold Feld, associate director of the Media Access Project, a non-profit public interest law and advocacy group, said that deregulation is neither the solution to increasing competition in broadband markets, or the key to greater innovation that its proponents contend. He said the history of Internet dial-up access demonstrates this fact.

According to Feld, companies like America Online and Earthink were able to spearhead narrow-bandwidth innovation 10 years ago and lead the marketplace drive for Internet access only because of the FCC move in the mid-1980s that opened up access to telephone lines for competing companies who wanted to use them. This allowed these then-small innovators to operate effectively.

"We think that this is the model that should be followed, as it has proven effective," said Feld.

Efforts in Congress focused on broadband technology are currently aimed at deregulating the DSL sector, but such measures have failed to win the support hoped for by the major telephone company providers. A bill sponsored by House Energy and Commerce Committee chairman Bill Tauzin (R., La.) and ranking member John Dingell (D., Mich.), that would remove the regulatory requirements for telephone companies and allow competing DSL providers access to their broadband lines, has emerged as the major piece of federal legislation regarding high-speed access. The measure, however, has little prospect of passing in the Senate.

Hazlett and other critics of DSL regulation contend that because cable-based broadband providers do not face open-access regulations similar to those placed on telephone companies, the telephone companies are put at a disadvantage in the marketplace. These critics believe that the regulations essentially force the telephone companies to subsidize their competitors because they must allow the competitors to use their lines -- any new investments the phone companies make in equipment will potentially benefit their competitors as well.

Hazlett said that Tauzin-Dingle bill is a step in the right direction and that its defeat would have significant implications for the entire technology marketplace.

"More important than the Tauzin-Dingell legislation by itself is the message that the legislation or its defeat sends," he said. "The idea (promoted by its failure) is that new technologies are still suspect and have to prove themselves in this policy environment. They need to prove themselves in the sense that they are not just extending the market of powerful established players. This demonstrates the hostility to investment and entrepreneurship that is holding back a broad range of activities that should be liberalized."

Nevertheless, the FCC is undertaking its own deregulatory effort that would -- like the Tauzin-Dingell measure -- release regional telephone providers from having to lease their broadband lines to competing DSL providers.

But Charles Ferguson, a senior fellow at the Brookings Institution, said during a March 18 debate with Hazlett at Brookings that if properly applied, regulation and tax incentives could force the lumbering cable and telephone monopolies to innovate beyond their own limited motivations. He added that it could also bring other potential players, such as municipalities and large property owners, into the broadband deployment sector.

According to Ferguson, to see how the regional telephone monopolies stifle innovation, all one has to do is compare the technological changes made by local telephone companies in the last few years, to the innovations made in the rest of the $1 trillion-per-year information technology sector. He said that as a rule, technological innovation in the information technology sector has run as high as 40 percent or 50 percent a year in recent years, while innovation in local and regional telephone systems and services -- even adjusting for advances made in digital telephony -- has run on average at nearly zero percent.

"The one staggering exception to this rule is local telecommunications," he said. "You have to work very hard to get a zero percent technological improvement, but our local telephone companies have succeeded."

Despite his belief that market control is needed, Ferguson argued that some government attempts to facilitate competition and spur innovation in the telephone industry have not provided the expected benefits.

For instance, he said that the Telecommunications Act of 1996 was a "noble attempt" to drive competition in the sector, but that lack of technical expertise and competence in this arena on the part of the FCC -- which is driven by broadcast and media concerns -- hindered the Act's effectiveness when the law was implemented.

Ferguson believes there is a good case for the use of tax incentives and other government initiatives to help facilitate the growth of available bandwidth. But he cautioned that these incentives must be spread evenly among competitors, not just among the incumbent industry players in the DSL and cable markets.

Hazlett told attendees that those hoping to regulate this sector are basing their ideas upon a correct assumption that in the long run, everybody wants competition between the cable and telephone companies, and any new player that may emerge in the future. But he believes that the current regulatory efforts ignore the broader effects of government control on the market.

For example, Hazlett said that the payment schemes developed by regulators for the lease of broadband lines from telephone companies by other DSL providers will cost more over time than they are worth for the competing firms, because subscriber pricing will drop and reduce their profit margins. The leasing regulations therefore act as a disincentive for small company investment, he said.

Hazlett proposed that removing these requirements could increase innovation and facilitate faster rollouts of broadband, because it would encourage both existing players --which now subsidize the competitors -- as well as new entrants, to invest in broadband development.

"The regulatory structure is not effective in getting modern communications into the marketplace," he said. "Deregulation is going to provide the incentives for investment."

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