John Haring and Harry M Shooshan

1 Introduction

Over the last year, it seems as if virtually all communications policy discussions in the United States (U.S.) have come to focus on a single topic: broadband. Broadband is touted as the key to productivity growth and economic progress, the antidote to the current stock market doldrums and earlier bursting of the 'dot-com' speculative bubble, as well as the fashionable couture within which to 'cloak' one's proprietary interests to curry government favor (supplanting the previously recommended wrapping of private interests in the 'public interest').

There is, at the same time, no real consensus as to just what broadband is. First broadband was defined as 'fiber to the home', then 'fiber-to-the-curb'; then 'hybrid fiber/coax'. While people have been talking about 'the full service network' for years, the transmission speed that qualifies remains undefined.

Similarly, all of the talk so far has produced very little action - either on the policy front or in the marketplace where, after an initial growth spurt, residential broadband (DSL and cable modem) penetration in the U.S. appears to have leveled off somewhat at about 8-10 per cent of total households. Is the broadband 'bandwagon' simply taking a breather with positive feedback between growth in subscribership and development of new "killer applications" inducing spontaneous market "takeoff" in the immediate offing? Or are there supply constraints that will limit broadband market growth and takeoff? If so, what if anything can be economically done to relieve these constraints?

2 The telco 'blues'

While some commentators point to similar adoption rates for previous communications innovations as evidence that there is no problem and broadband is developing 'normally', U.S. telephone companies point to the adverse effects of current U.S. government regulations as a debilitating constraint on more rapid broadband service deployment. Incumbent exchange carriers are required to offer rivals access to various 'unbundled' network service elements at rates that (it is contended) fail to afford sufficient remuneration to make the needed capital investments economic.

Congressmen "Billy" Tauzin (a Louisiana Republican) and John Dingell (a Michigan Democrat) have introduced legislation in the U.S. House of Representatives (H.R. 1542: Internet Freedom and Broadband Deployment Act of 2001) to remedy this perceived problem of inadequate investment incentives by, in essence, deregulating incumbent telephone company supply of new advanced services - removing the network technology sharing requirements and allowing the former Bell Telephone operating companies to provide long-distance, high-speed data service. This proposed legislation probably has little chance of enactment given opposition by various influential corporate interests, including the long-distance carriers, who naturally wish to deter competition from incumbent exchange carriers as long as they can, and the cable companies, which are unregulated and the largest current suppliers of broadband service to U.S. residential customers.

Cable television is the dominant supplier of multichannel video service in the U.S. (ie is roughly equivalent to satellite service in the United Kingdom (U.K.)). AT&T (which earlier purchased the TCI and Media General local cable systems and is now seeking to merge with Comcast, the third largest multiple system operator (MSO)) is both the largest long-distance carrier and the largest cable MSO in the U.S. As of June, 2001, cable modems provided high-speed service to 5.2 million lines, while ADSL provided high-speed service to 2.7 million lines.

3 Sauce for the gander

Notwithstanding their status as the economically dominant multichannel video and broadband service suppliers in the U.S., cable operators in the U.S. are not only not subject to the technology sharing/unbundling requirements to which incumbent telcos are subject, but many are also not subject to any 'open access' requirements. Customers can use their telco service to access whatever ISP they choose. Their cable choices are much more heavily circumscribed with many customers compelled to deal with the ISP designated by/affiliated with their (usually monopoly) cable system operator. It strikes as more than a little ironical that Excite@Home, one of the two large cable ISPs - the other is TimeWarner's Road Runner - has recently had to declare bankruptcy.

There has been very substantial consolidation of cable system ownership in recent years. The government competition authorities have conditioned their approval of the largest of these mergers with limited open-access requirements - demanding that system operators afford their customers at least some modicum of choice among/between ISPs. Whether a cable customer has any choice of ISP thus depends on the system's specific identity and whether it is part of a combined ownership whose consolidation has been conditioned by the government to require any choice of ISP. The FCC has now opened a proceeding for the purpose of determining whether 'open access requirements should be extended to all systems and, if so, what form they should take.

The telcos are likely to take this opportunity to point up the marked asymmetries in current regulatory treatment between themselves and cable. They will likely argue that asymmetrical regulation restricts the ability of the competitive process to select on the basis of genuine efficiency in addressing consumers' preferences.

4 All roads lead to the FCC

The FCC's position vis-à-vis open access has evolved as cable's market power has loomed increasingly transparent and the competition authorities have seen fit to impose access requirements selectively in negotiating conditions for various cable merger approvals. The Commission's initial position was that open access was not necessary because, the Commission conjectured, there would be sufficient competition among different platforms to ensure adequate choice. It then asserted that open access would result from effective competition among platforms, ie platform competition itself might not suffice, but would compel platform operators to offer choices beyond affiliated ISPs. It now proposes to address the issue directly after selective imposition of requirements in consequence of merger enforcement, but many 'read' the Commission as wishing to close the inquiry without taking any substantive action.

5 Attacking to the rear

Besides 'broadband', there is another expression that has recently achieved considerable currency in U.S. policy discussions. It is an expression that should be familiar to those, in turn, familiar with Oftel and communications policy as it has evolved in the U.K. since BT's privatization in 1984. The expression is 'facilities-based competition' (FBC) and, while the touchstone of U.K. policy from the outset, it has now become the governing policy 'mantra' in the U.S.

As FCC Chairman Michael K. Powell recently opined:

"Facilities-based competition is the ultimate objective. I believe that other methods of entry are useful interim steps to competing for local service, but Commission policy should provide incentives for competitors to ultimately offer more of their own facilities. This would decrease reliance on incumbent networks, provide the means for truly differentiated choice for consumers, and provide the nation with redundant communications infrastructure. (see note 1 below)

In implementing the 1996 Telecom Act, the U.S. authorities effectively 'pre-judged' the issue of FBC's viability - deciding that it was not viable and that competition must rely primarily on access to/resale of the incumbent's facilities. Resale/repackaging certainly has its place in the arsenal of pro-competitive, efficiency-enhancing policies, but it offers limited scope for competitive enterprise, leaving only marketing and various value-added services as the main competitive bones of contention. In other (and principal) respects, competitors are selling much (indeed, often literally) the same thing. With FBC, in contrast, there are a plethora of other dimensions to potential competition (eg mobility, transmission clarity, speed, security, redundancy, etc).

The U.S. authorities sought to make 'service' competition easy by taking steps to facilitate access at whatever location, no matter how uneconomic and technically tenuous, at very low- (indeed, arguably, below-) cost terms. The problem with this tack is that the terms and conditions governing access to the incumbent network operator's network by non-FBC service providers are also precisely the terms and conditions against which facilities-based competitors must compete. If the terms are too generous, they preclude competition by all but the most extra-efficient network platform suppliers.

6 Where do we go from here?

There is some prospect that the more extreme unbundling requirements will now be relaxed (eg so-called 'sub-loop' unbundling and 'line-sharing' requirements) and that the FCC may adopt a more economically defensible, less FBC-unfriendly methodology for estimating economically reasonable network service element charges. It is very difficult to pass a law and there is thus not likely to be any legislative resolution of these issues in Congress. As the former Bell operating companies pass the competitive checklist affording them freedom to enter the long-distance business, that constraint on their provision of high-speed data services will disappear. With a more sensible unbundling regime and more economically reasonable prices of network access to competitors (viz: prices that afford sufficient incentives to make risky investments), there is some, albeit, probably a fairly limited prospect of the telcos' bringing greater (if not fully effective) competitive pressure to bear on the dominant cable monopoly.

John Haring and Harry M. Shooshan are principals in Strategic Policy Research. Mr. Shooshan formerly served as Chief Counsel to what is now the Telecommunications Subcommittee of the U.S. House of Representatives. Dr. Haring formerly served as Chief Economist of the Federal Communications Commission and as Chief of the Commission's Office of Plans & Policy. He has served as an economic advisor to Oftel since 1993. The views expressed in this guest column are those of the authors and do not necessarily represent the views of Oftel.

1 See Digital Broadband Migration, Remarks of FCC Chairman Michael K. Powell, Press Conference (10/23/01) (emphasis in original).