Best Practices in Broadband Development Best Practices in Broadband Development Without Unnecessary IncentivesWithout Unnecessary Incentives

A Presentation at the 32nd Annual Conference of the

Pacific Telecommunications Council

Honolulu, Hawaii January 17-20, 2010

‘

Rob Frieden, Professor of Telecommunications and LawPenn State University

rmf5@psu.eduWeb site : http://www.personal.psu.edu/faculty/r/m/rmf5/

Blog site: http://telefrieden.blogspot.com/

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Incentive Creation and Disincentive Avoidance in Broadband Development

While best practices require nations to consider a variety of strategies for While best practices require nations to consider a variety of strategies for stimulating Next Generation Network development, the U.S. FCC has stimulating Next Generation Network development, the U.S. FCC has become preoccupied with “incentivizing.”become preoccupied with “incentivizing.”

Politically adept stakeholders have gamed the legislative and regulatory Politically adept stakeholders have gamed the legislative and regulatory process to secure premature deregulation, financial subsidies, and incentives process to secure premature deregulation, financial subsidies, and incentives even where competitive necessity would stimulate investment. even where competitive necessity would stimulate investment.

Governments need to calibrate incentive creation and avoid tilting the Governments need to calibrate incentive creation and avoid tilting the competitive playing field with inconsistent regulation, subsidies, grants, tax competitive playing field with inconsistent regulation, subsidies, grants, tax credits, loans, loan guarantees and other incentives.credits, loans, loan guarantees and other incentives.

NGN development has a substantial impact of a nation’s competitiveness in NGN development has a substantial impact of a nation’s competitiveness in the global economy and should not be the subject of regulatory the global economy and should not be the subject of regulatory brinksmanship. brinksmanship.

In the U.S., it appears that the most financially secure, incumbent carriers, In the U.S., it appears that the most financially secure, incumbent carriers, are playing a game of “chicken” with Congress and the FCC over NGN are playing a game of “chicken” with Congress and the FCC over NGN development; major incumbents have refrained from submitting proposals development; major incumbents have refrained from submitting proposals to use a portion of the $7.2 billion available for NGN development, to use a portion of the $7.2 billion available for NGN development, probably because of network neutrality requirements.probably because of network neutrality requirements.

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Until 2009 the U.S. Assumed a Robustly Competitive Broadband Market Existed

Despite ample evidence to the contrary, until 2009 the U.S. government, including Despite ample evidence to the contrary, until 2009 the U.S. government, including the FCC saw no need to create broadband incentives based on evidence of global best the FCC saw no need to create broadband incentives based on evidence of global best

practices.practices.

““[T]here is substantial competition in the provision of Internet access [T]here is substantial competition in the provision of Internet access services. Broadband penetration has increased rapidly over the last year with more services. Broadband penetration has increased rapidly over the last year with more Americans relying on high-speed connections to the Internet for access to news, Americans relying on high-speed connections to the Internet for access to news, entertainment, and communication. Increased penetration has been accompanied by entertainment, and communication. Increased penetration has been accompanied by more vigorous competition. Greater competition limits the ability of providers to more vigorous competition. Greater competition limits the ability of providers to engage in anticompetitive conduct since subscribers would have the option of engage in anticompetitive conduct since subscribers would have the option of switching to alternative providers if their access to content were blocked or degraded. switching to alternative providers if their access to content were blocked or degraded. In particular, cable providers collectively continue to retain the largest share of the In particular, cable providers collectively continue to retain the largest share of the mass market high speed, Internet access market. Additionally, consumers have gained mass market high speed, Internet access market. Additionally, consumers have gained access to more choice in broadband providers.” AT&T Inc. and BellSouth Corp., access to more choice in broadband providers.” AT&T Inc. and BellSouth Corp., Application for Transfer of Control, Memorandum Opinion and Order, 22 FCC Rcd. Application for Transfer of Control, Memorandum Opinion and Order, 22 FCC Rcd. 5662, 5724-25 (2007).5662, 5724-25 (2007).

In 2008, John Kneuer, then Assistant Secretary for Communications and In 2008, John Kneuer, then Assistant Secretary for Communications and Information and Administrator at the Commerce Department’s National Information and Administrator at the Commerce Department’s National Telecommunications and Information Administration claimed the United States “has Telecommunications and Information Administration claimed the United States “has the most effective multiplatform broadband in the world.”the most effective multiplatform broadband in the world.”

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The FCC Provides One Source Document for All the Positive News on Broadband Penetration—Everything Else Constitutes a “Trade Secret”

Necessitating Confidential Treatment

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The U.S. Has 100% Broadband Penetration With Consumers in 94.6% of All Zip Codes Having 4 or More Broadband Choices

Source: FCC (2009)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun2000

Jun2001

Jun2002

Jun2003

Jun2004

Jun2005

Jun2006

Jun2007

One or More Providers Four or More Providers

Percent of Zip Codes with High-Speed Providers

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Lines by Information Transfer Rates in the Faster Direction as of June 30, Lines by Information Transfer Rates in the Faster Direction as of June 30, 2008 (Includes only lines exceeding 200 kbps in both directions)2008 (Includes only lines exceeding 200 kbps in both directions)

Source: FCC (2009); http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-292191A1.pdfSource: FCC (2009); http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-292191A1.pdfTotal “High Speed” Lines (theoretical bitrate exceeds 200 kbps in 1 direction)Total “High Speed” Lines (theoretical bitrate exceeds 200 kbps in 1 direction)

High-Speed Lines by Technology as of June 30, 2008

Total High-Speed Lines

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The U.S. Ranks 15th Among OECD Nations in Terms of Household Penetration

source: OECD (2009) source: OECD (2009) http://www.oecd.org/document/54/0,3343,en_2649_34225_38690102_1_1_1_1,00.htmlhttp://www.oecd.org/document/54/0,3343,en_2649_34225_38690102_1_1_1_1,00.html

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The U.S. Lags Most Nations in Broadband Penetration On the Basis of Per Capita GDP

source: OECD (2008) source: OECD (2008)

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source: Internetinnovation.org; http://internetinnovation.org/images/factbook/by_country.png.

1010

Who’s Statistics Are Most Credible?Who’s Statistics Are Most Credible?

Most satellite and terrestrial wireless broadband options do Most satellite and terrestrial wireless broadband options do not yet provide true broadband service, yet the FCC reports not yet provide true broadband service, yet the FCC reports that 16.5% of all lines provided via satellite, terrestrial fixed that 16.5% of all lines provided via satellite, terrestrial fixed or mobile wireless. Offered service at greater than 200 kbps.or mobile wireless. Offered service at greater than 200 kbps.

Wall Street JournalWall Street Journal tests of the cutting edge, Apple iPhone 3G tests of the cutting edge, Apple iPhone 3G measured actual data speeds in the 200-500 kbps range. measured actual data speeds in the 200-500 kbps range.

The U.S. government and sponsored academics dispute the The U.S. government and sponsored academics dispute the OECD statistics as failing to include Wi-Fi hot spots, at work OECD statistics as failing to include Wi-Fi hot spots, at work access, etc.access, etc.

Additional excuses include the lack of computer literacy and Additional excuses include the lack of computer literacy and access, having a large rural hinterland, adverse demographics, access, having a large rural hinterland, adverse demographics, yet other nations with similar disadvantages do better.yet other nations with similar disadvantages do better.

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Reasons Why Incumbents Can Postpone Major Reasons Why Incumbents Can Postpone Major Broadband InvestmentBroadband Investment

Currently incumbents can “make their numbers” thanks Currently incumbents can “make their numbers” thanks to still growing wireless revenues, generous universal to still growing wireless revenues, generous universal service funding, and the absence of competitive service funding, and the absence of competitive necessity.necessity.

In the third quarter of 2009, Verizon reported that 58% In the third quarter of 2009, Verizon reported that 58% of its total revenues accrued from wireless service.of its total revenues accrued from wireless service.

Most of the $7 billion annually allocated for universal Most of the $7 billion annually allocated for universal service flows to incumbent local exchange carriers.service flows to incumbent local exchange carriers.

U.S. broadband in many locales is comparatively slow U.S. broadband in many locales is comparatively slow and expensive despite two platform options (DSL and and expensive despite two platform options (DSL and cable modem).cable modem).

Until 2009, the U.S. had no targeted broadband Until 2009, the U.S. had no targeted broadband development funding.development funding.

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Global Best Practices in Broadband DevelopmentGlobal Best Practices in Broadband Development

Best practices does not require nations to “throw money at the problem,” but instead:Best practices does not require nations to “throw money at the problem,” but instead:

•• Develop a vision and strategy;Develop a vision and strategy;

•• Promote digital literacy, i.e., the ability to use digital technologies to pursue Promote digital literacy, i.e., the ability to use digital technologies to pursue information, communications and entertainment interests;information, communications and entertainment interests;

•• Invest in infrastructure, aggregating demand, and serving as an anchor tenant;Invest in infrastructure, aggregating demand, and serving as an anchor tenant;

•• Foster facilities-based competition;Foster facilities-based competition;

•• Create incentives for private investment and disincentives for litigation and other Create incentives for private investment and disincentives for litigation and other delay tactics;delay tactics;

•• Offer electronic government services, including healthcare, education, access to Offer electronic government services, including healthcare, education, access to information, and licensing; information, and licensing;

•• Auction off universal service franchises that receive subsidies and grants; andAuction off universal service franchises that receive subsidies and grants; and

•• Revise and reform governmental safeguards to promote a high level of trust, security, Revise and reform governmental safeguards to promote a high level of trust, security, privacy, and consumer protection in NGN services, including electronic commerce.privacy, and consumer protection in NGN services, including electronic commerce.

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Development ModelsDevelopment Models

Top/DownTop/Down

Nations emphasize expanding the supply of broadband capacity by Nations emphasize expanding the supply of broadband capacity by

stimulating access through:stimulating access through:

Expanded universal service obligation to include broadbandExpanded universal service obligation to include broadband

service;service;

Using financial stimulus tools such as grants, subsidies, and tax credits;Using financial stimulus tools such as grants, subsidies, and tax credits;

Reallocated spectrum to expand available bandwidth Reallocated spectrum to expand available bandwidth useable for useable for

broadband services; andbroadband services; and

Supporting competition from multiple platforms, including retrofitted Supporting competition from multiple platforms, including retrofitted fixed line telephone networks, cable television plant, wireless, fiber fixed line telephone networks, cable television plant, wireless, fiber optic links, and the powerline grid.optic links, and the powerline grid.

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Development Models (cont.)Development Models (cont.)Bottom/UpBottom/Up

Nations emphasize stimulation of demand for NGN and the services Nations emphasize stimulation of demand for NGN and the services

they deliver through government:they deliver through government:

Becoming an early provider of NGN-mediated services and an underwriter of Becoming an early provider of NGN-mediated services and an underwriter of programs designed to enhance digital literacy, i.e., the skills needed to use NGNs programs designed to enhance digital literacy, i.e., the skills needed to use NGNs for enhancing social and personal utility;for enhancing social and personal utility;

Offering access to e-government services ;Offering access to e-government services ;

Offering free or subsidized computers and support for the creation of digital content; Offering free or subsidized computers and support for the creation of digital content;

Funneling grant money to “community champions” and broadband demand Funneling grant money to “community champions” and broadband demand aggregators in addition to carriers; andaggregators in addition to carriers; and

Addressing consumer protection issues including, privacy, network reliability, security Addressing consumer protection issues including, privacy, network reliability, security and neutrality, and competition policy issues.and neutrality, and competition policy issues.