Article The Weekly Standard

Strike Up the Broadband

IN HIS TENURE as chairman of the Federal Communications Commission, Michael Powell has spoken eloquently, and with genuine foresight, about the "digital revolution," which he calls "the most important economic development of our time." Powell has made clear that if the United States is going to compete successfully in the information age, "we have to help get broadband built and deployed to every American." And the FCC has said its "strategic goal" for broadband is to "establish regulatory policies that promote competition, innovation, and investment in broadband services and facilities."

Unfortunately, despite Powell's powerful vision, nearly a year after the FCC boasted that it would provide "substantial" regulatory relief and "incentives for carriers to invest in broadband network facilities," the companies that have the money to invest in building these new networks are still being thwarted by an uncertain and often contradictory regulatory landscape. If the FCC does not follow through on its promise to provide real regulatory relief, there will be serious economic consequences.

There is no better engine for new jobs and growth than the telecommunications sector. Over the past decade, the number of U.S. cell phone subscribers increased by roughly 1,200 percent, and, from 1995 to 2002, the number of people with Internet access leapt from 18 million to 166 million. Cell phones, email, data networks, fax machines, web browsing, and PDAs have revolutionized the way Americans do business. Telecommunications has also been the backbone for growth in countless other industries. From the credit card reader at the gas pump to online product tracking, telecommunications advances stoked the economic growth of the last decade. Information technology now accounts for an estimated $825 billion of our current economic output, or 8.3 percent of the GDP.

Much of the rapid expansion in telecommunications services has been built on the back of the old copper-wire telephone infrastructure. Fax machines, credit card readers, and computer networks, not to mention the proliferation of phone lines, all depended on existing infrastructure. Remember your first time on the web? Probably it was via a dial-up modem. Old "narrowband" telephone lines are stretched to capacity, but the market is begging for better, faster connections. Thus, the next several hundred billion dollars of spending in the telecommunications industry should be devoted to pushing the web to the speed of light. That investment--if it materializes--will enable a limitless range of productivity-enhancing applications, generating real revenues, for real companies, and improving the quality of life for everyone.

It has now been almost four years since the telecom boom went bust. The market capitalization of the telecommunications and equipment manufacturing sectors has declined by some $2 trillion from its peak; overall investment by wireline telecommunications carriers has declined by more than $60 billion. The Communications Workers of America reports that more than 900,000 jobs have been lost in telecommunications and information industries since 2001. The United States is also losing competitive ground in infrastructure. A recent study from the International Telecommunications Union found that the United States ranks a distant 11th in high-speed Internet connections per capita. This should all be of no small concern to policymakers in the White House and the FCC.

But the opportunity for a new boom is just around the corner if only the regulators will allow it. Over the next decade, telecom companies will have to make substantial decisions regarding investments in broadband and broadband services. These investments will be risky, given the dominant broadband position of cable companies and further competition from satellite and wireless operators. Some companies have moved aggressively to be ready to roll out the next generation of broadband, and are poised to begin making these investments in the coming weeks. But they will be hamstrung because of the commission's failure to deregulate broadband deployment. For example, a telecom company like Verizon could spend over a billion dollars laying fiber and then have to let its competitors use the fiber for a nominal fee.

Recognizing the economic significance of the issue, Powell has called broadband deployment "the most central communications policy objective of our day." In its Triennial Review Order last year, the FCC acknowledged that the so-called incumbent telephone carriers (the old Bell companies) "are unlikely to make the enormous investment required" for broadband deployment, "if their competitors can share in the benefits of these facilities without participating in the risk inherent to such large- scale capital investment." Accordingly, the FCC lifted many rules requiring telephone companies to sell all of their products to competitors at below-cost prices; this is called "unbundling" in FCC-speak. The FCC's decision was straightforward, and was based on its conclusion that unbundling broadband facilities is both unnecessary, because competing providers do not need access to those broadband facilities, and harmful, because it would deter deployment by all providers.

Unfortunately, as is often the case with regulatory agencies, what the FCC gave with one hand it seemed to take away with the other. Powell's clear vision of a digital future is now in danger of being lost in the quicksand of his agency. For example, the FCC removed the broadband unbundling requirements under one section of the law only to conclude that the carriers have other unbundling obligations under a different section. The sorry state of existing regulations is that both the former Bell companies and new market entrants are discouraged from building networks with new technologies and new facilities.

Unlike the old telephone market, broadband is one where everyone is starting from scratch--Bell companies, new competitors, and cable companies. New fiber is going to have to be laid by somebody. And there are strong economic incentives for companies to lay fiber where they can reach the most customers--businesses, apartments, and condominiums. You would think that the FCC would leave these most lucrative broadband markets--the ones most likely to attract fierce competition--unregulated and not subject to unbundling, because competition will naturally flourish, providing improved service and lower costs.

Guess again. The FCC has subjected broadband for businesses, apartment buildings, and even condominiums to the same tired regulations it uses for old copper-based systems. Worse, the FCC has created confusion as to when unbundling can be required by the states. Until the FCC removes the present uncertainty and, better yet, the obstacles it has created, investment will suffer.

A smart, forward-looking broadband policy would include certain key steps: First, fiber deployed to businesses would be unregulated. Has the FCC made this simple change? No. Indeed, the present approach is an invitation to widely disparate state-by-state, neighborhood-to-neighborhood, building-to-building, and even customer-to-customer regulation in an area where, without clearly defined rules, commercial investments are simply too risky. Second, apartment buildings and condominiums should not be subject to unbundling requirements at all. Cable providers have already made tremendous inroads in providing broadband services, giving stiff competition to telephone carriers. These are the last places where we need government trying to "foster competition" through regulation. Moreover, the FCC has set residential broadband deployment as a goal, and nearly one-third of the population currently lives in apartments, condominiums, and the like. But has the FCC encouraged a race to build new infrastructure for these facilities? Of course not. Instead, by allowing states to order unbundling, the FCC's rules actually encourage new competitors to piggyback on the Bell companies once they begin deploying broadband. After all, why build your own network when you can lease someone else's at a cheaper rate?

Finally, if the FCC is serious about promoting broadband deployment, it should make clear that the Internet is not going to be subject to the arcane regulatory rules that apply to traditional voice services. The FCC has already decided that cable's broadband services should be deregulated; there is no reason why a different set of rules should apply to Internet access from a telephone company. Consumers should have a choice between three different platforms for broadband service--telephone, cable, and wireless. The FCC should simply step aside and let the market work.

Last year's Triennial Review Order was heralded by the Republican commissioners as "bold action" (Kathleen Abernathy) and a "momentous step" (Powell), providing "sweeping regulatory relief for broadband and new investments" (Kevin Martin). But saying it doesn't make it so. We are on the verge of losing the FCC's promised revolution before it even begins. Leaving broadband trapped in a regulatory morass skews the incentives for deployment, ultimately hurting American consumers (fewer products) and workers (fewer jobs). It is time for the FCC to keep its promises and bring broadband regulation into the 21st century. If Powell's vision can be fully implemented, he will leave a lasting mark, not just on the FCC, but on the entire U.S. economy.

Reprinted with permission from The Weekly Standard.