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Technological Change and Economic Opportunity: The View from the Federal Communications Commission Peter A. Tenhula Federal Communications Commission Mr. Tenhula expressed his pleasure at having been invited by the STEP Board to present a perspective from the Federal Communications Commission (FCC) on the telecommunications challenge the symposium was exploring, although he also voiced regret that Michael Powell, the Commission's chairman, had not been able to attend and to share his views. He speculated that Mr. Powell, along with other FCC staff, were on their way to Nashville to attend the annual convention of the National Association of Regulatory Utility Commissioners, whose mem- bers are the state telecom regulators. As the Commission had ruled the previous week that the states could not regulate Internet telephone services and other IP- enabled services, the convention would "probably be like a lion's den" for those representing the FCC, he said. "But knowing the chairman as well as I do, I predict that he will be as safe as Daniel among those lions"--even if he would most likely have preferred attending STEP's symposium instead. Having spent 5 years as Mr. Powell's senior legal adviser, which Mr. Tenhula called "by far the most valuable experience" to date of his 14 years at the FCC, he was now working on spectrum policy reform. Warning that he might spend a disproportionate amount of time on spectrum, he apologized in advance, while also promising to try to shed some light on the wireless issues raised by Dr. Raduchel. He said he would do his best to depict in full the attempt of the FCC, a "70-year- old regulatory agency . . . to catch up and keep up with technological changes." 38

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 39 In light of both the subtitle of his presentation, "The View from the FCC," and his position as a career employee, Mr. Tenhula said he wished to call particular attention to the agency's standard disclaimer: "This presentation and the views expressed by the presenter do not necessarily reflect the views of the FCC, the chairman, individual commissioners, the FCC staff or the administration." Mr. Tenhula said he would begin by highlighting how the FCC was embrac- ing and fostering technological change and innovation, borrowing a metaphor from Mr. Powell that had been guiding the Commission for the previous few years: The Great Digital Migration. He would then briefly describe how the FCC's policies were fostering economic opportunity and entrepreneurship in line with another of Mr. Powell's themes, Power to the People, and with the ideal of consumer-driven innovation. Then he would discuss wireless as a successful deregulatory model for telecom, along with some current challenges of spectrum policy reform. Finally, he would share his personal take on some of the future issues and opportunities being generated by new technologies and on the regula- tory, technical, and economic challenges that the FCC, Congress, the administra- tion, the telecom industry, and academia might be in a position to address. THE GREAT DIGITAL MIGRATION To illustrate the challenging regulatory transition dubbed by Chairman Powell as "The Great Digital Migration," Mr. Tenhula projected a graphic repre- senting the "winding road from decades of regulatory stovepipes to a heavenly vision of a wide variety of applications and services being provided over a plethora of competing telecommunications platforms" (see Figure 1). Mr. Powell, he said, had been framing the FCC's agenda around this concept with the inten- tion of properly guiding and propelling the journey from a slow, conventional, analog world to a digital world with significant opportunities for faster, more reliable, higher quality information and communications. Accompanying this change would be an inevitable and radical transformation resulting in substantial benefits for American consumers. While he acknowledged that there were pot- holes depicted along the road--something he associated with the quality of roads in Washington, D.C.--he stressed that the vision adopted by Mr. Powell was a "very optimistic" one. "He could easily have adopted the more pessimistic image of an impending train wreck," Mr. Tenhula pointed out. Mr. Tenhula expressed one of this approach's two guiding principles through the phrase "multiple platforms are the key." The goal was to have additional physical platforms generate tremendous consumer benefits by delivering multiple facilities-based competitors. The transformative impact would scream out for deregulation because it would be accompanied by: 1. increased need for risky and heavy capital investment;

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40 -Fi Layers? Data; Satellite Wi Mesh UWB else! etc. one -- world Video; Fixed DTV 3G FTTH Audio; PLATFORMS blur APPLICATIONS Anything Voice; advances Cable PLATFORMS DSL Power Laser Digital broadband Based- Dimensional-3 More -- boundaries prices; levels -- all Facilities Technological at -- Converged Bundled differentiation; -- regulated Multiple services -- Lower Dynamic Less -- -- Networks -- Structures Political anxiety Competition Market network/many Consumer innovation/product Personalization/customization Innovation (Network/Applications/CPE) Ubiquitous Regulatory Transition Potholes and Risk uncertainty Consumer confusion product strong Federal) Incumbent dilemma service service Massive capital -- investment migration. No/little with and sanctioned slow (State digital prices; innovation but Universal TV/ Radio Balkanized network/one -- regulated Spectrum -- great one Limited/Govt. -- Limited world -- Regulated Significant Heavily boundaries The -- -- Networks -- Coax Video 1 Structures Stovepipes Analog narrowband Competition monopolies Market 2-Dimensional Consumer differentiation; Innovation Ubiquitous subsidies Regulatory jurisdictional Voice Copper FIGURE

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 41 2. demonstrable positive competitive effects and better ways to deal with demonstrable competitive harms; and 3. the anxiety and uncertainty of never-ending regulatory proceedings. The initial step under the second guiding principle, that of "avoiding reflexive symmetry," was to allow significant development, then assess market conditions and determine what, if any, regulation might be appropriate. A good example of this, wireless, will be discussed further in a moment. In the wake of the initial step, it would be important not to burden new services and applications with the physical-layer-based stovepiped regulations of yesterday. Mr. Tenhula listed some Wireline Migration matters in which the FCC was involved: The Triennial Review, a follow-up to the 1996 Telecommunications Act, was a "very litigious" proceeding involving deregulation of local loops as well as delegation to and regulation by the states of unbundled network element and its pricing. The Brand X Appeal, in which a petition of certiorari was pending before the U.S. Supreme Court, involved the appeal of a Ninth Circuit case dealing with whether cable-modem service was defined as an "information service" or a "tele- communication" service under the Telecommunications Act.2 A Universal Service Review was undertaken by the FCC in order to ensure the ubiquity of the next generation of technologies, as intended under the original 1934 Telecommunications Act. Intercarrier Compensation dealt with how carriers compensate each other for exchanging traffic, as well as how to deal with legacy access charges and other approaches to compensating carriers participating in the networks of networks. The IP-Enabled Applications/Services proceeding--covering all appli- cations over Internet Protocol, notably voice over Internet Protocol (VoIP)--was then pending. The FCC, as Mr. Tenhula had mentioned, had indicated where its jurisdiction lay in a couple of cases, having told the states to stay out of VoIP and other IP-enabled applications in a ruling on the Vonage case just the week before. As yet unresolved, however, were many other, tangential issues, among them Universal Service, Communications Assistance for Law Enforcement (CALEA), and Enhanced 911 (E911). Broadband over Powerlines, a rule making recently taken up by the FCC, dealt with the provision of very high speed bandwidth over the electrical grid. The issue facing the Commission here, rather than whether to allow this new broadband competitor, was the leakage of signals from power lines that interfered with other spectrum-based services. 2The Supreme Court since ruled in the FCC's favor on June 27, 2005.

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42 THE TELECOMMUNICATIONS CHALLENGE He then turned to examples of issues concerning Mass Media Migration that were occupying the FCC's attention: Digital Television Transition and Cable Must Carry were tied together. The FCC, which was contemplating a "hard date" for the conversion from analog to digital high-definition television, was looking at a time frame of around 2009, but the staff's proposal was "very tetchy." Also controversial was the main question regarding what cable must carry: How much of that digital signal must cable operators carry? Direct Broadcast Satellite (DBS) providers EchoStar and DirecTV had proved effective competitors against the cable video platform, while other high- definition, focused, direct-broadcast satellite competitors--VOOM, for one-- were getting set to come online. Digital Satellite Radio, as represented by XM and Sirius, was "taking off like gangbusters." Digital Terrestrial Radio, also called "high-definition radio," would bring crisp, clean, CD-quality music to homes and automobiles. Media Ownership battles were continuing. Video Over DSL was showing a great deal of promise. Wireless Mobile Media, an example of which was the one-minute TV episode had been the object of recent announcements by Texas Instruments, Qualcomm, and Infineon, which also planned to transmit high-quality video to the small screens on cell phones. Observing that he was "still talking in stovepipes--`wirelines,' `mass media,' `wireless'"--Mr. Tenhula moved on to issues affecting Wireless Migration: The process had started about 10 years before with Personal Communi- cations Services (PCS); having worked on that issue, he took great satisfaction in "see[ing] everybody walking around with these little phones." Already being rolled out in Europe and Asia, and on its way in the United States, was Third Generation (3G) or Advanced Wireless communications, which promised to be the mobile broadband platform of the ensuing few years. Broadband Satellite Services had had some "fits and starts" but might begin to fulfill their promise before long, especially to rural areas. An auction of Returned TV Spectrum, a byproduct of the media migra- tion that related to the digital TV transition, would be undertaken by the FCC. A great deal of spectrum from TV channels 52 to 69 would be on the block, some- thing that dropped "another hot topic," public safety and homeland security applications, into the FCC's lap. "Some would call it a pothole, some would call it a detour on this road," acknowledged Mr. Tenhula, "but it's a very important element of serving specialized enterprises with wireless communications."

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 43 Secondary Markets were enhancing flexibility in the use of radio spec- trum by making it possible to lease spectrum, and to trade it freely, as if it were "any other raw material." Cognitive Radios would increase spectrum sharing, since they were able to find holes in the spectrum and thereby allow the use of spectrum as available. Unlicensed Devices and "Hot Spots" would also demand the FCC's attention. Ultrawideband Devices and Applications, among other new technolo- gies, had recently been provided more access to the spectrum and authorized. Transitioning from Command-and-Control Regulation of the spectrum. POWER TO THE PEOPLE Turning to the theme of consumer-driven innovation that Mr. Powell emblematized in the slogan "Power to the People," Mr. Tenhula began with the question: "How are the FCC's policies empowering economic opportunities and entrepreneurship?" In an address at the National Press Club earlier in 2004, the FCC Chairman had talked about getting communications and computing power "to the edges." Resting in the hands of consumers, of end users--rather than in the hands of large, centralized institutions--would be the power of the silicon chips, massive storage, and speedy connections that combine to produce smaller, more powerful devices and very exciting applications. There were already "tons" of examples of this change, including: digital cameras and photo printers, which had allowed photography to move from the darkroom into the home; iPods, MP3 players, and downloadable services, which were combining to replace CDs; peer-to-peer communications and file sharing; personal video recorders, such as the TiVo, which give users control of what they want to watch and when they want to watch it; private movie theaters, found in family rooms and minivans; GPS satellite receivers, which were becoming standard on tractors, allow- ing farmers to know exactly where to plant their seeds; on automobiles, allowing drivers to know their location should they get into trouble; and in cell phones, fulfilling E911 requirements that the user be locatable through the phone in an emergency; and WiFi VoIP phones that can bypass public networks. Such were their economics that these devices were likely to become increas- ingly more powerful and less expensive, and they would require networks of networks to serve them and applications to ride on them. Consumers had been embracing them, and incumbents, in addition to entrepreneurs, were providing

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44 THE TELECOMMUNICATIONS CHALLENGE them. A desire to regulate them, which he attributed to "speculative fears," had raised its head. FCC Chairman Powell believed the benefits to Americans of such innova- tion to be enormous, as it furnished them with more choices, better value, and more control to tailor how they communicate and get information. "Credit for these successes rests primarily with entrepreneurs," Mr. Powell had said in a speech. "But government's commitment to focus on innovation in its regulatory policies, remove unnecessary regulatory chains, place faith in the free market, and promote technology solutions has paid dividends." The FCC's objective, as described by Mr. Tenhula, was "putting the `public' back into the `public interest' through inevitable innovation." WIRELESS: A MODEL FOR DEREGULATION Looking ahead to the remaining challenges of spectrum-policy reform, he suggested that "the wireless way of getting to multiple broadband platforms," whose results he judged to be "pretty promising," offered a successful deregulatory model for the rest of telecommunications based on flexible, market- oriented regulations, as opposed to "command-and-control" restrictions of the past. Although the number of national providers of wireless telephone services had shrunk to five with the Cingular-ATT merger, the country still had multiple regional and rural providers of wireless services, as well as dozens of niche players, especially in the middleware and applications layers. Such variety meant that consumers would enjoy lower prices and more choices, and also that there would be greater innovation and deployment, with both taking place at higher speed since flexibility means that the regulator need not be consulted at every turn. Since the FCC's first auction of licenses for PCS, in 1995, subscribership had risen by 407 percent, from 28 million to more than 142 million; the percent- age of the U.S. population with access to three or more providers had increased to 97 percent from 2.5 percent; and, currently, 78 percent had access to five or more wireless providers. Meanwhile, the average price per minute of services had decreased from 47 cents to 11 cents. "We've got more [flexible] spectrum in the auction pipeline," he said. He cautioned that "most [spectrum] was still under a `command-and-control' regime" in need of its own transition. Reforming spectrum policy was, therefore, a key item on Mr. Powell's agenda. Even as "demand for spectrum [was being] driven by an explosion of wireless technology and the ever-increasing popularity of wireless services," he had observed in late 2002, it was still under "a spectrum management regime that [was] 90 years old" rather than one "rooted in modern-day technologies and markets." Going down the lengthening list of factors that were propelling demand for wireless services, Mr. Tenhula cited the rise of the service sectors, which are "communications-intensive"; the increasing mobility of the U.S. workforce; con- sumers' speed in embracing the convenience and increased efficiency of wireless

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 45 devices and services; technological changes that had increased the diversity of service and device offerings; and the increasing prevalence in both businesses and homes of multiple computers and wireless local area networks. At the same time, he said, technological advances opening the door to changes in spectrum policy included the increased use of digital technologies with the potential for greater throughput of information; the improvement of interference-management opportunities; and the advent of spectrum-sharing technologies, an example of which was cognitive, or `smart' radio. FCC SPECTRUM POLICY TASK FORCE The FCC's Spectrum Policy Task Force (SPTF), of which Mr. Tenhula was director, issued three main recommendations in November 2002: Migrate from the current command-and-control regulatory model to the use both of a market-oriented, exclusive-rights model--which some would call a "property-rights" model--and of an unlicensed devices, or "commons," model. Implement a new paradigm for interference protection. Implement ways to increase access to the spectrum in all dimensions for users of both unlicensed devices and licensed spectrum. When it came to the regulatory models, Mr. Tenhula said, the Task Force had stressed that one size does not fit all. It had, in fact, recommended striking a balance among the three general approaches in assigning spectrum-usage rights. Under the exclusive-rights model, licensees would hold exclusive yet transfer- able and very flexible usage rights to specified spectrum bands within defined geographic areas. These rights would be governed primarily by rules protecting users against harmful interference. Under the commons model, unlimited numbers of unlicensed users would share frequencies. Usage rights would be governed by technical standards or etiquettes for devices, and there would be no right to pro- tection from interference. Only very limited use of the command-and-control model, the traditional regime under which the government picks the use and users of spectrum, was recommended by the Task Force, which would confine its application to the areas of public-safety, international-satellite, and broadcasting services. MOVING TO MARKET-BASED MODELS The consequence of using the command-and-control model, Mr. Tenhula explained, was the building up of silos. "We've got labels like `broadcast spectrum,' `cellular/PCS spectrum,' `public safety spectrum," he said. "Folks come to the FCC begging on hand and knee: `Can we increase power?' `Can we have some more spectrum?' `Can we change the service?' And the FCC takes a

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46 THE TELECOMMUNICATIONS CHALLENGE High interference to Medium High interference Sensitivity Low to Medium Low Medium High "Power" Sensitivity Low Low Medium High "Power" Uses & Flexible, Unlicensed, users market- consumer limited by based devices regulation services FIGURE 2 Spectrum usage models: Transition to market-based models. very long time." The goal of the Commission under Mr. Powell was to transition to market-based models by limiting use of the command-and-control model to "high-power, high-sensitivity applications" and by moving more toward flexible, market-based services and unlicensed consumer devices (see Figure 2). The Task Force under Mr. Tenhula (and former Task Force Director Dr. Paul Kolodzy) had also concluded that increased access to spectrum could mitigate the scarcity of spectrum resources. With most "prime" spectrum already assigned, it had become increasingly difficult to find spectrum that could be made available either for new services or for the expansion of existing ones. The Task Force's recommendation was to improve access to spectrum by permitting licensees greater flexibility and to promote access in all dimensions through smarter technologies. In the wake of the Task Force's report, the FCC had been eliminating barriers to secondary markets; designating additional spectrum for unlicensed devices; improving access to spectrum in rural areas; studying receiver interference immu- nity performance issues and interference temperature concepts; facilitating smarter radio technologies; and conducting service- and band-specific proceedings through which it was implementing these principles. In implementing the first of these courses of action, increasing access to spectrum through secondary markets, the Commission had:

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 47 authorized spectrum leasing in a broad array of wireless services; streamlined to a single day processing of most license transfer and assign- ment applications; improved the functioning of secondary markets to facilitate access to spectrum by new technologies that make "opportunistic" use of unused spectrum; this involved a concept that it called the "private commons" and under which licensed spectrum was used for a commons-like, infrastructureless approach; authorized public safety-to-public safety leasing; and facilitated infrastructure sharing, especially in rural areas. The SPTF also had an initiative underway in the area of research and devel- opment, in conjunction with which it was awaiting a study from the Computer Science and Telecommunications Board of the National Research Council. This SPTF report had been "inspiring a lot of study and debate around the world," Mr. Tenhula said, remarking that articles related to it were landing on his desk weekly. A parallel effort, the President's Spectrum Management Reform Initia- tive, was taking place within the Executive Branch; it was related to President Bush's goal of furthering broadband as well. The FCC had been collaborating with the National Telecommunications and Information Administration, a bureau of the Department of Commerce (DOC), on making more radio spectrum avail- able for wireless broadband technologies. In July 2004, DOC had issued a pair of reports containing recommendations focused on improving spectrum manage- ment, especially within the government. Implementation of those recommenda- tions had begun (see Figure 3). SPECTRUM ISSUES AND OPPORTUNITIES Mr. Tenhula, reminded the audience of the disclaimer, "the views expressed by the presenter do not necessarily reflect the views of the FCC, its Chairman, indi- vidual Commissioners, the FCC staff, or the Administration," then went down his own list of "issues and opportunities" relating to the spectrum policy, some of which reflected ideas that the SPTF had not examined. As areas of opportunity, he named: trends toward "layered" approaches and other regulatory frameworks; the question of where spectrum fit within broader discussions of tele- communications policy; multi-mode inter-modal broadband mania, and the question of how to define supply-and-demand problems and the relevant markets; and the question of whether there was a need for a new telecommunications act in an IP-based world. Moving to a "layered" regulatory model (see Figure 4) from the stovepiped model (see Figures 56), a possibility that academics and some in industry had

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48 THE TELECOMMUNICATIONS CHALLENGE June 24, 2004 -- Department of Commerce submitted two reports to the President that presented recommendations for developing a U.S. spectrum policy for the 21st century: -- Report 1: "Recommendations of the Federal Government Spectrum Task Force" -- Report 2: "Recommendations from State and Local Governments and the Private Sector Responders" Recommendations focused on: -- Modernizing and improving the current spectrum management system -- Establishing incentives for achieving improved efficiencies in spectrum use and for providing incumbent users more certainty of protection from unacceptable interference -- Promoting timely implementation of new technologies and services while preserving national and homeland security, enabling public safety, and encouraging scientific research -- Developing means to address spectrum needs of critical governmental missions FIGURE 3 President's Spectrum Management Reform Initiative. Layered model(s) should present an optimal regulatory Content framework for analyzing communications policy issues. Applications/Services Policymakers need to separate (or "de-laminate") the other layers (especially the services Logical and content layers) from the physical layer(s) in order to make rational decisions in a converged (and continuously Physical converging) world. FIGURE 4 Issues and opportunities: Vertical silos to horizontal layers--I.

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 49 Multichannel Telephony/Common Audio/Video: Content Private/Commercial Applications/Services Video: Broadcasting Logical Cable/DBS Carrier Radio Physical FIGURE 5 Issues and opportunities: Vertical silos to horizontal layers--II. Where's the "Spectrum?" "Broadcast "Cellular/PCS "Public Content "Military Safety Applications/ServicesSpectrum?" Spectrum?" Spectrum?" Spectrum?" Logical Physical FIGURE 6 Issues and opportunities: Vertical silos to horizontal layers--III.

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50 THE TELECOMMUNICATIONS CHALLENGE been exploring and that had entered into several FCC proceedings, would involve translating to a model of telecommunications regulation the Open System Inter- connect [OSI] stack or the IP layers approach in the Internet. Mr. Tenhula, acknowledging a personal preference for the layered model, asserted that it could present the optimal regulatory framework for analyzing communications policy issues because it would allow policymakers to separate the layers and thereby focus decision making at the level of the problem. The current focus, he noted, was on problems at the physical layer, especially in the last mile. Rather than preserve the artificial vertical integration that had existed for decades and had created the silos that grew up over the years, Mr. Tenhula sug- gested, it would make "total sense" to let the natural layers fall as they might. Replacing sector-specific telecom regulation, a "specialized, ex ante regime that can't keep up with technology," with a regime whose layers were not tailored to communications would be in keeping with the "New Economy": The notion that "it's all networked" would parallel that of "it's just commerce." In fact, a schematic depiction of such a layered model (see Figure 7) resembled a similar depiction of basic industrial organization (see Figure 8)--in the latter, the analogue to the IP stack is the sequence leading from raw materials, through production and distribution, and on to end-product services and the consumer interface. "I don't go to `restaurants,'" he said, displacing the metaphor for Interface Opportunity: The end of sector-specific Content telecommunications Interface regulation? The layered model(s) Applications/Services need not be tailored only to communications Interface regulation Logical In the "new" economy: -- It's just "commerce" Interface -- It's all networked Physical So, why a specialized ex ante regime that can't Interface keep up with technology? Spectrum FIGURE 7 Issues and opportunities: A generic, commerce-based layered model--I.

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 51 Opportunity: The end of Consumer Interface sector-specific End Product/Service telecommunications regulation? Interface The layered model(s) need not be tailored only Distribution to communications regulation Interface In the "new" economy: Production -- It's just "commerce" -- It's all networked Interface So, why a specialized ex Raw Materials ante regime that can't keep up with technology? FIGURE 8 Issues and opportunities: A generic, commerce-based layered model--II. purposes of illustration, "I go to a `food-area network'" through which the bits are `bites' at the consumer-interface level, having gone through many commer- cial `networks' of producers and distributors to get to the table. THE UBIQUITOUS NATURE OF SPECTRUM Advancing another argument for revising the regulatory regime, Mr. Tenhula stated that in his view "spectrum is not only in the air, but everywhere: in twisted- copper pairs, in coaxial cable, in fiber cables in the form of colors, and in powerlines." DSL is the high-frequency part of the twisted pair, coaxial cable "some video channels that are set aside from spectrum for cable-modem service." In support of this perspective, he posed the question: "Should the wireless spectrum be privatized like wireline spectrum has always been?" Other opportunities for studying alternative regulatory frameworks included: monitoring European Union electronic communications directives and their implementation; weighing enforcement against rulemaking models of regulation--for example, the anti-trust vs. the quasi-legislative approach taken by regulatory agencies; reexamining the role of U.S. federalism in communications policy, some- thing already in progress;

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52 THE TELECOMMUNICATIONS CHALLENGE considering more industry self-regulation, as well as the use of technical standards, to substitute for regulation; and asking whether sovereign nations and economic regions were better laboratories in a global economy, a question that recalled to him a Supreme Court dissent from the 1930s in which Justice Brandeis suggested using the states as labs. Mr. Tenhula's suggestions for avoiding "the pitfalls of the past" in the coming broadband, IP-based world were: "Focus on consumer welfare, the public interest, instead of producer welfare, the special interest. "Think long term, and think globally. "Let them build it and see if they come--and so what if they don't, because others will meet that unmet demand. "Recognize that killer apps will come and go, and doubt all predictions. "Don't get bogged down in potential collateral problems like CALEA, E911, and Universal Service. Just solve them, because true innovators--like those who started MCI to compete in long-distance--won't wait, and the market won't wait, either. "Allow for planning. Providing time for old regulations to phase out and new regulations to phase in has worked well in certain areas where regulation is necessary. "Experiment on a case-by-case basis, and allow for failure." AN UNCERTAIN LEGISLATIVE FUTURE On the question of whether a new Telecommunications Act might be on the horizon, Mr. Tenhula deferred, noting that bringing the 1996 Act to passage took more than a decade. Comparing the approaches of 1934 and 1996 acts, he described the former as providing "very broad delegation of authority; flexible standards; little determinacy; and permissive authority for the FCC [based on] trust in the agency as an enlightened group of individuals acting in the public interest." The 1996 Act, he said, was characterized by "a comprehensive blue- print based on current technology; very prescriptive terms inviting litigation; very parochial, special interests; restraint on the regulator; and the hope that competi- tive market forces will someday prevail." Was there something better than the status quo? Should the FCC become a Federal Communications Corporation along the lines of Fannie Mae and Freddie Mac? Should rules be abandoned in favor of an experimental expert tribunal that would resolve disputes? Mr. Tenhula predicted that a philosophical dispute, that pitting free markets against industrial policy, would be determinant. His "personal pitch," which reflected his self-admitted obsession with spectrum policy reform, was for the passage of a new act addressing spectrum management

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 53 problems. Noting that Title III of the Communications Act, which dates to the period 19121927, contains its oldest provisions, Mr. Tenhula set forth a poten- tial framework for new legislation that would: end the government monopoly over spectrum allocation; end implicit subsidies and eliminate windfalls; allow for natural separation of the layers and sub-layers; provide tools for policing anti-competitive denial of access to both the wireless and wireline spectrum that, however, would not deny the benefits of efficient vertical integration; and maintain FCC jurisdiction over the service layers and protect consumers in cases of market failure. Under such legislation, he asserted, the FCC might be able to act as an expert tribunal to resolve actual disputes in a timely manner. Leaving the podium, Mr. Tenhula thanked the audience and offered the following valediction: "I'll see you on the road to the Great Digital Migration, where spectrum policy will rule." DISCUSSION Beginning the discussion period, Dr. Jorgenson explained that not much time remained before the scheduled break and said that he would therefore enforce the "famous White House Rule": a limit on questions of one per person. He then recognized the first questioner. Asked by Hugh McElrath of the Office of Naval Intelligence to talk about the use of spectrum by the military, Mr. Tenhula expressed his opinion that, although the military reservation of spectrum had "been there since the begin- ning," it was in need of reexamination just like every other aspect of spectrum policy. And this reexamination was, in fact, taking place: A task force working under the President's Spectrum Management Reform Initiative was looking into improving efficiencies for spectrum management within the government. The White House could be expected to issue a memorandum soon, he said; it would direct agencies to do more efficient planning but would stop short of applying market principles through imposing fees or allowing the trading of spectrum. Thus, spectrum would probably continue to be, for the foreseeable future, a "unique [case] where a raw or natural resource is dedicated specifically in chunks for military or government use." Because such change did not appear likely any- time soon, other spectrum bands were under review, and it was spectrum that had been moved from the government to the commercial side that was making way for third-generation services. John Gardinier, who identified himself as retired, observed that while Moore's Law was in force for processing, and storage capability was growing

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54 THE TELECOMMUNICATIONS CHALLENGE even faster, communications was really about input/output (I/O). "I can't find any way to speed up the video streams that are sometimes just not giving me the information as fast as I want to process it," he remarked, asking whether I/O rates could be improved so as to take better advantage of available technologies. I/O Restraints Financial, Not Technical Dr. Raduchel responded that telecommunications is in the end all silicon, meaning all computers, and that there was no technological constraint on moving information more rapidly, as "what can be put over the spectrum is driven by Moore's Law." The issues that Mr. Gardinier had raised were instead related to provisioning decisions made by network operators and to cost decisions made by users regarding the speed of the microprocessors they wanted put into their devices. "The real limitation and constraint on the Information Age" was, he predicted, going to be battery life: "It's clear that a cell phone that needs to be recharged during the day is of no use to consumers and they won't buy it." It was because batteries sufficiently powerful to last through a day did not yet exist that so much research had been going into fuel cells. He believed, however, that a way would be found to get the information to Mr. Gardinier at the speed he demanded. Richard Lempert of the National Science Foundation said he had viewed the thinking behind Mr. Tenhula's presentation as focusing on efficiency, technol- ogy, and fairness as to who would get access to spectrum. While acknowledging the foregoing as "terribly important and understandable values," he pointed to that moment in the 2004 presidential campaign when the owner of 61 TV stations scheduled for broadcast as a documentary "what some people thought was a commercial." Mr. Lempert also related having read that "due to threats from the FCC," Saving Private Ryan was not shown on many networks. "Once one has concentration, which the auction method allows," he argued, "one also opens things up to a cutting back of the diversity of views that can be presented." He asked to what extent these issues, which he called "neither economic nor tech- nological," might be figuring in the Commission's deliberations. Mr. Tenhula recalled his personal reaction to the two controversies that Mr. Lempert had mentioned as: "There's 10 years more of the broadcast silo." The issue tied in the content layer, the very top layer of his model, with the physical layer of spectrum at the bottom. While "broadcast spectrum" is simply a means of distributing video signals, he said, because of the traditional definition of broadcasting such reactions would continue--until, perhaps, "viewership tips over" to cell phones, to cable, or to the Internet. "What it does for me is it just perpetuates those old models in the regulation of the stovepipe," he said. "It matters who has the spectrum, and then the content riding on top of that spectrum will be regulated accordingly."

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TECHNOLOGICAL CHANGE AND ECONOMIC OPPORTUNITY 55 South Korea Reaches a Tipping Point Dr. Raduchel interjected that South Korea had become the first "major society" to have reached a "very interesting" tipping point: In 2004, daily Internet usage there began to exceed daily television viewing for the society as a whole. This would happen elsewhere, he predicted. Mark Myers of the University of Pennsylvania's Wharton School said that the move from a stovepiped to a horizontal regulatory model called to his mind how the computing model went from vertical integrated systems to horizontal. But the latter model, he said, had begun to break up due to technology. "Are such models potentially limiting how we think and talk together about convergence as we go towards the future?" he asked, speculating that communications' conver- gence with computing could jump to a "yet-unpictured" model. Dr. Raduchel said he thought the layered model was becoming dominant. "I see open source as the economy's response to how you build integrated products and sustain a layered model of technology," he stated. While observing that the final packaging might be changing as costs dropped and consumers wanted more complexity, he called the layered model "alive and well," adding: "If anything, it's being more sustained by all the technology developments." Market Model vs. Legacy Claims Jim Snider of the New America Foundation commented that while the FCC had talked "about things like the importance of broadband Internet in rural areas and flexibility," its TV translator decision of the previous September 30 would tie up hundreds of additional megahertz of prime spectrum for what he called an obsolete application. Asserting that "the translators got what the high-power broadcasters got in 1996 and 1997, which was digital flexibility and the option of a second channel," he asked how the FCC squared this result with its stated goals. Mr. Tenhula, at pains to point out that as a staffer he did not have a vote, stated that digging into specific legacy uses and applications or into other specific problems would lead to the realization that they were secondary. With that real- ization would come the conclusion that they would "have to move out of the way if the new guy comes," he said. And although "they will move out of the way," the case cited by Mr. Snider had demonstrated that "they're there until somebody else wants to use that spectrum." He expected to hear more about the kind of transaction costs the decision would entail, especially in the vacated analog bands. Dr. Jorgenson closed this initial part of the program by thanking speakers and audience alike for their presentations and questions, which he said had com- bined to provide "an excellent overview" of the day's subject.