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Panel II ------------------------------------------ The Broadband Opportunity: What Needs to Be Done? INTRODUCTION Kenneth Flamm University of Texas at Austin Convening the panel, Dr. Flamm offered introductory remarks focusing on the areas it was to consider. The first of these concerned the definition of broad- band, and, specifically, the speed of transmission to which the term properly applied. Discussion by the previous panel of the United States' slipping behind in penetration rates for "something called, quote, broadband," he said, had failed to acknowledge that what qualified as broadband had been changing as well. Some of the countries that were pulling ahead of the United States in penetration rates were also offering higher quality, faster broadband connections. The FCC used 200 kilobits per second (kbps) as its threshold speed for broadband. He pointed out, however, that according to this definition, the variation between fast broad- band and slow broadband was greater than an order of magnitude--and thus sub- stantially wider than the variation between slow broadband and low speed dialup, since the former was only four times faster than the latter. "Increasingly," he said, "what broadband is, and the quality of broadband service, are going to be an important issue." 77

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78 THE TELECOMMUNICATIONS CHALLENGE Broadband Access: A Rapidly Changing Landscape A second area, broadband access, had been an issue for many years in the United States, but data that the FCC had been collecting on broadband availability had shown that the landscape was changing very rapidly and that it might no longer be an issue. At present, high-speed service was available in around 86 per- cent of Zip Codes containing 99 percent of the U.S. population, and approxi- mately 40 percent of U.S. Internet households connected with broadband (see Figure 20). "So the question is," Dr. Flamm said, "if the definition of broadband is one issue, and broadband access is no longer really an issue, what are the issues?" The panel, he anticipated, would focus on pricing and on competition. The latter, as measured by the number of providers per Zip Code, had changed rapidly over the previous four years (see Figure 21). Still, there remained many Zip Codes where the traditional duopoly--made up of the telephone company and the local cable company--were the sole providers of broadband services. He would take advantage of the occasion, Dr. Flamm said, to bring up what he called a "very important data issue" and to make a plea for funding. In 1999 and 2000, the Bureau of Labor Statistics had sponsored a survey sampling U.S. 50 45 40 35 30 Population 25 of 20 15 Percent 10 5 0 20 17 1819 15 16 13 14 June 2000 11 12 10 9 8 7 of Providers 6 December 2003 5 Number 4 13 0 FIGURE 20 99 percent of population now has at least 1 provider in their Zip Code: Population-weighted distribution of Zip Codes by number of broadband providers.

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 79 50 45 40 35 30 25 20 Percent 15 10 5 0 20 19 18 17 16 15 14 June 2000 13 12 11 10 December 2000 9 Providers 8 of 7 6 Number June 2003 5 4 13 December 2003 0 FIGURE 21 Rapid change in U.S. broadband penetration, competition over four years: Distribution of Zip Codes by number of broadband providers. NOTE: FCC numbers have been corrected to reflect undercounting of rural Zip Codes with zero providers; corrections probably somewhat overestimate zip codes with zero providers. households that collected data on broadband prices. The question on broadband prices had been discontinued in 2001, but why? His guess was that broadband was held to be less important then than it had been in 1999 and 2000. "There are some issues of priority in our statistical data-collection efforts," he declared, "that need to be addressed." Dr. Flamm then introduced the panel's first speaker, Charles Ferguson, whom he billed as "interesting and often provocative." Dr. Ferguson had left MIT to become one of the founders of Vermeer Technologies, where he had participated in the creation of a software technology that had subsequently become known as FrontPage. Vermeer, like quite a few successful startups, had been acquired sub- sequently by Microsoft, and FrontPage was being sold as part of the Microsoft Office suite. As a result of the sale of the company, Dr. Ferguson held a fair amount of Microsoft stock; he declared, however, that he had no financial interest in any telecommunications provider.

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80 THE TELECOMMUNICATIONS CHALLENGE THE BROADBAND PROBLEM: MARKET FAILURES AND POLICY DILEMMAS Charles H. Ferguson The Brookings Institution Dr. Ferguson said that his talk would address three issues: 1. the size of the problem that the United States was facing in the broadband area, which, as others had stated, was quite substantial; 2. why that problem existed; and 3, what could be done about it. He began with two points of presumed general understanding and agree- ment: that a rapid de-maturing of traditional analog consumer electronics was taking place; and that, technologically at least, the potential existed for de-maturing of the analogue telecommunications industry, which had previously been domi- nated by telephone service. Further, he postulated that a majority in the informa- tion technology industries would substantially agree on what the "radiant future" should look like, remarking that, in a few sectors, this future had already been reached. United States Lagging in Broadband Penetration Dr. Ferguson pointed, however, to an "enormous gap" existing between this vision of the sector's potential and its actual state, particularly in the United States. And perhaps of foremost interest, he said, was the extent of the gap between the United States and other nations. Those who had visited China's large coastal cities in the previous two years understood the U.S. lag; the same was true for those who had been to South Korea, Japan, Taiwan, or other parts of industrial- ized Asia, as this gap was very obvious. To illustrate, he posted graphics highlighting year-old data with the comment (see Figures 22 and 23): "As Mr. Isenberg mentioned a few minutes ago, things have gotten substantially worse since then." These figures showed that, as of late 2003, DSL penetration per 100 telephone lines had reached 27.7 in that category's leading nation, South Korea. The United States, which was not in the world's top ten, had only 4.8 DSL subscribers per 100 phone lines and trailed China, which was at 5.1. Moreover, when it came to the absolute number of DSL lines, both China and Japan had surpassed the United States, which, Dr. Ferguson conjec- tured, had likely fallen in the intervening year from third place to sixth or seventh.

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 81 Global Telephone DSL Subscribers DSL per 100 phone Ranking Country lines 31 December 2003 lines 31 December 2001/02 31 December 2003 2003 (ITU) 1 South Korea 6,435,955 23,257,000 27.7 2 Taiwan 2,800,000 13,099,416 21.4 3 Hong Kong 690,000 3,842,943 18.0 4 Belgium 789,677 5,132,427 15.4 5 Japan 10,272,052 71,149,000 14.4 6 Denmark 473,481 3,739,247 12.7 7 Singapore 242,000 1,927,200 12.6 8 Israel 380,000 3,100,000 12.3 9 Finland 336,600 2,850,000 11.8 10 Canada 2,170,243 19,962,072 10.9 FIGURE 22 DSL penetration by country--I. DSL per DSL Subscribers Global Ranking Country 100 phone lines 31 December 2003 31 December 2003 1 China 10,950,000 5.1 2 Japan 10,272,052 14.4 3 USA 9,119,000 4.8 4 South Korea 6,435,955 27.7 5 Germany 4,500,000 8.4 6 France 3,262,700 9.6 7 Taiwan 2,800,000 21.4 8 Italy 2,280,000 8.3 9 Canada 2,170,243 10.9 10 UK 1,820,230 5.2 FIGURE 23 DSL penetration by country--II.

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82 THE TELECOMMUNICATIONS CHALLENGE Slow Growth Holding United States Back Accounting for this drop were growth rates. The total U.S. growth rate for DSL lines, both in absolute number and in penetration per telephone line, was something on the order of 40 percent, with the rural growth rate at about twice that. Dr. Ferguson acknowledged that the cable telephone system still provided the majority of U.S. residential broadband connections; he contended, however, that that did nothing to change the overall picture. In the first place, he explained, when business connections were included, the percentage of total U.S. broadband connections provided by the cable telephone system was relatively low. In the second place, even in the residential market the percentage of connections pro- vided by the cable system had been holding roughly constant, as had the cable system's growth rate in respect not only to connections but also to bandwidth levels. Price/Performance Another U.S. Weakness In fact, although the U.S. cable television system had been improving its bandwidth levels slightly faster than had the U.S. telephone system, the price-to- performance ratio for broadband services abroad was enormously superior to that in this country. Depending on the nation and the service being compared, other nations were outpacing the United States by between 2 and 15 times. And the gap was growing rapidly, because U.S. price/performance in local telecom services-- not only in digital services like DSL and local broadband, but also in voice tele- phony and such related services as voice mail and caller ID--was, "quite aston- ishingly," roughly flat. The total local telephone bill in the United States was flat or even increasing, a surprising fact in that the underlying technology for all such services is computing--which was improving, depending on the technology be- ing measured and the measurement being used, anywhere between 20 percent and 50 percent per year. Alluding to Dr. Doms's discussion of the increase in the capacity of fiber-optic cable deriving from increases of both the number of chan- nels and the capacity of each channel, Dr. Ferguson said the technological im- provement was, in some cases, as high as 100 percent per year. Both DSL and cable-modem service, however, had displayed very low rates of progress. On top of that, the benefit that those broadband services had pro- vided relative to that a simple modem could provide had turned out to be, in Dr. Ferguson's words, "surprisingly modest." Modem technology had improved at a rate of around 40 percent per year until reaching its limits at 5660 kbps; modem service, he pointed out, was "to a first approximation, symmetric." It had then taken several years for consumer DSL services to be introduced, and they had been relatively expensive upon introduction; furthermore, they are asymmetric, something he called "not accidental." The result, combining all those factors, was an annual improvement in the price/performance of bandwidth of some 10

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 83 15 percent yielded by either DSL or cable-modem service. Not only was this rate already far below that which the technology curve should have been providing, but it seemed to be in the process of slowing even more. Bandwidth Costs Dominant Dr. Ferguson commented further that bandwidth rather than computer hard- ware frequently dominated the total cost of adoption of a new network-computing application. Personal computers were powerful and cheap, but deploying a high- performance, high-quality videoconferencing system could nonetheless prove extremely expensive. Purely for purposes of illustration, he posited the use of T-1 service, whose price/performance, he pointed out, had improved very slowly if at all over the previous several years. If two T-1 lines were required for point-to- point connections between two personal computers, over a three- or four-year period the total costs of using that service would be completely dominated by bandwidth costs. Competition in U.S. Markets Flawed What was the reason for this? While allowing that in various respects regula- tory costs imposed on the entire system accounted for some degree of drag, this was "not the principal story" in Dr. Ferguson's opinion. Very simply, he stated, there were two monopoly industries providing broadband service in the United States, both had very severe conflicts of interest, and they avoided competing with each other except in the residential market. And even in the residential market, their competition with one another was "quite restrained, and much less substantial than you might suspect." The conflict of interest of the telephone companies was, Dr. Ferguson asserted, "fairly obvious": They had incumbent businesses that were providing very expensive voice and traditional data services, and very rapid improvements in price/performance of bandwidth would have undercut their dominant busi- nesses in a major way. The same was true of the cable system: It provided video services that could easily be provided over a sufficiently high-performance IP network. Additional conflicts of interest in both industries related not only to Internet telephony but also to intellectual property rights and to proprietary intellectual property control. This was particularly so of the cable television industry, which had many proprietary-entertainment and other content assets. It was very afraid of the effects of piracy, and one consequence was that cable operators wanted to provide downstream-weighted services, because "upstream service is what deter- mines piracy levels when you're using peer-to-peer networks," Dr. Ferguson stated. Cable-modem service, like DSL, is a very asymmetric service and heavily weighted downstream; and the reason that the telephone companies preferred

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84 THE TELECOMMUNICATIONS CHALLENGE downstream-weighted is that symmetric service would make it far easier to use Internet telephony. `Local Bandwidth Bottleneck' Hurts Computing Distortions existed in both industries, he said, and not only about service's price/performance but also about its technical characteristics, its quality levels, and the degree to which it was symmetric. He judged the economic stakes involved in this question to be "quite large" for the country. While computing them in a rigorous way would be extraordinarily difficult, it seemed increasingly clear that the "local bandwidth bottleneck" was having a substantial effect on the growth of the computer industry, of various other portions of the information technology hardware sector, and of the American economy. "You can convince yourself reasonably easily," he stated, "that this effect is something on the order of one-half of 1 percent--or even up to 1 percent--per year in lost productivity growth and GNP, which is a lot." This obviously had some effect, although it was not clear how substantial, on American job losses, Dr. Ferguson said, alluding to the prevailing debate over outsourcing. There was no question that broadband infrastructure was having a significant effect on the way industry was growing in China and Southeast Asia. While India had traditionally been far, far behind in telecommunications infra- structure and was still far behind both the rest of Asia and the United States, even it was gaining rapidly: Although from a very, very low base, the number of broad- band connections in India was going up quite rapidly, on the order of 300 percent per year. Broadband Shortcomings Hurt National Security In addition to the direct economic effects, there were quite significant national security effects arising from forgone opportunity and capability in the broadband system under which the United States was laboring, Dr. Ferguson said. First, any major terrorist emergency, such as an attack that used weapons of mass destruc- tion, would undoubtedly result in major quarantines and disruption of transporta- tion systems. It would be imperative for many people to be able to talk to each other and understand each other's concerns at high bandwidth across wide geo- graphical distances and with impaired mobility; the utility of a nationwide broad- band system in such a situation is obvious. Then, in light of recent events in the Persian Gulf, one might also ask about the impact of reduced transportation demand on oil prices, oil security, and so forth. "Once again," he said, "one can convince oneself that the issue here is really quite substantial." To whatever extent the United States faced a problem of "digital divide"-- disparity in broadband, Internet, and computing access as a function of economic ability and economic status--that problem was also coming to be increasingly

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 85 dominated by the bandwidth question. The reason here, again, was that band- width dominated the total cost of adoption of new computing applications. Can Policy Changes Help United States? How, then, might the United States attempt to address this question, which was of such macroeconomic and military significance? The nations that were ahead of the United States, in what they had done in the broadband-policy arena, had evidenced two shared characteristics. The first was that their governments had been "much more heavily involved in providing incentives and/or money and/or direct construction of networks than is the case in the United States," Dr. Ferguson said. The second, also related to governmental policy, was that their systems were much more competitive than that of the United States. There might be many more providers, but even when there was a relatively low number, the providers were under government pressure to improve their price/performance and to compete with each other. This was true even where there was no explicit antitrust policy. Certainly none existed in China, but the Chinese government obviously had made very clear to the country's principal telecommunications providers that broadband deployment was a major national priority and had put them under a great deal of pressure to continue accelerating it. The case was similar in Japan and Korea, and even in non-Asian countries--Canada, for instance, and the Scandinavian coun- tries--that had surged well ahead of the United States. Dr. Ferguson cited as a "somewhat hopeful recent development" the FCC's unanimous vote to preempt regulatory control of voice over IP, "so at least there will not be a patchwork of 50 different state regulations of Internet telephony." He charged, however, that the United States had been "notably absent from pro- ductive efforts in regard to broadband for quite some time." RBOCs' Consolidation `A Major Mistake' This was not specific to the Bush administration, he said, although he gave it lower marks than its predecessor did. What had begun to undermine the potential benefits of the Telecommunications Act of 1996 in a significant way was the series of mergers among Regional Bell Operating Companies that had effectively halved their number to four.3 "That consolidation was unopposed by the FCC and by the Justice Department," Dr. Ferguson observed, commenting: "That, I think in retrospect, was a major mistake." A great deal of litigation had followed, and there had "not been much effort by the federal government and/or the FCC-- 3While consolidation among RBOCs may have eliminated a source of potential competition, the issue of whether it eliminated actual competition and whether potential competition was likely or unlikely to begin with remains to be resolved.

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86 THE TELECOMMUNICATIONS CHALLENGE depending on whether you want to differentiate between the two--to ensure that there is a competitive, open-architecture system." Nonetheless, he did not see new legislation--even if it might be helpful in providing what he called "appropriate broadband policy"--as necessary. What was required instead was "some kind of national political will." This could open the door to a range of measures, among which might be: subsidizing deployment of municipal networks; offering investment incentives to any and all providers, whether public or private; constructing a large federal network; and putting more pressure on incumbents to open up their networks so that there was an open-architecture broadband system in the United States that was more analogous to the structure of the Internet itself. Calling this last point critical to the future of network architecture and services, he called for a "far more open-architecture, computer-industry-like structure and feel" for the U.S. telecommunications system. Commoditization No Enemy of Investment In closing, Dr. Ferguson questioned Mr. Isenberg's suggestion that, since the network logically anticipated for the future would function as a commodity pro- vider of bits, industry would likely be averse to committing to sufficient levels of investment and research. The history of the computer industry did not support that proposition, he claimed, and neither did the behavior of those Asian and European nations with broadband service superior to that available in the United States. On the contrary, most sectors of the computer industry were composed of large companies that produced commodity products in brutal competition. While there were a few notable, very profitable exceptions--he named Intel and Microsoft--more typical as examples were Dell, Hewlett-Packard, most of IBM, most of the semiconductor industry, the entire disk-drive industry, the display industry, and so on. "Disk drives are like disk drives, bits are like bits, DRAMs are like DRAMs," he stated. "And while those industries are volatile, one does not see any hesitancy for entry or investment. Indeed, competition in those sectors is quite healthy." If there were an appropriate government policy, he concluded, it would be reason- able to expect that levels of investment and technological progress in the industry would be sufficient. Dr. Flamm, asking the audience to hold its questions, recessed the panel's proceedings until after lunch. Resuming the session after the lunch break, Dr. Flamm introduced Mark Wegleitner, the chief technology officer of Verizon, as the only one among the

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 87 panel's distinguished speakers about whom the previous presenter, Dr. Ferguson, had had many good things to say in his recently published book. THE BROADBAND CHALLENGE: A TELECOM PERSPECTIVE Mark A. Wegleitner Verizon Mr. Wegleitner expressed his appreciation at having the opportunity to speak about a subject that his company was pursuing with great vigor, spurred by a conviction apparently shared by many at the symposium: that broadband could be an engine for growth. There were two dimensions to broadband's contribution. One was in the capital investment required to build a network and the multiplier effect that could be expected to have on growth, jobs, and innovation. Obviously, however, the investment was not an end in itself; the second dimension, at least as envisioned by Verizon, was the stimulation to the economy, as well as the social good, that would come of having a broadband network available. Although the United States had traditionally been a leader both in communi- cations and in attracting capital, it had not been holding onto that leading position of late. Mr. Wegleitner displayed a chart based on International Telecommunica- tion Network (ITU) data that showed the United States to be thirteenth in the world in broadband deployment. While acknowledging that there were "lots of ways to spin numbers," he stated that the conclusion to be drawn was "that we aren't leading in what we have to perceive as one of the key technologies for any national economic environment going forward." Richer Applications in Broadband's Future But a question underlay this last assumption: What did we think broadband was actually going to do for people? Mr. Wegleitner named applications--email, instant messaging, basic Web browsing, small file transfer--whose requirements could be met by current broadband access technologies. Such familiar applica- tions, although important, could almost be characterized as modest. True two- way videoconferencing and gaming, as well as voice over IP, were the next step up the ladder, but they would not in themselves exercise a huge demand on broad- band. Further along, however, lay multimedia Web browsing, distance learning, and telemedicine. Even beyond those would come immersive gaming and what- ever means of information and entertainment delivery were to come after high- definition television: 5-megabit and 9-megabit pixel TV, 3D TV, and/or holographics. "We know that the bandwidth demands are just going to continue to grow and grow and grow," said Mr. Wegleitner. With the richness of the future appli-

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106 THE TELECOMMUNICATIONS CHALLENGE video industry in particular. "More outlets for the delivery of these products to consumers will bring nothing but more investment and a richer set of services," he explained, because "investment in network infrastructure is the key thing that enables all of this." Contesting the opinion of previous speakers, he said the pressure would be on to open these networks to all comers, but he added: "Performance needs to be maintained." No model for additional revenue was in existence "for those who want[ed] to hitch a ride over existing network infrastructure," he said, alluding to Mr. Thompson's iTown venture. Therefore, while the idea of community- owned networks was "interesting," it would be "very difficult to continue making the investment from that posture." Meanwhile, new regulation would need to take into account both the convergence and the amount of investment taking place in these industries, as well as to "provide for economic incentives that [would] ensure continued innovation." As the current system "seem[ed] to be working pretty well," change should be made only after careful deliberation. Calling the management and control of private networks "critical" to main- taining the quality of service, Mr. LaJoie underlined that it was nonetheless important that private networks and public networks have robust methods for interconnectivity and interoperability. This was being addressed, albeit slowly, in standards bodies, and it might be an area in which regulatory application "could actually help." Integration into an interoperating communications infrastructure would enhance the power of each of these networks. "The more devices con- nected to the network, the more valuable it is," he explained, and "the more inter- connected networks there are, the more international or national value there is in that infrastructure." Over time, bandwidth and connections--the industry's primary drivers--would tend to become increasingly commoditized. As a conse- quence, distributors would have to be able to add content, commerce, and other rich communications elements to their offerings. Consumers' Mobility Steadily Rising Wireless was having an undeniable impact, Mr. LaJoie said, citing the trend, made so obvious by subscribers, toward consuming content, communications, and information on the move. For network owners, this might present the main challenge of the future: While customers were still willing to consume products at home, more and more wanted the ability to consume them on the move as well. "Nomadicity" and mobility would become increasingly important components of communications infrastructure in the future, requiring far more investment than had the hard-line broadband infrastructure of the last decade. Concluding, Mr. LaJoie raised the issue of digital rights management. Even though TWC's business, delivering content, did not involve it in owning copy- right, he expressed his concern for maintaining the integrity and ownership of copyright. An economic model that safeguarded products and protected their producers' rights to financial return was essential to the continued development

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 107 of interesting content. A degradation of the notion of copyright ownership had accompanied the advent of digital distribution, he stated, as making high-quality copies and redistributing them had become exceedingly easy. This was another critical area, and one that was "certainly appropriate for regulatory attention." DISCUSSION Dr. Flamm opened the discussion by noting that the panel had provided "a rare example" of unanimity in agreeing that broadband was important to the country's economy, its society, and, to some extent, its national security. There was likewise unanimous agreement that the United States had fallen behind other countries and was not necessarily catching up. Substantial variation was to be seen, however, in the panel members' prescriptions for dealing with the nation's lag. While characterizing one of the solutions presented as complete deregulation of the local loop, he pointed out that a complete re-regulation of the local loop had also been put on the table, and that there had been some advocacy of "`relax, don't worry, be happy' as one of the potential policy paths as well." Claiming the right to the ask the first question as his "moderator's prerogative," Dr. Flamm began by recalling that more than one panelist had spoken of observ- ing a tendency to dismantle some of the opening up of the local loop--for instance, the unbundled network elements that had been a centerpiece of the 1996 Telecommunications Reform Act. He then solicited all the panelists' expecta- tions for future developments: Was unbundling network elements as the vehicle for opening up the Net "essentially dead--and just put flowers on its grave, and move on to something else--or [was it] something that should be resuscitated?" A second question, inspired by the discussion of municipally owned fiber, was whether an increase in regulation at the state level, including the passage of legislation, would limit such initiatives. Finally, he asked the panelists to reflect on the innovative forms being taken by the regulation seen "popping up" at the state level. Unbundled Network Elements Already Pass Mr. Thompson, speaking as the author of a portion of the 1996 act, said he "would be the first at this point to put flowers on the grave of unbundled network elements." He said the pertinent provisions of the act had been used as a "light- ning rod" to draw a large number of CLECs into the business, based on the notion that "somehow there would be regulatory oversight and a pricing structure." Most of the incumbent operators would call it robbery and argue that it should never have happened, he stated, even as he reminded the audience that these incum- bents were the very ones who had agreed to the process in the beginning as a way of getting the act passed. The unfortunate reality was that the regulatory environ- ment in Washington had been greatly affected over the years by the power of the

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108 THE TELECOMMUNICATIONS CHALLENGE incumbents on all sides; it was therefore no surprise that the notion that open access would rest on a basic, agreed pricing structure had been dead on arrival. Open Access from the Incumbent's Standpoint Expressing his disappointment at the turn events had taken, he explained the case from the incumbent's point of view. As the local loop became commoditized, as voice communications increasingly dropped in price, and as such competitive sources as satellite and cable came into the market, it was becoming clear that the incumbent telephone company would be left with plant that was no longer pro- ducing revenue. Stranded plant was a fundamental issue; it had been one of the great fears after the breakup of AT&T. And the issue for the incumbent then became how it could shift to getting at least some revenue from that stranded plant; for that would allow it, under its economic model, to invest in future capacity, whether it was going to sell the output on a wholesale or a retail basis. Admitting to having been "on the opposite side" as chairman of Ireland's tele- phone company, Mr. Thompson said he had wanted to encourage measures ensuring that such facilities "would always be used and we could be the provider at the local level of those facilities." As circumstances evolved, however, regula- tion had to address the incumbent's obligation to become increasingly open. "If you were going to treat it as a local utility," he declared, "then it should be regulated as a local utility." This, in essence, was what he was proposing. Mr. Wegleitner, while cautioning that "throwing a technologist into a debate on unbundling [was] probably a very dangerous thing," permitted himself the following observation: The general objection he had heard on the part of the RBOCs, rather than being to the idea of wholesaling access as part of unbundled network elements (UNEs), was to the setting of prices that were "not compensable for the facility." The crux of the matter, from his point of view, not so much the policy of unbundling access as the amount of revenue that could be obtained from selling it as a wholesale facility. Second, the point of the process, as he understood it, was to encourage facilities-based bypass: The facilities--in the case under discussion, copper loop--had been made available so that CLECs might establish some traction in the market, but the ultimate goal had been to spawn competition at the facilities level. This, he stated, "really did not materialize." While there had been continued effort to work the use of the unbundled element as a business, in the end many such business models had simply failed. `New Wires, New Rules' Mr. Wegleitner then shifted perspective from the past to the future. Some of what had been tried with the copper network had worked, some of it had not. Saying he was speaking frankly as a technologist, he described the copper net- work as already "pretty much obsolete" in any case and said it was "going to go

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 109 away." But what rules should apply to the new facilities that Verizon, along with other players in the business, were putting into the ground? The future would see a move into broadband facilities, among them broadband to the premises. This raised the question of how new construction--"which, quite frankly, anyone could undertake"--would be regulated. His own company's position: "It's new wires, it should be new rules." Disconnect Between Network, Service Layers Mr. LaJoie, suggesting that his listeners draw their own conclusions regard- ing both the effectiveness of unbundling network elements and the associated regulatory impact, identified network owners' main future concern as a "real dis- connect between the services layer and the network layer" rather than unbundling. Companies that provided services to subscribers but owned no network infra- structure other than their server complexes--he named Google, Yahoo!, and MSN as examples--had arrived on the scene, grown, and proved successful. He called their viability "a testament to the fact that there are effective models out there for making sure that new companies, and new communication products and services, can be devised separate from who owns the network." This was "one of the beauties of the public Internet," which promised even richer and higher-bandwidth versions of such companies with further growth and the advent of Internet Protocol Version 6 (IPv6). The issues of unbundling and providing access to the last mile had become a moot point, he said, "because you don't need access to the plant." He recalled meeting Masayoshi Son, the founder of Yahoo! Broadband in Japan, who had driven a huge penetration of new products and services without owning any physical network himself just by leveraging existing infrastructure. One reason Mr. Son had been able to do that was that he had pinpointed a niche in Japan's regulatory arena, whose climate is "completely different" from that of the United States. Mr. LaJoie acknowledged that Mr. Son was "now a billion dollars in debt and losing more every day," but, calling him "an amazing guy," he pre- dicted: "He's going to turn that around." In this country, he reiterated, unbundled access to the physical plant was going to be far less significant than the separation of the network layer and the services layer. Competition or Consolidation? Dr. Ferguson said that those who knew his opinions on the subjects under discussion would experience no surprise at his disagreement with the previous two speakers. Noting that his background in the competitive information- technology sector had shaped his temperament, he said that he shared the overall goal of a deregulated environment. "But that environment can and should be deregulated," he stipulated, "only once it becomes open and competitive, which it currently is not." While it was "very much in the incumbents' interest to portray

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110 THE TELECOMMUNICATIONS CHALLENGE themselves and each other as [being] as competitive as possible," he observed, "if you in fact look at the structure of this industry over the last ten years, it has been getting steadily less competitive." He issued a warning: "If you deregulate a monopoly, you get a deregulated monopoly." Detailing the "wide variety of ways" in which he believed the telecommuni- cations industry to have been concentrating, Dr. Ferguson began with Internet access. Under the dial-up regime there were thousands of ISPs, but "when every- body converts to broadband, there are going to be two ISPs." Asserting that the cable industry had been consolidating rapidly, he charged that it had become "an oligopoly of about half a dozen diversified, vertically integrated industrial com- plexes." All of these owned proprietary content assets; alluding to Mr. LaJoie's comment that Time Warner Cable's business was delivering content and that it was thus not involved in owning copyright, Dr. Ferguson declared that TWC's corporate parent was "very definitely concerned with copyright" as owner of Warner Communications, of Warner Bros. Studios, and, through Time Inc., of text-based magazines. Dr. Ferguson traced a similar consolidation among ILECs, saying their number had dropped from somewhere between seven and nine to four. Comment- ing on the UNE regime, he moved to cast doubt on the ILECs' complaint that they were being subjected to unfair pricing, with the prices of unbundled network elements set unfairly low. "If that [were] true," he argued, "then the most logical thing in the world [would have been] for each of them to purchase those incred- ibly cheap unbundled network elements from each other, integrate into each others' geographies, and compete with each other." That none of them ever did that, he stated, meant that "a certain degree of skepticism" was in order when viewing "those claims, and the structure of this industry, and the kind of conduct it has engendered." Concluding, Dr. Ferguson cited several issues--"the precise way in which an open-architecture industry can and should be achieved, exactly which inter- faces should be open, whether there should be divestitures or not"--as meriting debate. Noting the potential to choose among "a wide array of possibilities," he nonetheless emphasized his misgivings regarding the status quo and the direction in which the industry had been moving. Dr. Flamm, responding to Mr. Thompson's request to comment, also asked him if he would discuss whether municipal fiber networks had not already been preempted by state law in a number of places. Regulatory Underpinning to Access Cost Structure Mr. Thompson said he would begin by making a point that, though "criti- cally important," might escape some who were younger than he: In 1983, when the access regimen was put into place and the first policy debates occurred, "there was no such thing as the Internet." The TCP/IP protocol did exist, and there were

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 111 four companies using it; one of these, Western Union, had 750,000 employees who were members of the Communications Workers union. During discussions of the use of the embedded network and of who should pay for it, there was a "very great hue and cry on Capitol Hill" that came back to the FCC, which estab- lished "enhanced services." These services--the use of the TCP/IP protocol and of telex on the backbone, as it was being employed at the time for TWX and other functions--carried no fees for access to the public switched network. And the Internet service providers of ten years later, when the Net was taking shape, still paid nothing for access despite a "huge outpouring of objections from every one of the incumbent telephone companies." In fact, even in 2004 an ISP's access to the public switched network was without cost. "What we have seen as the advance of the Internet in our society," he concluded, had therefore enjoyed a "huge regulatory underpinning." States, Incumbents Ganging up on Non-profits? Turning to Dr. Flamm's question regarding state laws' preempting municipal fiber networks, Mr. Thompson asked: "Is it any great surprise that the incum- bents--which in many states are very close to the regulators and play a fairly major role in political campaigns--have put forward proposed legislation in virtually every state making it illegal for a municipality to compete with them on the grounds that the municipality would come to the business from a non-profit and governmental point of view?" He stressed that his company's was not a competitive offering but a significantly different package, based on the premise that the municipality had a right to provide an access network--as it does in the case of roads, sewers, or water--but would not provide services unnecessarily in competition with incumbent franchises. Each state's laws were different, Mr. Thompson explained, in line with whether the state had been nurtured or neglected by its incumbent providers of services. Those towns participating Opportunity Iowa, whose advisory board included two former governors and numerous university presidents, felt "the time had come to make a point," he said: "They have been overlooked by their incum- bent carriers and their incumbent cable operators to the point where they are losing their brains, the graduates of their schools, to other states." In 2003, a bill had been put before the Iowa legislature by the largest incumbent cable provider and the incumbent telephone service provider that would have made it illegal for any community to own a telecommunications network. The same had been done in other states, including Wisconsin and Kansas; Opportunity Iowa had been crafted as a non-profit, political effort in order to deal with such pressures-- which were being seen all across the country--before the legislature. The follow- ing year or two, he predicted, would see "a very interesting debate" about the role of the community in providing essential facilities for their residents, for, he stressed, network access is an essential facility.

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112 THE TELECOMMUNICATIONS CHALLENGE Seeds of a Consumer Rebellion? Dr. Flamm opened the floor to questions, and John Gardinier, who identified himself as retired, commented that he was leaving broadband because of the monopolies. "I know some consumers are leaving cable completely," he said, "and a certain number are leaving their phone providers to go strictly cellular." He asked Dr. Ferguson to state his reaction to Mr. Thompson's endeavor-- speculating that he would see it as a step in the right direction, albeit one with shortcomings--and to reflect on the idea that unless the industry looked to a different model, it might face a consumer rebellion. Dr. Ferguson, characterizing as interesting the question of whether and at what point the broadband problem will become politically salient, identified two possible sources of rebellion: consumers and the technology sector. The last mile already had become a significant drag or drain on the growth rate of much of the technology sector, he said, pointing specifically to personal computers. "In pri- vate, a number of those companies and the people who work in them will tell you they're rather upset about it," he recounted. "But, unfortunately, the telephone companies are frequently their largest customers--sometimes the cable compa- nies are as well--and both are politically powerful, so they have to be careful about how they proceed." He pronounced himself as "not terribly optimistic" that this would become a political issue soon. Addressing the status of municipal networks, Dr. Ferguson said he would concur with Mr. Gardinier's formulation: that they were a good thing but were unlikely under prevailing regulatory, political, and economic conditions to make up for the system's other problems. Tax incentives for the construction of municipal networks could be useful in a reformulation or improvement of broad- band policy. There would, however, be a requirement for continuous technological improvement of those systems over a long period of time, and in general munici- palities were not considered to be the best stewards or managers. He did not, therefore, believe that municipal networks would replace other portions of the system. Prospects for a New Telecommunications Act Mike Nelson of IBM asked the panelists to reflect on a question raised by Mr. Tenhula earlier in the day: whether there would be a new telecommunica- tions act. What might actually drive a rewrite of the 1996 Telecommunications Act? Was it possible that giving this serious consideration would only generate more uncertainty in the marketplace--considering that, as the details were hashed out and after they were finalized, it would take the courts another five years to figure out what those details meant? Mr. Thompson, saying he had spent some 15 years on the 1996 Telecommu- nications Act beginning with what was called the Bell Bill in the late 1970s,

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 113 offered to take off his shirt and display his scars. A telecommunications bill ranked only one step below a trade bill as measured in money spent, both by proponents and by opponents. Any would-be competitors to the incumbents were, at the moment, weak enough financially and sufficiently dispersed that there was no strong need to propose a bill. The exception was that a bill might come from the telephone or the cable companies, but he saw that as unlikely because most FCC decisions on the issues attendant to the 1996 Act had, to date, been in favor of the incumbents. Mr. Wegleitner, while demurring on the question of whether another tele- communications act might be coming, stated that both technology and "the way the industry has shaped up" had outrun the 1996 Act. He said that something needed to be done but expressed uncertainty as to whether another act would be needed to do it. Factors Behind U.S. Broadband Lag Turkan Gardenier of Pragmatica Corp. offered a pair of observations regard- ing the United States' No. 13 ranking in broadband penetration. First, whereas outside the United States the caller paid for a cell phone call, in this country the recipient was responsible for the charges incurred by the caller. Because these charges could add up, she said, she personally did not give her cell phone number out to many people. Second, where a larger percentage of the population lived in apartment houses, such as in the Far East, whole buildings could be wired for broadband, avoiding installation fees and monthly charges for each individual dwelling. Could these factors be contributing to the less-than-optimal use of broadband technology in the United States? Mr. LaJoie disputed the notion that the charts showing the United States in thirteenth place told the full story. For a number of reasons, some related to the issues raised by Ms. Gardinier, the picture was somewhat less stark than the charts made it appear. Important to keep in mind, he said, were differences in regulatory climates, in the history and condition of infrastructures, in how products were used, and in the concentration of homes. The concentration of population in Tokyo and Seoul, for example, was much greater than in all but a few places in the United States, and so broadband penetration would tend to be greater there. A comparison of penetration there with penetration in major U.S. cities would show that there was not such a discrepancy. But the regulatory climate and the age of infrastructure were also significant. Building greenfield was different from putting in facilities when a lot had already been built out. While infrastructure in Asia and Europe was newer than that in the United States, this country was in the process of making investments in both the cable industry and the telecom industry.

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114 THE TELECOMMUNICATIONS CHALLENGE No Denying U.S. Broadband Shortcomings Dr. Ferguson said he disagreed for a number of reasons. First, even if it were true that geography, population density, or other considerations made a differ- ence with regard to broadband penetration, they did not explain growth rates. For growth rates had been "enormously different": less than 40 percent per year in DSL residential connections in the United States vs. about 80 percent in the rest of the world. Second, the countries that were ahead of the United States, and that in many cases were growing more rapidly even though they were already ahead, were not always countries with markedly different geographical or population- density profiles. Not only was Scandinavia ahead of the United States, so was Canada--a nation almost as large as the United States with a population of only 40 million. Third, a comparison of price to performance in urban areas would show bandwidth to be somewhere between two and ten times more expensive in the United States than it was in much of Asia. Arguing that such facts under- mined Mr. LaJoie's claim, he insisted that the United States' problems in band- width penetration were real. Connections Between Communications, Transportation Mr. Hellman said he would discuss the relationship between communica- tions and transportation but he wished to preface his comments by saying that he considered outrageous that many accepted DSL or cable-modem as broadband; instead, he asserted, these were "the sales tax on broadband." Then, speaking as a real estate developer, he noted that because the long-term fixed assets he con- structed--buildings--do not move, wireless was of interest to him mainly as a subset of a much bigger picture. Since it could be deployed very quickly, wireless might indeed be a step in the evolution toward a new wired network; but its particular value, mobility, was irrelevant in the case of buildings. The economic significance of the relationship between transportation and communication, Mr. Hellman declared, was greatly underappreciated. Transpor- tation was extremely expensive, and the expense could arise at many different levels: building roads and bridges was expensive; building rail was expensive; oil and gas were expensive, and they had international political implica- tions as well; and environmental compliance could be expensive, and arduous as well--the Washington, D.C., metropolitan region was currently in violation of the federal Clean Air Act.

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THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 115 The way to begin solving such problems was to reduce the amount of time people spent in stop-and-go traffic. But, "if you're going to do that," he said, "you've got to give them an alternative way of getting the job done." He called desktop videoconferencing an absolute necessity in this regard but noted that it required sufficient bandwidth that "you can see a good picture and see what you're talking about at the same time." Bringing together the policy discussions on trans- portation, which entailed massive expenditures by both the federal government and the states, and telecommunications might be a way of starting to come to grips with these issues, he suggested. Extending Great Teachers' Reach Related in Mr. Hellman's mind was another public-interest issue, that of improving education. The decline of urban schools was much discussed, but less talked about was the fact that "the suburbs [were not] going to give up good teachers to the cities." Because truly great teachers were limited in number, "a hybrid of computer and communication networks and broadband and inter- connectivity" would be required if the best teachers were to be made available to everybody. He therefore recommended expanding the policy debate. Mr. Wegleitner stated his agreement with Mr. Hellman on broadband's potential for helping solve the nation's energy problems. While he hesitated to make a detailed statement connecting the construction of a fiber-optic network with the economics and social impact of reducing emissions from gas-powered vehicles, he called "being able to move the business to the house--and, in fact, transparently providing the virtual office--absolutely part of the vision of broad- band as we see it." Upstream was one of the key components; downstream was arguably O.K. at a few megabits, but symmetry was needed and 10 megabits or more would be required in order to do the job correctly. It was for this reason, he said, that Verizon had adopted as its platform for fiber deployment the G.983 passive optical network, which "can take a residence and make it look like an office in a remote sense." Mr. Wegleitner affirmed Mr. Hellman's observations on the importance of distance learning as well. Verizon had built a number of educational networks using the more traditional ATM frame relay technologies. He mentioned Net- work Virginia, on which Verizon had worked in conjunction with other carriers to tie together a multitude of universities; extending its reach to other schools as well was a primary objective. A similar network was online in New Jersey. RBOCs' Consolidation: Legal, Economic Perspectives Mr. Nelson recalled that Dr. Ferguson and Bob Metcalf had a few years before suggested the need for an antitrust suit against the Regional Bell Operating

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116 THE TELECOMMUNICATIONS CHALLENGE Companies (RBOCs), since they clearly weren't competing with each other.5 He asked Dr. Ferguson whether these declarations had prompted calls from: lawyers who wanted to explore the possibilities, since such a settlement would have made them far wealthier even than the tobacco lawyers; the Justice Department's Antitrust Division; or economists who wanted to do a study that would show there actually was a case. There had indeed been discussions on these questions with the people who ran the Antitrust Division in the Clinton administration, Dr. Ferguson said. "There was clearly some interest and concern," he recalled, "but also an acknowledgement of the rather significant political barriers." To highlight the size of these barriers, he stated that the industry's incumbents "literally spend more money on lobbying and litigation than they do on R&D." In this, they are behind only the energy industry and, possibly, the cigarette industry. When Mr. LaJoie objected that the cable companies spent far less, Dr. Ferguson acknowledged this and specified that, by "incumbents," he had meant the ILECs. He asserted, however, that spending by the cable industry was "increasing rapidly." Returning to Mr. Nelson's question, he added that he had received calls from private attorneys exploring private antitrust suits and noted that one "semi-serious" attempt had been made but it had, to his knowledge, not gone anywhere. There had been no calls from economists. Dr. Flamm then thanked the panelists for an excellent discussion. 5We may note in this regard that a firm in one geographical market is under no obligation to to compete against firms providing similar services in a different geographical market. To the extent that the Regional Bell Operating Companies operate in separate geographical markets, this issue is not relevant.