4
Promoting Competitiveness: Policy Issues and Obstacles

Digital convergence introduces new problems into the ongoing debates over international competitiveness, telecommunications policy reform, and the evolution of the information infrastructure. Policymakers are challenged to balance the different priorities, national interests, and legal and regulatory traditions of the telecommunications, computer, and entertainment industries. At the same time, there is pressure on government to act—both to relax existing laws and rules and to enact new ones—because information technologies are evolving more rapidly than ever before.

Central to the policy debate are the prospects for an enhanced information infrastructure, which galvanized private- and public-sector attention during 1993-1994.1 Legislative efforts during that period constituted the first major attempt since passage of the Communications Act of 1934 to alter the goals and frameworks for state and federal regulation and the constraints on business entry by common carriers provided by the Communications Act of 1934 and the Modified Final Judgment codifying the breakup of AT&T.2 Although telecommunications reform legislation failed to pass in 1994, new legislation was introduced in 1995. Contention about the specifics suggests that whatever legislation does pass will launch a process in which various parties will seek to fix and fine-tune those aspects that affect them.3

Developments over the ensuing months indicate that comments at the colloquium were symptomatic of the kinds of concerns being expressed in multiple forums. They reflect the political process that has driven legislative efforts to overhaul the legal and regulatory framework for telecommunications. For example, Samuel Ginn, speaking then as the head of a regulated common carrier



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4 Promoting Competitiveness: Policy Issues and Obstacles Digital convergence introduces new problems into the ongoing debates over international competitiveness, telecommunications policy reform, and the evolution of the information infrastructure. Policymakers are challenged to balance the different priorities, national interests, and legal and regulatory traditions of the telecommunications, computer, and entertainment industries. At the same time, there is pressure on government to act—both to relax existing laws and rules and to enact new ones—because information technologies are evolving more rapidly than ever before. Central to the policy debate are the prospects for an enhanced information infrastructure, which galvanized private- and public-sector attention during 1993-1994.1 Legislative efforts during that period constituted the first major attempt since passage of the Communications Act of 1934 to alter the goals and frameworks for state and federal regulation and the constraints on business entry by common carriers provided by the Communications Act of 1934 and the Modified Final Judgment codifying the breakup of AT&T.2 Although telecommunications reform legislation failed to pass in 1994, new legislation was introduced in 1995. Contention about the specifics suggests that whatever legislation does pass will launch a process in which various parties will seek to fix and fine-tune those aspects that affect them.3 Developments over the ensuing months indicate that comments at the colloquium were symptomatic of the kinds of concerns being expressed in multiple forums. They reflect the political process that has driven legislative efforts to overhaul the legal and regulatory framework for telecommunications. For example, Samuel Ginn, speaking then as the head of a regulated common carrier

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(Pacific Telesis), was perhaps the most forceful in criticizing the constraints on telecommunications firms, contending that "public policy and regulatory policies will be the most significant factor in determining whether these kinds of services can be made available to the public, not technology." Ginn asserted that public policy and regulation will be the most important factor—and one of the toughest challenges—in making advanced information services available to all. Similarly, Ameritech's Richard Notebaert said government policy is the "major speed bump" inhibiting the application of technology to solve societal ills. Beneath these general statements lie concerns about the mechanisms (e.g., delays and uncertainties associated with multiyear proceedings) as well as the objects (e.g., ability to enter certain markets, terms of participation in certain markets, and pricing constraints) of regulation. Those concerns were aired universally in a series of late-1994 interviews (Appendix C lists those interviewed), suggesting that between 1993 and 1995 both interest in market entry and concern about constraints had grown among the various players in the digital convergence arena. Despite concerns about the impact of regulation on the cost and profitability of a given investment, comments by several participants suggest a broad recognition that absent government intervention, the owners of key capabilities control timing and access. Thus Ginn observed, "It's not clear to me, given the way the markets are developing, that there is an opportunity here to serve all elements of society unless you have intervention in terms of social policy." The proliferation of public interest advocacy groups in the 1993-1994 period attests to a broadening concern about how the public policy agenda for information infrastructure is being set and how various objectives are weighted when decisions are made. Yet another face on this concern was provided by the change in the Congress with the 1994 elections. This process of politicization also reflects a recognition that the distribution of benefits from digital convergence will vary over time: costs come down and access can broaden over the long term. The question raised by public interest advocates is, How long will and should be the wait for mass access to technology's benefits? The question emphasized by business is, Who pays to direct or accelerate receipt of benefits that do not derive directly and naturally from the evolution of various markets? INTERNATIONAL COMPETITIVENESS Because of leadership in the fundamental markets associated with it, digital convergence, in the judgment of the colloquium steering committee and other observers, should contribute significantly to the economy and international competitiveness of the United States. U.S. companies lead the world in most aspects of computing and communications technology and entertainment programming; in addition, innovation-stimulating market competition is more prevalent in the United States than in rival nations, and English increasingly is becoming the international language of commerce and entertainment (Memmott and Maney,

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1993). David Nagel asserted that, despite recent erosion of U.S. dominance in computers, "it's clear still that nearly all of the interesting innovations, both in computing and in telecommunications, are being driven in the U.S. industrial base." Whether this dominance is sustainable, Nagel said, depends on whether U.S. firms have learned the lessons of the past and can apply and profit from their own innovations. Entertainment adds a new and unknown variable to the mix: it is seen as a source of economic benefit to its purveyors, but unlike computing and communications tends not to be seen as an "intermediate good" or vehicle to broader benefit except as an item of mass consumption. There are therefore more assumptions than facts when it comes to assessing entertainment's contributions to competitiveness. In a late-1994 interview, Peter Cowhey, formerly a professor of international relations and political science at the University of California at San Diego, noted that entertainment products are receiving more attention in trade policy, with leaders in some countries showing growing concern about the prevalence and impact of U.S.-originated programming. It may require explicit action, he suggests, to point out and ensure that the expanding, advancing global information infrastructure will provide capacity for distributing cultural outputs from everyone—it is not an exclusive vehicle for distributing U.S. content, although global distribution outlets (of which Music Television may be a crude forerunner) are likely to emerge, and it broadens the market for cultural outputs generally (i.e., it makes the pie larger). A sister issue, notes Cowhey, is the issue of ownership of media. Current U.S. policy restricts foreign ownership of broadcast media to 25 percent,4 and some countries are introducing reciprocal restrictions or program quotas to limit U.S. entry, in particular. The National Telecommunications and Information Administration (NTIA) also warned in a 1993 report that the United States "cannot afford to be complacent about the success of U.S. media firms in international markets. Recent regulatory and technological changes require U.S. policy makers to continue to adapt in order to promote the development of international mass media markets that are open and competitive—the type of markets in which U.S. firms historically prosper" (NTIA, 1993). The NTIA made a series of recommendations designed to foster economic growth in the mass media industry, not only in the United States but also—because of the global nature of the industry—worldwide. The United States has provided fertile ground for development and application of a number of services that provide a working foundation—in the form of corporate learning and consumer familiarity and expectations—for digital convergence. As Michael Borrus has argued, technical progress depends on an economy's potential for "learning by doing and by using" (Borrus, 1993). See Box 4.1. Use of digital technologies has not only benefited organizations and individuals within the United States, but has also provided the basis for the development of global enterprise, including global service industries that tap and

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Box 4.1 Contributions of Business-oriented Network-based Services Several successful, highly profitable on-line services (legal, financial, and medical) serve professionals and specific industries (e.g., computerized reservation systems (CRSs) in air transport). CRSs have dramatically improved the efficiency, speed, and effectiveness with which travel agents can make and change reservations, and they have improved load and resource management for the airlines. They are also increasingly accessible to individual consumers for direct reservation transactions. 800-number services now generate about $10 billion per year for telecommunications companies; they constitute a major portion of long-distance telephone network traffic during certain hours, are profitable, and are growing. Almost everyone uses them to make reservations, to order merchandise, and to contact the customer service organizations of providers of goods and services. 900-number services, which tend to be more entertainment-oriented, are also a large and profitable business, as are automated voice response systems. All of these information systems are enabled by the convergence of computers and communications, and sometimes entertainment as well: the customized call-processing in 800-number service is enabled by complex computer systems: interactive voice response systems (for inquiries about an account, to change investment options in a 401(k) account, to issue a buy or sell order for securities, and so on) involve consumer use of touch-tone pads to communicate upward to a server, which communicates downward with synthetic speech. Although these systems use a different set of multiple media, they are completely analogous to using a keyboard on a terminal to communicate upward, and the display on the terminal to communicate downward from the server. The apparently large and growing economic impact of these on-line services provides a basis for expecting growth in other services combining various computer-and communications-based media. deliver knowledge and talent wherever it resides or is needed (CSTB, 1992, 1994a). This phenomenon has itself resulted in a refocusing of trade policy and trade negotiations on trade in and conditions for service industries as opposed to physical product or commodity distribution. Cowhey remarked on these developments in a late-1994 interview: Digital technology made it possible to start thinking about global service enterprises. … A bank in Cleveland can be a bank in Tokyo. So the digital revolution allowed services to imagine themselves to be global enterprises, and now the trade negotiators are starting to say that means we have to integrate and liberalize these markets and bring them together. A second great revolution is that trade negotiators are now tackling the problem of foreign investment rights, and starting to bring some notion of what are minimum rights of foreign investment. And in turn that means that these high-technology enterprises start to be able to define the fact that yes, I can go to my customers, and yes, I can find a way of bringing my technologies to bear in your market by being on the ground and seeing what people need.

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Cowhey noted that the large and diverse installed computing base has led to an artificially large U.S. lead in digital convergence.5 He observed that it is reasonable to expect greater diffusion—and associated benefits—of personal computers and other systems in at least the industrial nations. Moreover, explained Fuller in another interview, "By its very nature, an information utility or an internetwork will be global as well as national in scale, and issues of geography will become less important." As Cowhey noted, the 1993-1994 public statements of President Clinton and Vice President Gore focused attention on information infrastructure across the industrialized world, making it folly to assume that only the United States would place emphasis in that area. Indeed, the "G7" industrial countries held their first ministerial summit devoted to a single industry when the European Union hosted the February 1995 "G7 Ministerial Conference on the Information Society." The European Union particularly championed the event in order to build political support for European regulatory reforms necessary to catch up with the United States. Box 4.2 lists 11 multinational pilot projects agreed upon at the G7 summit, which also resulted in agreement on several high-level principles:6 Promoting fair competition; Encouraging private investment; Defining an adaptable regulatory framework; and Providing open access to networks while Ensuring universal provision of and access to services; Promoting equality of opportunity to the citizen; Promoting diversity of content, including cultural and linguistic diversity; and Recognizing the necessity of worldwide cooperation with particular attention to less developed countries. European nations have recently moved to launch their own video-on-demand trials, often drawing on U.S. technology. The cable television business is more advanced in the United States than elsewhere: U.S. firms are supplying cable equipment and programming worldwide. Further, as George Gilder observed, "No other country in the world has broadband connections to 60 percent of homes or passing 90 percent of its homes." Although there have been publicized instances of high-level capabilities in specific locations overseas, the actual average capability available to almost all households appears higher in the United States than elsewhere. On the other hand, foreign suppliers of consumer and other electronics, such as Thomson Consumer Electronics, are a significant presence in the U.S. market. Although slower European progress has been attributed to the high cost of installing high-bandwidth communications facilities, advances in data compression and other technologies for more fully exploiting copper wire and advances in computer systems have been cited as encouraging European

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Box 4.2 G7 Project Matrix Theme Area Main Project Objective Global inventory To create and provide an electronically accessible multimedia inventory of information regarding major national and international projects and studies relevant to the promotion and the development of the global information society. An assessment of social, economic, and cultural factors impacting on its development will also be undertaken. Global interoperability for broadband networks To facilitate the establishment of international links between the various high-speed networks and testbeds supporting advanced applications. Cross-cultural education and training To provide innovative approaches to language learning, in particular for students and for small and medium enterprises. Electronic libraries To constitute from existing digitization programs a large distributed virtual collection of the knowledge of mankind, available to the public via networks. This includes a clear perspective toward the establishment of a global electronic library network that interconnects local electronic libraries. Electronic museums and galleries To accelerate the multimedia digitization of collections and to ensure their accessibility to the public and as a learning resource for schools and universities. Environment and natural resources management To increase the electronic linkage and integration of distributed databases of information relevant to the environment. efforts. Moreover, cellular telephony has spread relatively rapidly in Europe, aided in part by agreement on a supporting standard (GSM). Tempering the discussion of competitive advantage and disadvantage, Borrus suggested that evolving international business relationships may become more complex and cooperative. He noted that the United States controls the ''soft" side of the electronics industry—from design, architecture, and marketing to software and systems integration—but that key hardware technology and manufacturing activities have been migrating to Asia. "No one geographic region, and certainly no individual company, has all of the necessary know-how to develop this next generation of electronic systems," Borrus said. Yet the persistence of U.S. leadership in software and U.S. reliance on offshore manufacturing raise questions

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Global emergency management To encourage the development of a global management information network to enhance the management of emergency response situations, risks, and knowledge. Global health care applications To demonstrate the potential of "telematics" technologies in the field of telemedicine in the fight against major health scourges; to promote joint approaches to issues such as the use of data cards, standards, and other enabling mechanisms. Government on-line To exchange examples of experience and "best practice" in the use of on-line information technology by administrations in establishing procedures for conducting electronic administrative business between governments, companies, and citizens. Global marketplace for small and medium enterprises To contribute to the development of an environment for open and nondiscriminatory exchange of information and to demonstrate the interoperability of electronic and information cooperation and trading services on a global scale for the benefit of small and medium enterprises. Maritime Information Systems To integrate and enhance environmental protection and industrial competitiveness for all maritime activities by means of information and communication technologies, including applications in the area of safety and the environment, intelligent manufacturing, and logistics networks.   SOURCE: Matrix reproduced from a document found on the World Wide Web at http://www.ispo.cec.be (EC Information Society Project Office Webserver) under G7 Information Society Conference category and Key Documents subcategory. about what trends and indicators are most reliable. Moreover, it may be that digital convergence represents an opportunity to reclaim areas lost to foreign competitors, such as consumer electronics, to the extent that such areas become more computer-like. Eli Noam has said that international asymmetries hamper the global system of systems, which will function effectively only if it is competitive at each stage, and if regulation establishes nondiscrimination. At present, the information infrastructure stands at uneven levels of development in technology and policy across the globe; most countries still have an established monopoly communications provider, and outside of the United States monopoly remains the dominant communications paradigm. Government policies and limited competition abroad

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may be a greater impediment than available technology; certainly, those factors have limited both deployment and experimentation with computing and communications technologies in the past, to a far greater extent than have policies in the United States. Telecommunications reform is emerging in many countries (Hudson, 1994; Lavin, 1995), and considerable discussion has surfaced over the desirability of more market-oriented regimes (Bangemann et al., 1994). In a late-1994 interview, Cowhey seemed to anticipate the 1995 "G7 Ministerial Conference on the Information Society" by describing the importance of policy relating to broad social objectives as a factor in the international competitiveness dynamic: Now Europe, for example, has been very strong in emphasizing public service through the digital technologies, but they've been weaker on benefiting from competition, and they're trying to change their mix today. And if the Europeans get the mix right and we don't, then they may become the model for the rest of the world. … The United States has to show that this digital revolution does speak to larger concerns about making schools work, making hospitals work, and making it possible for people to share in the benefits of information technology, not just in New York, and Washington, D.C., and London, and Tokyo, but also in the many poorer countries of the world. Borrus also pointed to the need to address international asymmetries in technology access. He has warned that the U.S. supply base is likely to be more accessible to foreign rivals than is the Japanese market, and that software skills and technology can be appropriated more easily than can manufacturing components and expertise (Borrus, 1993). Borrus outlined the problem of how to assure equitable access to both U.S. and foreign companies. It is easy to invest in a U.S. company and thereby gain access to know-how,7 but very difficult to gain similar access to a Japanese company, for example. The Japanese have discriminatory public procurement policies (COC, 1993), and their keiretsu system of business alliances establishes preferential sales, supply, and capital allocation arrangements that impede market access by new entrants.8 Also, there are far fewer publicly held companies in Japan (2,000 as of 1987) than in the United States (24,000; Gerlach, 1992). Borrus anticipated a shift in U.S. trade policy to deal with the access problem. Experiences in the semiconductor arena illustrate the possibilities; see Box 4.3. In pursuing open markets worldwide as a trade policy objective, suggests Cowhey, the United States must attend to concerns in other countries that they not open their markets at a point in time when the United States appears to be closing its own. Another, more perplexing problem, according to Borrus, is to identify the foreign technologies and know-how that should reside in the United States, and to find ways of moving them here. An example is flat panel displays, used in applications such as laptop computers. Flat panel displays were invented in the United States over 35 years ago, but Japanese companies now control over 95 percent of the burgeoning $3.5 billion market and outspend U.S. firms on display

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Box 4.3 Semiconductors and Trade Policy The United States relies on foreign suppliers for some computer hardware components, such as dynamic random-access memory (DRAM) computer chips.* The semiconductor chip was invented some 30 years ago in the United States, but in the mid-1980s Japan gained a majority share of the global semiconductor market, and U.S. companies were virtually eliminated from the critical DRAM market due to Japan's system of industrial organization and its dumping (below-cost sales) of chips in the U.S. market (COC, 1993; Cowhey and Aronson, 1993). In the U.S.-Japan Semiconductor Arrangement of 1986 (renewed in 1991), Japan pledged to prevent dumping, to help U.S. suppliers gain access to its markets, and that U.S. firms would have 20 percent of the Japanese chip market by 1991. In addition, the U.S. government and industry cooperated to form the research consortium SEMATECH. Both of these approaches have had some success, and by the end of 1992 the United States had regained its leadership in the global semiconductor market, and Japanese firms were moving some of their production overseas (COC, 1993; Cowhey and Aronson, 1993). *   See Borrus (1993) for an accounting of gaps in the U.S. technology supply architecture for components and U.S. dependence on foreign semiconductor equipment and materials. research by more than 20 to 1. Various means have been explored for strengthening the U.S. base in display technologies. "Dumping" duties were imposed on imported Japanese displays in 1991, but that trade policy has had mixed results. The Advanced Research Projects Agency launched a research initiative to promote innovation. A broader approach may be called for. However, the Republican congressional leadership has expressed strong doubts about such programs, worrying that they constitute little more than subsidies for large electronics firms. Symmetrical international access to technology—including increased U.S. access to certain technologies—will not emerge unaided. There is no unanimity on the precise mix of policy. For example, Gilder has criticized the semiconductor agreement praised by Borrus. But Borrus captured the terms of the policy discussion when he wrote that trading blocs need "(1) to agree on a set of principles that endorse reciprocal access to regional markets, investment opportunities, and supply base technologies; (2) to negotiate for tangible results that mitigate the disruptive impacts of domestic practices that violate agreed norms of behavior; and (3) to develop new multilateral institutions for coordinating bilateral regional moves" (Borrus, 1993). Cowhey has noted that trade pacts have limited effect, in part because so much of world commerce is now determined by investment flows and global production strategies of multinational firms. This has heightened the importance

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of emerging industrial alliances in international competition. For example, IBM Corporation has established a joint factory with Japan's Toshiba using the latter's liquid crystal display technology, and the two companies are working with Siemens of Germany to develop an advanced (256-megabit) dynamic randomaccess memory (DRAM) chip (Cowhey and Aronson, 1993). Of particular significance is the location of development teams at IBM's facilities in New York State. Such alliances permit the development of common, global infrastructures for technology development and allow firms to reduce the costs and risks of producing extensive product lines, Cowhey has noted (Cowhey and Aronson, 1993). National technology and trade policies, especially those for the information infrastructure, have to be evaluated in light of their impact on these alliances because much of the world's information infrastructure will be developed by such alliances. How to design policies to stimulate innovation and promote competitiveness remains a subject of contention. A Council on Competitiveness project recently concluded that, if policymakers determine that U.S. development of a certain technology is in the national interest, "then they must create an integrated, systematic approach to the industry which includes capital market reform, the establishment of consortia, [and] support for the underlying technology infrastructure, along with trade policy" (COC, 1993). That report argues that policies to stimulate technological innovation in the United States are a necessary complement to trade policy. Unfortunately, achieving an integrated, systematic approach is elusive. Experience in economics and industry suggests that chaos and conflicting efforts do better. The high-definition television (HDTV) situation, subject to a variety of interpretations, is a case in point. See Box 4.4. One area where there appears to be consensus on the need for government action is international aspects of intellectual property protection, a source of growing concern as the information infrastructure becomes more global. The federal government has recognized the need for stronger intellectual property laws worldwide and in recent years has promoted international standards in this area. For example, the United States joined the Berne Convention for the Protection of Literary and Artistic Works9 and has bargained with other countries through the General Agreement on Tariffs and Trade and other regional and bilateral negotiations. Since digital transmissions are increasingly global, and since our evolving national information infrastructure is effectively part of a global information infrastructure, some mechanisms will be needed to handle the problem of differences among countries as to what constitutes a copyright infringement. For example, the concept of a parody as a fair use does not exist in all countries.

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Box 4.4 High-definition Television: A Case Study The United States was a late entry in the high-definition television (HDTV) arena. Research on HDTV was initiated in the 1960s in Japan, where the first HDTV transmissions and prime-time programming were offered (COC, 1993). Even in the late 1980s, the conventional wisdom was that an analog HDTV standard would be pursued, until General Instrument Corporation demonstrated the potential for a digital approach (General Instrument unveiled the first all-digital system in 1990). That development encouraged constructive engagement by the Federal Communications Commission (FCC),* which established an industry-led and industry-funded advisory committee to evaluate competing HDTV standards (COC, 1993). The Japanese standard was disadvantaged by the FCC's decision to try to get HDTV into 6-MHz channels to make it easier for the established broadcasters, earlier lukewarm toward HDTV, to play. The FCC's standards advisory committee began evaluating HDTV systems in 1991; in 1993, Japan's system, acknowledged as inferior to the digital systems, was pulled from the competition, and the European Community indicated that it probably would adopt the U.S. standard (COC, 1993). The three remaining electronics teams in the contest announced they would collaborate to produce a standard system (COC, 1993). The saga of HDTV illustrates that government action may be perceived in different ways. The Program on Digital Open High Resolution Systems at the Massachusetts Institute of Technology has outlined two views of HDTV standards development.** The industry view is that the government refrained from either subsidizing or designing HDTV technology, acting merely as an arbitrator in industrial development. The alternate view is that the innovative U.S. proposals derive from a government-industry partnership, in which agencies such as the Department of Defense*** support academic and other private research on underlying technologies, such as image compression, high-speed computing, communications, encryption, flat panel displays, and viewer requirements. Relatively small U.S. governmental research investments in fundamental computing and communications technologies have had large payoffs in the form of U.S. industry and competitive advantage (CSTB, 1995). *   For example, the FCC established the standards evaluation group, required that HDTV transmissions be compatible with existing television systems, and developed a timetable for the selection of a standard (without allocating new spectrum, thereby motivating video compression research). Such actions stimulated the private sector to attain world leadership in underlying technologies, such as digital transmission (COC, 1993). **   "America's Approach to HDTV: a Government-Industry Success Story," a paper prepared in May 1993 by the MIT Program on Digital Open High Resolution Systems (DOHRS) for Rep. George Brown (D-CA), then chair of the House Space, Science, and Technology Committee. ***   Over a four-year period, the [Defense] Advanced Research Projects Agency funded close to $300 million in research and development of high-resolution video display, digital signal processing, and data compression technologies (COC, 1993).

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regulatory authorization to offer commercial video programming over its telephone distribution system attests (Landler, 1995; Carnevale, 1994). "We're living through a great moment of experimentation here, and part of our problem in making public policy is that it's not self-evident which bet is right," Cowhey said. Both the European Union and Japan decided in 1994 that their approaches had to change. The European Union required the introduction of competition in voice telephone services by 1998. Japan reformulated many regulations that had hindered competition and actively debated breaking up NTT, its dominant phone company. The United States also wrestled with changes in 1995. It was trying once again to legislate permission to allow the regional Bell operating companies, cable systems, and long-distance carriers to enter each other's markets. It also promised (in a speech by Vice President Gore at the 1995 summit of the G7) to remove the 25 percent limit on foreign ownership of spectrum, a limit that the foreign firms cited as a bar on their market access to the United States. The Vice President promised to achieve this goal by either legislation or regulation by the end of 1995. The one condition was that restrictions on foreign investment would be removed only for countries that liberalize their own markets. In short, this was an offer to liberalize on a bilateral basis with like-minded countries. The same speech by the Vice President affirmed an even more sweeping goal, that is, success in the General Agreement on Trade in Services (GATS) trade negotiations on liberalizing basic (i.e., voice) telecommunications services scheduled to conclude by April 1996. If successful the GATS pact would make true competition in telecommunications services into a binding trade obligation for major industrial and some developing countries. Such a pact was considered unthinkable even 10 years ago. The promise of information infrastructure clearly depends on considerable investment by private parties. At issue are not only competing technological and business approaches, but also the degree to which facilities and services offered by different parties can interoperate. Technical features—including those relating to openness and symmetry in communications, equity in access to infrastructure, and who gets to enter what markets—are among the key issues that informed colloquium discussions and more recent debates. These features have figured in the development of regulatory reform legislation, and they are also at the heart of initiatives relating to standard setting for voice, video, data, and multimedia services as well as to the formatting and transfer of various kinds of information and documents. For example, the Cable Act of 1992 provided for measures to foster greater compatibility between consumer electronic devices and cable television systems, resulting in digital convergence-related standard setting by the Federal Communications Commission (FCC) and industry. Also, the administration sponsored a mid-1994 workshop to identify key issues and options for facilitating standards development. But it is an open question as to how far the government can or should go in promoting the kinds of standards

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needed for digital convergence; its efforts are likely to focus on points at which different networks and other infrastructure come together. PERSPECTIVES ON REGULATION Colloquium participants suggested that government policies with respect to digital convergence should be guided by two general principles: first, that relaxation of traditional forms of regulation and increased market competition are beneficial in general; and, second, that there will continue to be a need for government intervention, but in different forms and areas than in the past. For example, many referred to growing (perceived) needs to protect intellectual property rights and to ensure that those who control a conduit not have a monopoly on the content that goes through it. Behind such comments lies the recognition that a growing portion of the investment in and returns on information infrastructure relate to information or content. Although most of the policy discussion reflected conditions in the telecommunications industry in particular (and within that the telephony component), many comments were relevant to information industries in general. On the other hand, there is little foundation in terms of regulation and other legal constraints affecting entertainment technology, and possibly even less constraining the computing industry. The first principle may be obvious, because the benefits of market competition are well known. Noam and Cowhey have documented, in separate papers (Noam, 1995), the benefits derived specifically from the breakup of AT&T. Noam, in an analysis of the accuracy of various predictions concerning deregulation, has concluded that the doomsayers generally were wrong—that few benefits attributed to the monopoly system were lost. He found that proponents of deregulation were right more often than were pro-regulators, although liberalization evoked new issues that have been addressed effectively by regulation. In addition, Noam has concluded that the telecommunications sector is more dynamic and innovative as a result of deregulation. Cowhey also has pointed to the benefits of liberalization, citing a number of statistics: since the breakup of AT&T, long-distance service cost has declined about 50 percent, the average household has seen a reduction in service costs, and the productivity of telephone companies has climbed an estimated 40 percent, all while these companies have introduced greater innovation in services and increased flexibility for users (Cowhey, 1990). The second principle—concerning the changes in policy needs—requires thorough exploration. The breakup of telecommunications monopolies and the emergence of new media are having two primary effects on the policy-making landscape, Noam explained. First, there is less need for regulation to balance the power of small users facing giant, often monopolistic suppliers. Second, price and quality regulation also becomes less important as a systems integration industry emerges and begins to compete for consumers.11

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According to Noam, government should not react to this transformation by picking favorites—that is, by influencing or impeding change to favor any particular technology or carrier. Expanded Robert Johnson in a late-1994 interview, even the best-intended government intervention can distort the market, interfering with market demand and entrepreneurial creativity. Noam and others generally agreed that policymakers may need to promote rules of the road for the "network of networks," such as in interconnection and common carriage. Policymakers need to assure access to scarce facilities that could become "bottlenecks" in the marketplace, and they need to address international access asymmetries, he said. As noted earlier in this report, with the development of specialized networks and the evolving need for content-selection aids, the economics of basic carriage become less attractive. The real advantage to a network owner increasingly will accrue from diversity in programming and services, and so there will be expanded opportunities for niche marketing; a network owner will become, in effect, a manager of a shopping mall, housing many "boutiques."12 In their quest to enter new markets, telephone companies have contended that substantial traffic must be generated to justify the building of fiber networks, that voice alone will not generate such volume. The NTIA, in a 1993 report, maintained that freeing telephone companies to provide cable programming would stimulate competition in the video market and provide incentives for infrastructure development, and, furthermore, any resulting increased demand for video programming could stimulate international trade (NTIA, 1993). Wildman has argued that, given the substantial costs of desired network upgrades and the nation's dependence on private investment to cover them, policy restrictions on the business opportunities of information providers should be reduced.13 This is the essence of the arguments advanced by telephone companies, although companies differ in their preferences for what restrictions are most critical to relax.14 Foreshadowing if not encouraging recent legislative and rulemaking debates, the NTIA had recommended relaxing restrictions on networks owning cable systems,15 common ownership of television stations and cable systems in the same market,16 national multiple ownership,17 and foreign ownership. Its own interests affected, the cable television industry contends that restrictions on cross-ownership should be relaxed only if the Congress acts to repeal state laws barring cable companies from providing telephone service.18 Greater freedom for telephone companies may involve unbundling or providing other service providers more direct access to basic network facilities and service elements. To that end, some have submitted proposals to the FCC and state regulatory authorities for unbundling their networks.19 The theory behind these proposals is that, by giving up their monopolies, regional telephone companies become deserving of entry into other markets, such as long-distance services. However, the technology of open data networking makes unbundling both easier to achieve and economically more compelling than it has been, although

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most telephone companies may continue to resist ceding the control and revenue streams historically associated with bundled service provision (CSTB, 1994b). That is, the nature of the new technologies threatens to make traditional approaches to assessing infrastructure investments obsolete. Noted Noam, ''Private carriers are now increasingly competing with common carriers, and conversely, common carriers will increase and compete with what private carriers do today. Those [situations] require all kinds of new forms of legal arrangements for dealing with traditional problems." Noam elaborated on the underlying economics: … when [common and private contract carriers correctly] compete head to head, one has to serve everybody indiscriminately in similar classes of customers at similar rates and the other one doesn't. The one that has more flexibility has an inherent advantage with all other things being equal. You can price people differently and, therefore, undercut for some customers, depending on their price elasticity. You can undercut the one that has to provide the same price for everybody, particularly when you cannot prevent arbitrage. Where one cannot prevent arbitrage, but the other one can, you cannot, even if you wanted to, have price discrimination because of the arbitrage issue. Similarly, if one has access rights to the other, but the other doesn't have access rights to the first, then you have asymmetries of the kind that whenever a transmission segment on the common carrier is cheaper, the private carrier will use it. If it's the other way around, there is no access. You add those two up plus three or four other factors and again, all other things being equal, the common carrier will have a problem. So, either it goes out of business, which is unlikely, or the common carrier obligation is being whittled away at the margin under the guise of meeting competition and so on. That is an effect that's already been happening in the long-distance field for large users where bargaining and negotiations are taking place whatever the formal regulatory arrangement is. So the alternatives are to make private carriers common carriers, which is not realistic: it really means making every corporate, private network, every value-added service provider into a common carrier. You can also have some kind of a hybrid arrangement of which you can think in terms of at least 8 or 10 different hybrids. That is likely to work for a while, but eventually, the same dynamics take place. The private is going to push out the common carrier here, too, so a hybrid arrangement is not going to be a stable solution. If that is the case, then may be common carriage as an institution in the long term is on its way out. In speculating on the need to change common carriage arrangements, Noam posited that most of "the policy goals behind common carriage, which are free flow of information, limited liability, reduction of transaction costs, and a whole bunch of other things … will be taken care of in a competitive system of private carriers. … The ones that are not necessarily going to be taken care of involve the free flow of information aspect. That would then suggest not so much making everybody a common carrier, but rather making sure that no carrier can discriminate

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based on certain content criteria or some other long-term policy. This would be better than hanging on to the notion of common carriage per se." Clearly, the debates over advancing the national information infrastructure underscore that development of nationwide networks will be very expensive; by one estimate, the physical facilities alone could consume $422 billion over 20 years.20 In addition, the nation's reliance on the private sector for infrastructure investments demands that both public and private facilities be addressed in national policies (Egan and Wildman, 1992). Although volatile cost estimates reflect political considerations and business maneuvers, and although concerns have been raised about various risks, proponents argue that much of the investment would be made anyway,21 and that the payback to investors (let alone to society generally) will be worth it.22 Apart from its controversial price-capping strategy—a relatively new approach to the regulation of information industries—the Cable Television Consumer Protection and Competition Act of 1992 demonstrates to members of the colloquium steering committee that Congress is often more amenable to retrospective "police" work than to forward-looking action on communications issues of the future. The chilling effect on cable-related investments and alliances ascribed to recent rate rollbacks is a cause for concern. And yet, even the Cable Act contained within it provisions that may have forward-looking impacts. For example, provisions relating to compatibility between cable service delivery and consumer electronics (TVs, VCRs) could serve to promote greater interoperability, notwithstanding industry concerns about specific mechanisms for doing so. Noam elaborated on several points. The traditional telephone rate-subsidy system23 will have to be restructured, he said, through some form of neutral surcharge and a voucher mechanism as a replacement for the present myriad pools, funds, and transfers. Through a principle of "third-party-neutral interconnection," a carrier could pick and choose its own customers, but it could not pick its customer's customers. This change will be brought on by increasing competition; providers will tend to compete for users who pay, and lower-revenue user groups will be left with fewer options and, as a result, with increasing prices. "These transitions will be painful. You'll hear from the losers, and [the transition] would require, therefore, leaders," Noam said. Competition will increase efficiency and hence reduce the magnitude of any subsidy, but it is not likely to decline to zero. Hence, we must reform the way it is being paid for, and reconcile it with competition. One idea, for example, is for every company providing telephone service to contribute in proportion to its customer base.24 Gilder, on the other hand, argued that the need for subsidies will disappear altogether, because digital wireless technology will reduce cost disparities between rural and urban services. This view is not universally accepted, given the bandwidth limitations of wireless technology. But Gilder's optimism about available bandwidth leads him to anticipate the obsolescence of the entire regulatory and legislative structure that controls information services (Kelly, 1993). In its

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auctions of spectrum for personal communications services (PCS), the FCC designed the auction so that even rural regions will have at least five major cellular and PCS providers. This approach should speed investment and lower prices. The issue of how to assure universal service in a competitive marketplace also requires attention. As the information infrastructure evolves, people have begun to ask whether it will close or widen the gap between the rich and the poor. The Clinton administration has said it is "committed to developing a broad, modern concept of universal service—one that would emphasize giving all Americans who desire it easy, affordable access to advanced communications and information services, regardless of income, disability, or location" (IITF, 1993, p. 8). The progress during 1993-1994 of various new service trials, administration policy statements and explorations through the Information Infrastructure Task Force and the National Information Infrastructure Advisory Committee,25 and legislative debates point to the difficulty of defining what it is that should be universally available. Mused Robert Johnson when interviewed, Clearly there should be a level at which everybody should have access to the service. Now, access is different from ability to use. Everybody can have access to cable television, but should it be pay-per-view cable television, should it be 50 channels, or 100 channels, or should it be all the other things that go along with it? Should everyone have the shopping channel? Should everyone get a remote for each room? You know, all of these things come into play when you start talking about an entitlement. I think the government should decide that there should be an entitlement for a certain level of access, but beyond that I think you get into trouble in deciding how much. It is difficult, for example, to identify what kinds of information may relate to different kinds of gaps in socioeconomic status; it is difficult to build a case for mandating simultaneous access to a broad range of new services when experimentation and exploration of what kinds of services will be most popular and how costs can be optimized are still at early stages.26 Borrus, more optimistic than Noam about the future of common carriage, suggested that different types of carriers be assigned different responsibilities: Maybe what we're talking about is different levels of obligation, different levels of performance requirements, privacy requirements and other things including access to intellectual property based on the kind of network and service that you're providing—providers of physical networks being held to one standard, providers of virtual networks over physical networks to another standard. At the margins that runs into all the problems Eli talks about, but there are compensations for owning versus not owning, for managing and controlling a virtual [infrastructure] versus actually owning physical infrastructure. This debate has just begun.

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OTHER USEFUL ROLES FOR GOVERNMENT Regardless of how policymakers seek to guide or control information industries, the federal government can play a valuable role in promoting technological progress in other ways. In particular, colloquium participants stressed the effectiveness of procurement policies in improving government efficiency and diffusing new technologies throughout the economy. Noting that the federal government is a major force in technology development,27 Gilder suggested that government's role in the digital convergence should be that of an "aggressive, forward-looking consumer," purchasing the best possible technologies for interconnecting its supercomputer centers and other facilities. Such connections would maximize efficiency, according to Gilder, who has contended that the government typically "discovers a technology after its moment is passing" (Kelly, 1993). Gilder's comments echo other discussions about how the effectiveness of the federal investment in the Internet, whose backbone initially connected a variety of research and education facilities, contrasts with other federal efforts to promote specific technologies for government use, such as the Open Systems Interconnection protocol suite through the GOSIP federal information processing standard. Borrus also has pointed to the influence of procurement policies. In assessing federal research and development (R&D) sponsorship in general, Borrus has contended that direct federal support historically has been less important to the success of commercial technology than have federal procurement and indirect support, because the latter approaches have tended to diffuse new technologies into widespread use.28 On the other hand, the administration's National Performance Review (Clinton and Gore, 1993) and perennial efforts by adminstrations and the Congress to improve procurement policy and practice attest to the fact that procurement can be at best a blunt instrument. Also, the blossoming of the U.S. computer and communications enterprise provides evidence of the long-term fruits of federal R&D support overall (CSTB, 1995). To further foster growth of the information infrastructure, Borrus suggested that policymakers consider how to stimulate experiments involving new technologies, configurations, and services, so that new applications and demand can emerge to support further evolution of the network portfolio. Similarly, Noam suggested that the government provide seed money for demonstration projects, as the National Science Foundation (NSF), the Advanced Research Projects Agency (ARPA), and other agencies have done. For example, NSF and ARPA contributed $15.8 million to the Gigabit Testbed program, which involved researchers from universities, national laboratories, supercomputer centers, and telephone and computer companies (CNRI, 1992). More generally, several colloquium participants identified the Internet as a working model for the type of experiment the federal government could support.29 Experiments and demonstrations can help overcome a basic obstacle to network development: until a network is

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established, its usefulness is difficult to prove, but a sponsor must pay for the project first. "So you run into the catch-22 where you can't develop demand until you're willing to pay for the network, but no one is willing to pay for the network until you've got some demand developed," Borrus explained. At the same time, Borrus noted, oversight is needed to "permit a kind of a logical infrastructure to emerge which would emphasize standards for access interoperability between these various pieces of the network portfolio—levels of privacy, reliability, performance standards, and the like—but which wouldn't determine the actual implementation of any of the networks themselves." The National Cable Television Association (NCTA) has provided specific suggestions along those lines, arguing that local telephone companies should be required to "interconnect their facilities with those of more specialized providers on reasonable and nondiscriminatory terms" (NCTA, 1993a). NCTA also supports a federal role in standards setting for networks and customer equipment, to ensure, for example, that computers and telephones can send and receive cable signals and programming, as well as tax incentives to stimulate investment (NCTA, 1993a). The current fiscal climate makes it relative unlikely that tax incentives will be initiated. Moreover, whether and what kind of oversight is possible to achieve logical connectivity and so on is a challenge at the heart of public policy for advancing the information infrastructure: it is a challenge that many recognize but few can resolve to the satisfaction of the majority. Commercial activities in the Internet arena have built on contributions to the technology base through federal research programs (such as the High Performance Computing and Communications Initiative) as well as development by private enterprise. However, competition, deregulation, and industry consolidation appear to have reduced telecommunications industry R&D from what it was in the heyday of AT&T's Bell Laboratories and in the early years of Bellcore. Thus Wildman has noted that U.S. telephone companies lag their foreign counterparts in R&D spending and patent activity (Egan and Wildman, 1992).30 The combined forces of deficit-reduction pressures and a policy shift toward applications may constrain federally funded research in related technologies. Any slowdown in research would be particularly troubling now, because integrating diverse systems to evolve the nation's information infrastructure poses new technical challenges, some associated with lowering the costs of providing more general and flexible technology as compared to more specialized technology that is optimized for the delivery of a single service (CSTB, 1994b). As noted in earlier chapters, a valuable part of the infrastructure is the content—the software and the programming. Thus, it is important for the government to support experiments focusing not only on networking hardware, but also on applications. Part of the appeal of the Internet, it should be noted, is that users develop their own "programming" and other information resources, from articles to databases, resources that can be located and interconnected increasingly easily

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through the search and navigation tools (e.g., gopher, World Wide Web) that are themselves being developed by users (Berners-Lee et al., 1994). NOTES 1.   The administration envisions national high-speed networks capable of transmitting billions of bits (gigabits) of information—such as the entire textual portion of the Encyclopedia Britannica—in one second. These networks would link computers, data banks, fax machines, telephones, and video displays. In its national information infrastructure (NII) policy statements, the administration has articulated a high-level vision for a "network of networks" funded primarily by the private sector. The statements outline numerous broad goals but provide few details; the Information Infrastructure Task Force is laying the groundwork to develop proposals in a number of areas, and proposed legislation is proceeding through the Congress as this report is written. The organization of several budget elements under the NII umbrella in the FY 1995 budget request added to the emphasis on this area, as do the new emphasis on information infrastructure technology and applications within the High Performance Computing and Communications Initiative and the expansion of the new Telecommunications and Information Infrastructure Assistance Program for developing access by schools, libraries, hospitals, and clinics. 2.   Common carriers provide neutral, nondiscriminatory service. They are subject to public utility regulations described by Kahn (1970, p. 3) as "control of entry, price fixing, prescription of quality and conditions of service, and the imposition of an obligation to serve all applicants under reasonable conditions." 3.   Lobbying activity is so intense that it itself has become a news item. See, for example, Andrews (1995). 4.   Section 310(b) of the Communications Act limits foreign investment in U.S. broadcasting companies to 25 percent. 5.   For example, several measures show that Japan lags the United States in use of communications and information technology, even accounting for population difference: PCs used in business per 100 workers (U.S. 41.7, Japan 9.9); domestic commercial databases (U.S. 3,900, Japan 900); Internet nodes (U.S. 1.18 million, Japan 39,000); LAN connections per 100 PCs used in business (U.S. 55.7, Japan 13.4); cellular phones per 100 people (U.S. 4.4, Japan 1.4); and cable (non-basic service) subscribers as percent of households with TV (U.S. 60 percent, Japan 2.7 percent). Regulation-supported high prices and market structure factors lie behind some of these conditions (Pollack, 1993). 6.   Principles quoted from "The G7 Theme Paper," a document found on the World Wide Web at http://www.ispo.cec.be (EC Information Society Project Office Webserver) under G7 Information Society Conference category and Key Documents subcategory. 7.   Foreign investors have taken advantage of the opportunity to invest in U.S. companies, notably in the entertainment industry. For example, News Corp. of Australia owns (20th Century) Fox Inc., Sony Corp. owns Sony Pictures Entertainment (formerly Columbia Pictures), and Matsushita Electric Industrial Co. owns MCA Inc. (parent company of Universal Pictures). See Turner (1994a). 8.   An extensive analysis of the keiretsu system may be found in Gerlach (1992).

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9.   Virtually every major nation has signed the convention, which is administered by the World Intellectual Property Organization. 10.   Further analysis of these national differences may be found in Cowhey (1993). 11.   See CSTB (1992) for a discussion of the business of systems integration. 12.   Colloquium steering committee member Janice Obuchowski noted that, at the time of the consent decree, AT&T indicated no objection to the Bell companies entering the information content business, and the court concluded they would not abuse any residual bottleneck power in information services. In addition, the court observed that the FCC had established safeguards that would help protect against such abuse. 13.   If these types of incentives prove inadequate, then policymakers could consider other measures, such as a value-added tax (VAT) on public network services, with the proceeds to be invested in the public infrastructure, Wildman suggested. An advantage of the VAT approach, he noted, is that the major beneficiaries—end users and suppliers—would pay (Egan and Wildman, 1992). 14.   The regional Bell holding companies have promised, if the restrictions on cable programming and long-distance service are relaxed, to invest an additional $100 billion in advanced technology in the next decade—precisely the sort of private investment needed to advance a national information infrastructure. 15.   In 1992, the FCC modified its 1970 rule that prevented networks from owning cable systems (47 CFR 76.501[a][1991]) to allow cross-ownership so long as the number of cable homes affected was limited. Networks have been barred by the Cable Act of 1984 (47 USC Section 533) from owning cable systems in their own markets where they own and operate stations (NTIA, 1993). Progress through judicial and regulatory hurdles toward video dial-tone service is reflected in Bell Atlantic's moves toward offering cable-like programming in its service areas (Landler, 1995; Carnevale, 1994). 16.   In 1970, the FCC adopted a rule barring common ownership of a television broadcast station and a cable system in the same market (47 CFR Section 76.501[a][2]). Congress codified that rule in the Cable Act of 1984 (NTIA, 1993). 17.   The FCC adopted a 12-station limit for all broadcast services in 1984. 18.   David Nicoll, National Cable Television Association, personal communication, December 13, 1993. 19.   Ameritech, for example, proposed a new regulatory model (the Customers First Plan) under which the corporation would guarantee its competitors physical access to the telephone network and fair pricing; all that a competitor would have to do is buy a switch (costing several million dollars new). Ameritech also pledged to upgrade its network to support digital switching and fiber optics. In return, Ameritech asked for "the freedom to fully compete, including the ability to de-average all access rates, to respond to competitive proposals, and to enter into contracts with customers" (Ameritech, 1993c). Local telephone service would remain affordable, the company said, due to increased usage of telecommunications services. 20.   Carol Weinhaus, project director for the Center for Telecommunications Management at the University of Southern California, cited in Andrews (1994a). 21.   Local telephone and cable companies already spend about $25 billion a year on new equipment and modernization (Federal Communications Commission estimates, cited in Andrews (1994a)). A number of telephone companies announced ambitious infrastructure improvement plans in 1993. 22.   The Clinton administration, in its national information infrastructure (NII) policy statement, noted that an estimated two-thirds of U.S. workers hold information-related

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    jobs, while the rest work in industries that rely heavily on information. According to the administration, the NII "will help create high-wage jobs, stimulate economic growth, enable new products and services, and strengthen America's technological leadership. Whole new industries will be created, and the infrastructure will be used in ways we can only begin to imagine" (IITF, 1993, p. 13). A number of statistics were cited to bolster this contention. For example, the Computer Systems Policy Project estimates that the NII will produce as much as $300 billion annually in new sales across multiple industries. And the personal communications services industry, a new family of wireless services, is expected to create as many as 300,000 jobs in the next 10 to 15 years. 23.   According to the United States Telephone Association (USTA), regulatory policy promoting universal service has resulted in up to $20 billion in internal subsidies that benefit rural and residential customers. USTA (1993) has claimed that, as competition in the marketplace increases, the price of local telephone service would move to cost and could double. 24.   David Nicoll, National Cable Television Association, personal communication, December 13, 1993. 25.   Several public meetings (e.g., the 20/20 Vision and Public Interest conferences) were held and documents issued for public discussion and comment in 1994. 26.   For example, NTIA estimates that the biggest problems in regard to universal service pertain to the urban poor, even though infrastructure is cheap and ubiquitous, not rural areas. 27.   The federal government finances some $70 billion in research and development annually and creates early markets for high-risk technologies such as computer hardware and semiconductors (Clinton and Gore, 1993). 28.   In this paper (Borrus, 1992), echoing a decade-old recommendation made by the economist Richard Nelson and his colleagues (Nelson, 1982), Borrus suggested that the government associate research and development (R&D) support with procurement or other well-defined public objectives; define and fund arenas of nonproprietary research and allow the scientific community to guide R&D allocation; and develop mechanisms whereby potential users guide the allocation of applied R&D funds. Borrus made several additional points, specifying conditions that should exist for applied research and the importance of pursuing widespread diffusion of new technologies within the domestic economy. He also stressed the importance of ensuring that the development process produces technology that meets commercial market requirements. 29.   Over the years, the government's role in running the Internet has been reduced. The initial goal was to link military users and contractors with remote computer centers so they could share software and hardware; today, more than half the hosts are commercial, while many others are in education and nonmilitary research. The National Science Foundation has provided the fixed-cost network "backbone," but by early 1994 the direct federal subsidy had shrunk to an estimated 3 percent of total Internet costs, and even that small share is to be eliminated. Meanwhile, standards for transmission, user interfaces, management, and other aspects of Internet use are set through a "grass-roots" process led by the Internet Engineering Task Force, whose meetings are open to anyone with a demonstrated working protocol. Howard Funk, the Internet Society, personal communication, November 10, 1993. 30.   Egan and Wildman (1992) citing NTIA (1991). The seven nations evaluated included the United States, the United Kingdom, Germany, France, Italy, Japan, and Canada.