National Academies Press: OpenBook

The Changing Nature of Telecommunications/Information Infrastructure (1995)

Chapter: PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE

« Previous: PART 2--REGULATION AND THE EMERGING TELECOMMUNICATIONS INFRASTRUCTURE
Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Part 3
Public Investment in Telecommunications Infrastructure

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×
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Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

Introduction to Part 3

David G. Messerschmitt

This session of the workshop discussed different mechanisms for increasing investment in infrastructure through direct or indirect public investment. Areas for investment or subsidy that were specifically considered were basic research, development, service and information providers, and end users.

A recent report from the Clinton administration, National Information Infrastructure: Agenda for Action (IITF, 1993), laid the groundwork by suggesting some areas for direct investment or subsidy. It proposed the basic thesis that carefully crafted government action can complement and enhance the efforts of the private sector, and assure the growth of an information infrastructure available to all Americans at reasonable cost. This thesis addresses two phases of evolution of a network infrastructure where free market mechanisms are inadequate, as identified by Eli Noam during Panel 2's discussion: the lack of critical mass early in its evolution (when the marginal utility to users does not justify the cost) and the desire for universal service in the mature phase (when the network is widely but not universally available, disadvantaging a subset of the population). Public investment or its close cousin user subsidy may be needed in the early phases to "jump start" the infrastructure, and cross-subsidy or user subsidy may be required later to extend the infrastructure to all users, particularly disadvantaged people or those in rural areas.

Four specific actions related to public investment or action to encourage the national information infrastructure (NII) are identified in the Clinton administration report:

  1. Help the private sector develop and demonstrate technologies and applications. This most likely takes the form of government support of research or may take other forms such as tax credits or subsidy of private research.

  2. Adjust federal procurement policies to provide incentives for the private sector to contribute to NII development. The question here is whether the government is in a position to choose the winning technologies.

  3. Make the vast reservoir of government information available via the NII. Since the government at all levels has traditionally provided library service, to what extent should this extend to becoming an NII information provider?

  4. Extend the universal service concept of the telephone network to the NII. Since the NII is likely still in the "critical mass" phase, it may be premature to consider this issue. Nevertheless, there are significant issues inherent in introducing the new NII into the existing telecommunications environment, with its existing cross-subsidy structure and regulatory disincentives to the introduction of new technology.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

Walter Baer gives an enlightening perspective on past government investments in telecommunications, beginning with the construction of the first telegraph system. Starting with the formation of Western Union and later the Bell system, most telecommunications infrastructure was constructed with private funds under the watchful eye of state and federal regulators. However, the government did support research and development of may telecommunications technologies for defense needs, and many of these later became important commercial successes, for example, microwave radio, computing, digital signal processing, satellites, and computer networking. Now whether the government should continue to support technological development, and, if so, how it can best shift from a defense- to a commercial-based investment. Baer describes some ways that government is currently investing in telecommunications and other technologies:

  • Research and development tax credits. A shortcoming of the current approach is that software tax credits are more difficult to obtain and yet are the lifeblood of the telecommunications industry;

  • Direct investment in research and development, much of it subsumed under the High Performance Computing and Communications Initiative;

  • Networks and systems. This includes a direct investment in networking infrastructure in the National Research and Education Network program. It also includes military systems such as the ARPANET and the Global Positioning System that are now making a transition to important commercial uses. It also includes investment in infrastructure for internal government use, such as FTS-2000, that has a substantial impact on commercial technologies because of the size of the procurements;

  • Subsidizing of user networking, which is relatively infrequent but includes support for rural telephone networks through the Rural Electrification Administration telephone loan program;

  • Support of applications, such as telemedicine, which is spread through a number of government agencies and is relatively small in the aggregate;

  • Subsidizing of users, which is also rare but includes support for school and college connection to networks and support of public television stations;

  • Direct funding of agencies that regulate or set standards, such as the Federal Communications Commission, the National Telecommunications and Information Administration, and the National Institute of Standards and Technology. These programs have tremendous leverage over private investments in telecommunications, especially in comparison to the size of government expenditures; and

  • Support for information and databases. The government is the largest creator, collector, user, and disseminator of information.

Baer makes the important point that all federal investments in telecommunications infrastructure amount to between $0.5 billion and $2 billion per year (depending on how broadly you define

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

infrastructure), which is tiny in comparison to the roughly $50 billion per year spent in the private sector. Since the government is not in a position to greatly increase these investments, direct government investment will remain tiny in comparison to private investment. Thus, the government will make the greatest impact if it focuses its investments in areas that will maximally leverage private investment. There are three important rationales for government investment where market mechanisms fail: redressing underinvestment in research and development, achieving critical mass in new technologies, and achieving equity in access. Given budgetary limitations, government can have a much greater impact through policies, standards, and regulations than it can through direct investments. The exception is research and experimentation, where government expenditures are a significant factor and are justified by shortcomings in market mechanisms.

Baer finishes by asserting that given these factors and the shift of government attention from military to economic and social purposes, the government should shift from the supply to the demand side, focusing more heavily on end-user applications and end-user support, rather than on networking infrastructure. It should also focus more on the diffusion, as opposed to just the development, of new applications. This may include some direct support of end-user groups, such as a voucher system. Baer also urges skepticism in accepting arguments that investment in telecommunications infrastructure will yield compensatory savings in administrative or other costs.

Bridger Mitchell discusses direct government construction of network facilities and subsidies to end users. He reiterates the issues relating to the critical mass problem in the early stages of a new network technology and the dissemination or universal service problem that arises as the network grows and matures. Most rationales for government subsidies of networks and users redress one or the other of these problems.

Charles Jackson considers government investment from the perspective of telecommunications carriers. He points out that the capital flows and usage charges are huge in relation to any credible government expenditures, and thus the government is unlikely to make any significant difference by direct investment in facilities or subsidies to users. Rather, the government should concentrate on the tremendous leverage it has in regulatory policy, for example, bringing the depreciation time of assets into line with the increasingly rapid obsolescence of the equipment.

William Gillis speaks from the perspective of an information supplier. He argues strongly for allowing marketplace mechanisms full rein, and against making prior assumptions about the information marketplace based on historical conceptions of the technology. Government should invest in the timely creation of standards for network interoperability and the establishment of testbed facilities but not the direct creation of services, where there is adequate private-sector activity. An exception is the creation of applications within the scope of government activities such as education. Gillis reiterates that applications never move from zero to a mass market quickly and that discussions of universal service in information services are therefore grossly premature. In the area of information services, he urges the government to make its vast databases available electronically but in the process to also reorganize the data and invest in the development of a uniform nomenclature to make it more accessible. The goal should not be simply to unleash runaway data, but rather to turn the data into easily accessible and useful information.

Robert Kahn addresses government investment in research and development. He begins by describing a conceptual framework of a generic network core, a demand-specific layer, and applications built on top of that (similar to the computer central processing unit, operating system, and applications). He emphasizes that applications are what matter to the end user but that the government has a critical role in coordinating and standardizing the core and demand-specific layers. It is extremely important that the core be designed in an "open system" fashion so that market mechanisms can freely define and deploy the applications without interfering with one another. The government should also ensure that there is a level playing field for all commercial participants. Kahn describes in some detail the conception and development of standards for the Internet as a premier example of how relatively small government investments in research and experimental

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

testbeds can have a tremendously leveraged impact on the technology, economy, and society. He also gives a number of examples of companies (such as Sun Microsystems and Silicon Graphics) that have been the result of support by the Advanced Research Projects Agency to universities and another (Cray Computer) that was strongly influenced by government procurement and applications. His basic point is that government investment in basic research and precompetitive technology development can pay great dividends for the economy.

Laura Breeden, then of the Federation of American Research Networks (FARNET), speaks from the perspective of a systems integrator who repackages network services for nonprofit organizations. She emphasizes, as did earlier speakers, that the success or failure of the NII will be founded on the applications and the user friendliness and cost of the access devices, not the transport of the network. Also needed is a more active assessment program for determining the value of government investments and helping to guide future investments, rather than simply following the "religion" that the NII will be built and the benefits will be there. Finally, she appeals for greater scrutiny in the areas of massive federal investment, such as the defense and intelligence communities, as opposed to the relatively small scale of investments in research and educational networking. Can those investments be targeted for a greater commercial payoff?

The discussion following the panelists' presentation brings out a number of interesting issues:

  • Questioners reiterate the importance of the applications and their value and friendliness to the end user, rather than the networking technology itself.

  • The distinction between private and public investment in the telecommunications infrastructure is perhaps not as great as one might think, since virtually all taxpayers are also regulated ratepayers. Mistaken investments are subsidized by either the taxpayer or the ratepayer, which are one and the same.

  • The NII will be used for accessing information services perhaps as much as for people-to-people communication. The question arises as to what universal service means in that context. What good does it do to get poor people or rural residents connected to the infrastructure if they cannot afford to access the information sources? In addition, an increasing portion of the cost is in access devices (e.g., computers) rather than in network access, and again this is an important obstacle to universal service.

  • Government should consider and assess not only the economic aspects of the NII but also the impact on society. In the past, major new telecommunications infrastructures such as those for the telephone and television have had profound impacts, both positive and negative.

REFERENCE

Information Infrastructure Task Force (IITF). 1993 National Information Infrastructure: An Agenda for Action. Information Infrastructure Task Force, Washington, D.C., September 15.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

Government Investment in Telecommunications Infrastructure

Walter S. Baer

INTRODUCTION

U.S. government investment in telecommunications infrastructure dates back at least to 1843, when Congress appropriated $30,000 to support construction of Samuel Morse's American Telegraph System between Baltimore and Washington, D.C. (Thompson, 1947, pp. 16–19). In the 150 years since then, the federal government has supported many other advances in telephony, terrestrial broadcasting, satellite communications, and data networking. But unlike investments in highways, mass transit, water supply and treatment, and related categories of physical infrastructure, telecommunications investments have been made largely by private-sector firms under regulations set by federal, state, and local authorities. Consequently, direct government investment in the U.S. telecommunications infrastructure has remained quite small compared to investments by telecommunications common carriers and other private firms.

In the past, federal investments in telecommunications have been driven principally by national security considerations and other direct government missions. Defense spending during World War II and throughout the Cold War period spurred the development of microwave and satellite transmission systems, computers for switching and network control, and new network concepts such as packet switching. Today, however, public concerns are shifting from military security toward U.S. economic competitiveness and societal needs in such areas as health care, education, and the delivery of public services.

The growing interest in telecommunications and information infrastructure reflects these economic and social policy concerns. Like other infrastructure elements, telecommunications and information networks directly and pervasively support both public- and private-sector activities. Their expanded use is generally believed to increase productivity and output, spur innovation, and lead to significant changes in organizational structure.1 And they are changing rapidly.

The policy importance of technological advances in telecommunications and information is twofold. Not only do these advances promise even greater benefits to individuals and organizations who use them, they also break down the regulatory fences that governments have erected to keep industries separate. Technology is rapidly blurring the boundaries between the telephone, cable, broadcasting, and computer industries; between point-to-point communication and mass communication; and between communications and information services. These changes raise anew questions of how public- and private-sector responsibilities for infrastructure investment should be divided.

This paper discusses the issues surrounding public-sector investment in telecommunications infrastructure. It basically addresses the following questions: In what ways and for what reasons does the government invest directly in telecommunications infrastructure? Should these investments change in light of the rapidly advancing technology and increasing importance of telecommunications

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

and information? The paper primarily focuses on federal investments in telecommunications infrastructure, recognizing that state and local governments play important roles as well (Mechling, 1993). Examples include state government investments in telephone and data networks, state university investments in local area networks, and local government investments in police, fire, and other communications networks and facilities.

This discussion of direct public investment complements the prior workshop session on how government influences private infrastructure investment through legislation, regulation, spectrum allocation and assignment, standards setting, and other ''indirect" means. It should be emphasized that these indirect government activities have considerably more effect on total investment in telecommunications infrastructure than do direct government investments or subsidies.

A Note on Definitions

Defining the telecommunications infrastructure is tricky, particularly if the intent is to differentiate the "telecommunications infrastructure" from the "communications infrastructure" or the "information infrastructure." The 1991 infrastructure report from the National Telecommunications and Information Administration (NTIA) distinguishes between the "communications infrastructure which, broadly speaking, encompasses all of the facilities and instrumentalities engaged in delivering and disseminating information throughout the nation" and the more narrowly defined "telecommunications facilities, by which we mean facilities that permit point-to-point, two-way transmission of information of the user's choosing" (NTIA, 1991, pp. 13–14). The broader NTIA definition seems akin to the current "national information infrastructure" that includes point-to-point communications, mass media, the U.S. Postal Service and express delivery services, publishers and printers, and the motion picture and video industries.

This paper defines telecommunications infrastructure as encompassing all electronic communications, but not print. Unlike the NTIA definition, it includes both point-to-point and mass media such as cable television, since their technologies are swiftly converging and both can be used for the transmission of video, voice, and data services. The definition of infrastructure here also comprises four principal components: (1) the physical infrastructure, including both network and user facilities and their operating software; (2) applications software; (3) research and development on physical infrastructure and software; and (4) human capital investments relating to these other elements. This again is broader than the NTIA definition that includes only the physical infrastructure.

FEDERAL INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE

The federal government subsidizes or directly invests in telecommunications infrastructure in a variety of ways, ranging from funding research and development (R&D), to building prototypes and operating systems, to supporting users who purchase telecommunications equipment and services in commercial markets. The principal categories of direct government support and subsidy are listed in Box 3 and described below.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

BOX 3 Categories of Federal Investment in Telecommunications Infrastructure

Tax Incentives

Direct Support of Research, Development, and Demonstrations

  • Internet

  • Other components of the High Performance Computing and Communications Initiative

  • Defense research, development, testing, and evaluation

  • Demonstration and prototype systems

Support of Telecommunications Networks and Systems

  • Defense and space systems

  • FTS-2000 and other government systems

  • National Communications System

  • Capital and operating subsidies

Development and Support of Applications

Support of Users

  • Hardware and software purchases

  • Operating subsidies

  • Training

Other Types of Federal Support

  • Support of regulation (e.g., Federal Communications Commission)

  • Support of policymaking (e.g., National Telecommunications and Information Administration)

  • Support of standards (e.g., National Institute of Standards and Technology)

  • Databases and information

Tax Incentives

Since 1981, the federal government has subsidized technology investments in general through research and experimentation (R&E) tax credits, available to firms whose expenditures on laboratory or experimental R&D are above a base level.2 Most communications equipment manufacturing firms and carriers benefit from R&E tax credits.

One controversial issue since these tax credits were first introduced is the extent to which software development qualifies as eligible R&E. Software is an increasingly important part of the telecommunications infrastructure, so that extending the range of software eligible for R&E tax credits would be a stimulus to infrastructure investments.

Investment tax credits were eliminated in the 1986 Tax Reform Act. Legislation to reenact them has [previously] been proposed to stimulate overall U.S. investment, but it seems unlikely to pass in the current Congress.

Direct Support of Research, Development, and Demonstrations

The administration budget for fiscal year 1994 (FY 94) included $72 billion for research and development, of which $30 billion (42 percent) was for nondefense purposes. Most of the

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

nondefense R&D support for telecommunications, as well as $343 million from the Advanced Research Projects Agency (ARPA) of the U.S. Department of Defense, is now subsumed under the $1.1 billion multiagency High Performance Computing and Communications Initiative (HPCCI). The HPCCI includes five principal components:3

  1. High-performance Computing Systems

    • Research for future generations of computing systems

    • System design tools

    • Advanced prototype systems

    • Evaluation of early systems

  1. Advanced Software Technology and Algorithms

    • Software support for "Grand Challenges"

    • Software components and tools

    • Computational techniques

    • High-performance computing research centers

  1. National Research and Education Network (NREN)

    • Internet

    • Gigabit research and development

  1. Basic Research and Human Resources

    • Basic research

    • Research participation and training

    • Infrastructure

    • Education, training, and curriculum

  1. Information Infrastructure Technology and Applications (IITA)

    • Information infrastructure services

    • Systems development and support environment

    • Intelligent interfaces

    • "National Challenges"

The NREN and the new IITA program are the two components most clearly directed toward advancing the nation's telecommunications infrastructure. However, the entire HPCCI can well be considered to be a federal investment in telecommunications and information infrastructure.

Beyond its contributions to the HPCCI, the Department of Defense invests heavily in advanced communications research, development, test, and evaluation (RDT&E). The FY 94 line-item budget for defense RDT&E for "intelligence and communications" totaled more than $5 billion. Although it is difficult to estimate how much of this directly related to the national telecommunications infrastructure, defense requirements have in the past often led to technology developments with commercial applications. Examples of such national security programs include much of the early work on digital signal processing, R&D on the ARPANET, and research by the National Security Agency on encryption in commercial telecommunications networks.

The federal government has occasionally supported prototypes and demonstrations of telecommunications systems intended for widespread commercial use, of which the Morse telegraph system is the earliest example. In the 1970s, the National Aeronautics and Space Administration (NASA) sponsored the ATS-6 satellite program that successfully demonstrated direct broadcasting of television and other communications services from space. The ATS-6 demonstration convinced a

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

number of developing countries to invest in communications satellite systems, thus benefiting U.S. suppliers of satellites and ground stations (Cohen and Noll, 1991). It did not, however, directly influence the pace of investment in satellites for the U.S. telecommunications infrastructure.

In September 1993 NASA launched the Advanced Communications Technology Satellite (ACTS), which is a direct descendent of the earlier ATS program. As its name implies, ACTS is intended to demonstrate advanced technologies—principally high-data-rate switching and processing onboard the satellite. NASA project managers say that ACTS has directly influenced commercial infrastructure investments such as Motorola's Iridium system, which will provide satellite links to wireless communications users (NASA, 1993, pp. 1–2). Critics claim, however, that commercial technology had bypassed the $600 million ACTS program well before its launch (Broad, 1993).

Support of Telecommunications Networks and Systems

The Department of Defense and other national security agencies have traditionally built and operated their own telecommunications networks, ranging from secure military communications links to the ARPANET, which began as a low-cost computer-to-computer network, to the Global Positioning System (GPS), which sends satellite signals that give accurate location information worldwide. Some defense networks such as the ARPANET and the GPS have evolved to become part of the telecommunications infrastructure, but most remain separate systems dedicated solely to defense missions.

A few civilian agencies such as NASA build and operate extensive telecommunications networks of their own, but most other federal agency communications are coordinated by the General Services Administration (GSA). Since 1987, GSA has maintained an Information Technology Fund to procure telecommunications facilities and services for federal agencies. Its largest contract is known as FTS-2000, providing intercity voice, data, and video services. Managed by AT&T and Sprint, FTS-2000 is a software-controlled "virtual network" whose traffic is physically commingled with nonfederal communications. Whether or not the primarily leased services under FTS-2000 constitute federal "investment" in a technical sense, they certainly support investment in the telecommunications infrastructure by private carriers. Through the Information Technology Fund, GSA also procures local telecommunication services and supports information security and emergency management programs. In addition, the federal government maintains a National Communications System Office responsible for providing critical communications needs during emergencies (NCSO, 1993).

The history of the Internet illustrates how federal support of telecommunications networks can change as the systems evolve (Hart et al., 1992). The original concept of distributed computer/communication links was based on research in the early 1960s supported by the U.S. Air Force (Baran, 1964).4 In 1969 ARPA built the ARPANET, the first computer-to-computer network based on this "packet-switching" concept. The ARPANET was a fully government-funded network linking the Department of Defense and its contractors. By the early 1980s the ARPANET's success led to proposals to develop similar networks for nondefense uses. The National Science Foundation thus funded its own NSFNET to link its supercomputer sites and other major U.S. centers of computing research. Other regional and local networks quickly developed, linked by the NSFNET and other "backbone" networks and connected to many sites and networks around the world. Today, the Internet comprises tens of thousands of interconnected, interoperable computer networks. Federal direct support represents only about 10 percent of total Internet costs in the United States (Hart et al., 1992, p. 686).5 As of July 1993, more than half of the 46,782 registered networks connected to the Internet were commercial.6

Whether federal agencies should continue to provide network subsidies as the Internet becomes part of the national telecommunications infrastructure has emerged as a key policy issue.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

The federal government generally does not provide capital or operating subsidies for telecommunications, except for special congressionally mandated purposes. Since 1949, the Rural Electrification Administration (REA) has offered low-interest loans and other subsidies to support the expansion of telecommunications to rural areas. And the National Telecommunications and Information Administration has awarded planning and construction grants, primarily for public broadcasting and educational television, through its Public Telecommunications Facilities Program.

NTIA is now expanding its grants program to include networking pilot projects, sometimes described as network "on ramps." These grants provide matching funds to schools, libraries, state and local governments, and other nonprofit organizations to purchase the equipment needed to connect to computer networks such as the Internet.

Development and Support of Applications

The federal government has often funded innovative telecommunications applications for defense, education, health care, criminal justice, agricultural extension, and other areas of federal agency concern.7 While past applications have successfully used existing voice, video, and low-speed data facilities, the emerging high-speed data networks may make many new applications possible.8

To promote such applications, the administration requested $96 million in FY 1994 for the new Information Infrastructure Technology and Applications component of the HPCCI; $156 million was eventually allocated, covering a larger number of agencies than the request.9 This effort "will develop and apply high-performance computing and high-speed networking technologies for use in the fields of health care, education, libraries, manufacturing, and provision of government services" (IITF, 1993, p. 9).

Even more difficult than developing new applications, however, is helping users adopt them and adapt them to their own circumstances. The innovation literature is replete with examples of how private firms and public-sector agencies often lag in utilizing new technologies or applications that have been demonstrated elsewhere. As a consequence, some government programs aim to speed adoption and diffusion through technology transfer or extension services. Intensive use of telecommunications and information networks is of growing importance for such diffusion-oriented programs.

Support of Users

Proponents of an expanded NREN propose increased government support to help bring schools, libraries, and other new users onto the network. The administration's program to expand the NTIA networking grants is a clear step in this direction. Legislation proposed in 1993 would have established within the National Science Foundation (NSF) a "Connections Program" to "(1) foster the creation of local networks in communities which will connect institutions of higher education, elementary and secondary schools, libraries, and State and local governments to each other; and (2) provide for connection of such local networks to the Internet."10 The bill also would have authorized federal funds for training new users, which is no less important than purchasing the hardware and software necessary to connect them.

Up to now there have been no categorical federal programs to support telecommunications users. Recipients of federal research grants and contracts may cover some equipment, service, and training costs under their awards; and their institutions receive indirect costs that they can use to pay for telecommunications equipment and services. Federal laws may require telecommunications equipment suppliers and carriers to provide specific features or services, such as closed-caption

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
×

decoders in television receivers11 or "telecommunications relay services" that let hearing-impaired individuals communicate over the telephone network.12 The FCC also offers matching funds to states that adopt "Lifeline" or other assistance programs to low-income telephone subscribers. But the specifics of user subsidies are generally left to state public utility commissions and state and local government welfare programs.13

Other Types of Federal Support

The federal government supports the telecommunications infrastructure in a variety of other ways as well. Most directly, federal support of policymaking, regulation, spectrum allocation, and assignment by the FCC and NTIA sets the ground rules that govern private-sector investments in the telecommunications infrastructure. These agencies as well as NIST support standards-setting activities in telecommunications. And government agencies through their own R&D and procurement sometimes set de facto standards, such as the TCP/IP protocols developed by ARPA and now used by the Internet.

As "the world's largest creator, collector, user and disseminator of information" (OMB, 1992, p. III-5) the federal government provides information and database that flow over the telecommunications infrastructure. Recent revisions of the government's information management policies encourage electronic dissemination (OMB, 1993), and the National Technical Information Service, the U.S. Government Printing Office, and the Library of Congress, among other agencies, are developing ways to make more of their information accessible in electronic form. Although not direct investments in the telecommunications infrastructure itself, these efforts support the infrastructure and make it more valuable to other users.

SCALE OF FEDERAL INVESTMENT IN INFRASTRUCTURE

Federal investments in telecommunications infrastructure are not as well documented as are investments in other physical infrastructure categories. Table 1 presents 1994 federal budget requests totaling $49 billion for infrastructure investments in highways, rail and mass transit, aviation, water transportation, and water supply and treatment. Data published by the Congressional

TABLE 1 Federal Investment in Nontelecommunications Infrastructure

 

Budget Authority ($M)

Category

1993 Estimate

1994 Budget

Highways

21,439

21,321

Rail and mass transit

5,802

5,738

Aviation

10,466

10,863

Water transportation

8,639

8,724

Water supply and wastewater treatment

4,408

2,338

TOTAL

50,754

48,984

 

SOURCE: Congressional Budget Office (1993), Table 4, pp. 16–17.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Budget Office show that state and local governments invested more than twice as much in infrastructure as did the federal government during the 1980s.14

Data available in 1993 on federal investments in telecommunications infrastructure are shown in Table 2. As noted above, the largest direct investments have been for R&D through the HPCCI. The budget for defense RDT&E for intelligence and communications is five times greater than the HPCCI budget, but most of this cannot be linked directly to the national telecommunications infrastructure. However, the new Technology Reinvestment Program (TRP) of the Department of Defense to develop dual-use technologies [could have made] some contributions to infrastructure. The TRP identified information infrastructure, including network architecture, wireless communications, software development, and heterogeneous databases, as the first of eleven key dual-use technologies for funding (ARPA, 1993, p. A-1). TRP received $472 million in fiscal year 1993, with $600 million requested for 1994. [FY 1995 appropriations were recised.]

Under networks and facilities, GSA's Information Technology Fund had a proposed FY 94 budget of $1.3 billion, of which $834 million was for lease or purchase of interexchange and local telecommunications services and equipment. The direct subsidy component of the REA telephone loan program varies from year to year but is less than 15 percent of the total loan portfolio.

Federal budget requests for telecommunications applications and user support totaled about $230 million. These include programs in NTIA, REA, the Department of Education, and the Department of Health and Human Services, as well as the two initiatives for information infrastructure applications and networking pilot projects. Direct federal spending on telecommunications regulation, policymaking, and standards through the FCC, NTIA, and NIST amounted to about $160 million.

A narrow definition of direct federal investment in telecommunications infrastructure—including only the NREN, ACTS, the National Communications System, the REA telephone loan subsidies, the NTIA Public Telecommunication Facilities Program and networking grants, the IITA program, and other federal agency telecommunications applications programs—gives a 1994 total of about $530 million in proposed budget authority. Broadening the definition to include the entire HPCCI, the investment portion of the GSA Information Technology Fund, the small fraction of the TRP and Defense RDT&E (outside the HPCCI) that contributes to the civilian telecommunications infrastructure, and federal funding for telecommunications regulation, policymaking, and standards setting increases the total to perhaps $1.8 billion to $2 billion. This figure is still small compared to the $49 billion the federal government budgeted in 1994 for other physical infrastructure and to the $50 billion estimate for annual private investment in U.S. telecommunications infrastructure,15 but it represented a significant increase over federal investment in prior years and signified the importance the Clinton administration has placed on advancing the telecommunications infrastructure.

RATIONALES FOR DIRECT FEDERAL SUPPORT

Given the large and growing private investments in U.S. telecommunications infrastructure, why should the federal government directly fund or subsidize additional investment? Can we not rely on the private sector to make better investment decisions than the government? The basic response is that in some cases the net benefits to society from infrastructure investment will exceed the benefits that individuals and firms can appropriate to themselves. This is the classic public goods argument for government support of highways, airports, and water and sewer systems. Some telecommunications investments may share these public goods characteristics.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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TABLE 2 Federal Investment in Telecommunications Infrastructure

 

Budget Authority ($M)

Category

1992 Actual

1993 Estimate

1994 Budget

Research and Development

National Research and Education Network

92

114

171

Other High Performance Computing and Communications Initiative components (except Applications)

563

681

829

National Aeronautics and Space Administration ACTS program

11

12

9

Defense research, development, training and education—intelligence and communications

4,584

4,910

5,168

Defense Technology Reinvestment Program

 

472

600

Networks and Facilities

General Services Administration Information Technology Fund

 

 

 

• Intercity services

554

589

508

• Local telecommunications

261

324

326

• Information security and emergency management

34

35

36

National Communication System

52

67

73

Rural Electrification Administration (REA) telephone loan subsidy (total direct telephone loans)

34 (240)

44 (344)

45 (359)

Applications

Information Infrastructure Technology and Applications

47

96

Dept. of Education Star Schools Program

18

23

27

Dept. of Health and Human Services Medical Library Assistance

21

21

3

REA educational and medical links

5

5

10

Support of Users

National Telecommunications and Information Administration (NTIA) public telecommunications facilities

220

20

21

• Information infrastructure networking pilot projects

 

 

54

Other Support

Federal Communications Commission operations

126

141

130

NTIA operations

18

20

22

National Institute of Standards and Technology Computer Systems Laboratory

12

12

13

 

SOURCE: Budget of the United States Government, Fiscal Year 1994; other U.S. government documents.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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The general public goods rationale can further be divided into four principal arguments for federal investments in telecommunications:

  1. Serving government missions. This rationale is used especially to justify federal investment in R&D and advanced communications systems in defense, space, and intelligence operations. A related argument states that the federal government should directly support telecommunications infrastructure that provides net benefits to education, improved state and local government operations, and other activities that have public goods aspects, even when the federal government is not the direct provider of these goods or services.

  2. Balancing private underinvestment in R&D. New knowledge is a true public good, expensive to generate but generally cheap to replicate, and consequently yields social returns much higher than private returns (CBO, 1991, p. 75; 1993a). Private firms and individuals will thus consistently invest less in R&D than is socially optimal. This argument lends particularly strong support for government funding of basic research but also is used to justify government support of "precompetitive" technologies and prototypes such as the gigabit network testbeds under the NREN program. It is also the underlying rationale behind the R&E tax credit.

  3. Redressing other private market failures. Beyond underinvesting in R&D, private markets may fail to give the right signals for optimal investments in telecommunications for such reasons as:

    • Economies of scale or scope, which characterize most infrastructure investments whether they be highways, electricity distribution systems, or telecommunications distribution networks.16 The trend toward digital communications reinforces economies of scope, since a digital network can efficiently intermix voice, video, and data services and provide customized "virtual networks" to users. Economies of scale and scope constitute a principal rationale for government regulation of telecommunications services;

    • Network externalities, which are more specific to telecommunications, since the value of the network to each subscriber increases as others connect to it;

    • Uncertain demand for new services, which may lead telecommunications carriers and other suppliers to underinvest and thus support government efforts to aggregate demand or subsidize costs in order to seed the market;

    • Lack of information among users that hinders them from signing up for or using telecommunications services. This argument is often made to justify government subsidies to public-sector organizations, small businesses, and individuals; and

    • High transaction costs for users, often related to lack of information.

  1. Assuring equitable prices and access. A clear purpose of government is to make sure that all citizens have fair access to and use of essential infrastructure. In the United States, issues of fairness in access to and cost of telecommunications services are generally handled within the regulatory process. Under the Communications Act of 1934 and subsequent legislation, the FCC sets the basic rules for common carrier, broadcast, and cable services. State and local government agencies then regulate prices of some services, often providing lower rates to certain groups of subscribers through cross-subsidies from other subscribers. Federal direct investment has played a relatively minor role in fostering equity—one exception being the REA-subsidized loans for rural telecommunications systems. But concern about the new technologies exacerbating the gap between the "information rich" and "information poor" leads some to propose direct federal programs to provide Internet connections and other advanced services to disadvantaged groups.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Federal direct investment has played a relatively minor role in fostering equity—one exception being the REA-subsidized loans for rural telecommunications systems. But concern about the new technologies exacerbating the gap between "information rich" and "infromation poor" leads some to propose direct federal programs to provide Internet connections and other advanced services to disadvantaged groups.

Table 3 shows how these rationales relate to the categories of direct federal support discussed above. Of course, the conceptual basis of an argument for federal support does not mean that such support is appropriate or sensible. Many past federal investments in telecommunications to serve agency missions, for example, have proved short sighted.17 Where infrastructure investment comes predominantly from the private sector, the burden falls on the government to justify its direct involvement. A recent forum by the Organization for Economic Cooperation and Development (OECD) on "Infrastructure Policies for the 1990s" concluded:

In order to exploit more fully the scope for making greater use of private capital and building infrastructure, government and the private sector need to explore new and flexible ways of cooperating with each other—including the possibility of mixed financing—and establish criteria for the allocation of roles between public and private resources . . . . If a project's rate of return is perceived to be sufficient to attract private sector capital, then the project should be left to the private sector to construct. . . . Where a project's profitability is a borderline case and/or social equity considerations are involved, then the government should offer incentives to attract private capital . . . . Only where profitability is clearly negative but the social rate of return high should be project remain in the public domain (OECD, 1993, p. 6).

Table 3 Rationales for Direct Federal Investment in Telecommunications Infrastructure

 

 

Rationale for Investment

 

 

Category of Federal Investment

Federal Government Missions

Non-federal missions

Underinvestment in R&D

Other Market Failures

Equity

Tax incentives

 

 

x

 

 

Research and development

x

 

x

 

 

Networks and systems

x

 

 

x

x

Applications

x

x

 

x

 

Support of users

 

x

 

x

x

Other federal support

x

 

 

x

x

Regulation

 

 

 

 

 

Policymaking

 

 

 

 

 

Standards

 

 

 

 

 

Databases and information

 

 

 

 

 

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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DISCUSSION

Direct federal support of telecommunications infrastructure has primarily been on the supply side: support of R&D, testbeds and prototypes, and operating networks and systems. These supply-side initiatives work best when the objective is to serve government missions or bolster private-sector underinvestment in R&D. Underinvestment in research may be of particular concern in a time of industry restructuring and uncertainty such as that facing the telecommunications industry today.18 When the objective is to improve economic performance by reducing market failures, demand-side initiatives seem more suitable. These can include stimulating adoption and diffusion of applications and innovative services or supporting users. When equity considerations dominate, legislative mandates (e.g., requiring carriers to provide services for the hearing impaired) or regulatory approaches may be preferred.

Past studies have concluded that the U.S. government is not very good at picking commercial winners in telecommunications or other advanced technologies (Cohen and Noll, 1991; Baer et al., 1977). Some allege that foreign governments have been more successful in building advanced telecommunications infrastructures, citing Japanese plans to deploy fiber optics to the home, and both European and Japanese investments in integrated services digital networks (ISDNs). Under close scrutiny, however, these examples are not very persuasive. Japanese plans for installing fiber to the home have been regularly deferred, so that the United States and Japan now seem on roughly comparable schedules. And the ''ISDN gap" between the United States and Europe and Japan results largely from the ready availability of less expensive digital lines in the United States (OTA, 1993a, p. 183; Flamm and Weingarten, 1993).

Market feedback becomes essential when direct government support extends beyond the R&D stage. The lessons from past government efforts to demonstrate new technologies are clear (Baer et al., 1977):

  • Involve industry and users in the project design and at all subsequent stages.

  • Require significant cost sharing from participants and others who stand to gain if the demonstration succeeds.

  • Have an explicit plan to hand off the technology to the private sector.

  • Keep the demonstration focused on meeting its technical and economic objectives; insofar as possible, shelter it from capture by political constituencies.

  • Avoid rigid schedules or tight time constraints.

These guidelines pertain to gigabit network demonstrations and testbeds under the NREN program as much as to past government-funded demonstrations in transportation or energy.

The federal government has opportunities to restructure its own activities in support of advancing the telecommunications infrastructure. The decision under FTS-2000 to lease virtual networks from private carriers rather than build separate government facilities is one excellent recent example. Others include:

  • Making Internet services available through the FTS-2000 system. Assuring interoperability between FTS-2000 and the Internet could improve federal agency operations and enhance public access to government information and services (OTA, 1993b, p. 70).

  • Accelerating efforts to make federal information and databases available on the Internet and other electronic networks. This is itself an important topic of current policy discussion, with controversies over developing directories and other tools to make access easier, appropriate pricing, potential competition with private-sector information providers, appropriate use of the Freedom of Information Act, privacy considerations, and other issues that are beyond the scope of this paper. Nevertheless, federal agencies should be encouraged to provide the public with greater electronic access to government-produced information.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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  • Extending federal technology transfer and technology extension services to make full use of telecommunications networks. In some cases this may mean the redesign of technology programs to emphasize demand-pull from users rather than technology-push from federal agencies.

  • Expanding federal agency use of electronic data interchange (EDI) for forms and standard documents. The Commerce at Light Speed system originated by the Department of Defense is a good example of how EDI systems can lower costs and increase efficiency.

These and other efforts to improve government services and operations by using the telecommunications infrastructure more effectively have been a major theme of the administration's new program to "reinvent government" (Gore, 1993).

Federal support can also help develop telecommunications applications in education, health care, library access to information, and other ways to improve state and local government services; and it can help new users adopt these applications. The new programs for information infrastructure applications and networking pilot projects are cases in point. But one should recognize that the federal government is a relatively small player in these arenas. The federal role should be to support applications development and diffusion, not to provide permanent operating subsidies that could become expensive new entitlements. Steady-state funding of telecommunications applications should ultimately rest with the public- and private-sector users who find value in them.

Another way the federal government can directly advance the domestic telecommunications infrastructure is to reallocate spectrum from government to nongovernment use. According to legislation introduced in 1990, "the [federal] government currently reserves for its own use, or has priority of access to, approximately 40 percent of the spectrum that is assigned pursuant to the Communications Act of 1934."19 Much of this spectrum was initially allocated to the federal government for national security purposes, but advances in technology and burgeoning commercial demand for wireless services suggest revisiting that decision. Reallocating underutilized government spectrum can greatly expand the infrastructure's capacity to provide cellular telephone, paging, and the next generation of wireless personal communications services. By auctioning spectrum licenses, it can also bring significant new revenues to the federal government. Congress began this process by authorizing the reallocation of not less than 200 megahertz as part of the Omnibus Budget Reconciliation Act of 1993.20

Beyond direct investment, the federal government's most important role remains that of sustaining an innovative, competitive telecommunications infrastructure provided by private-sector firms. Government's responsibilities are to maintain a sound economic climate for private investment and a regulatory framework that encourages fair and open competition among equipment and service providers. We no longer think of the telecommunications infrastructure as dominated by a single network that provides all services to all users. Rather, the infrastructure includes multiple networks with different functions, capabilities, and patterns of ownership and use. Assuring interconnection and interoperability of these networks is an important role of government at all levels, so that society can gain the maximum value from both public- and private-sector investments in telecommunications infrastructure.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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REFERENCES

Advanced Research Projects Agency (ARPA). 1993. "Technology Reinvestment Project: Program Information Package for Defense Technology Conversion, Reinvestment, and Transition Assistance," Arlington, Va., March 10.

Akselson, Sigmund, Arne Ketil Eldsvik, and Trine Folkow. 1993. "Telemedicine and ISDN," IEEE Communications Magazine (January):46–51.


Baer, Walter S., Leland L. Johnson, and Edward W. Merrow. 1977. "Government-sponsored Demonstrations of New Technologies," Science 196(May 27):950–957.

Baran, Paul. 1964. On Distributed Communications: Summary Overview, RM-3767-PR. RAND Corporation, Santa Monica, Calif., August.

Broad, William J. 1993. "Satellite a White Elephant, Some Say," New York Times, July 20, p. C1.


Cohen, Linda R., and Roger G. Noll. 1991. "The Applications Technology Satellite Program," pp. 165–166 in The Technology Pork Barrel. Brookings Institution, Washington, D.C.

Committee on Information and Communication (CIC), National Science and Technology Council. 1994. High Performance Computing and Communications: Technology for the National Information Infrastructure. Office of Science and Technology Policy, Washington, D.C.

Congressional Budget Office (CBO), U.S. Congress. 1991. How Federal Spending for Infrastructure and Other Public Investments Affects the Economy. Congressional Budget Office, Washington, D.C., July.

Congressional Budget Office (CBO). 1993a. A Review of Edwin Mansfield's Estimate of the Rate of Return from Academic Research and Its Relevance to the Federal Budget Process. Congressional Budget Office, Washington, D.C., April.

Congressional Budget Office (CBO). 1993b. Updating Trends in Public Infrastructure Spending and Analyzing the President's Proposals for Infrastructure Spending from 1994 to 1998. Congressional Budget Office, Washington, D.C., August.


Egan, Bruce L., and Steven S. Wildman. 1992. "Investing in the Telecommunications Infrastructure: Economics and Policy Considerations," pp. 19–54 in A National Information Network: Annual Review of the Institute for Information Studies. Institute for Information Studies, Queenstown, Md.


Federal Coordinating Council for Science, Engineering, and Technology (FCCSET), Office of Science and Technology Policy. 1992. Grand Challenges 1993: High Performance Computing and Communications, The FY 1993 U.S. Research and Development Program. Committee on Physical, Mathematical, and Engineering Sciences, Office of Science and Technology Policy, Washington, D.C.

Federal Coordinating Council for Science, Engineering, and Technology (FCCSET), Office of Science and Technology Policy. 1994. High Performance Computing and Communications: Toward a National Information Infrastructure. Committee on Physical, Mathematical, and Engineering Sciences, Office of Science and Technology Policy, Washington, D.C.

Flamm, Kenneth, and Fred W. Weingarten. 1993. "Final Report to the National Science Foundation: Participation in International Study of High Performance Computing." National Science Foundation, Washington, D.C.


Gore, Jr., Albert. 1993. From Red Tape to Results: Creating a Government That Works Better & Costs Less: Reengineering Through Information Technology, Accompanying Report of the National Performance Review. U.S. Government Printing Office, Washington, D.C., September.


Hart, Jeffrey A., Robert R. Reed, and Francois Bar. 1992. "The Building of the Internet," Telecommunications Policy (November):666–689.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Information Infrastructure Task Force (IITF). 1993. The National Information Infrastructure: Agenda for Action. Information Infrastructure Task Force , Washington, D.C., September 15.


Johnson, Leland L. 1988. Telephone Assistance Programs for Low-Income Households. RAND Corporation, Santa Monica, Calif., February.


Mechling, Jerry. 1993. "A State-level View of Information Infrastructure: Aligning Process and Substance," pp. 31–45 in Building Information Infrastructure, Brian Kahin, ed. McGraw-Hill, New York.


National Aeronautics and Space Administration (NASA). 1993. "ACTS Technology Being Used by Industry," ACTS Quarterly. NASA Lewis Research Center, Cleveland, Ohio, August.

National Communications System Office (NCSO). 1993. FY92 National Communications System's Annual Report, NCS 2653/6. National Communications System Office, Washington, D.C.

National Science Board (NSB). 1993. Science and Engineering Indicators, NSB 93–1. U.S. Government Printing Office, Washington, D.C.

National Telecommunications and Information Administration (NTIA). 1991. The NTIA Infrastructure Report: Telecommunications in the Age of Information. U.S. Department of Commerce, Washington, D.C., October.


Office of Management and Budget (OMB). 1992. Information Resources Plan of the Federal Government. Office of Management and Budget, Washington, D.C., November.

Office of Management and Budget (OMB). 1993. Management of Federal Information Resources, Circular No. A-130. Office of Management and Budget, Washington, D.C., revised June 25.

Office of Technology Assessment (OTA), U.S. Congress. 1989. Linking for Learning: A New Course for Education. Office of Technology Assessment, Washington D.C., November.

Office of Technology Assessment (OTA), U.S. Congress. 1990. "Communication and Comparative Advantage in the Business Sector," pp. 107–142 in Critical Connections: Communication for the Future. U.S. Government Printing Office, Washington, D.C., January.

Office of Technology Assessment (OTA), U.S. Congress. 1991. Rural America at the Crossroads: Networking for the Future. Office of Technology Assessment, Washington D.C., April.

Office of Technology Assessment (OTA), U.S. Congress. 1993a. U.S. Telecommunications Services in European Markets. Office of Technology Assessment, Washington, D.C., August.

Office of Technology Assessment (OTA), U.S. Congress. 1993b. Making Government Work: Electronic Delivery of Federal Services. Office of Technology Assessment, Washington, D.C., September.

Organization for Economic Cooperation and Development (OECD). 1993. Infrastructure Policies for the 1990s. Organization for Economic Cooperation and Development, Paris.


Thompson, Robert L. 1947. Wiring a Continent: The History of the Telegraph Industry in the United States, 1832–1866.Princeton University Press, Princeton, N.J.

NOTES

1.  

Not everyone agrees with this assessment. For a discussion of relevant studies, see Egan and Wildman (1992) and OTA (1989).

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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2.  

Congress has extended the R&E tax credits for three years, and the administration has sought to make them permanent. See Technology for America's Economic Growth, A New Direction to Build Economic Strength, Washington, D.C., The White House, February 22, 1993, p. 27; Technology for Economic Growth: President's Progress Report, Washington, D.C., The White House, November 1993, pp. 23-24.

3.  

Gibbons, John H., testimony before the Committee on Science, Space, and Technology, U.S. House of Representatives, April 27, 1993. The HPCCl is described in FCCSET (1992).

4.  

Ten additional volumes detailing Baran's concept of distributed communications were also published by RAND in August 1964.

5.  

A good portion of the remaining 90 percent of costs is paid for by universities that receive some payments for indirect costs from the federal government, and by state and local governments.

6.  

Presentation by Tony Rutkowski at INET '93, International Networking Conference, San Francisco, California, August 1993.

7.  

See, for example, OTA (1989, 1991) and Aksclson et al. (1993).

8.  

See FCCSET (1993), pp. 41-65.

9.  

See FCCSET (1994), p. 25, and CIC (1994), p. 50.

10.  

U.S. Congress, High Performance Computing and High Speed Networking Applications Act of 1993, H.R. 1757, April 21, 1993.

11.  

U.S. Congress, Television Decoder Circuitry Act of 1990, PL 101-431.

12.  

U.S. Congress, Americans with Disabilities Act of 1990, PL 101-336, July 26, 1990.

13.  

For example, see Johnson (1988).

14.  

See CBO (1993b), Table 1, p. 3.

15.  

Pepper, Robert, testimony before the Subcommittee on Technology, Environment, and Aviation, Committee on Science, Space, and Technology, U.S. House of Representatives, Washington, D.C., March 23, 1993. Pepper estimates that the $50 billion is "split almost evenly between network equipment and customer premises equipment." Some would argue that investment by regulated common carriers constitutes "public investment" in telecommunications infrastructure, noting that The NTIA Infrastructure Report (NTIA, 1991) compares U.S. common carrier investments with investments by goverment-owned carriers in other countries (see Table 5.2). However, this paper contends that investments by regulated private carriers in the United States (and increasingly in other countries as a result of privatization of goverment-owned telecommunications entities) are qualitatively different from direct goverment investments and should be clearly separated.

16.  

Wired distribution networks, including coaxial cable and fiber optic systems, show economies of scale; but wireless networks typically do not. Whether scale economies apply at the level of telecommunications services, when labor and other costs are factored in, remains an open question. P. Srinagesh, Bell Communications Research, private communication.

17.  

The rapid obsolescence of telecommunications facilities and equipment was a principal reason that the federal government turned to leasing and purchasing services from private firms under FTS-2000.

18.  

The most recent data collected by the National Science Foundation on industry-supported R&D in the communication equipment sector (SIC 366) show a small decline in constant dollars—about I percent per year—over the seven years following the AT&T divestiture in 1984 (NSB, 1993, Appendix Tables 4-1, 4-32, and 4-33).

19.  

U.S. Congress, Emerging Telecommunications Technologies Act of 1990, H.R. 2965.

20.  

Title VI, Omnibus Budget Reconciliation Act of 1993, August 10, 1993.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Federal Investment Through Subsidies: Pros and Cons

Bridger M. Mitchell

Subsidies for public programs have an appealing ring to many enthusiasts of the information infrastructure—until one confronts the need to finance them! The "shadow price" of a subsidy dollar today is high. Additional federal spending for telecommunications investment requires increased taxes, a larger deficit, or cuts in other government programs—each is a measure of the opportunity cost of a greater subsidy. Efficiency in public budgeting would adjust government spending across diverse programs to equate the marginal benefit per dollar spent.

In this paper I consider the benefits that federal subsidies could yield by examining the types of market failures that may cause private investment to fall short of socially desirable levels. I then discuss policy instruments for directing public funding to the industry, consider the characteristics of supply-side and demand-side subsidies, and conclude with a highly stylized view of how subsidies may promote network growth.

MARKET FAILURES

Market failures can cause investment and consumption decisions reached in private markets to be economically inefficient. In such markets public tax and subsidy policy can potentially improve the performance of the economy. In the telecommunications sector three types of market failures can arise.

First, in a communications network existing subscribers place greater value on their network connection as more users join the network. The consequence of this "network externality" is that the social value of enlarging the telecommunications network by one user exceeds the private value expressed in a potential subscriber's willingness to pay (his/her maximum demand price). To a large extent, a single network supplier is able to internalize this effect by offering promotional prices and volume discounts that are recovered by increased revenues from a larger future network. However, if there are several competing suppliers, they may be unable to appropriate the full gains from eventual network expansion. The result is a failure of the market to reach its optimal size.

Second, the spread of telecommunications services is restricted by the limited income of some consumers. Social goals and principles of equity may then establish "universal service" as an objective, one that calls for expanding service beyond the point implied by the network externality.

A third failing of markets occurs when the commodity is a public good that, once produced, can be consumed by any number of users without additional cost. Information per se is a good that has zero marginal cost when an additional user consumes it. Many sources of information are consumed by using telecommunications services to perform search, access, and retrieval services at

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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a distance. As a result of this complementarity of information and telecommunications, the derived (net) demand for information resources is increased as the costs of effective access (telecommunications and information processing) fall.

INSTRUMENTS FOR GOVERNMENTAL FUNDING

Governments have several classes of policy instruments with which to transfer resources into the telecommunications sector and to specific services.

Price discrimination and internal (cross-) subsidies permit revenues to be transferred from profitable, high-value services to other services. Public regulation has traditionally encouraged monopoly networks to set selected prices well above incremental costs and maintain low prices for favored services. Such rates will be unsustainable in competitive markets. In the telephone network, business subscribers and long-distance callers have been charged high rates in order to benefit residential users and local calling. However, major price discrimination requires that the supplier have market power. As more markets are contested by new entrants, frequently with new technology, the scope for "cross-subsidization" is diminishing rapidly.

Direct governmental subsidies to the telecommunications sector include research grants, demonstration projects, matching funds, state assistance programs, and low-interest loans.

Government provides in-kind assistance in the form of discounts or preferential access to public resources. Thus, the radio frequency spectrum has traditionally been transferred to private suppliers for only nominal licensing fees. The many inefficiencies that this allocative mechanism has created have long been understood, including the wasted resources expended by contenders for licenses that may largely dissipate any intended assistance.

Finally, through broad-based tax preferences for investment and research and development expenditures, government encourages higher levels of activities in sectors, such as telecommunications, that are particularly capital and research intensive.

SUPPLY-SIDE AND DEMAND-SIDE SUBSIDIES

Government subsidies can be applied on the "wholesale" side of the market to expand supply and lower private costs or on the "retail" side to stimulate demand and reduce prices to users.

A supply-side strategy requires the government to pick the probable winners when the market is young or to risk extended delays through administrative and legal processes. Market-like procedures, such as auctions, can help direct resources to high-value suppliers and hasten the transfer. Regulatory bodies, which have encouraged forms of price discrimination that direct suppliers' revenues to favored users and services, have found that the concentration of divested interests that became entrenched as a result of such policies makes it difficult to terminate "cross-subsidies." The relatively recent shift away from a regime of cost-based telecommunications regulation to a policy based on incentive regulation, combined with the shrinking size of the monopoly sector, is reducing the use of off-budget cross-subsidies.

User-based "retail" subsidies place purchasing power directly in the hands of final consumers, giving them the choice of vendor and technology. An effective demand-side strategy requires network pricing mechanisms, so that user values can be signaled to suppliers. While long established for the telephone network, user pricing of services has yet to develop in many computer networks. Also, a program of end-user subsidies incurs relatively high administrative costs. Funds must be closely targeted to reach intended beneficiaries; otherwise, resources are dissipated in the form of inefficient funding of unintended uses.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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A STYLIZED MODEL

We can distinguish the effects of supply-side and demand-side subsidy strategies by considering a highly stylized view of the economic evolution of a telecommunications network. Figure 5 shows both the average cost of a connection and the average value subscribers place on being connected to the network as a function of the percentage of the market coverage. In these stylized terms we can represent the change in cost per subscriber and value per subscriber during the time that the network grows from its inception toward 100 percent penetration.

FIGURE 5 Economic evolution of a telecommunications network.

Initially, the average cost of a connection declines with network size, a cost improvement that combines several effects. As a result of "learning by doing," the network suppliers improve production activities and achieve lower unit costs. At larger scales, higher-capacity technologies begin to substitute for the initial transmission and switching facilities. Because the growth in penetration occurs over time, technological improvements and innovations that reduce average costs first become available when the network is larger. Eventually, when the network is mature, "dis-economies of scale" from switching connections between a larger number of subscribers and

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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the higher costs of extending the network to low-density and distant regions set in and cause average costs to level off or turn up.

On the demand side, the average user's valuation of a network connection tends to decline with network size. The first subscribers are those who highly value communication with a small community of interest. Consumers with somewhat less to gain defer subscribing until the price has dropped. To some extent, network growth itself causes the average value of membership to increase—as more subscribers join the network and connectivity spreads, a connection becomes more valuable to existing subscribers and their network usage expands. (One recent example is the fax subnetwork.) Users, as well as the network supplier, also gain from learning by doing and discover unanticipated uses and value in network communication. The demand side of the market also experiences innovation over time, as novel applications are developed and complementary services take hold. Finally, as market penetration approaches high levels, the remaining nonsubscribers may perceive only limited value in network membership and the average value of a connection declines further.

The social value of the network at different stages of development is indicated by the difference between the average user value and the average cost, scaled up by the number of subscribers. Viewed statically, the network is unprofitable to suppliers of network services at low penetration rates. Assuming a common price is charged to all subscribers, profits are negative in the region to the left of a break-even point such as that shown in Figure 5. If, using nonlinear pricing, suppliers are able to capture a higher fraction of the average value per subscriber, they will begin to earn profits at penetration rates somewhat before the break-even point is reached. Beyond this point suppliers will strive to expand the network, potentially competing up to an equilibrium penetration point at which profits fall to zero.

Both supply-side and demand-side subsidy policies can encourage network growth. In a young network, supply policies lower the average cost of a subscriber connection. Demand-side subsidies reduce the consumer's price of subscribing or support applications that increase the value of subscription and thus shift the value curve upward. Each intervention reduces the break-even size of the network and helps get the industry to a point of self-sustaining growth at an earlier date.

In the mature phase of network development, subsidies can assist in pushing penetration toward achieving universal service. User subsidies, particularly if targeted to nonsubscribers, reduce the net price of subscription and effectively shift the market demand upward.

The case for public subsidies to the telecommunications infrastructure turns on the extent to which private markets fail to achieve efficient outcomes and the policy objective of ensuring widely available service. Subsidies to both suppliers and end users can, in principle, improve on market outcomes. But such interventions also result in administrative mechanisms and political interests that increase costs and dilute effectiveness. As a result federal subsidies are purchased with high-cost dollars, and the benefits of a federal subsidy policy need to be substantial and clearly established if they are to compete successfully with other demands for public funds.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Telecommunications Infrastructure from the Carrier's Point of View

Charles L. Jackson

Here I discuss the carrier's point of view regarding public investment in the telecommunications infrastructure. Although I am not associated with any particular carrier, I have worked closely with many different carriers over many years. As a result, I think I provide a unique point of view, based partly on interviews with carriers and partly on my own normative analysis. I see three very important points regarding telecommunications investment. These points are vital to effectively planning for tomorrow's telecommunications infrastructure.

POINT ONE: PRIVATE-SECTOR INVESTMENT IS THE KEY TO TOMORROW'S INFRASTRUCTURE

It is critical to realize that the private sector will have by far the greatest influence in developing the telecommunications infrastructure. Historically, government investment in telecommunications has largely been limited to military and research applications. More recently, growing public concern about U.S. economic competitiveness and social services has yielded several initiatives for federal government investment in the telecommunications infrastructure. The Clinton administration is promoting the development of a national information infrastructure to connect end users to vast amounts of information. However, the administration correctly acknowledges government's role as secondary to that of the private sector—one that serves to "complement and enhance" private-sector efforts. Although such secondary federal support does aid infrastructure development, it can have nowhere near the impact of the private sector. Any federal government investment in the telecommunications infrastructure will be dwarfed by private-sector investment. To illustrate this point, Table 4 contains estimates of annual revenues and investment by major players in the private sector in recent years.

These amounts far outweigh the public investment that can be provided through direct government investment programs, such as the High Performance Computing and Communications Initiative (HPCCI). My (conservative) estimate of private investment [circa 1991] is over $45 billion. In contrast, the annual budget for the National Research and Education Network (NREN) program, which is the HPCCI component that most directly advances the telecommunications infrastructure, is about $123 million.1 There is some call for federal subsidies for telecommunications users as a way to expand the infrastructure. Proposals to expand NREN would

NOTE: The contributing author is Kirsten M. Pehrsson of Strategic Policy Research.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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TABLE 4 Private-Sector Revenues Compared to Capital Investment

 

Annual Revenues ($B)a

Annual Investment ($B)b

AT&T

34.4

2.4

MCI

8.3

1.4

Sprint

5.4

1.2

Local exchange carriers

82.2c

19.9

Cable industry

19.8

2.3

Cellular industry

3.1

2.5d

CIMe

n/a

15.4f

TOTAL

>150.0

45.1

a Sources: AT&T, MCI, and Sprint: FCC (1991); local exchange carriers: USTA (1988); cable industry: Paul Kagan Associates, Inc. (1992); cellular industry: Leibowitz (1992); commercial, industrial, and military communications equipment: EIA (1991). Figures reflect 1991 except where otherwise noted.

b Sources: Same as sources for revenues, except MCI and Sprint figures from Standard & Poor's (1992). Figures reflect 1991 except where otherwise noted.

c 1987 figure—total operating revenues.

d Derived by subtracting total capital investment as of December 1990 from that of December 1991.

e Commercial, industrial, and military communications equipment.

f 1990 figure—estimated by Electronic Industries Association Marketing Services Department.

support bringing schools, libraries, and other new users on to the network and training new users once they are connected. However, there has never been any comparable funding to support telecommunications users in the past. And even if such proposals were to be adopted, federal subsidies of telecommunications usage would likely be so small as to do little to promote the infrastructure. A direct usage subsidy of $5 billion per year would affect only about 3 percent of our nation's spending on telecommunications.

The dramatic contrast between potential public and private investment highlights the importance of creating an environment that invites private investment. This brings me to my second point.

POINT TWO: REGULATORY POLICY IS CRITICAL TO PRIVATE-SECTOR INVESTMENT

Regulatory policy is an extremely important factor in creating an environment that favors investment in the infrastructure. In fact, any major aspect of regulatory policy is likely to have a much greater effect on the nation's telecommunications infrastructure over the next decade than could any politically feasible level of government investment.

There are many examples of regulation's enormous influence over telecommunications investment. The Federal Communications Commission's (FCC) recent rules for personal communications services, for one, are bound to have a tremendous impact on the evolution of wireless communications for decades to come. Limits on market entry (e.g., the cable/telephone company cross-ownership bar, local exchange carrier franchise requirements) restrict areas in which certain telecommunications players may invest. And even within the area to which investment is restricted,

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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regulation may pose other deterrents to investing. Prudence reviews threaten a ''heads-you-win, tails-I-lose" situation for the carriers, whereby profits on successful risky investments are limited, while at the same time losses from unsuccessful risky investments are disallowed from the rate base. Depreciation schedules that lag behind actual economic depreciation also deter investments.

Any one of the many facets of regulation may have an enormous impact on incentives for investment in the infrastructure. Consider, for example, depreciation policy. The amount of depreciation currently allowed could be adjusted to more closely match the decline in economic value of the resource being depreciated. As a result, investors would be more likely to get their money back from a resource before it becomes obsolete. This would serve as a catalyst to investment. And depreciation adjustment would encourage additional investment not merely by the amount imposed in additional consumer charges each year, but by several times that amount. The dollars affected by even a slight change in one aspect of regulation—such as the acceleration of telephone company central office depreciation from, say, 18 to 15 years—is comparable to NREN's total annual funding.

Due to the tremendous effects of regulation on investment, it is important to look ahead and consider how regulation is likely to affect carrier investment in the future. There are several possible scenarios that would deter investment. Carriers could find themselves in a world where they are forced to unbundle services. While facing massive competition, they may not be allowed to take measures to confront that competition. They could be in an environment that prevents them from recovering investments. In that case it might be rational for carriers to enter a "harvest" mode. They would reap whatever income is possible from current capital investments but not make any additional investment. As a result, the telecommunications infrastructure would begin to wither. It would then be left up to new entrants in the telecommunications market to build the network for the twenty-first century. No carriers have yet adopted this strategy (at least not openly). But given the current direction of regulation and competitive entry, this scenario is not unimaginable.

POINT THREE: THE PUBLIC SECTOR HAS A ROLE IN INFRASTRUCTURE DEVELOPMENT

The fact that regulation will have far greater impact on infrastructure investment than will public sector infrastructure investment does not mean that certain types of public-sector support are not important—even critical. Government initiatives in telecommunications research and development and promoting applications are beneficial. History shows that government support of research and development has generated important telecommunications technology developments. Over 20 years ago the Advanced Research Projects Agency (ARPA) of the U.S. Department of Defense built the ARPANET. ARPANET's packet-switching technology provided the foundation for today's Internet, which provides nationwide public access to an international network. Federal funding supports the Massachusetts Institute of Technology's Lincoln Laboratory, which has pioneered important developments in telecommunications electronics, including communications satellite technology. Although benefits from investments such as these are difficult to quantify, they advanced the state of the art of telecommunications. Past government funding of facilities has also promoted the telecommunications infrastructure. The Rural Electrification Administration's lending program helped extend telephone service to remote rural areas. Federal funding helped establish the Alaska telephone system. The National Science Foundation's effort to network research centers to supercomputers has provided the backbone to the Internet system.

Government funding in the future will be important because market failures happen. There will continue to be areas of telecommunications where the private sector lacks the incentive to make investments that would benefit society. Government spending can make a significant contribution in those areas.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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The Clinton administration is already targeting many of the areas where public-sector support will be beneficial. For example:

  • Research and development. Public support of research and development of fundamental technologies will help to advance telecommunications state of the art. Recall the extent to which ARPA funding appears to have driven computer and network technology. As of late 1993, funding for the ARPA-led Technology Reinvestment program had fostered numerous proposals for information infrastructure technology development as well as applications.

  • Applications. Another important role for government is in applications development, which serves to bridge the gap between new telecommunications tools and the user. For example, standardization of electronic medical and other types of forms would help promote use of telecommunications services.

  • Trials. The government can play a unique role in implementing large-scale trials of new applications. Past successes include the ARPA/Internet and electronic mail.

  • Electronic publishing/access. Government can make more information electronically available to more users. It can do this by serving as publisher and central server of public information. For example, the government could publish statistical abstracts and provide them via a central server or CD-ROM. Or it could provide access to FCC rules and filings on a central server. Currently, the Office of Management and Budget has a new policy to encourage agencies to increase citizen access to public information. And the White House has become accessible to the public via electronic mail.

  • International parity. The federal government should promote international parity of telecommunications markets. U.S. telecommunications suppliers operate in many countries. A telecommunications monopoly in one of those countries might use its position as service provider to influence consumers against buying from a U.S. supplier. Government policymakers can be alert to situations where market distortions may disadvantage U.S. suppliers and may help to neutralize such a situation.

CONCLUSION

Public investment in telecommunications infrastructure is unlikely to be of sufficient scale to make a significant difference in the development of our nation. I have discussed areas in which the federal government can contribute to infrastructure development. However, there are other areas that are obviously not candidates for public investment. For example, intercity fiber networks are not a candidate—the private sector has already built five or six fiber networks.2 Local fiber distribution networks do not appear to be a candidate for federal investment because they are too expensive for feasible additions to the federal budget. These types of investments in the infrastructure must come from the private sector. A look at history, federal budget realities, and the existing infrastructure indicates that government investment in the telecommunications infrastructure per se is likely to have little impact. However, government initiatives that expand our ability to use the telecommunications infrastructure promise significant benefits. Although carriers may engage in some such research, their incentive to do so is limited by how much they think they can capture the benefits of that research.

Changes in regulatory policy are the only realistic means of increasing infrastructure investment by any effective amount and, as I discussed earlier, may be necessary to maintain the

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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status quo. Therefore, it is critical to both preserving and advancing the nation's infrastructure that regulatory changes encourage private-sector investment.

REFERENCES

Electronic Industries Association (EIA). 1991. Electronic Market Data Book. Electronic Industries Association, Washington, D.C.


Federal Communications Commission (FCC). 1991. Statistics of Communications Common Carriers. U.S. Government Printing Office, Washington, D.C.

Federal Coordinating Council for Science, Engineering, and Technology (FCCSET), Office of Science and Technology Policy. 1992. Grand Challenges 1993: High Performance Computing and Communications, The FY 1993 U.S. Research and Development Program. Office of Science and Technology Policy, Washington, D.C.


Kraushaar, Jonathan. 1993. Fiber Deployment Update—End of Year 1992. Industry Analysis Division, Common Carrier Bureau, Federal Communications Commission, Washington, D.C., April 30.


Liebowitz, Dennis. 1992. The Cellular Communications Industry. Donaldson, Lufkin, Jenrette, New York.


Paul Kagan Associates. 1992. Cable TV Financial Databook. Paul Kagan Associates, Carmel, Calif.


Standard and Poor's Corporation. 1992. Corporation Descriptions. Standard and Poor's Corporation, New York.


United States Telephone Association (USTA). 1988. Statistics of the Telephone Industry. United States Telephone Association, Washington, D.C.

NOTES

1.  

Estimate for 1993 from FCCSET (1992), Figure 6, p. 28.

2.  

Major fiber networks include those of AT&T, MCI, Sprint, and the local exchange carriers. The FCC reports that interexchange carriers other than AT&T, MCI, and Sprint have more than 15,000 route-miles of fiber. See Kraushaar (1993).

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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An Information Provider's Perspective on Government Investment in the Telecommunications Infrastructure

William F. Gillis

I have been asked to comment on the benefits, if any, of government investment in the so-called information highway. I will do so from the perspective of an information provider who soon will be introducing some of the services that can utilize this much-discussed facility. This perspective is shaped by my experience in many of the business sectors upon which this workshop's discussions will have direct impact—consumer electronics, pre- and postdivestiture telecommunications, software, and on-line services. I operate on the basis of the marketplace being the final arbiter of discussions like those in which we workshop participants are engaged. I am a supporter of a free, open, and competitive marketplace unencumbered by historical beliefs and restrictions.

Here I address several questions that have been put to me:

  • Should there be any (or more) government investment in infrastructure, facilities, or services?

  • Is there a benefit from government-provided seed funding?

  • Do government-supported services really put a meaningful damper on investment in new or better services?

  • How much government investment would be too much?

Before directly addressing the questions at hand, I offer the observation that we cannot and should not define the ultimate delivery mechanism in terms that are too restrictive. To speak of it only in terms of copper or fiber presupposes that the marketplace is unaccepting of additional delivery methods offered by various wireless and broadcast techniques.

SHOULD THERE BE ANY (OR MORE) GOVERNMENT INVESTMENT IN INFRASTRUCTURE, FACILITIES, OR SERVICES?

I firmly believe that government investment should be directed to areas in which it serves to support a free and competitive market. This would include investments in the timely creation of standards and to ensure network interoperability. It could also include the establishment of testbed facilities but should not include the creation of services.

I have not observed conditions that traditionally suggest that government investment is warranted in infrastructure per se. There have not been either marketplace failures or a demonstrated lack of ability or of willingness on the part of the private sector to invest.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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IS THERE A BENEFIT FROM GOVERNMENT-PROVIDED SEED FUNDING?

For the government to begin investing in the creation of commercial services is not necessary. There are ample services being investigated and developed in the private sector. There is, however, a potential role for government to provide seed funding to encourage the deployment of variations of selected services—in the educational setting, for example.

By way of illustration, two years ago while heading an unregulated unit of a telco, my unit conceived and developed a fax machine-based social studies learning aid. It was deployed in two inner-city schools in Denver. It was an immediate hit with students and faculty alike. Not only was interest in the curriculum heightened but there was also a dramatic reduction in absenteeism and a measurable improvement in writing skills attributed to the project by teachers overseeing it. As a result of these positive results, there was a strong interest in deploying the course throughout the city's school system. Unfortunately, an opportunity was lost—no government funds were available to expand the program to other schools despite the equipment providers', curriculum designers', and our willingness to provide our services on a greatly discounted basis. If ever there was an opportunity that warranted government investment, this was one. It sits on a shelf, its promise unfulfilled due to a lack of funding. This is an area in which seed funding would have been both productive and appropriate.

Seed funding in the area of acquiring equipment for classroom use and the training of instructors in its use is also an appropriate investment for the government to make. Consider, many schools across the country have recently invested in computer equipment and have begun integrating it into classrooms. Much of it will be rendered obsolete by some of the services contemplated as the basis of this workshop discussion. Much of the equipment in place in schools today is not suitable to display full-motion video or generate the stereo sound of services.

DO GOVERNMENT-SUPPORTED SERVICES REALLY PUT A MEANINGFUL DAMPER ON INVESTMENT IN NEW OR BETTER SERVICES?

Although there is no universal answer to the question of whether government-supported services put a meaningful damper on investment in new or better services, there is a distinct risk that government-supported services could limit the introduction of new and improved services. One of the primary incentives to the creation of new services is that they, due to the diligence of their creators, offer a degree of uniqueness in the marketplace that, in turn, offers the hope of substantial return on investments. Were there an existing or contemplated government-supported service that offered competition to a proposed new service, would venture capitalists and corporate investment organizations be as willing to invest as they are today? I believe not.

Not only would this present a reduced earnings scenario, but it could also have other impacts of significance. Among these are:

  • Fewer patent disclosures and patents granted;

  • Slower and more widely spaced introductions of newer generations of products/services; and

  • Fewer creative ventures and small businesses formed.

On the latter point, I believe that any action that could forestall the creation of new small businesses should be avoided. Small businesses continue to be a strong source of job creation in today's service-based economy.

In lieu of direct government spending on applications and services, rethinking investment tax credits and incentives may be a more beneficial form of government investment.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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There is an alternative area in which government investment would be beneficial—reorganizing its vast databases of information to make them more useful to the public. I read with interest the proposed National Information Infrastructure Act of 1993 and its stated intent to digitize government data to allow public access. I applaud this effort but also encourage us not to stop at simply digitizing the data. More importantly, I believe it is necessary to reorganize the data into a uniform structure that allows the data to be more efficiently accessed and searched. Successful completion of this effort would simultaneously reduce access charges to constituents who use the services and reduce the government's future data input and printing costs.

Once the data are suitably reorganized, two other areas of investment would seem appropriate. First, investment should be made in developing descriptive terminology and nomenclature that is readily understood by nonspecialists. Refer to a ten-penny nail as just that and not with the "fastener-interfibrous galvanized" terminology that I encountered during a recent search. Next, once the nomenclature is revised into everyday English, on-line directories should be made available to facilitate searches. I recognize that this is a mammoth undertaking, but it is both necessary and consistent with the aims of legislation recently contemplated and becomes only more complex and unwieldy the longer we wait.

HOW MUCH GOVERNMENT INVESTMENT WOULD BE TOO MUCH?

Obviously, there can be no definitive answer to the question of how much government investment would be too much. In general terms, government investment should be sufficient to support creating interoperability standards, revamping its vast storehouse of data, and providing classroom facilities for utilizing the newly available information. These benefits and, I dare say, market-driven aspects of such possible legislation as the proposed National Information Infrastructure Act of 1993, are most appealing.

With the government concentrating on its role as a facilitator, those of us who are charged with extracting value from visions can set about the task of delivering the products and services that the market demands—products and services that save time and money and allow Americans to better manage their lives on both personal and professional bases.

Finally, unlike a description I read recently that indicated that legislation such as the proposed National Information Infrastructure Act of 1993 could help unleash an information revolution, I submit that it holds the promise of harnessing runaway data and allowing it to be delivered as easily accessible and useful information.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Economic Dividends of Government Investment in Research and Technology Development

Robert E. Kahn

In addressing the role of government with respect to information infrastructure, I start with the assumption that a role for government not only exists but also is essential; but there is no formula for it yet.

Second, the national information infrastructure (NII), as we have all been referring to it, is more than just the networks and the computers that attach to it; it includes the higher levels of this infrastructure and the applications that sit on top of it. I tend to describe the NII in terms of the core, which contains the generic portions of infrastructure; the mantle, which contains the domain-specific portion; and the outer shell, which contains all the systems and applications that run on top of it. I also tend to describe the elements that are at the network level as being the lower level. Many people think that the network is all that there is in the infrastructure. Identifying it as the bottom layer implies that there are higher levels, too, and that there are applications that you can then put on top of that.1

But if all you have is a network on which to build end-user applications, it is no different than taking a personal computer (PC) as a plain piece of hardware (without systems software) and writing an application on it. If somebody else were to write an application on it, there would be no guarantee that the two applications would work together, because each person probably had to deal separately with all of the system problems for their application on this raw hardware. Each would have or develop separate naming conventions, file systems, buffer management, and all of that. So if you put the two programs in the same machine, they would surely collide with each other.

At least a few companies have made a big business out of building what I call the "middleware" of the personal computer industry. I think there is a similar problem and opportunity in the NII to build the middleware—namely, the generic and applications-specific services.

I also see the NII as evolving more like the economy than a building to be architected. I don't think there will be an architectural blueprint for the NII as there is for a building such that, having produced the blueprint, you then have somebody construct the NII. Instead, I believe we are going to architect a framework in which the NII can evolve as a technical development; this will allow market forces to develop on their own. The framework will probably involve notions of standard interfaces or standard objects and the like. But fundamentally the NII will behave like an economic system. It is going to have a certain degree of Brownian motion associated with it, but hopefully it can be guided by user needs and requirements.

Most important is going to be the process by which the NII is managed and evolves. A critical part of that, from the government's perspective, is the oversight that it can provide in ensuring that the process maintains a level playing field, doesn't disadvantage parties, and so forth.

My comments focus on the research and development (R&D) side of the picture. And although I was pleased to hear Walter Baer mention some of the work that I had done on the use of

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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vouchers to take technology from a maturing state into commercialization, I am going to focus now on how we take a technological idea and get it to the point where the technology reaches critical mass. If there is one example that embodies all of the attributes I want to touch upon, it is the Internet.

The genesis of this concept may be traced back to an idea that existed within the Advanced Research Project Agency (ARPA) back in the early 1970s. I was fortunate enough to be involved in that. We watched a network of networks grow from a concept to something that is probably going to have more than 100 million users on it by the end of this decade. It is a real success story in many different dimensions. The amount of government money that has gone into nurturing it is a tiny fraction of the total sum that is now spent on it.

Now, you probably know that some of the carriers at first saw the Internet as their competition. It took a while before they realized that the Internet was really their market. So the question, then, was how to co-opt it. But in fact the Internet is likely to be part of the larger NII, and what they really want is to play a major role in providing the NII.

There are multiple competing forces as we develop this infrastructure. One force tends toward early commercialization. Once a capability has reached a critical mass, it really wants to grow. In the case of the Internet today and what is happening on it, there are forces to spread connectivity to more places, to get it to the schools, to get it to the small businesses. This is the kind of demand for which low-bandwidth lines or even an integrated services digital network (ISDN) service would suffice, especially if the users were only going to use e-mail. For many who don't use networks today, even that would be a major step forward. Another set of people, those who are dealing with the most advanced supercomputers and moving billions of bits a second on gigabit nets, are looking forward to going to teraflop machines and terabytes per second.

So there is a market pull on the low-end side as the usage base expands, but also a technology push at the top to take into account new technology opportunities or maybe even high-end application opportunities. Both of these are important because this is where the market is, and this is where the future is, in some real sense.

R&D AND COMPUTER TECHNOLOGY

Let us focus on how R&D can move the cutting edge forward. In addition to creating new capabilities, R&D can help to expand the market and improve services, making things more reliable and integrating commercial offerings with advanced research capabilities. These are essential elements of what government research funding can enable.

My focus here is R&D rather than long-term infrastructure development in the sense of building networks and maintaining them. But long-range R&D on computer architecture and, in fact, anything that is related to NII technology should be coupled to prototyping key architectural concepts. If you have an interesting concept that people have developed or on which some basic research has been done, you may want to prototype that concept, build pieces of it, a chip here, a cache there—whatever it is, try it out, see if it works. You may want to actually build a whole experimental system. If a systems idea is worthwhile enough to evolve but is not likely to be generated spontaneously in the marketplace, building an experimental version is a useful way to proceed. If you build a suitable testbed, you would like to get it used in small numbers by a few groups of people who are knowledgeable in the area and also real users.

Those are all viable and important roles for the government to play.

Now, there are some unique mission-oriented requirements where the government literally has to do more than that (e.g., concerning space and embedded computing for the military). But in general it seems to me that the government ought to avoid funding production development of

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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computing. They ought to piggyback on commercial development whenever possible. A couple of computer-related examples can put this into context.

Case A involves computers that have been developed with direct government support. The ILLIAC-IV project was an ARPA effort that started in 1965 and produced a working parallel processing machine that was built with government support. Although many people thought it wasn't a success because there was only one of the machines (later dismantled), the project made several crucial contributions. It demonstrated to the world, at a time when a million instructions per second (MIPS) seemed like a very large amount of computation, that it was possible to build a machine at the hundred-MIPS level. ILLIAC-IV was actually used for real work at a time when you couldn't buy any commercial supercomputers, because no companies were making machines at that level. It also stimulated the commercial production of semiconducting memory.

The Connection Machine was another example where ARPA created a parallel processing computer that had 64,000 processors on the way to a million processors. Again, this was an attempt to actually develop a machine. Yet in late 1993 it was unclear what the long-term commercial viability would be of the Connection Machine, but Thinking Machines Corporation [which filed for bankruptcy in 1995] was then trying to sell those machines in the commercial marketplace. The government also invested in the Butterfly machine at Bolt, Beranek, and Newman. This is not a machine that succeeded in the commercial marketplace.

In the three examples above of government involvement in funding production development, the results are mixed. In some cases it really is important for the government to be involved; in these, not.2

Case B, which involves indirect government support, includes areas where the involvement of the government is crucial, but the government never set out to fund the development of these machines. For example, some of the Cray machines have been developed basically in close liaison with government-supported national laboratories. But instead of setting out to fund the development of a new supercomputer, the government involved key researchers at the national laboratories to generate concepts for a new machine and make specifications available to industry. The government implicitly or explicitly agreed to buy a few of them when they became available, if some company (e.g., Cray) would build them. Their initial production, in fact, started a process in motion to make them available commercially to a larger set of customers. The government didn't contract for the development of the machines, but it did agree to buy a few of them if the machines were produced and met the specifications.

Sun Microsystems and Silicon Graphics are two spinoffs of ARPA support. Sun Microsystems, a company that is now the largest producer of workstations in the United States, got its start as a small ARPA-supported research project at Stanford. (The Sun acronym stands for Stanford University Network.) ARPA had funded a small project at Stanford to do innovative very large scale integrated (VLSI) circuit architecture work, and the principal investigator, Forest Baskett, needed some VLSI design workstations. After having looked at what was likely to be available from other sources—research and otherwise—they decided they needed to develop their own capability and had a good idea for how to do it. A student named Andy Bechtelsheim had an interesting design for a frame buffer system. Bill Joy at Berkeley had been funded by ARPA to build a virtual memory version of UNIX. ARPA gave Stanford a very small amount of money to prototype a tool, basically, rather than a computer, for doing VLSI design. That work became the basis for Sun Microsystems.

Silicon Graphics actually had its genesis in that same effort. Jim Clark, who until recently was chairman of the board of Silicon Graphics, designed a chip that could manipulate graphic images. He called this the geometry engine, and based on that he then set up a company that could manufacture low-cost graphics workstations with the geometry engine as an integral component. Silicon Graphics is now a leading producer of high-quality, low-cost graphics workstations.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Those are some examples where government involvement was critical, but the government didn't set out to actually build machines and in most of those cases not even to buy them, as in the Sun Microsystems and Silicon Graphics examples, although it did so with Cray.

Case C includes examples where there has been no government support. One example is the personal computer, which didn't start from the government building the first personal computer. The microprocessor is a second example. The interesting thing about these two developments is that they took off by themselves because there was a latent market for something at that level, given that it could be built.

R&D AND NETWORKING

There are three stages to the development of networking. The first stage is what I call the seed stage, in which you have an idea and are trying to get it explained, just like with the machines mentioned above. The elements of that stage are technology development (generally experimental technology development, because you are building things that need to work), testing and evaluation (generally through hands-on experience, initially in the laboratory), and field testing deployment, hopefully with some friendly real users, and pilot projects.

If, as a result of this seed effort, you learn that there are real users and that the technology really works, you go into a second stage, an expansive mode, where you get more users, conduct further tests, and refine the technology, give it more capabilities, make it more stable, make it more robust—scale it up and iterate. What is happening at this point is that a small market is being nurtured. One of the critical questions later is how to wean that market from something that may be provided as a free good. This often occurs when the government has been involved in setting a network up and operating it or funding it for its contractors.

The third stage is to commercialize the technology, given that is has real commercial potential: it has been demonstrated, it has a reasonably sized user base, it provides a meaningful capability, and one can see how it can expand more broadly. Hopefully, commercialization can be done without the government actually having to take a direct role in leading the effort.

Now, let us consider the critical mass phenomenon. There is a period of time before the infrastructure is actually deployed, when R&D on it is being conducted. When the technology infrastructure is ready, major R&D money has already been invested. More funding is needed for deployment of resources and for staffing the operation. As the user base starts to grow, additional R&D money is needed for developing applications to run on it, for testing and refining the technology, and, at some point, if the market continues to develop, critical mass is reached. And then, around the critical mass point, the risk flow turns positive, and one can start to make a profit, although it may take a while longer to break even. So there is a big up-front cost in deploying infrastructure, which could be as long as 20 years in some cases. The private sector won't invest until the technology is close to the positive side of profitability.

Now, there are different kinds of government involvement in networking infrastructure. One kind is direct hands-on involvement—I call this procurement. The ARPANET embodied this kind of model. No computer networks existed, and nobody was taking steps to develop them (apart from continued use of dial-up telephone lines). The government just jumped in—and it could afford to do so, a crucial element. It leased 50-Kbps lines from AT&T. The government funded Bolt, Beranek, and Newman (BBN) to develop switches, because there were none in existence—these were the very first packet switches. They then procured the switches from BBN. The government also took responsibility for managing the network, for controlling access to it, and for developing ARPANET policy. The day-to-day management was contracted out, but the government remained in charge. This is an approach I would characterize as a procurement network.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Project involvement is a second kind of approach to infrastructure deployment. This approach is more characteristic of the early stages of the Internet, which began with the ARPANET as a central core but evolved with research networks, gateways, and local area networks connected to it, mainly for research initially. During the initial phase, almost all of the R&D was funded by the federal government. The initial networks were government-procured networks, but soon thereafter private-sector networks were connected as well. The gateway was provided by both parties. The government became very much involved in managing the process by which the Internet evolved. It controlled the handing out of addresses and the standards process, and so actually had a tight rein on the Internet system. There was no commercial use during this early phase.

Another kind of approach is benevolent partnering. In this example the government's role is not the dominant one. Rather, the government manages selected elements of the process, rather than the whole process. I think this approach characterizes the NSFNET and certainly characterizes the Internet development. In benevolent partnering, the R&D is funded by both the private sector and the federal government. And, in fact, the standards process is starting to involve private-sector efforts as well as government-related efforts.

The final approach is one that I think is going to be more applicable to the national information infrastructure. I call it oversight and steering. In this approach there is both private sector and government-funded R&D. The standards development is carried out largely in the private sector, perhaps overseen by the federal government in some sense. There is widespread commercial use. Instead of the government managing selected elements of the process, it now provides oversight, because the actual management of the enterprise can reside in the private sector as well.

We have some experience with this approach in the context of the Internet. When the Internet started, it was an R&D project within ARPA. For the first 10 years or so, the project was run by just one or two of us within ARPA (Kahn and Cerf). Few people had yet discovered the power or the latent potential in this technology.

Around 1978, as the technology deployment was continuing, I got worried that if Vint Cerf, who was the program manager and who had most of the project details in his head, got hit by a truck, we would have a real problem. I thought we needed to get the community involved in a more direct fashion. And so Vint formed something called the Internet Configuration Control Board, or ICCB. The ICCB helped in many ways but mainly was in the path of the information flow. It could be aware of developments while they were in planning and even help to plan them.

In 1983, shortly after the split of the ARPANET into two roughly equal parts—the MILNET and a residual ARPANET—it became clear that the ICCB meetings were too big to allow the ICCB to serve its original function. Instead of 12 ICCB members meeting around a table, an order-of-magnitude more people were coming to listen to the deliberations, because they had become interested in networking. Coordination of ICCB meetings had become unwieldy. I had briefly retained Vint Cerf as program manager for the Internet activities in late 1982 and handed the responsibility to Barry Leiner about a year later.

One of Barry Leiner's first acts was to set up something called the Internet Activities Board, or IAB. In this new model the work that had been a subject of discussion in the ICCB meetings was farmed out to task forces. There were 10 task forces originally. They reported to the IAB. That process actually worked very well. Today there are close to 100 different task forces involved in the continued evolution of the Internet. It was no longer possible for the IAB to coordinate this growing set of activities. And so something called the Internet Engineering Task Force (IETF), which was a task force of task forces, got created with Phil Cross as its chair.

In the 1986 time frame, when this was becoming the mode of operation, there was no government body directly involved. In 1986 ARPA decided to get out of networking. ARPA literally got out of it for a very short period, and, during this period, NSF took steps to lead the

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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federal networking activities. So there was a period in which no part of the government was responsible for this effort; it free-floated.

During the 1987 to 1988 time period, the U.S. government became involved once again. A federal network was established (originally called the FRICC and later the Federal Networking Council). DOE, NASA, ARPA, and NSF funded a secretariat, whose job it was to make sure that these Internet-related processes kept going and that the government maintained its involvement with the process. The IAB ended up with not only an engineering task force, the IETF, but a small research task force as well.

Today, this process has evolved still further. The U.S. government funds an IETF secretariat and separated other parts of the Internet standards process. It continues to administer addresses, and it supports several network information services. However, the process itself has gotten more mature. And, along with its educational and scientific uses, the commercialization of international usage of the Internet has grown rapidly. The Internet Society (ISOC) was recently set up as a professional organization to take responsibility for adopting and promulgating the standards, for official publication of relevant information about the Internet, and for holding an annual meeting to bring together the relevant parties. In addition, ISOC engages in a variety of nonprofit activities that help to promote the Internet in a professional society context.

The old IAB was replaced by a new body with the same acronym, the Internet Architecture Board, which is part of the Internet Society and serves as an appeals court for the standards process. Adoption of standards is taken up by an Internet Engineering Steering Group, which basically is the leadership of the IETF.

As of late 1993, connections between ISOC and the IETF were not formally constituted. This is interesting for a standards-making process, because the IETF meetings are open to anybody who wants to come. You don't have to be a member of ISOC to show up. While the analogy is not perfect, I could liken it to a gathering on the Mall, where one group handles the logistics, another group plans and leads what happens, and another group reports on the events. You don't have to become a formal member of any organization to be present. You just have to show up.

Let me now discuss the chicken-egg syndrome in some of these network R&D activities. The single most important concern, to me, is that if you don't have the technology in place to use the network and if you also don't have the network in place to make use of the technology, how do you get started since you need both of them?

In the case of very high speed networks, the computer industry won't build the machines that send and receive data at a terabit per second or a petabit per second and the carriers won't deploy networks with these end-user speeds until a market develops, resulting in a kind of a deadlock. One way to get started is through the use of testbeds. The Corporation for National Research Initiatives has effectively exploited that notion with support from NSF and ARPA under contributions from industry (and particularly the carriers). Several gigabit testbeds have been created around the country. Many of the Bell regionals have participated and have been very helpful. So have some of the long-distance carriers like AT&T and MCI. Bellcore and IBM have been two of the most active participants. Bellcore has contributed advanced technology including an experimental ATM switch. And IBM also has contributed technology. GTE and Bell are active participants in a testbed involving medical networking applications. Many more of the computer companies were willing to participate both because the government was backing the effort and because the overall direction of the project was right. The federal government put up about $20 million for research to be carried out over about a five-year period. Private industry, it has been estimated, put up something like several hundred million dollars in equivalent costs of their people, their facilities, and their technology over that same period. I believe they would never have done that if the federal government hadn't gotten involved. Industry was able to capitalize on research in the universities, which is nominally where all the government-provided funding ultimately went, by providing facilities.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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I would like to emphasize how hard it is to make this kind of collective effort work. Even though a few million dollars for facilities is a small fraction of a large company's budget, it comes out of somebody's budget. Deciding to take that money and put it into an R&D project, which may not have any potential in the very short term, is not something that companies are usually likely to do.

But when the government says that an investment is on the path to a national network, to our NII, then it may become quite a bit more important for them. What is in it for them to invest? Well, they will learn about technology and its applications, and they will get some early experience with deployment of the technology; this is relevant because they think there is a follow-on. They may get to do some interoperability testing much earlier than would otherwise be possible or in contexts not easily achievable. SONET was made to work as a result of some of these testbed activities. Finally, there is the stimulation of applications as well as general business development on their part.

The same kind of thinking process applies to the computer companies. Their motivation in participating in advanced testbeds is to explore advanced technology, develop new knowledge, meet the needs that are perceived in the R&D community, and, in many cases, develop a market for the technology. Certainly all these companies are getting market visibility. Some of them are actually advertising their participation, which may have value in its own right.

Having gone through this process once, I can tell you it is really hard. If we had to do it again, I don't know that we could create another national network initiative and motivate the carriers and the industry participants to do this one more time. We need to find a way to make upgrading the national infrastructure part and parcel of the normal R&D process in this country.

There are things that we can do to help. One element is government funding for some of the early infrastructure. In the case of gigabit testbeds, the infrastructure has all been contributed. No funding was provided for the facilities. I doubt this can be replicated in a larger sense, however. Another element might be tax credits for investment in advanced infrastructure testbeds. Certain rights and imprimaturs that could be granted by the government may also play a role.

Given that these testbeds have gotten to the point where they are viable demonstrations, can they be grown (individually or collectively) to include more of the research community or even to a critical mass state? What are the mechanisms? Is direct support from the government the answer, or is there another way to do it? Are there other approaches that would help us get there just as fast, if not faster and at least as effectively?

REFERENCES

Computer Science and Telecommunications Board (CSTB), National Research Council. 1994. Realizing the Information Future: The Internet and Beyond. National Academy Press, Washington, D.C.

Computer Science and Telecommunications Board (CSTB), National Research Council. 1995. Evolving the High Performance Computing and Communications Initiative to Support the Nation's Information Infrastructure. National Academy Press, Washington, D.C.

NOTES

1.  

Editor's note: The conceptual layering of the information infrastructure is described in Chapter 2 of Realizing the Information Future (CSTB, 1994). Dr. Kahn was a special advisor to the NRENAISSANCE Committee that developed the report.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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2.  

Editor's note: As discussed in Evolving the High Performance Computing and Communications Initiative (CSTB, 1995), commercial success of a given company or a given product design is not a complete or even relevant indicator of the contributions of federal R&D investments. The investments in parallel processing have resulted, as of 1994-1995, in commercial adoption of moderately parallel processing systems and scientific research benefits from the application of moderate and massively parallel systems.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Perspective of the Noncarrier Transport Provider

Laura L. Breeden

As the executive director of FARNET (the Federation of American Research Networks), I work with 35 organizations that are providers of Internet services at the state, regional, and national levels. These organizations vary greatly in size and in their objectives. Some are small nonprofits with only a few employees, focused on serving a single state. Others are large for-profit companies with hundreds of employees and a national reach. In discussing their perspective I will, of necessity, be describing an idealized view that may not fully represent any single one of them. Since a majority of the members of FARNET are small- to medium-sized nonprofit organizations, that is the perspective I will lean toward.

First, some definitions. By ''noncarrier transport providers" I mean value-added systems integrators (who do not typically own the transmission facilities and who are not regulated as common carriers). Because I have limited knowledge about them, I have not included cable, wireless, bypass, and similar providers of "raw bits." I define "transport" in this context to mean the movement of digital information from one location to another. Note that "transport" used in this fashion is an increasingly low-margin (commodity) business, although when the market is vast, there is plenty of room for niche providers to prosper. The recent frenzy of mergers and joint ventures among telephone, cable, and entertainment companies attests to the perception in the industry that the most interesting, and potentially most profitable, new developments are in information delivery (of news, games, databases, and so on).

The question before us is, What is the role of federal investment in building the telecommunications infrastructure? For the community that I represent, this question can be approached by asking what supply-side investment has reaped? The history of federal support for the Internet (and its predecessor the ARPANET) demonstrates a movement from direct federal sponsorship of the network (including the research and development (R&D) required to develop it, the equipment needed to connect to it, and the ongoing operational expenses associated with it) toward indirect support (to developers of network services, who then purchase commercial equipment and tariffed circuits, and to network users).

I would argue that, through its policies in the 1980s in this arena, the government stimulated a group of "market makers," to use Richard Mandelbaum's phrase (see Mandelbaum and Mandelbaum, 1992) with their roots in higher education, the computer industry, and research. This group

NOTE: At the time she developed this paper, Laura Breeden was executive director of FARNET. Since March 1994 she has been division director for information infrastructure at the National Telecommunications and Information Administration, within the Department of Commerce.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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was focused on the needs of the education and research communities initially, and federal support allowed them to develop new services and develop the market for the Internet by reducing risk, guaranteeing a certain level of demand, and creating a critical mass of users.

In late 1993, as we contemplated the development of the national information infrastructure and how the government's investment strategies should change, it became time to ask, "When do you move federal investment from the supply side to the demand side?" (As many other members of this panel have said, it is also important to look at all of the tools at government's disposal, such as tax policy and regulation, since these may be more effective and influential in many situations.)

It is doubtful that if Washington gave a $100 tax rebate to every teacher in America for "networking" (a $100 million investment), the result would be a national research and education network. There is a social organizing principle at work here, which argues for targeted spending aimed at leveraging certain activities within the target community, whether that is K-12 education, libraries, health care, or economic development.

To be effective, federal investment policy will have to be designed to meet the needs of specific user communities, at specific points in time. Generalizations about information infrastructure are becoming rapidly more hollow as new technologies, service providers, and access devices sweep on to the scene. Lessons from the past will be useful only to the extent that they are carefully drawn from particular historical circumstances.

Policymakers will need to practice humility. They will need to be painfully honest about what they know and what they don't. Data, and the recommendations that follow from them, will have to be looked at with a cold eye. A lot of what we heard at this workshop was amazingly vague, imprecise, or not well supported. Further, we need to maintain a sense of scale in policy discussions. The U.S. telecommunications industry spent approximately $200 billion in 1992. Comparatively, as mentioned in this workshop today, defense research, development, testing, and evaluation for intelligence and communications accounted for $5.3 billion, the High Performance Computing and Communications Initiative (HPCCI) accounted for $1 billion, and the National Research and Education Network component of the HPCCI accounted for about $100 million. Typical research university computing cost $50 million, the National Science Foundation's Networking and Communications Research and Infrastructure Division budget was $35 million, and the NSFNET backbone was $12 million.

What can the federal government do effectively? Is there a role for government investment? I believe that government has an obligation to promote equity, in the first place. Further, public support at the right time and in the right place can offer:

  • Risk reduction, in high-risk but potentially promising areas;

  • Proof of concept (when private capital is not available, because of the risk or because the benefits to be obtained are not likely to attract private investment); and

  • Support for network externalities (such as the development of a critical mass of users) and for public goods.

There are a number of ways to achieve these goals, including support for:

  • Applications development;

  • User connection to the network or information service;

  • Development of telecommunications networks and systems;

  • Direct R&D; and

  • Incentives (e.g., tax policy).

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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I concur with Walter Baer's excellent test of investment policy as presented earlier at this workshop:

  • Involve industry and users in design and deployment;

  • Require cost sharing;

  • Have an explicit plan for handing off technology to the private sector;

  • Focus on meeting technical and economic objectives;

  • Shelter from capture by political constituencies; and

  • Avoid rigid schedules and time constraints.

I would further recommend that formal evaluation and dissemination be required components of all federal technology and infrastructure investments.

To summarize, I urge that policymakers:

  • Examine their data critically and carefully. Data must be accurate, and conclusions that follow must be relevant to specific times and circumstances;

  • Admit their assumptions up front, and question them continually; and

  • Maintain a sense of scale. Data presented at this workshop demonstrate that some of the areas that have received the most attention from policymakers actually loom small within the overall dimensions of federal activities. Pay attention to the things that matter.

REFERENCE

Mandelbaum, Richard, and Paulette A. Mandelbaum. 1992. "The Strategic Future of the Mid-level Networks," pp. 59–118 in Building Information Infrastructure. Harvard University Press, Cambridge, Mass.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Discussion

JOEL ENGEL: I would like to address a couple of things. The first is the whole issue of critical mass, which so many people have spoken about. Surely, there is a critical mass issue. But that doesn't require subsidies. We have many examples, even from very recent history. For example, the very first purchaser of a VCR [video cassette recorder] found it not very useful if there were no cassettes to play on it, and it would not be very good business for people to make cassettes if there weren't very many VCRs. In the same way, without software the utility of PCs [personal computers] would be considerably less than it is today, but it was not very desirable for people to develop software if there wasn't a large mass of PCs and PC owners to sell it to. And yet, those are two examples of exploding industries that didn't require any kind of subsidy to get started, but were started by what we used to call investment.

Wally Baer gave the example that even for the telephone industry, the entire telephone network was built on private investment. The government did invest. It invested in telegraphy, which is the other example of the ability to choose winners.

Bob Lucky gave the figure of about $25 billion as being required to convert the telephone network from copper to fiber cabling. But we ought to put it in perspective. As Chuck Jackson said, just the LECs [local exchange carriers] alone spend about $20 million every year to keep their networks modern. In the last few years about a third of that has been in local distributions, but that is because all of us have been replacing our analog switches with digital switches. That emphasis can shift. In addition, the front page of the business section of yesterday's USA TODAY shows that the free cash flow of the LECs ranges from $4 billion to $6.5 billion, which means that even in addition to this shift, if there were good business reasons, those investments could as much as double. So, as Wally Baer pointed out, while we sit in this room and debate whether or not there is a critical mass issue, the private investor is going to inconsiderately knock the legs out from under the debate.

The other point that I want to make with much fervor has to do with the view that one of the necessities is to make the upgraded infrastructure available to all Americans. I don't think that is the critical issue. The critical issue is to make it interesting and attractive to all Americans. I really want to reinforce the point that Bill Gillis made about the importance of applications and content. Earlier today, both Bruce Alberts and George Turin told about having to either hide or lock up their TV sets because they didn't like the content that their children were getting out of it. They didn't say, but from my experience as a parent, I am willing to bet that they didn't have to lock up their encyclopedias. I think that the real challenge is understanding what, when we build the infrastructure, is the content that will make them come.

DAVID MESSERSCHMITT: I think that particularly on the first point—that market mechanisms will take care of the critical mass problem—there may be some comment.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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CHARLES JACKSON: Just a historical observation. I believe that the first widely known economics paper on critical mass issues in networks, network externalities, is by a colleague of mine named Jeff Rohlfs [formerly] of Bell Laboratories. He looked at the problem by looking at the videophone experience in the late 1960s, when the old Bell system rolled out a product for which they charged $60 a month independent of usage. His analysis was that if the charges had been based on usage so that people had the product on the desk but didn't have to pay for it if they didn't use it, the network might have grown a lot faster.

Economists have tools to analyze these issues. But I think that the insights that we get from network externality theory do give us clues about how to price new services, and maybe some ideas for promotional activities by the government. I think the point in the long run—which complements Bridger Mitchell's point that if you try to subsidize something and then it never quite makes it to the critical mass point, then you still have all these people getting the subsidies—is that you can lock yourself into a very unfortunate and wasteful situation possibly, and we need to be sensitive to that.

But nevertheless, I think that theory can give a lot of useful insights.

MESSRSCHMITT: Would those pricing mechanisms be consistent with making a profit during this critical mass period?

JACKSON: No. What you need at the beginning is a promotional price to get people into the network, and then you profit from it later. And clearly you can imagine industry structures where that second stage isn't possible.

WALTER BAER: I don't think you are hearing any wild enthusiasm from this panel for large government investments in this area. What you are hearing, I think, is that there may be government roles on the R&D side in dealing with some of the network critical mass issues.

The two examples that you gave are interesting. The VCRs and the PCs really are kind of stand-alone products, at least initially. They didn't require networking to be sold initially. And there may be some difference when you get this network externality effect. The other point is that the VCR actually did profit from a fair amount of government-supported R&D 10 or even 20 years before; much of it was, again, defense oriented at the beginning.

LAURA BREEDEN: I agree with the point, though, that the applications that are going to be delivered over the information infrastructure are critical. I heard Larry Irving, who at one point was very involved in the reevaluation of cable before he went to the Department of Commerce, say that the two biggest sellers on pay-for television are tractor pulls and soft pornography. I believe that the government may have an interest in seeing that other kinds of programming are available that perhaps are not driven by the market, because the market either isn't there or is so immature that no single private investor or group of investors can make a profit on those applications.

Having said that, I don't think it is fair for the private sector to say that government should fund all the high-risk application development and that the private sector then will reap the benefit, the profits. One of the things the questioner said was, "let's make it attractive," and that is the hard part. If there is one thing that U.S. industry is good at, it is making stuff attractive. It is creating demand.

So, I think there is an issue of balance here and it is not a black-or-white decision between no government investment and socialized networking.

LUCY RICHARDS: Since I come from an R&D committee on Capitol Hill, I want to make a couple of comments on the issue of government R&D. First, I appreciate the comments on the National Information Infrastructure Act of 1993. That was our committee's bill and is basically a refinement of Public Law 102–194, which funds a lot of the high-performance computing applications. As that bill went through our committee, we tried very hard to refine it, to try to make clear that the government was not trying to compete with the private sector in the development of services or networks. That bill also makes significant changes to the NREN programs, with one of the goals being to make clear that the NREN is not trying to duplicate what private industry can provide.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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A couple of other comments on funding. One concerns the issue of manufacturing, which we have addressed because we found it very relevant. It is contained in H.R. 820 as a separate provision. It is not a high-performance computing application. It is in S. 4, though, as a high-performance computing application, which is development of applications using information technologies to assist manufacturing. There is, in H.R. 820, the development of a manufacturing outreach program that will have as part of it an advanced communications network to help link small- and medium-sized manufacturers and give them assistance, because we found that even though there are manufacturing centers around the country, small business owners can't take the time to travel to them to get assistance. So we are going to try to link them up electronically, in a kind of extension network….

One last comment on financing. In H.R. 820 we have a Title III, which essentially provides for the government to set up some venture capital mechanisms, funneling money into other organizations that will hopefully provide venture capital financing for the development of critical technologies. There are a lot of communication technologies on the critical technologies list.

The administration hadn't accepted that. They agreed to make it a study. But at the same time, when you look at the National Performance Review, Sally Katzen, when she testified before us, was talking about a program to finance the development of information technology applications for government purposes through a venture capital fund. I think it was 1 percent of the agency's operating budget.

Then you have venture capital provisions in the seed act that was passed a couple of years ago, which has the government in the position of giving government money to finance venture capital, start-up funds in Eastern Europe but not for American companies doing the same thing in the United States. What we have heard is that the Treasury Department has decided to set up an interagency group to look at the whole issue of government financing for new technologies.

BRIAN KAHIN: I think Joel Engel's example of the VCR was a bad one, because the VCR business took off on the basis of off-air taping, rather than the existence of cassettes. And I think it is a problem with the PC analogy, too.

WILLIAM GILLIS: Maybe I can help just a bit. I introduced the VHS-brand VCR in August of 1977, and in fact, it did take off immediately. There was a predecessor, the Betamax, the one-hour machine that was out in 1975. We introduced the VHS in 1977 as a time-shift mechanism and to give the ability to record off the air. From the day that we first introduced it, I went into backlog for the next year and a half because of the incredible demand.

One story that I will share with you highlights the point. We were bold enough to put my name—it was an error—in one of the ads that we ran. I got a call from a lady who said, "Are you Mr. Gillis? Are you the one that is responsible for this VHS brand VCR?" I said, "Yes." She said, "Well, I called to say thank you.'' For the first time in 2 years her husband had taken her out to dinner on a Monday night because he was able to record Monday night football.

Then she said, "I have a problem. Last Monday night's game went into overtime and he hasn't watched it all yet and we are out of blank tapes. Could you please find me a way to get blank tapes?" And that was only one of many such calls.

Clearly, the overwhelming evidence—and there is certainly data available—is that off-air recording was the driver; you can record when you are not at home or record when a competing program is running. That information is very definitive.

BREEDEN: What was the cost of that device when it was introduced in 1977?

GILLIS: We introduced the first one at $1,000 suggested retail. We sold it to distributors for $750. We made money the first year.

MICHAEL ROBERTS: I want to make a brief comment on the issue of winners and losers and the federal role in that, which gets everybody's blood moving. I was surprised, with all of the economists in the workshop, that nobody has mentioned Christopher Ferrell. One of his observation

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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is that one of the great advantages of capitalism comes through innovations and asset reallocation. It harnesses a lot of creative energy and improves society.

But intrinsic to that is the notion of whether an asset reallocation is going to destroy industries. When diesel engines did away with steam engines, or Henry Ford did away with horses, thousands of jobs were destroyed, but that wasn't considered a big government policy issue. Since World War II, the government has become the majority force in technological innovations. So, the government is now linked to the destruction as well as the creation of a tremendous number of jobs, which means that there isn't any way for us to get the winners and losers out of this policy space.

I think that the challenge that we have is evolving a policy space around the NII [national information infrastructure], which we really haven't done—certainly this day and a half has shown how primitive the policy space is around the NII. We have to manage that issue, not wish hopefully that it will go away.

KAHIN: There is also the example, on the other side, of the Internet—network externalities, the government leveraging with an extremely small amount of money what has turned out to be an outstanding and increasingly commercial success.

The general information infrastructure development problem has been well phrased. There are many arguments for government investment. A couple Wally Baer mentioned that haven't been pointed out are the information cost and the transaction costs, which is why the government investment of the producer's subsidy into the backbone has made sense at the beginning.

The basic problem is the information management problem and the risk of the government interfering in private investment. If the government doesn't have the information flowing to it in a way that enables it to refrain from stepping on private investment, it is not going to work. And that is a problem in the applications area, too, that we really haven't faced yet.

I was struck by Bill Gillis's comments that he has been relying on patents in this piece of the infrastructure he is building. This is a situation where the government is directly involved in issuing patents, and it is an information management problem. The government is doing an absolutely crummy job of handling patents in the software area. It is a disaster. It is taking 32 months to process the applications, and the quality control is absolutely abysmal. At the same time, what you have witnessed in industry in general is a moving away from proprietary positions because the users won't accept it.

So, you are building a proprietary system, you are placing your bets on a proprietary infrastructure system, and you are taking a big gamble that there won't be some kind of standard that passes you by.

GILLIS: On that, I think you misunderstood. While we do hold parents, we are not necessarily basing our system on patents as its protections. And you will find that the customers, who number among the household names for the products and services, would differ. If I left the impression that that was our sole safeguard, I want to point out that what we are going to deliver is the highest-quality service that is available. It is not an issue of proprietary software or not that is really driving our market, because we are taking the information of our various customers and we are delivering it back to them in a form that they and their customers find useful.

CAROL HENDERSON: I want to thank the National Research Council for including various user communities in this workshop, such as health care and education and libraries. To misquote a former FCC chair, this particular infrastructure is not just about selling toasters. Unlike, say, the agriculture or the transportation infrastructure, it really is the infrastructure that is related to what makes us human, the ability to communicate. And it certainly has the potential to be in the future the main way that humans communicate beyond just shouting distance to each other. As such, it will have enormous and probably unpredictable effects on society at large.

In the discussions on how we go forward, what the government role is, and how we rearrange the regulatory landscape, I think that the effects on society are something that must be considered, if it is not just economic stimulus alone. Concerning some of the government roles we

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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talked about, there seems to be some general consensus on what might be useful, such as stimulating certain kinds of applications and fostering at least start-up activities for certain communities. Those roles are very useful, and I support them.

But in a way, I take libraries, which I represent, as an example. Giving a library a little bit of money to get started in doing something new in the telecommunications or computer networking area is very useful. It requires that institution to come up with some matching money and stimulates a lot of additional activity. But it doesn't necessarily solve the systemic problem of making sure that that publicly funded institution is able to get from the infrastructure what it needs to continue its mission in the future.

And some of what, say, schools and libraries will need is similar to what other communities need in terms of ubiquity and interoperability and a fair amount of capacity and so on. But there may be other things needed that don't necessarily coincide with the mass market approach—pricing mechanisms, for instance, such as the ability to predict what that cost is going to be and to have that cost not be too usage sensitive. Otherwise use in the education, research, and library areas will be hindered, which actually is harmful to society.

These are points that we need to pay attention to in the basic regulatory structure.

BAER: I think you raise very good points, and you bring us back to the question of pricing and appropriate regulation, which is very real. I also relate to your early comment about selling toasters because, interestingly, we are dealing with different cultures in the various media, in terms of how we are generating universal access. Obviously, in the broadcast media, the way we get near-universal access to low prices is to use advertising in support of content.

It is interesting that the culture of the Internet so far has not only avoided that kind of service, but has also actively rejected it in many cases. I think it is an issue, as we move ahead and look toward larger mass use of the Internet-related networks, as to whether we are going to allow selling toasters to be a part of the system.

ALFRED AHO: I would like to make two points that I don't think have had adequate attention during this workshop. One is the importance of software in the information infrastructure. A number of industries today, say, the telecommunications industry, run on hundreds of millions of lines of code in operation. To develop 100 million lines of code could cost anywhere from $10 to $100 per line of code. We are talking about investments of tens of billions of dollars to create the software to run the infrastructure. I just want to make sure that people understand the importance of software.

Yet, there is another consequence to this, and that is the embedded base of software that is already there. And this embedded base may be more of a bottleneck than many people realize. Companies and universities just can't afford to get rid of—or the Internet, in particular can't get rid of—its embedded base of software overnight.

Bill Gillis mentioned the importance of standards and interoperability. I would like to add a third point, and that is evolvability of the infrastructure. The technology is changing very quickly, and the applications are also changing very quickly. Whatever kind of infrastructure we put in place should be an evolvable one, so that 20 years from now we won't be stuck with a narrow-gauge railway system that we can't get out of. We have seen somewhat similar effects already with the current infrastructure that is in place.

The second observation that I want to make with respect to direct investments (and in particular, whether this is something for the government) concerns investment in people, people who understand not only how to create the new infrastructure, and the evolving infrastructure, but also how to use the infrastructure.

Vice President Gore talks about reinventing government, and we have had a number of excellent presentation about how, by changing business processes or the process we use in various segments of industry and other human endeavors in health and education, we can do business and restructure the manner in which we interact with one another and conduct business in those arenas.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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I think we are just now beginning to see, in a very early stage, the profound impact of this kind of business prospect—restructuring—that is going to take place in almost every area of human endeavor because of this infrastructure. What we need to do is to train people to be able to take advantage of this.

ROBERT KAHN: I couldn't agree more about the importance of software. Between the physical infrastructures and the end-user applications is the so-called middleware, which is largely services based on software. It is, in some sense, the network analog of the operating system, plus some more things, that is all software-based. And obviously, investing in people is what you ultimately end up doing with your investments. I agree with Al Aho completely.

I would like to comment about that $5 billion number that Laura threw out, just for clarification. Basically, as I understood that number, it goes for a number of things that are unique to defense. Defense has a centralized capability for communications and also a distributed part that the Army, the Navy, and the Air Force separately administer. They have their command and control messaging systems, which are part of the command structure of the military, for getting orders out and controlling our forces. They have a command and control backbone that they maintain. It is secured and protected against a variety of threats.

They worry about security technology a lot. They worry about systems that operate on the ground, in a field headquarters of the Army, and on ships, planes, and a variety of space-based systems like MilStar and the GPS [global positioning system], and they also provide support for a lot of other organizations. The R&D involved in those systems, often unique, one-of-a-kind military systems, is large. That is what the R&D budget goes for. The actual maintenance and operation of that stuff can be much larger.

DALE HATFIELD: While we are congratulating ourselves on the success of the Internet, I think we should remember something that the FCC [Federal Communications Commission] called the enhanced service exemption, and also the special access exemption from the payment of access charges, which means, essentially, that when you make a circuit-switched call, you pay a subsidy, and when you make a packet-switched call, you do not. Obviously the packet-switching community has benefited greatly by that exemption. I think we have to be very careful when we talk about success to recognize that we are not calculating all the costs. I think that should be considered.

MESSERSCHMITT: Can you elaborate on that a little bit more, Dale?

HATFIELD: Yes. Let me give you an example. My elderly parents live in Ohio and I call them on a regular long-distance network. About half the cost of the call is split between the two carriers on either end. And a fraction of that is a subsidy that goes to maintain universal service.

When I call on the packet node in Denver and I sit there for two or three hours, it is a flat-rate call and I am paying no common carrier line charge on the originating side of that or on the terminating side. So, essentially, when I make that packet-switched call, I am not paying the subsidies that I do when I make a circuit-switched call. And that is one of the reasons that a fax call is free on the Internet and yet costs X dollars on the circuit-switched network, because of the payment for access. When I call, an enhanced service exemption of the FCC says I can make a circuit-switched call to that packet network and I am not paying the access charge. It is treated as a local call, even though it is terminating in Columbus, Ohio.

JACKSON: When the Commission proposed removing the enhanced service exemption, it became quite contentious.

HATFIELD: And we were inundated with computer-generated mail that went to Congress that put political pressure on the Commission to maintain the exemption.

JACKSON: Never pick a fight with an interest group whose hobby is word processing!

HATFIELD: Let me make one other distinction that I think we are missing here. I think we all agree that most taxpayers are also telephone subscribers, that those two communities are roughly the same.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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There seems to be a consensus against government investment. But then, I hear Chuck Jackson saying that if we just speeded up depreciation a little bit …, and I hear Joel Engel saying that if we have all these billions of dollars of free cash flow, if you just make it a little bit more attractive, we will make this investment.

But if you are making an investment as a utility and there are constitutional provisions against confiscation and so forth, if this turns out to be a bad investment—in other words, if the investment doesn't work out—then you and I as ratepayers are going to be stuck with paying for that investment through higher rates. I think some of the distinction here between private investment and public investment is a little bit wrong, because ultimately, as ratepayers, we are going to be responsible for that investment at some point anyway, if it is made under the traditional sort of public utility type of investment.

So my conclusion is, let's not kid ourselves. There is not so much difference between public investment and private investment as one might think, from the public utility standpoint.

MESSERSCHMITT: Thank you, Dale. Any comments on that?

JACKSON: Yes, I want to respond, because there are some differences. One is that, although the budget process is difficult and contentious, once you vote to make the investment, you can go ahead.

With private-sector investment and even the regulated utilities, if their management decides that they aren't going to get that money back, then they aren't going to make that investment. We haven't seen that kind of drawing up of investment in telecommunications yet, but I understand that with electric utilities now, about half to two-thirds of the generating capacity being built in this country is what are called qualified facilities rather than being built by the utilities. The combination of prudence reviews, disallowances, nuclear plants, the whole nuclear fiasco, has dried up utility investment in power-generating facilities.

If a telephone company chooses not to invest in new infrastructure, it is very hard to order it to do more. It is possible, but it is a tough fight.

HATFIELD: On the other side of the coin, if they go ahead and do it and it turns out to be a bad investment, we are not going to let telephone companies go out of business.

JACKSON: Well, we might let them go out of business at some time in the future. We will have to wait and see. We have let long-distance carriers go out of business when they imprudently invested in obsolete satellite facilities, things like that. But if it is the only phone company in town, then I think society will be very reluctant to let it go out of business, although we have had some electric utilities lose a huge amount of money in nuclear power plants. I think that nuclear power plants lost something like 10 percent of their equity in the late 1980s from failed nuclear power plants.

I think that some people have put forward a variety of schemes, like price caps, for moving away from traditional utility regulations so that you can free up this investment and not face the specter that, if the investment fails, then the residual monopoly ratepayers are going to bear all the costs.

But those are very contentious issues, and a lot of people who support reform are quite unwilling to say okay, we will let it go, we will cap the prices, and if the returns run up to 30 percent on equity because of some great new efficiency, we will let them keep it.

JOHN RICHARDSON: I believe one of the most important points made by the panel, through Laura Breeden's remarks, was the need for an estimate of the benefits of the NII. I have felt this for a long time and I am very glad to hear this come out.

I do remember one of Bob Lucky's popular columns in IEEE Spectrum a few months ago, perhaps a year ago, discussing the NREN. I believe his point of view in that column was build it and they will come. Perhaps much of the NII is based on this same sort of religion, but for firm policy development, I do think that we need some sort of impetus. We need to begin that task.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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My question for the panel is, Do you have some ideas or some suggestions of how to approach this estimating of the future benefits?

BAER: That is obviously a hard topic to quantify at this point, because of both the long-term nature of the investment and the problem of confounding a number of government objectives—the equity objective along with any kind of efficiency ones.

One very crude measure of the effectiveness of government programs past the R&D stage is to require matching funds from private industry. How much is the private sector willing to invest to match a dollar of government money? That is not the only measure, but it seems to me it is a reasonable one to place on a whole variety of proposed government investments beyond basic R&D. And on that measure, so far, it looks like the NREN would have come out pretty well.

RICHARDSON: You are suggesting that we feel our way. And I am asking for something more than that.

BREEDEN: I am not an economist, so I am not putting my professional reputation at stake here and I can say anything I want. Having prefaced my remarks with that comment, I would say that if you are going to make an investment decision as a nation, you want to try to evaluate the long-term or medium-term benefits of that decision.

Now, if this information infrastructure succeeds, presumably there are going to be more devices sold, which means healthier industries in computing and personal communications systems and so forth. It means that more transport is going to be sold, which I think is why you see lots of phone companies doing deals with lots of entertainment and information service providers.

I think you can probably make a case—and again, I am not an economist—that a lot of spending decisions in the private sector are going to be stimulated by the development of an infrastructure that we can all use. If we look at highways and cars, and gasoline and fast food, there is maybe a similar relationship there. And I think the exercise is worth doing, because, you know, we, as a nation, have some very hard choices to make. Are we going to increase our national debt indefinitely, or are we going to do something different with our capital and our country?

KAHN: It is clearly an interesting question to pose, and it would be very nice if we could get some answers to it. You could even broaden the question to ask not only what the benefits are, but also what the return on investment is, and you could phrase that in various different terms. The thing that I would like to caution us on is not holding our breath waiting for an answer to those questions, because I am not sure they are going to be very easily forthcoming.

If you were to try to ask that same question in other areas where, I think, people have naturally just bought into the concept, you would have an equal amount of difficulty. For example, if you asked what the benefits of personal computers are in the workplace, I can make a strong argument that they are negative as well as positive, that you are spending too much money and it takes too much time and it has encumbered you. If you were to ask about the value of education, which we spend a lot of money on, you would have a tough time quantifying the benefit of any one year of the educational process, or the whole thing, or even what society would be like if you had more or less of it or a different kind. Likewise, I think you have much the same problem with health care, despite the fact that everybody knows the need for it and wants it. Estimating the benefits of it would be very hard to do.

I think you would have an even worse time trying to explain what the benefits were of the economy in general, even though I think you could make a better stab at that than perhaps all the others. So I just wouldn't hold my breath waiting for the answer, despite the fact that I wouldn't mind seeing something that tries to describe the answer.

RICHARDSON: I appreciate your point of view and I agree with it. My point of view is to encourage somebody to try to get quantitative, even though it is a feeble first step.

BRIDGER MITCHELL: I think Laura steers us in an interesting direction of trying to be specific. But trying to answer the broad question about the benefits of the NII is almost doomed to

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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fail from excessive generality. If we can focus on specific programs, specific kinds of initiatives, there is some chance of advancement.

For example, we have a particular quantitation of the way federal action has held up gains in consumer value in the cellular area where, for nearly 10 years, it delayed the introduction of a technology that was clearly there. We have market evaluation processes for measuring that sort of thing. But the market may not send adequate signals to evaluate the "public good" aspects of education and consumption of raw information.

CLIFFORD LYNCH: In listening to this, I have felt that an aspect is missing in some of the discussions. I want to try to quickly outline it and then solicit some reaction.

I think that when we have been talking about this information infrastructure and looking at some of the economic models that might provide insight, we tend to be thinking about a communications network. And we think about universal service objectives in terms of getting everybody connected. I have some reservations about whether the primary use of this new network world is going to be person-to-person communication for the vast majority of users. Certainly, things like the telephone work really effectively for a lot of people right now. And things like the picture phone haven't been roaring successes.

I suspect that a lot of the use of this system is going to be access to various kinds of information services. If you think of that as accounting for a lot of the use of an information infrastructure, a bunch of questions come up. What does universal service mean in that sense? You have connected people to something, but they can't afford to use most of the services on it, because they cost many many times what the connection costs. As with the phone, just because we give them universal service doesn't mean that we give everybody a blank check for 900 numbers.

Another point. It seems to me that another area of potential government investment choices to be considered is placing information services on your network, including, as you mentioned, some of the enormous stores of government information that could be organized and made accessible, either at very low cost or perhaps, in some cases, for free if there are policy or legislative mandates to do so, for access by the citizenry. It seems to me that that is a whole other dimension of potential government investment that could move along the creation of the infrastructure by giving people reasons to want to make use of it.

BREEDEN: I think Cliff is right. It is incorrect to focus only on the communications aspect of this and to assume that that means people communicating directly with other individuals. One of the other panelists made a point about the need to standardize presentation of data. Cliff has done a lot of work in something called Z39.50, which is an information standard. I think those areas are going to be tremendously important.

I tend to think that the equity issues, if we are going to avoid having a society of information "haves" and "have nots," are going to be solved in the public libraries.

MESSERSCHMITT: Laura made a very important point from my perspective—that is, increasingly, the cost to users in terms of equipment and services is often for equipment that they buy themselves, rather than for network transport services, which are rapidly being driven toward zero. Bob Lucky made this point in his talk, that Internet was so cheap in comparison to the telephone. So I think that the issues with respect to customer-owned equipment that is necessary are quite different, probably, from the issues having to do with the communication infrastructure and yet may ultimately be more important in terms of issues like universal service.

Suggested Citation:"PART 3--PUBLIC INVESTMENT IN TELECOMMUNICATIONS INFRASTRUCTURE." National Research Council. 1995. The Changing Nature of Telecommunications/Information Infrastructure. Washington, DC: The National Academies Press. doi: 10.17226/4816.
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Next: APPENDIX: CONTRIBUTORS AND PARTICIPANTS »
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Advancement of telecommunications and information infrastructure occurs largely through private investment. The government affects the rate and direction of this progress through regulation and public investment. This book presents a range of positions and perspectives on those two classes of policy mechanism, providing a succinct analysis followed by papers prepared by experts in telecommunications policy and applications.

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