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Page 205

25
Organizing the Issues

Francis Dummer Fisher
University of Texas at Austin

Summary

The following should be kept in mind as the rich submissions to the NII 2000 project are synthesized:

1.

Division of markets. The local telecommunications markets should be differentiated; the residential broadband market should be distinguished from the downtown business market and from the rural market. The downtown market is likely to take care of itself, and the rural market has unique problems. In view of the importance of universal coverage, the residential market should be emphasized.

2.

''Competition" and the closed character of cable TV. It should be clearly recognized that cable TV, since it controls both network and content, has a strong economic interest in excluding other content suppliers from unrestricted access to the cable TV broadband network. Even were there to be more than one vertically integrated broadband network reaching homes, openness would not be assured without either regulation or antitrust litigation. Confusion between "competition" and "openness" should be avoided.

3.

State and local regulation. Federal regulation was emphasized in the NII 2000 project white papers and discussion. Yet federal power to force openness may be limited, as suggested by the claim of those supplying video that the First Amendment confers rights to select whatever video messages the network owner wishes. It may ultimately be the power of local governments to place conditions on use of their rights-of-way that must be invoked to achieve universal and open use of broadband networks.

4.

A broadband connection to the Internet. A connection to the Internet for anyone who is served by a local broadband network would achieve many of the goals of the national information infrastructure (NII) initiative.

The Residential Home Market

The phrases "local exchange" and "local telecommunications market" can gain from greater precision. It is particularly important to distinguish between the market in the downtown business area and the residential market. The residential market can be defined as those homes and businesses that are passed by cable TV but that are not located in the downtown market. In the downtown market, traffic is great and distances small, and the relative cost of entry to serve the market is low. Many different networks and services will be provided. Hence, there is no problem of "openness." In the residential market, traffic is much lower in relation to the area covered. The problems in the residential market will be to assure universal open service by at least one provider and to arrange that the network will be open.

One reason for distinguishing the residential market from the rural market (customers not served by cable) is that the technology for providing broadband service in the former seems much clearer at this time. Indeed, for the residential market, there was in the NII 2000 project activities substantial agreement on the probable technology: a digital service over largely fiber networks with the ability to increase two-way bandwidth as demanded. Special problems in the rural market, besides providing the technology of choice, include difficulties in providing bandwidth "symmetry" and the likely need for subsidies to assure universal service in sparsely populated areas.



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Page 205 25 Organizing the Issues Francis Dummer Fisher University of Texas at Austin Summary The following should be kept in mind as the rich submissions to the NII 2000 project are synthesized: 1. Division of markets. The local telecommunications markets should be differentiated; the residential broadband market should be distinguished from the downtown business market and from the rural market. The downtown market is likely to take care of itself, and the rural market has unique problems. In view of the importance of universal coverage, the residential market should be emphasized. 2. ''Competition" and the closed character of cable TV. It should be clearly recognized that cable TV, since it controls both network and content, has a strong economic interest in excluding other content suppliers from unrestricted access to the cable TV broadband network. Even were there to be more than one vertically integrated broadband network reaching homes, openness would not be assured without either regulation or antitrust litigation. Confusion between "competition" and "openness" should be avoided. 3. State and local regulation. Federal regulation was emphasized in the NII 2000 project white papers and discussion. Yet federal power to force openness may be limited, as suggested by the claim of those supplying video that the First Amendment confers rights to select whatever video messages the network owner wishes. It may ultimately be the power of local governments to place conditions on use of their rights-of-way that must be invoked to achieve universal and open use of broadband networks. 4. A broadband connection to the Internet. A connection to the Internet for anyone who is served by a local broadband network would achieve many of the goals of the national information infrastructure (NII) initiative. The Residential Home Market The phrases "local exchange" and "local telecommunications market" can gain from greater precision. It is particularly important to distinguish between the market in the downtown business area and the residential market. The residential market can be defined as those homes and businesses that are passed by cable TV but that are not located in the downtown market. In the downtown market, traffic is great and distances small, and the relative cost of entry to serve the market is low. Many different networks and services will be provided. Hence, there is no problem of "openness." In the residential market, traffic is much lower in relation to the area covered. The problems in the residential market will be to assure universal open service by at least one provider and to arrange that the network will be open. One reason for distinguishing the residential market from the rural market (customers not served by cable) is that the technology for providing broadband service in the former seems much clearer at this time. Indeed, for the residential market, there was in the NII 2000 project activities substantial agreement on the probable technology: a digital service over largely fiber networks with the ability to increase two-way bandwidth as demanded. Special problems in the rural market, besides providing the technology of choice, include difficulties in providing bandwidth "symmetry" and the likely need for subsidies to assure universal service in sparsely populated areas.

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Page 206 Since many of the most important policy issues that must be faced in constructing the NII are presented in assuring universal broadband communications to the home, it will help to address these issues in the specific context of the residential market. "Competition" and the Closed Character of Cable TV The wire broadband network that exists today in the residential market is that of cable TV. It is especially important, therefore, in considering how it might evolve as part of the NII to recognize the strong economic interest of cable TV in continuing to operate a closed network. The problem in designing the NII is only partially technical; it is equally economic. And unless we attend to it, economics may dictate technology. "Openness" is easy to define. A network is open if it permits users, at their choice, to be connected to competing sources of information and permits providers easy access to users. In a truly open network, users and providers cannot be distinguished, although those connected to the network can be distinguished by the amount of bandwidth they require. The phone network is an example of an open network. For cable TV, an open network would permit a customer to connect to packaged TV programs offered by firms that compete with the network owner and the packages it offers. Cable TV is a closed, vertically integrated system. The existing cable TV system is well described in the white papers in this volume. What is important here is that the same company owns the network and sells, or arranges for the sale of, the content moving over the network. As contrasted with common carriage or an "open system," suppliers of content over cable TV do not compete directly for the business of customers, striking with customers whatever deal the market demands. The business arrangements are, rather, first between content producer and the cable company and then, for those products that cable TV decides to offer, between the cable TV company and those connected to its network. It could be argued that the profits of cable TV flowing from its monopoly character are necessary to raise the money with which to upgrade the home network, but that harsh argument has not been advanced in the papers. Perhaps understandably, the papers do not make clear the closed character of vertically integrated networks in the absence of regulation. Bailey and Chiddix state that "while companies such as Time Warner will be one of many content providers, these PC networks that the industry is building will be networks that success in a competitive world will demand be kept open." Rodgers contends that "where the network provider faces competition" it has "an incentive to make interconnection as easy as possible." These comments ignore the profit maximization behavior of competing virtually integrated companies. Powers et al. postulate that where there is unbundling and resale on a fair basis, providers of services can compete, but the additional statement that "effective competition can bring about those results'' is not supported. In Brugliera et al., one paragraph stands out: It is further arguable that regulation should work to inhibit or even prohibit any single entity from owning or controlling both program production and program delivery operations, if such control results in the customer being denied access to any available program source. Consumer access should be a [sic] prime consideration. Yet the general scenario presented in that paper is that of the "500 channel" technology that satisfies what is described as "the consumer's primary desire for passive entertainment, and not interactivity." One wonders how the writers would decide, if forced to choose for their homes today, between the telephone or the TV as a single permitted technology. Would not interactivity and choice be reasons for their likely preference for the phone? Why should those considerations diminish as bandwidth grows? Of course, if one of the network competitors offers an open system, as does the phone company for transporting voice and data, cable TV as a competitor will probably offer equally open transport as to those services. According to Bailey and Chiddix, "Regardless of whether PC interconnection ultimately flows through a number of competing national on-line services or through the laissez-faire anarchy of the Internet, cable intends to offer a highly competitive avenue for local residential and business access to any viable service provider." Personick states, "All RBOCs have expressed a commitment to deploy broadband access services as quickly as

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Page 207 the market demand, technology cost trends, and regulatory/legal environment permit." These comments seem to apply to voice and data, and not to video. Phone companies entering the video market claim that they, like cable TV companies, have the right to use their video network to capture customers for those particular content services offered by them in their video-supplying role. The interest of cable TV companies in closed systems is reflected not only in the fact that cable TV companies trade for much more than the capital costs of the network investments. It is shown also by the reluctance to be clear about "openness" as even an eventual goal for video networks. In Austin, Texas, where the city is offering access to its right-of-way (poles and conduits owned by the municipal electric utility) to any firm willing to operate an open network, the local cable company, far from applying for the resources that it could use in its investment program, has sought to block the city-sponsored effort to achieve openness. Competition does not imply openness. Even if competing networks did develop in the home market, it does not follow that customers would have the option of being connected to any information source of choice, or that suppliers of content would be able to access the network, if the competing companies were vertically integrated. For it would probably be in the interest of both such "competing" video providers not to open their networks to other content providers. For example, each network might offer an alarm service, but a third alarm service might well be denied access over either network. Huber et al. consider the possibility of overbuilding local networks and estimate that the savings would "swamp" the unnecessary costs of overbuilding. Their paper provides little support for this estimate, and its comparison between monopoly and oligopoly probably applies to the monthly charges for those content services offered. It does not follow that a competing deliverer of content could even gain access to either network. If one cable network could handle all the traffic in the residential market and were open to all, the competition between services envisaged by Huber et al. could still take place, just as it can take place by firms using common poles or conduits and without the cost of overbuilding. This illustrates that it is important to be precise in specifying exactly what it is that is in competition: the services of local carriers (alarm services, voice mail, etc.), the content provided, or merely two largely identical fiber cables. In sum, the economic interests of cable TV are at present in opposition to achieving the goal of the NII in an open network; to achieve the desired openness on these important broadband networks will require public action. Federal, State, and Local Regulation Interconnection and Regulation Some of the papers in this volume intimate that the regulation required to achieve openness is fairly minimal. Arlow recommends that all providers of telecommunication services should be required to interconnect with each other, "but there should be no other day-to-day regulatory oversight or standards to which providers are obliged to adhere." Mohan urges the public sector to "remove impediments to the deployment and interconnection of competitive local exchange and access capabilities." These authors, and Huber et al., exemplify the tendency to treat deregulation and interconnection as feasibly consistent. In fact, however, mandated interconnection, without regulation of interconnection charges, would be meaningless, and with such price regulation closely resembles common carriage regulation, the heart of traditional government intervention in wired telecommunications. Role for States and Localities In both the papers and the discussion of them at the forum, there was a strong tendency to identify government action as the action of the federal government. But it may well be that by applying the First Amendment to video content, courts have substantially reduced the federal power to prescribe the kind of openness for video that pervades the voice and data system of the telephone network and, to date, of the Internet.

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Page 208 As Ithiel deSola Pool presciently forecast, it may ultimately be the power of local government to control its right-of-way that provides the governmental lever to open up the cable video networks. A Mandate for Broadband Connection to the Internet In this political climate, it could be that openness and switched access to competing content suppliers might be more readily achieved through connection to the Internet than by what might sound like a backward invocation of common carriage regulation of video. In view of the unsettled constitutional basis for a federal mandate of openness in broadband networks, it could be that a simple statement by the National Research Council urging localities to make broadband connection to the Internet a condition of renewing municipal cable franchises could be an important step in achieving the goals of the NII.