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Best Practices in Broadband Development Without Unnecessary Incentives A Presentation at the 32nd Annual Conference of the Pacific Telecommunications Council Honolulu, Hawaii January 17-20, 2010 ‘ Rob Frieden, Professor of Telecommunications and Law Penn State University [email protected] Web site : http://www.personal.psu.edu/faculty/r/m/rmf5/ Blog site: http://telefrieden.blogspot.com/ Incentive Creation and Disincentive Avoidance in Broadband Development While best practices require nations to consider a variety of strategies for stimulating Next Generation Network development, the U.S. FCC has become preoccupied with “incentivizing.” Politically adept stakeholders have gamed the legislative and regulatory process to secure premature deregulation, financial subsidies, and incentives even where competitive necessity would stimulate investment. Governments need to calibrate incentive creation and avoid tilting the competitive playing field with inconsistent regulation, subsidies, grants, tax credits, loans, loan guarantees and other incentives. NGN development has a substantial impact of a nation’s competitiveness in the global economy and should not be the subject of regulatory brinksmanship. In the U.S., it appears that the most financially secure, incumbent carriers, are playing a game of “chicken” with Congress and the FCC over NGN development; major incumbents have refrained from submitting proposals to use a portion of the $7.2 billion available for NGN development, probably because of network neutrality requirements. 2 Until 2009 the U.S. Assumed a Robustly Competitive Broadband Market Existed Despite ample evidence to the contrary, until 2009 the U.S. government, including the FCC saw no need to create broadband incentives based on evidence of global best practices. “[T]here is substantial competition in the provision of Internet access services. Broadband penetration has increased rapidly over the last year with more Americans relying on high-speed connections to the Internet for access to news, entertainment, and communication. Increased penetration has been accompanied by more vigorous competition. Greater competition limits the ability of providers to engage in anticompetitive conduct since subscribers would have the option of switching to alternative providers if their access to content were blocked or degraded. In particular, cable providers collectively continue to retain the largest share of the mass market high speed, Internet access market. Additionally, consumers have gained access to more choice in broadband providers.” AT&T Inc. and BellSouth Corp., Application for Transfer of Control, Memorandum Opinion and Order, 22 FCC Rcd. 5662, 5724-25 (2007). In 2008, John Kneuer, then Assistant Secretary for Communications and Information and Administrator at the Commerce Department’s National Telecommunications and Information Administration claimed the United States “has the most effective multiplatform broadband in the world.” 3 The FCC Provides One Source Document for All the Positive News on Broadband Penetration—Everything Else Constitutes a “Trade Secret” Necessitating Confidential Treatment 4 The U.S. Has 100% Broadband Penetration With Consumers in 94.6% of All Zip Codes Having 4 or More Broadband Choices Source: FCC (2009) 100% 90% Percent of Zip Codes with High-Speed Providers 80% 100% 70%90% 80% 60%70% 60% 50%50% 40% 40%30% 20% 30%10% 0% 20% 10% Jun 2000 Jun 2001 Jun 2002 Jun 2003 One or More Providers Jun 2004 Jun 2005 Jun 2006 Jun 2007 Four or More Providers 0% One or More Providers Four or More Providers 5 Lines by Information Transfer Rates in the Faster Direction as of June 30, 2008 (Includes only lines exceeding 200 kbps in both directions) Source: FCC (2009); http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-292191A1.pdf Total “High Speed” Lines (theoretical bitrate exceeds 200 kbps in 1 direction) Total High-Speed Lines 140,000,000 130,000,000 120,000,000 110,000,000 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 Jun 2000 Jun 2001 Jun 2002 Jun 2003 Jun 2004 Jun 2005 Jun 2006 Jun 2007 High-Speed Lines by Technology as of June 30, 2008 ADSL 22.6% All Other 46.2% SDSL and Traditional Wireline 0.7% Fiber 1.8% Cable Modem 28.8% 6 The U.S. Ranks 15th Among OECD Nations in Terms of Household Penetration source: OECD (2009) http://www.oecd.org/document/54/0,3343,en_2649_34225_38690102_1_1_1_1,00.html OECD Broadband subscribers per 100 inhabitants, by technology, December 2008 40 Other Fibre/LAN Cable DSL 35 30 25 OECD average 20 15 10 5 0 7 The U.S. Lags Most Nations in Broadband Penetration On the Basis of Per Capita GDP source: OECD (2008) OECD broadband penetration and GDP per capita Broadband penetration, December 2008 40 Broadband penetration (subscribers per 100 inhabitants, Dec 2008) GDP per capita, 2007 90,000 GDP per capita (USD PPP, 2007) 80,000 35 70,000 30 60,000 Simple correlation = 0.65 25 50,000 20 40,000 15 30,000 10 20,000 5 10,000 0 0 8 source: Internetinnovation.org; http://internetinnovation.org/images/factbook/by_country.png. 9 Who’s Statistics Are Most Credible? Most satellite and terrestrial wireless broadband options do not yet provide true broadband service, yet the FCC reports that 16.5% of all lines provided via satellite, terrestrial fixed or mobile wireless. Offered service at greater than 200 kbps. Wall Street Journal tests of the cutting edge, Apple iPhone 3G measured actual data speeds in the 200-500 kbps range. The U.S. government and sponsored academics dispute the OECD statistics as failing to include Wi-Fi hot spots, at work access, etc. Additional excuses include the lack of computer literacy and access, having a large rural hinterland, adverse demographics, yet other nations with similar disadvantages do better. 10 Reasons Why Incumbents Can Postpone Major Broadband Investment Currently incumbents can “make their numbers” thanks to still growing wireless revenues, generous universal service funding, and the absence of competitive necessity. In the third quarter of 2009, Verizon reported that 58% of its total revenues accrued from wireless service. Most of the $7 billion annually allocated for universal service flows to incumbent local exchange carriers. U.S. broadband in many locales is comparatively slow and expensive despite two platform options (DSL and cable modem). Until 2009, the U.S. had no targeted broadband development funding. 11 Global Best Practices in Broadband Development Best practices does not require nations to “throw money at the problem,” but instead: • Develop a vision and strategy; • Promote digital literacy, i.e., the ability to use digital technologies to pursue information, communications and entertainment interests; • Invest in infrastructure, aggregating demand, and serving as an anchor tenant; • Foster facilities-based competition; • Create incentives for private investment and disincentives for litigation and other delay tactics; • Offer electronic government services, including healthcare, education, access to information, and licensing; • Auction off universal service franchises that receive subsidies and grants; and • Revise and reform governmental safeguards to promote a high level of trust, security, privacy, and consumer protection in NGN services, including electronic commerce. 12 Development Models Top/Down Nations emphasize expanding the supply of broadband capacity by stimulating access through: Expanded universal service obligation to include broadband service; Using financial stimulus tools such as grants, subsidies, and tax credits; Reallocated spectrum to expand available bandwidth useable for broadband services; and Supporting competition from multiple platforms, including retrofitted fixed line telephone networks, cable television plant, wireless, fiber optic links, and the powerline grid. 13 Development Models (cont.) Bottom/Up Nations emphasize stimulation of demand for NGN and the services they deliver through government: Becoming an early provider of NGN-mediated services and an underwriter of programs designed to enhance digital literacy, i.e., the skills needed to use NGNs for enhancing social and personal utility; Offering access to e-government services ; Offering free or subsidized computers and support for the creation of digital content; Funneling grant money to “community champions” and broadband demand aggregators in addition to carriers; and Addressing consumer protection issues including, privacy, network reliability, security and neutrality, and competition policy issues. 14