Wrong turn in the Net's future

The expansion of phone monopolies in the Baby Bells, such as Verizon Communications and SBC Communications, must be handled carefully. If it is not, the United States could drop even further behind other nations in the implementation of broadband, damaging our economy, increasing consumer Internet bills and hampering the recovery of the Internet and telecommunications sectors. The United States already lags behind much of the industrialized world in terms of how many of its people currently use broadband Internet service. For example, in Hong Kong, 66 percent of Internet homes have high-speed access, compared with just 17 percent in the United States.

The benefits of widespread use of broadband are clear. Some studies suggest as much as $500 billion in economic benefits and 1.2 million new jobs will come with greater broadband usage. While these may not be the precise numbers, this much is evident: We will realize these benefits if, and only if, more people get high-speed Internet access. And there is a battle being fought in Washington and in state capitols around the country over two dramatically different and competing visions for how to make that happen.

One school of thought--currently supported by the Federal Communications Commission--favors allowing local-phone monopolies to maintain their dominance and extend that monopoly into the high-speed Internet market. It relies on corporate monopolies making investments to spur broadband penetration. The second school of thought relies on the lessons learned in international broadband markets and in the domestic long-distance market and local-telephone market. In each case open access to networks and functional wholesale markets spurred lower prices and competition.

The Bells' vision advocates a position that follows in the footsteps of companies like Standard Oil and Microsoft. At the beginning of the previous century, Standard Oil's monopoly extended up and down the oil market--from wells to barrels. Microsoft seeks to control its market from operating systems to browsers, and makes a great effort to shut other software companies out of the market.

SBC, with 95 percent of the local phone network in its region, is certainly in a class with Microsoft and Standard Oil. It wants to move its local monopoly "downstream" to control the high-speed Internet market. Proponents of this view believe that allowing monopolies to dominate in their market will give them the incentive to invest in the kind of upgrades that will speed a broadband rollout.

According to the other vision, one reason the United States lags way behind the world in access to high-speed Internet is that other countries have taken steps to keep their Internet wholesale markets free from monopolies. This openness promotes competition, lowers prices and stimulates demand. Use of broadband in Japan's Internet market doubled in one year after the Japanese government started to open up the market to competitors.

The Bells' vision advocates a position that follows in the footsteps of companies like Standard Oil and Microsoft.

When we try at home, it often works. It's worked in both the U.S. local and long-distance telecommunications markets. A network sharing arrangement was used during the 1970s and 80s to pave the way for more competition in the long-distance phone market. AT&T was required to share its network and give new competitors, such as Sprint and MCI, a chance to enter the market. The rest, as they say, is history--and the long-distance market is still vibrantly competitive.

California officials have adopted this philosophy successfully in the local-phone market. In recent years, SBC's "wholesale" rates for the local-phone network were artificially high. The results were felt: Competing local phone companies couldn't afford to enter the market and consumer prices stayed high. When the California Public Utilities Commission stepped in and lowered wholesale prices in May 2002, nearly a million consumers switched to a competing local-phone company. By my estimate, as a result of the competitive offers, local-phone bills have dropped by nearly $189 million a year.

Despite these successes, the Bells appear to have persuaded the Federal Communications Commission to rule that they no longer have to share their Internet networks with competitors. Such an action hands complete control of the telephone Internet market over to the Bells and defeats the purpose of the Telecommunications Act before giving it time to work.

The United States is the world leader of the technology industry, but has so far conceded its potential leadership in broadband access.

It also makes it nearly impossible for rival Internet providers to establish themselves in the local market, which leaves consumers with less choice and higher prices.

The U.S. is the world leader of the technology industry, but has so far conceded its potential leadership in broadband access. Once these circumstances reverse themselves and governments make a stand, we will see great strides made in the Internet and telecommunications sectors. The U.S. Internet market holds too much promise for it to be squandered through a mixture of misguided policies and a lack of conviction.