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Broadband: Why policies must change

special report Drastically different rules are needed to foster true competition in the rapidly evolving Internet landscape.

Broadband: Why policies must change

July 27, 2004, 4:00 AM PDT

SAN JOSE, Calif.--Presidential candidate John Kerry stepped to the podium at San Jose State University here last month and declared that broadband was as important to the future of the economy as electricity.

At almost the same moment, on the other side of the country, President Bush was outlining his own plan for providing universal access to high-speed Internet connections by 2007.

"We need to drive to connect every corner of our country to a network that's up to 100 times faster than everyone else's today," Kerry told an audience of Democratic stalwarts in a speech laden with populist themes. Bush struck a patriotic tone as well, in an address at the Commerce Department in Washington: "The goal is to be ranked first when it comes to per-capita use of broadband technology."

In a month dominated by news ranging from the Iraqi handover to rising interest rates, their remarks underscored the growing importance of broadband Internet policy this election year. Aside from some practical differences, such as Kerry's more activist approach, the positions taken by the two men were notable for their similarities.

Yet turning rhetoric into action will be equally difficult for whichever candidate wins the White House in November. Federal communications policy is a highly politicized and impossibly complicated mess, with regional phone companies and cable networks locked in mortal combat. Landmark telecommunications regulations, passed in 1996, when broadband was largely theoretical, are likely to be reopened in Congress next year--ensuring a new round of Washington infighting and multimillion-dollar lobbying efforts.

Utopia

Salt Lake CIty, Utah (photo)
Salt Lake City is one of the municipalities that decided not to fund construction of Utopia's fiber-optic network.
Eric Schramm/Salt Lake City Convention & Visitors Bureau
Utopia's business plan
  • Cities sell low-interest bonds to fund the fiber network build-out.
  • The government builds the network, but only private companies can resell access to consumers.
  • Revenue is generated when ISPs pay the government a fee to access local customers.
  • Revenue pays off municipal bonds and operation costs.
Source: Utopia white paper, November 2003.
Fiber-optic vision

The most ambitious public broadband project in the United States can be found in the mountains of Utah. A project is under way to connect 18 cities with fiber-optic lines that can deliver hundreds of TV channels and speedy broadband. However, the project--dubbed the Utah Telecommunication Open Infrastructure Agency, or Utopia--is in peril. Salt Lake City has backed out of the program, and many other cities are on the fence about ponying up funds. Utopia hasn't abandoned its build-out projects, but it now seems like an incomplete puzzle.

How fast is fiber?

Typical broadband technologies can't handle as much data as can fiber-optic links.

(chart)Source: Utopia white paper, November 2003

"When you look at the trends, it's not chaos yet--but, if everything continues, it will be chaos in a couple years," said Blair Levin, a Legg Mason analyst and former high-ranking official at the Federal Communications Commission. "I don't think the trains will collide. But sometimes it takes the trains being within earshot of each other before people do anything."

The urgency behind these competing forces has risen from the historic convergence of voice, video, music and other data into bits and bytes that can flow equally well over any network. Advances in digital technologies have created a massive common battlefield for multiple industries where telephone companies, cable operators, broadcast TV networks and even radio stations are targeting one another's businesses.

Download the full report in PDF format

As a result, experts increasingly say United States needs a more cohesive national broadband policy. High-speed Internet connections will be a pivotal factor in determining the outcome of this rapid evolution, which will have a lasting effect on virtually every household. Some policy makers and industry leaders point to the success of South Korea's national technology initiative as evidence that the U.S. government can break the broadband logjam without excessive regulation.

From scores of interviews with government officials, technology executives, industry analysts, academics and consumers, CNET News.com has drawn several recommendations that could help form a national broadband agenda, based on three key points: incentives to spur competition, authority for municipalities to build their own high-speed networks, and changes to communications laws that predate the modern Internet.

In the largely rural community of Chico, a Northern California town in an agricultural area about an hour north of Sacramento, Jim Higgins' DigitalPath Networks is going head-to-head with cable leader Comcast and telecommunications giant SBC Communications. The small company sells broadband connections based on popular Wi-Fi technologies--similar to those in many homes, hotels and wireless cafe "hot spots"--that relay signals among fixed receivers to serve a wider territory.

Kerry vs. Bush

Both presidential candidates want universal broadband access, but they have outlined different ways of getting there.

Sen. Kerry
  • Introduce 20 percent tax incentive for "next generation" broadband investment
  • Put in place universal broadband for emergency services by 2006
  • Free up more wireless spectrum for broadband
  • Promote rural broadband purchasing groups to help lower prices
President Bush
  • Keep Internet access tax-free
  • Eliminate regulations that discourage investment
  • Use federal land for wireless towers, fiber rights of way
  • Free up more wireless spectrum for broadband

Although DigitalPath's service is limited, it represents the viability of the kind of alternative-communications technology that buoys the free-market optimists of Washington. More competition generally means lower prices, and in other parts of the world that has led to faster networks and better customer service.

Under today's policies, U.S. telephone and cable companies are allowed near-complete control of their networks--a situation that consumer groups say stifles competition from businesses and technologies that are not part of the DSL-cable duopoly that dominates much of the country's markets. The slower dial-up Net access business, by contrast, was built up by hundreds of companies, often with dozens of small providers competing in a single area. They served a wide variety of customer demands by offering Internet connections with different pricing and service plans, using telephone lines that carriers are mandated by law to share.

"The FCC is pursuing the 'cable model' of closed networks, in which facility owners act as gatekeepers. This will produce neither genuine consumer choice nor an environment that promotes dynamic innovation," the Consumers Union and the Consumer Federation of America contended in a joint letter to Bush in March. "That is not consumer choice; it is a dictatorship by the facility owner. This has led to inflated and rising prices."

If policy makers are serious about stimulating the economic and societal changes inherent with broadband, they must take substantial steps to help create a truly competitive market. Possible incentives--which would not need to be direct subsidies--include affordable loans, tax credits or other financial assistance to companies building their own networks, so they can offer services that compete with the cable and telephone juggernauts.

Blair Levin When you look at the trends, it's not chaos yet--but, if everything continues, it will be chaos in a couple years. --Blair Levin analyst, Legg Mason

Some steps toward this goal have already been taken, including a $2 billion low-interest loan program for rural broadband access programs, passed as part of the Farm Security and Rural Investment Act of 2002. For the most part, however, two fundamental goals remain unmet: bringing broadband to outlying areas that might otherwise be left behind, and stimulating investment in next-generation technologies that are much faster than the status quo.

In crafting these incentives, though, policy makers must guard against pork-barrel politics and prejudice toward specific technologies. Decisions made by politicians and bureaucrats unfamiliar with technology are among the many reasons that the industry has long opposed government regulation.

"I think that those kinds of incentives are helpful, but removing the regulatory barriers to investment are actually more important to stimulating investment," said David Young, director of technology policy at Verizon Communications, a regional phone company.

The federal government has ample precedent for acting as a catalyst in the construction of national infrastructure.

In the 1860s, proponents of transcontinental railroad projects found it difficult to raise cash from banks skeptical of their future. To help build what was seen as a critical national infrastructure, Congress gave four of the five transcontinental projects land grants amounting to millions of acres, some for laying tracks and some to sell in order to defray construction costs.

Highways, which benefit all who drive cars or consume foods transported in refrigerated trucks, were built with taxpayer money. Rural telephone networks were subsidized by government programs, which still lead to slightly higher telephone bills in urban areas--essentially a tax collected by the phone company.

Entrepreneurs like DigitalPath's Higgins do not believe in outright subsidies for money-losing ventures. As tempting as such help might be for struggling businesses, that kind of artificial support is anathema to the libertarian principles held by many in the high-tech industry.

Instead, he believes that the government can provide the seeds to encourage critical private-sector investment.

"Low-interest debt, if it is material, would help," Higgins said. "That would stimulate the investors to want to invest. Get the money flowing out of the venture capitalists. That's what is going to drive the alternatives."

Connecting one town at a time

Kutztown is a typical industrial town of 5,500 about halfway between Allentown and Reading in Pennsylvania, with a band shell in its park, a roller rink on Main Street and a tradition of self-reliance. In the late 1990s, civic leaders got so frustrated with the reluctance of cable and phone companies to bring broadband there that they decided to do it themselves.

The community built its own fiber-optic line, over the objections of Verizon and Cablevision, and last year began offering voice, video and data service directly to local residents. They paid for the $7.5 million project largely with 30-year municipal bonds, giving it much more time to become profitable than commercial operations usually have.

Video: Doctors tap broadband to monitor patients a mile away

Hundreds of other municipalities, mostly in rural areas avoided or underserved by the communications giants, have started or are planning similar broadband projects. The cable and telecommunications companies are so threatened by these grass-roots networks that they have redoubled their lobbying efforts against them in recent months.

Specifically, the large companies have seized on a March decision by the U.S. Supreme Court, which ruled that states have the legal right to block local governments from building their own telecommunications utility projects. Although only about a dozen states have laws that block or limit local government broadband projects, cable and phone companies are citing the ruling in efforts against local networks in the Pennsylvania capital of Harrisburg and in other jurisdictions.

"It is being used in a political sense to cause concern among city council members and utility members," said Richard Geltman, general counsel for the American Public Power Association, a municipal utility trade group that also monitors public broadband projects. "It has been used by incumbent providers with state legislators to seek state legislation for municipal prohibitions, saying that the Supreme Court has endorsed that position, which it did not."

Municipal fiber projects (chart)

Geltman and others believe that Congress should step in to protect local broadband projects even if state legislators--who often prove receptive to the big-money lobbying campaigns of large corporations--are opposed.

The idea of such overriding federal action has found support even among some who are typically wary of allowing government at any level to take over functions normally performed by private companies.

"If there are state laws that prohibit municipal projects, we should probably look at that again," said Rick White, a former Republican congressman who is now chief executive of TechNet, a lobbying group that represents the technology industry.

Frank Caruso, Kutztown's director of information technology, says he doesn't lose sleep worrying about opposition to local projects like his, because those projects simply make too much sense.

"Elected officials are going to have a tough time telling voters that they don't have a right to save money in their own communities," he said.

Bringing laws up to hyperspeed

Four years ago, communications analyst Kevin Werbach, a former FCC lawyer, penned a manifesto advocating a new kind of regulation for the Information Age, writing that "communications will be a subset of Internet policy, rather than the reverse." That statement, considered hyperbolic at the time, has proved prescient.

Kevin Werbach Existing legal structures force regulators to make absolute category distinctions that don't work for Internet-based applications. --Kevin Werbach former FCC lawyer

The FCC has tried its best to apply pre-Internet laws to today's landscape, but those measures are proving a poor fit. Regulations aimed at fostering competition have been repeatedly blocked by courts. A generation of upstart telecommunications companies has collapsed. Meanwhile, giant cable and phone companies now offer almost indistinguishable service packages, despite still being regulated in very different ways.

"I don't think anyone would disagree that there has been a tremendous amount of confusion and bitter opposition in trying to implement the 1996 Telecommunications Act," Werbach said in a recent interview. "The clear problem we have today is that the existing legal structures force regulators and other policy makers to make absolute category distinctions that don't work when you're talking about Internet-based applications."

One solution, according to Werbach and a rising number of academics, is a "layered" regulatory system based on the Internet's architecture, rather than on a 70-year history of networks and technologies that are now obsolete. Elements of the concept are contained in legislation proposed by MCI.

A layered system would treat corresponding elements of different networks similarly. It would recognize that cable TV and telephone wires are increasingly carrying the same bits of data and apply the same appropriate rules to them, instead of regarding them as entirely different creatures.

(chart)

This would, for instance, make voice services subject to the same laws whether they are provided over a cable network, a telephone line or an Internet Protocol connection. Advocates note that this approach requires only consistency, not more regulation.

Phone and cable companies remain skeptical, fearing that the practical result would be to leave their networks subject to more government intrusion. Instead, they say, the FCC should selectively remove government controls until all industries face as little regulation as possible.

"There is already a version of the layered approach in place," said Dave Pacholczyk, a spokesman for telephone carrier SBC Communications. "They can forbear from applying certain rules to certain industries."

Others say they are concerned that the congressional action necessary to modernize broadband regulations could lead to an expensive political battle that likely would once again favor deep-pocketed industries that can afford extensive lobbying.

"It's an interesting approach, and is a good intellectual point for discussion," said Jeff Campbell, director of technology and communication policy for networking gear maker Cisco Systems. "But at this point in time, it is not very realistic."

Nonetheless, it is clear that the telecommunications rules made for yesterday's networks are increasingly inappropriate and therefore ineffective in governing the 21st-century infrastructure--meaning major changes are inevitable.

"The whole concept of the Communications Act is breaking down in so many ways," said Rick Whitt, senior director of global policy and planning at MCI. "A lot of folks are looking for a way out." End