As Cynthia has discussed in recent posts here, here and here, network neutrality and related issues such as video franchising and municipal broadband continue to hover over policy deliberations in Washington and, to some extent, broadband industry business models. And, as we’ve noted in previous posts, there are signs that the public at large favors the basic principles of net neutrality, wants increased competition and, at least in some local markets, has shown support for municipal broadband at the polls.
All this points to the obvious—that people want to retain and expand the benefits of an innovative high-speed Internet, and they want choice and competition among service providers, which they believe will lead to better service and better prices. The much tougher question, of course, is how best to achieve these goals from where we stand today.
Back in October, I cited a post by Susan Crawford, which argued that:
Competition in the market for pipes has to be the issue to focus on, not the neutrality of those pipes once they have been installed. We’ll always lose when our argument sounds like asking a regulator to shape the business model of particular companies.
Susan makes a key point, one that is underscored by the practical difficulties of implementing “business model-shaping” policies, as evidenced by the decade since passage of the 1996 Telecom Act. That period, marked by a continuous series of expensive and time-consuming legal battles, eventually led to a duopolistic broadband access market structure largely unintended by lawmakers and regulators. It also witnessed the overfunded rise and value-destroying demise of large numbers of independent ISPs and CLECs that had bet their business on a regulation-mandated ecosystem opposed by access incumbents and eventually crushed by a combination of regulatory and market pressures brought to bear by these dominant players.
Admittedly, the construction of additional broadband access networks faces significant economic challenges. Again, the decade following the Telecom Act’s passage is testimony to this, as are the basic laws of economics as they relate to late market entry in industries with high upfront capital costs. What that says to me is that a top priority for public policymakers should be to do what they can to encourage facilities-based competition and avoid doing things that increase already substantial barriers to entry.
In any competitive scenario, access network incumbents will enjoy huge advantages simply because they are incumbents. If other players can bring different competitive strengths to the game, policymakers should avoid setting ground rules that require new market entrants to leave their best assets on the bench, or that are so poorly designed they invite prolonged legal challenges that, over time, suck the economic life out of new competitors’ business models.
In terms of new entrants into the broadband access market, possibilities that come to mind are municipal broadband, broadband over powerline (BPL) and wireless broadband. While each faces its own challenges—and the shared challenge of competing with two entrenched incumbents—each also enjoys some unique strengths and benefits.
As I said in an earlier post:
During the past few years, we’ve seen a growing interest in the idea of “municipal broadband” or “community Internet” among cities large and small, who see it as both a driver of healthy economic growth and a tool for supporting government functions, public safety, education, healthcare, traffic management and other “social goods.”
While a case can be made that ground rules are required to avoid unfair competition by government-backed ventures, I’d argue that the value of additional competition and potential “social goods” provided by municipal broadband networks should place the burden of proof on incumbents to make the case for restrictions on municipal broadband initiatives.
And, as I noted in that earlier post:
A new phase of the Community Internet movement is characterized by the emergence of “bypass” models largely funded by Internet-based companies like Google or Earthlink, but with the active cooperation of city governments and local communities…[P]ushback by incumbents against Community Internet initiatives…is putting pressure on cities to avoid putting taxpayers’ money at risk and to not get too directly involved in the provision of commercial services. This, in turn, seems likely to push the Community Internet movement in the direction of the Public/Private models proposed by Earthlink, Google and others.
Google’s role in deploying alternative access networks has gotten lots of attention in recent months, including here at IPD. I speculated on the possibilities here and here, and Cynthia provides an update in a post today. We also considered Earthlink’s model after it was selected to build and operate citywide WiFi networks in Philadelphia, PA and Anaheim, CA.
Another area with some promise is broadband over powerline (BPL). One of BPL’s strengths is that it can accomplish two important goals with a single network investment. One goal is to create a “smart grid” that brings utility operations and services into the 21st century by marrying the electrical grid to an integrated IP-based network. Another is to introduce a new broadband access pipe into the competitive equation (Its worth noting here that Google has invested in Current Communications, a BPL service provider).
Unlike telcos and cable operators, most utilities appear to have little interest in becoming retail broadband service providers. Instead, most prefer to either: 1) play the role of “landlord,” providing pole and line attachments and power; 2) provide wholesale network services to multiple ISPs that compete for retail customers or; 3) take a relatively passive investment position in a retail and/or wholesale BPL service provider. So, for those fearing cable and telco “walled gardens” as threats to the open Internet, BPL should be attractive in that it can provide not only another access network, but also one that’s relatively friendly to carriage of independent ISPs and web-based service providers.
At this point, state-level policies are particularly important to BPL’s economic prospects. This is because state regulators have a say in how BPL network costs would be allocated between the regulated energy utility and an unregulated broadband service provider.
Here again we face a question of policy priorities. While incumbent broadband service providers (and, of course, electric power customers) have valid arguments against ratepayer subsidies of unregulated BPL network services, it seems unwise from a broader public policy perspective to let these concerns unduly delay BPL deployments. There are already signs that utilities and regulators in some states are working together to develop cost-allocation rules that are relatively clear, simple and unlikely to become embroiled in decade-long legal challenges. These efforts should be encouraged and, where practical, shared among states to expedite the adoption of workable rules throughout the country. This, in turn, seems likely to encourage the development, funding and execution of “smart grid” and commercial BPL business models.
Wireless broadband is another source of increased competition in the local access market. Among the models being pursued on this front are municipally-backed projects and private initiatives that can reduce their financial risks by working with local governments who serve as anchor tenants and provide attractive rates for pole attachments and other support services.
The wireless broadband world is also developing some walled-garden models. To some extent, this is happening in the mobile data space, while Craig McCaw’s Clearwire has reportedly blocked competitive VoIP providers from delivering service on its network.
And, if reports are correct that News Corp.’s DirecTV unit will launch a WiMAX-based broadband service, it seems highly likely that this will lean in the direction of a walled garden model, something News Corp. may already be exploring with its recently-acquired and fast-growing MySpace web service. Assuming rumors are correct that DirecTV will in some way team up with its satellite competitor Echostar in pursuing a WiMAX play, the latter may also opt for a walled garden model. But Echostar’s lack of in-house content and web services, and its historical mode of operation, suggest its garden would rely more on content and services provided by others.
Another key element of the broadband wireless competitive equation is spectrum. A few days ago, the House, by a vote of 216 to 214, set January 28, 2009 as the date for auctioning analog broadcast spectrum, to be followed by a transition to all-digital broadcasting on February 28, 2009. What happens to that spectrum is an important policy question. If the three dominant wireless players end up as high bidders, the likely result would be a solidifying of an oligopolistic telecom market structure dominated by Verizon/MCI, AT&T/BellSouth/Cingular, and Sprint/Nextel in an alliance with major cable operators.
I don’t know if pending House or Senate bills address the question of whether any of the analog spectrum will be set aside for unlicensed use, but I hope Congress, in its rush to set a date for return of analog spectrum and to grab some quick debt-reduction bucks, will at least give this option serious consideration. As I said in an earlier post:
Given the impressive value that unlicensed Wi-Fi has squeezed out of tiny slices of “junk” spectrum bands, one would hope that the fate of large bands of high-grade broadcast spectrum are decided on grounds more strategic (from economic, social and geo-political perspectives) than the political expedience of paying down a small chunk of the federal government’s vast and irresponsibly-created deficit. To do less would only compound that irresponsibility…As the date for the return of broadcast spectrum nears, it’ll be interesting to see whether companies like Intel (a strong Wi-Fi and WiMAX proponent) and the GYMAAAE Internet giants (or anyone else, for that matter) come up with proposals for unlicensed or licensed uses that create new broadband access pipes and spur competition and innovation.
It’s hard to predict the prospects for any of these emerging access models, all of which would face intense competitive pressures from incumbents. But, given the value of increased competition as it relates to concerns about network neutrality, retention of a vibrantly innovative Internet, and potential anti-competitive behaviors by access incumbents, I’d urge policymakers at the federal, state and local levels to avoid any measures that increase the already formidable barriers to entry these newcomers face. Instead, they should adopt policies that enable new entrants to leverage their unique strengths and assets in ways that promote healthy competition and increase the value of services delivered on our nation’s broadband infrastructure.
Mitch Shapiro at 1:33 PM|Comments(0)
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