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Broadband Laws
By Rob Howald
Weýre creeping up on the five-year anniversary of a major telecommunication event. While my anniversary here at Motorola Broadband is one correct answer, another is the landmark Telecommunications Act of 1996. In this column, weýll take a peek at some of the fallout from that important piece of legislation.
Whatýs the difference between a dead skunk in the road and a dead lawyer in the middle of the road? There are skid marks in front of the skunk. I received this joke from a lawyer friend (not necessarily an oxymoron), so I consider that as license to repeat it. Some interesting things are happening on the way to telecommunication reform ý and lawyers are mired in the middle of much of it.
In this column, we take a break from pure techno-babble to discuss telecommunication reform ý primarily the controversial open access topic. The controversy involves access to high speed interconnectivity for Internet service providers (ISPs), who wish to have cable lines forced open for their use. ISPs are taking this issue to the courts, city-by-city.
Currently, access to cable lines is at the discretion of the cable operator. These operators have limited access at this point to two main service pro-viders, which have ties to the industry. Weýll discuss some of the economic issues surrounding this debate.
The Telecommunications Act of 1996 was a landmark piece of legislation for all of the main providers of communication services, including telephone companies, broadcasters, cable companies, the wireless industry, and newspapers and other media. Naturally, it also became significant legislation for the equipment manufacturers and their suppliers, whose success and profits required investment and purchase by the service provider community.
The last attempt at significant legislation of the communication industry occurred with the Communications Act of 1934. At that time, the legislation dealt with merely one phone company and three TV networks. There was no such thing as a personal computer, much less computer networks or the Internet. Obviously, the 1934 effort was severely outdated with regards to todayýs telecommunication landscape. In fact, upon signing the bill into law in 1996, President Clinton did not liken it to the Communi-cations Act of 1934. Instead, he drew a parallel between it and the 1957 Interstate Highway Act signed by then-President Eisenhower (contrary to the recent rumors, Al Gore did not invent the Interstate Highway system).
The analogy was based on the nature of the two bills in bringing people together like never before, something the construction of physical highways and the development of the information highway both have achieved with remarkable success. The goal of the 1996 act has not been questioned much, but many intricate issues within the act have been the subject of passionate debate. Letýs start off with an overview of the act.
Goals
The legislation was favored by both parties in Congress because of the many goals that are indifferent to party affiliation. Some of the primary goals are discussed below.
ý Stimulate private investment and encourage innovation. Government wanted to be less involved in telecommunication oversight, so that the industryýs projected explosive growth would be free to take place. It was felt that an industry which, taken as a whole, represents about one-sixth of the economy, can best set the agenda for itself and consumers by being placed in a competitive environment. Also, government wanted venture capital to bear the risks of the multiple complex technologies competing for a stake in the industryýs future.
ý Promote competition and prevent monopolies. Congress sought to inspire innovation and creativity, higher performance, and lower consumer prices, by allowing head-to-head competition amongst previously separately regulated providers.
ý Protect diversity of viewpoints. Instant mass communications created concern about the level of influence possible in the new atmosphere of information exchange. The fear was intensified by the industryýs prior monopolist structure.
ý Provide universal service/coverage. A key point covered by the spirit of this definition emphasizes accelerating and assuring the connection of schools, libraries, and hospitals to the Internet.
ý Provide parental choice technology
(V-chip). Government came down on the side of mandating the capability of parental censorship of programming within the home.
Legistlated Actions
To achieve these goals, many wheels were set in motion. The 1996 act is over 100 pages, over 300 when considered in conjunction with the amended 1934 act, which was how the 1996 act was implemented. Thus, it is impossible to describe in detail all of the measures taken. However, here is a general summary:
Reforming the CATV
industry
The cable TV (CATV) industry developed as monopolies by geography. That is, there are multiple cable system operators (called MSO for multiple service operators), and each MSO had a right to operate without competition in their granted territories. As a result, operators undertook investment in equipment and labor to build out cable networks to serve subscribers. The quality and quantity of video was an instant hit with consumers accustomed to only a limited number of over-the-air broadcast quality channels. Americaýs love affair with television intensified during this time period, and cable grew quickly, offering tens, then hundreds of channels of programming to choose from.
The launch of digital cable increased the channel count considerably, as this new technology allowed ten or more channels to occupy a frequency band formerly needed for a single channel, making the delivery via cable significantly more efficient. The overall impact of the cable industry in society has increased with the ability of cable to now provide this large content of video programming, as well as data and voice services.
Universal service vs open access
The core question at the center of
the broadband connectivity debate involves what is meant by the action to provide universal service/coverage. Part of this definition clearly seeks to assure interconnectivity for social purposes to schools, hospitals, and libraries. Part of this goal is also to provide access to broadband connectivity to low income homes and rural communities that may not necessarily have the complete wired infrastructure.
The debate comes into play when the details of implementing this goal are considered. In general, virtually any ISP can be connected through dial-up (telephone system-based) connections. However, the cable industry has developed its own cable-specific modem services. Currently, this consists of two major players that provide the ISP function for cable, Roadrunner and Excite@Home. Fortunately or unfortunately, both of these new companies are linked via investment to cable operators themselves.
The ongoing debate regarding open access simplifies to this: Should cable companies be forced to open their cable lines to any ISP that desires coverage in the area served by the cable company? In practice, cable companies will generally cluster in the major metropolitan areas, and are thus seen as attractive markets for an ISP to offer high-speed service. For ISPs connected only via phone lines, their service can sometimes become bottlenecked. In one important way, this makes the product effectively inferior to those allowed to talk on the cable lines.
Key CATV access questions
Does cable have legitimate competition for high-speed Internet access? How strong is cableýs monopoly power under new deregulation legislation? Consumer groups have cried foul over the limited options facing Internet users who desire high-speed interconnectivity. Cable companies, they say, have an unfair advantage over ISPs forced to rely on dial-up connections, an advantage built through government protection in the form of monopoly power.
FCC chairman William Kennard at Cableýs Western Show last year indicated that government will not sit back and allow such a scenario to take place or persist, saying, ýyou need regulation when market-based incentives are not aligned with the needs of consumers,ý which is a battle cry for many consumer groups. However, these groups tend to downplay the rest of Mr. Kennardýs opinion, when he went on to say, ýbut, I believe there are market incentives that will drive openness in the broadband world.ý
A new reality
Todayýs reality already differs greatly from that of 1996, as the Internet explosion has brought many new players to the broadband game, most of which represent direct competition for cable companies. These technologies include developments in the telephone industry of the video-capable and high-speed data techniques of asymmetric digital subscriber line (ADSL) and very high rate DSL (VDSL). ADSL, in fact, had a head start on cable modems but was extremely slow in standards development and developing operational hardware.
Additionally, there are successful and soon to be ready-for-prime-time wireless Internet services, albeit none as high speed ready. There are utility companies entering the market on their right-of-access via power lines to deliver telecommunication services.
Finally, the level of deregulation permits entirely new firms to enter and build networks from scratch, and venture capital is funding many such endeavors, with promises of higher speeds than cable systems due to increased use of fiber optic technology.
Thus, the question is no longer ýis there competition?ý Instead, the question to answer becomes: Has the monopoly power of twenty plus years given to cable left them with an unfair beginning advantage over the competition now trying to enter the market?
Should ISPs have free access to the cable network? Are consumers better off by government enforcement of such access? ISPs and consumer groups argue that having cable companies operate as high-speed Internet gatekeepers is a dangerous situation, granting cable extreme power over mass information delivery. This argument by ISP providers suffers from inherently weak credibility, as it would obviously be an economic windfall for such providers to be given the connection pipe that they played no financial part in developing.
From a consumerýs perspective, the argument has more merit in that, having found an ISP they are happy with, the idea of having to change ISPs to upgrade their access is not attractive.
What best serves consumers? The short and long run answers may be markedly different in such a quickly advancing industry. Indeed, what even qualifies as ýlong runý may be as short as two years due to the rapid turnover of technology.
High speed access reigns
The short run answer, in which access to high speed service is still dominated by cable, with ADSL lagging not too far behind in second place (2.2 million cable subscribers to 600,000 ADSL in 2000), is that consumers are thrilled to have high speed access in any form.1 Also, consumers are not married to their ISPs enough to create a great demand for guaranteed access by those ISP providers.
AOL is perhaps an exception to this rule, although, ironically, AOL plays a dubious role in the issue. AOL was a leader, perhaps THE leader, in the forced-access camp, pressing hard in the courts to force cable lines open citing the arguments above, including the rights of access and looking out for the consumerýs best interest.
Then, however, AOL became a cable company when they purchased Time-Warner. Since that time, they have backpedaled considerably on their stance, rightfully losing credibility as a result.
Consumer surveys point to high-speed connectivity as the number one reason they upgrade their Internet access. Cable holds a healthy 24% to 18% lead in consumers who name that particular feature as what the product best offers them, and a 44% to 28% lead in awareness of high-speed options by consumers.1 Thus, the market argument could be made that consumers are making their choices in favor of cable, possibly in part based on this awareness. However, perception can be a reality in effective product marketing. A solid marketing effort by one side or the other is part of any good business plan and should not be held against either industry.
The atmosphere of telecommunications at the the time of the 1996 act, indeed the entire theme of the new legislation, was deregulation. Government intervention to try and enforce market conditions contradicts the goals of the act,
with no guarantee of achieving the results, or operating more effectively to create a market environment than a market environment itself. Additionally, the rapid pace of new technology development and deployment suggests that governmentýs step back is on track.
Todayýs telecom economics
The cable monopoly created an interesting situation by the time deregulation came about. The power of a monopoly was allowed to build before the government backed away and asked for competition to play its role in benefiting consumers, society, and the economy.
Clearly, a level playing field will take time to achieve. The government made the call that the best way to allow this to occur, rather than enforce criteria that may effectively cripple the long-run goals, would be to apply a moderate regulatory structure with similar anti-competitive themes of the previous law and with incentives for competition to jump in.
The FCC recognized the extremely rapid pace of technology advancement, virtually guaranteeing that whatever edge the cable companies had would not be guaranteed in long run. Certainly, cable companies could be very successful if they used their entrenched advantage and made technology and strategy changes that allowed them to stay ahead. In this case, consumers would also benefit immensely from the push of competition that created this change, which is indeed a stated primary goal of favoring forced open access.
Does cable have legitimate competition for high-speed Internet access? How strong is cableýs monopoly power under new deregulation legislation? Cable has legitimate data competition today, with the projected cable and ADSL subscriber gap, in relative size, to be shrunk from an over five times cable advantage today to less than two times by 2003 (6.8 million to 3.5 million in 2003).1 By 2009, projections indicate wireless access will be about a quarter of the size of both cable and ADSL (which are projected to be about equal) in subscriber count. Thus, cable has competition today, and stronger competition tomorrow.
The question of whether or not cable was given too big of a head start for the legislation to be fair is really a two-part question. Cable has market share dominance in high-speed access today. This implies that the short-term answer may be yes. However, competing technologies are already in deployment phases, and projections indicate a leveling of the playing field with time.
Thus, it seems that the legislation is aimed properly at this point in letting the market dictate the ongoing fairness of play, rather than trying
to legislate short-term fixes whose manipulative effects may disturb the very market environment the government is trying to created.
An Advantage
The rapid development of a sophisticated technology like cable modems should be viewed as an advantage brought to the consumers in part because the government did not become intrusive in regulating how cable deploys high-speed data access ý cable did this itself quite quickly.
Should ISPs have free access to the cable network? Are consumers better off by government enforcement
of such access? Since deregulation, domestic cable companies have invested billions of dollars of profits in infrastructure upgrades in order to maintain and/or extend competitiveness. Allowing guaranteed access to the cable lines to ISPs who have taken none of the risk of this investment seems a difficult economic pill to swallow. Of course, it is valid to point out that it was government regulation and the monopoly situation that allowed cable companies to be in the financial position to make these investments. However, the fact remains that the ISPs took no risk and now desire full reward.
The angle that looks more reasonable for the access issue is the consumerýs angle. ISPs are critical links for consumerýs comfort in their Internet access. The cable companies highly restrict choice, offering basically one modem service for their network. Thus, this service itself, minus the physical speed of it, has not had to stand on its own as a communication package against the family of ISPs currently forced to operate over telephone lines.
Consumers are content with cable modem service just because it is high speed, and may be willing to overlook the overall poorer (if this is the case) service provided. Other providers are not being given the chance to compete on an equal playing field in this case.
But, more importantly, consumers today are not being exposed to the best of both parts of the technology
or the economy. They are given one price for one service if they want a cable modem.
The other option
Their other option, of course, may be ADSL. But, not all homes are accessible by ADSL, due to its distance limitations. However, not all homes are served by cable either. Thus, there is not really an advantage or disadvantage given to either ADSL or cable in this regard, and if one does exist, ADSL would have it because of the nearly ubiquitous phone line penetration.
Thus, given the monopoly head start and consumer choice issues, one could argue over short term concerns that address the troubles of entrepreneurial efforts due to the added difficulty of market entrance on account of the obstacle of high-speed cable.
As an example of how to deal with the imbalance, charges for cable line rental, fixed contract lengths, fees based on number of new subscribers or subscribers to the new service are compromise options.
In this case, other complicated issues ý such as what is a fair rental price ý would still likely require government intervention. However, the debate becomes simplified more to a quantifiable business proposition at this point. The dollars that can be generated by a given amount of cable bandwidth is more firm data or analysis that make this sort of intervention less intrusive. It should make the task of the lawyers more palatable.
Soooo, it was so cold last winter ...
(How cold was it?) I saw a lawyer with his hands in his own pockets. Indeed, the lawyers have been busy. Court rulings have taken place on the topic of open access and, to date, have favored the cable companies.
Bitter debates and target high-tech markets look like possible pivotal turning points going forward. Internationally, both Canada and some South American countries
have led the charge for free national access. However, in South and Latin America, the government itself is also very heavily involved in telecommunication even beyond that of the US before the passage of the 1996 act. Thus, regulations and mandating access in those countries will likely be matched by government subsidy and tax structuring.
Domestically, the regulation paradigm doesnýt seem to be working, and debates on the topic are destined to continue. Economically, the telecommunication industry is experiencing exactly the boom that was projected when the legislation was drawn up. This suggests that the FCC has been correct so far on this most important aspect of pushing the legislation, and they should maintain a similar observing, but minimal-tinkering, stance going
forward.
Rob Howald is the director of systems engineering in the transmission network systems group at the Motorola Broadband Communications sector (formerly General Instrument) in Horsham, PA. He has a BSEE and an MSEE from Villanova University, and received his PhD from Drexel University. He can be reached at rhowald@gi.com.
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