The broadband problem isn't supply, it's demand.
IN A YEAR OF RECESSION, unprecedented terror attacks, and the largest bankruptcy in history, there was good news from a surprising front. During 2001, the number of American homes and offices that hooked up to the Internet using fast broadband technologies like cable and digital phone lines roughly doubled--from 6.5 million to 12.5 million. Broadband revenue grew even more--up 127 percent to $4.8 billion. Why is broadband so important?
IN A YEAR OF RECESSION, unprecedented terror attacks, and the largest bankruptcy in history, there was good news from a surprising front. During 2001, the number of American homes and offices that hooked up to the Internet using fast broadband technologies like cable and digital phone lines roughly doubled--from 6.5 million to 12.5 million. Broadband revenue grew even more--up 127 percent to $4.8 billion. Why is broadband so important? Because the next big stage in Internet commerce--a boom in online medicine, telecommuting, distance learning, and video entertainment on demand--depends on it. Such services are impractically slow when carried over the poky modems most people still use to connect to the web. TechNet, a Silicon Valley trade association, last month issued a report claiming that, with "widespread adoption of true broadband, . . . the benefits to quality of life are immeasurable." Such statements may sound hyperbolic, but they carry a political punch. Since it took office, the Bush administration has been trying to figure out how to help extend broadband practically everywhere--both to boost the economy and to show that Republicans are tech-friendly, too. The chairman of the House Committee on Energy and Commerce, Rep. Billy Tauzin, has made broadband deployment his top priority. Since 1999, Tauzin and his Democratic counterpart, Rep. John Dingell, have been pushing a bill they say will solve a supposed broadband shortage--mainly by killing off pesky competitors to the four regional Bell monopolies. But Tauzin-Dingell and other grandiose schemes are beginning to look like solutions in search of a problem. Broadband is now available to about 80 percent of Americans. According to the latest statistics, people seem to be adopting it awfully quickly. Why not more quickly? Perhaps because they don't like what the Internet has to offer. That could be a chicken-and-egg problem: Better content may first require more customers. Still, the more closely you look at the broadband question, the clearer it becomes that the trouble is not the supply; it's the demand. More than two-thirds of Internet users still connect using dial-up modems with top speeds of around 56 kilobits per second. Typically, broadband allows speeds of about 400 kilobits--though speeds that are 100 or more times faster than dial-up are feasible. The TechNet folks want a "national policy" to give every American access to 400 to 500-kilobit broadband (fast enough to download a typical Hollywood movie in less than ten minutes). After all, many TechNet companies sell the stuff that makes these super speeds possible. Still, even 400 kilobits is speedy compared to dial-up (a 10-minute download becomes just 90 seconds), and last year, the number of new users of four methods of delivering broadband shot way up. Subscribers to digital subscriber line (or DSL) technology, which juices up copper phone lines to broadband speeds, increased 87 percent. Subscribers to similarly speedy cable-modem services, which got a head start on DSL and provide broadband over the same wires as cable TV, grew 88 percent. And residential subscribers who access the Internet by speedy wireless or satellite increased from 120,000 to 500,000. If this pace were to continue, every U.S. home would have broadband service in four years. That's quite a turnaround, and it seriously undermines the Tauzin-Dingell bill, which rewrites the Telecommunications Act of 1996. That 1996 law, passed with the support of House Majority Leader Dick Armey and every other congressional free-marketeer, created the blueprint for deregulating the final bastion of the old telephone monopolies--the "last mile," the wire that goes from your house to the greater telecom network. Five years later, the last mile is still controlled in more than 90 percent of offices and homes by one of the four Bells: SBC, Verizon, BellSouth and Qwest, which divide up the country but don't compete with one another for local service. But the Bells now have to compete, both for local service and for broadband, with CLECs, or competitive local exchange carriers. So the Bells have been lobbying and filing lawsuits to make them vanish. Tauzin-Dingell offers a new justification for giving the Bells a clear field. Its premise is that America desperately needs broadband, and that the competition engendered by the 1996 law only holds up progress. Instead of trusting competition, the bill trusts monopolists to get the job done. But the job is getting done--without Tauzin-Dingell. And the firms that are doing the job are the selfsame Bells. They dominate DSL, but they wouldn't have rolled it out at all without the spur of competition. Nevertheless, the Bells continue to complain to Congress and the White House that they're discouraged from investing in broadband technology because current law allows their competitors to connect (at a price, of course) with the Bell systems. The new numbers, however, belie that claim. For example, BellSouth recently announced that it had nearly tripled its subscriber base in a year and that new remote terminals make DSL service available to 70 percent of the households in its region. "Despite a recessionary environment," wrote Robert Luke, a reporter for the Atlanta Journal-Constitution, on December 26, "BellSouth has met its goal of 600,000 subscribers this year . . . [and] expects to have 1.1 million customers next year, with revenue of $600 million." The company predicts that its broadband business will become profitable as early as 2003. BellSouth had only 30,000 broadband subscribers as recently as the end of 1999 and only 215,000 in December 2000. Meanwhile, according to a January 9 news release, Verizon, formerly known as Bell Atlantic, "ended the year  with an estimated 1.2 million DSL subscribers, meeting the company's year-end target on the strength of approximately 225,000 net additions in the fourth quarter." Verizon more than doubled its DSL base from 540,000 customers at the end of 2000. In October, SBC Communications (the old Southwestern Bell) reported that it "has made its DSL Internet service available to more than 23 million homes and business locations today, which represents more than 55 percent of SBC customers." And, in its most recent earnings report, for the quarter ending September 30, 2001, Qwest Communications (successor to Pacific Bell) reported, "DSL revenue grew approximately 80 percent, reflecting an 84 percent increase in DSL subscribers to 391,000." Nationally, DSL grew from 2.4 million lines in 2000 to 4.5 million in 2001, three-quarters of them residential. And DSL technology is available already to two-thirds of the customers of rural telecom carriers. Should deployment be moving even faster? No one can possibly say. If Americans don't want broadband--especially at today's typical prices of $50 or $60 a month--then it's their own choice. No one wanted television either, until there were some decent TV shows, and few businesses were attracted to computers until spreadsheet software was developed. Right now, it makes little sense for government to subsidize broadband or otherwise try to ram it down people's throats. STILL, the broadband market isn't operating as freely as it should. There are roadblocks that stop consumers from getting what they want. And it's a legitimate function of government to remove those roadblocks--especially when government creates them. Nearly all the obstacles are on the demand side. Federal Communications Commission chairman Michael Powell has noted that "broadband-intensive content is in the hands of major copyright holders"--especially music and movie companies that may appropriately fear Internet piracy but are inappropriately delaying economic progress in the process. These entertainment moguls have formed a frightened, retrograde cartel that's been withholding content from the Internet. Part of the problem is the cowardice and stupidity of Hollywood, but another part of it is law that needs to be brought up to date. In a recent article in the Washington Post, Stanford law professor Lawrence Lessig advocated a review of current copyright laws to assure they do not "become a tool for dinosaurs to protect themselves against evolution." Here's a worthy project for the Bush administration that would do far more to disseminate broadband than fooling with the 1996 Telecom Act. But the battle to free up content should not end there. Licensing requirements, backed by medical guilds, have held up the development of online health diagnosis and treatment across state borders. Many states also prohibit manufacturers from selling automobiles online, and entrenched education interests thwart the growth of the Internet as a tool for taking university courses or other educational programs in the home. While many of these roadblocks have been erected by states, President Bush could use his bully pulpit--and more substantive means--to tear them down. He's already been instrumental in preventing the worst of all roadblocks--Internet taxes, which the states would dearly love to impose but which have been barred by an extended moratorium. To be sure, there are some supply-side problems. Broadband is an arena of high prices and low quality. Such ills are almost always a sign that competition is not robust enough. The reason is no mystery. Many CLECs have gone out of business in recent years because they had to rely on cooperation from recalcitrant Bells. "The competitors," wrote Karen Kornbluh of the New America Foundation, "are akin to the Gingerbread Boy of the fairy tale, riding across the river on the nose of the hungry fox. Their sole means of transportation has every incentive to do them in." Through ingenuity and perseverance, however, many CLECs have survived and even thrived. If the 1996 Telecommunications Act were more vigorously enforced, they would be able to put more downward pressure on prices and upward pressure on service. More consumers would sign up, and more broadband-content companies would spring up. If the successful deregulation of long-distance service in the mid-1980s is a guide, the CLECs probably need access to the Bells' networks for only a few more years--enough time to win a customer base sufficient for rolling out their own networks, the way that Sprint and MCI did in long distance. But Tauzin-Dingell would deny them the access the Telecom Act mandated, and without that access, CLECs would disappear altogether--and with them any incentive for the Bells to lower prices or expand broadband further. The Bells argue that they are deterred from making broadband investments because the law requires them to give CLECs access to parts of their networks--a practice known as unbundling. But an extensive report by the Organization for Economic Cooperation and Development (OECD), issued in October, found the opposite. "To date," says the study, "the major criticism of unbundling or line sharing [is] that such policies allegedly discourage investment in new infrastructure. No evidence has been forwarded to substantiate that claim. By way of contrast, there are huge investments being made by new entrants in local access markets, where unbundled elements are available, to provide broadband services." Since 1998, the report continues, "CLECs have invested $50 billion in network infrastructure in the United States. . . . Nor does unbundling deter [the Bell] incumbents from investing in upgrading networks." Far from it. Growing at better than an 80 percent clip, broadband is alive and well in the United States. But it won't keep growing if the CLECs die. One way the Bush administration and Congress could help--and at the same time enhance national security--is by adopting a requirement that government agencies have at least two separate broadband pipes (one from a Bell and one from a CLEC, for example) into their key facilities. If one is disrupted in an attack, the other will continue operating. This sort of redundancy could be enacted simply by an executive order of the president. What else can government do to speed broadband throughout the nation? It could enact a tax change to make it easier for businesses to write off capital investments--tech and otherwise. But beyond that, there's not much to do. The administration is eager to show that it's pro-technology, and that's fine. But being pro-technology does not necessarily entail intervention. Sometimes it means removing a few roadblocks and then stepping aside to let markets operate. After the roadblocks come down, it may still be the case that most Americans won't want to sign up for broadband, perhaps because the offerings on the screen aren't particularly appealing. I guess that, as a technophile, I would be sorely disappointed, but as a believer in free markets and free choices, I would be completely satisfied. James K. Glassman is a fellow at the American Enterprise Institute and host of the website TechCentralStation.com. He is the author of a new book, "The Secret Code of the Superior Investor" (Crown).
Web Link: http://www.weeklystandard.com/article/2167