Thursday, August 30, 2007

No Need to Commit Hara-Kiri

I am old enough to remember the so-called “Japanese miracle” of the 1980s, and the subsequent bust, with a decade of recession and then little or no economic growth. The articles concerning Japan’s boom and bust are legion, but the following quote by Asian expert David Asher from a 1996 article, “What Became of the Japanese ‘Miracle,’” captures the essence:

“What became of the Japanese economy that appeared so threatening that some Americans spoke of the need for cold war-style containment? Where today is the developmental state capable of turning depression to growth on the basis of smart industrial policies that deserved to be emulated throughout the world? Japan seems mired in a bog, weighed down by a series of financial crises unprecedented in the postwar era, a major wave of industrial hollowing-out, rising unemployment and corporate bankruptcy, and a growing divide between insider haves and outsider have-nots throughout the system.”

During the 80s—before the crash--it was all the rage to marvel at “keiretsu,” the interlinked networks of Japan’s big businesses. And to suggest that perhaps America was falling behind because that we lacked Japan’s “smart industrial policies,” featuring a lifetime guaranteed employment system and close collaboration between government and private enterprises.

The article in yesterday’s Washington Post, “Japan’s Warp Speed Ride to the Internet Future,” is all about how the U.S. trails Japan in broadband service. According to the article, “Japan has the world’s fastest Internet connections, delivering more data at lower cost than anywhere else.” This may well be true, and the United States should never be complacent about its technological prowess and economic progress, related as they are, of course.

But some words of caution are in order in the face of yet another “we are behind” broadband broadside. It was Japan that changed its economic system in the 90s to become more free market-oriented like ours. While I am not an expert on Japan’s telecom laws and policies, I am not convinced the U.S. should shift gears to emulate Japan’s communications policies.

There is much that already has been written comparing the U.S. broadband experience with other countries, and I don’t want to rehearse all that here. But here are the cautionary notes that occurred to me as I read the Washington Post piece:

· The article notes that Japan’s success in expanding broadband penetration and increasing bit rates “is partly a matter of geography and demographics: Japan is relatively small, highly urbanized and densely populated.” Even though the U.S. is not small, highly urbanized, and densely populated —all characteristics that make the dispersion of broadband a much less costly proposition— it is doing very well in getting broadband to consumers. Now, about 50% of U.S. homes have a broadband connection, and the penetration figure continues to grow. Among the homes that have an Internet connection at all—some people just don’t want one, even if they can afford one—fully 70% have high-speed service. (70% of Americans access broadband at home or at work.) This and a lot more data may be found in the most recent broadband report from the Pew Internet and American Life Project. In light of the fact that the United States is large and not densely populated in the same way as Japan and many European countries are, the U.S. is doing well by any reasonable standard that does not simply ignore such geographical and demographic differences. And that we are doing well is in no small measure attributable to the adoption several years ago of a policy by the FCC of a “minimally regulated environment” for broadband. Alas, since then, and even now, that deregulatory policy has been subject to never-ending, vigorous counterattack by those net neutrality, open access, and unbundling advocates who are convinced that the nation’s communications infrastructure should always be operated under a public utility-like common carrier regime—which brings me to next cautionary note.

· The Post article acknowledges that an important reason for Japan’s super-fast broadband speeds is that, on average, the country has shorter and newer copper loops than those used for telco-provided DSL service in the U.S. But it also credits “Japanese-style competition through regulation.” The essence of this “competition by regulation” approach seems akin to the UNE forced unbundling approach this country abandoned four years ago. It became increasingly evident that a policy directed towards supporting newly-created “competitors,” wholly dependent as they were on government-mandated and price-controlled access to the incumbents’ copper loops, was inhibiting investment in new broadband facilities by incumbents and new entrants alike. I don’t think keiretsu is the way to organize the American economy, and I don’t think “Japanese-style competition through regulation” constitutes sound regulatory policy in any sustainable sense, which brings me to the final cautionary note.

· At the end, the article says the growing speed addiction is having the ironic effect of “returning near-monopoly power in fiber to NTT, which owns and controls most new fiber lines to homes.” NTT is the incumbent former state-owned telephone company. A Japanese professor of telecommunications economics is quoted to the effect that, “NTT is becoming dominant again in the fiber broadband kingdom.” Aha! So it appears that at the end of the “competition through regulation” regime that “opened up” DSL lines to entrants, Japan may be left with a near-monopoly provider of the next-generation broadband facilities. I think America’s (thus far) deregulatory broadband regime which has served to stimulate investment by facilities-based broadband competitors will serve America’s consumers better in the long run than will “competition by regulation” policies that discourage investment. I don’t think Verizon would be investing $23 billion in building a new fiber-to-the-home network, or the cable companies already would have invested over $100 billion in upgrading their networks to handle digital broadband, if the U.S. had maintained a Japanese-style regulatory regime.

Even though our deregulatory posture is working to stimulate investment and promote competition by facilities-based competitors, America should not become complacent about our broadband standing. With our country’s continental expanse that includes large, little-populated area, there may be a justification, for example, for using narrowly targeted, time-limited tax incentives to exapnd broadband infrastructure in rural areas.

But that is far different than committing hara-kiri, or even keiretsu, or swooning over a Japanese-style “competition through regulation” regime that is pointing towards a monopolistic environment down the road.