Friday, June 06, 2008

Broadband Policy, Dollars and Sense

The United States has had a generally deregulatory broadband policy since 2002 when the FCC declared that broadband services “should exist in a minimal regulatory environment that promotes investment and innovation in a competitive environment.” Despite the fact that, since 2002, the broadband marketplace has continued to become more competitive and broadband services more ubiquitous and innovative, the FCC has not adhered in a consistent fashion to its declared deregulatory posture. When it has strayed, the results have not been good.

Take the recent 700 MHz auction of spectrum for wireless broadband services. FCC Chairman Kevin Martin insisted a portion of the spectrum to be auctioned be encumbered so that the auction winner would be required to use the spectrum consistent with net neutrality principles. The spectrum would be an “open access” zone in which all content, applications, and devices would be required to be treated on a “non-discriminatory” basis. With 80 years of common carrier non-discrimination regulation as historical context, potential bidders knew a regulatory quicksand pit when they saw one. The result: The auction bids fell way below the FCC’s reserve price, and the spectrum block, so-called prime real estate for advanced wireless services, will continue to lay fallow. And, in the meantime, the U.S. Treasury is deprived of the funds that would have been realized in an unencumbered auction.

Now Chairman Martin apparently is proposing another encumbered auction for another chunk of spectrum that can be used to provide broadband services. This time the auction winner would be required to offer a “free” broadband service of some bandwidth capacity to some percentage of the nation’s population over some future build-out schedule. And, for good measure, this free service would be required to filter out “indecent” programming.

The FCC should have learned its lesson from the 700 MHz auction. It is unsound public policy to encumber spectrum auctions in this way, rather than auctioning the spectrum on an unencumbered basis that allows market mechanisms to work properly. The spectrum is devalued, and U.S. taxpayers lose. And the FCC establishes a regime that will, assuming a bidder meets whatever “reserve price” the Commission in its wisdom sets, will invite, nay, ensure, regulatory scheming and litigation over the “free” block rules far into future. There will be attempts by all interested parties to use the regulatory process to game the regime, with ongoing battles over bandwidth requirements, the build-out schedules, and the interpretation and enforcement of the “indecency” regulations. What about a waiver of this rule? Why not a waiver of that rule? For how long? Pretty please! Any casual observer of the FCC’s regulatory history knows this to be true and understands the troubles such encumbrances promise.

Like virtually all goods and services, broadband capacity is “scarce.” Indeed, it takes huge capital investments to build-out broadband networks, and once built-out, unless periodically upgraded and modernized, they quickly can become less than the moving target that is called “state-of-the art.” It is important, therefore, that regulators allow the broadband market, like other competitive markets, to work in a way that uses price signals to respond to changing consumer demand. Of course, a zero-price of “free” is no price signal at all.

U.S. broadband penetration has been remarkable over the last several years, with over a 100 million lines now in service, and broadband service available in over 99% of the zip codes in America. To be sure, these figures do not demonstrate that broadband service is ubiquitous, or that everyone who would like broadband, has it, or even that those that have it, have as much bandwidth capacity as they would like today or tomorrow. There is still more progress to be made, and, truth be told, there most likely always will be with respect to ever-increasing demand for more bandwidth.

If policymakers determine that measures are needed to address broadband penetration or usage rates in certain high-cost geographic areas or among certain low-income persons, any such measures should be carefully and narrowly tailored to address those areas or persons in the most economical and efficient manner. But to continue the progress already made, policymakers should not abandon market mechanisms for regulatory encumbrances, whether they happen to be in the form of requirements for “free” service, “open access” zones, or “net neutrality” mandates.

In a not unrelated development, Time Warner announced earlier this week that will experiment in a few markets with plans that tie bandwidth usage to price. In other words, heavy users would be required to bear more of the burden for the capacity demands they place on Time Warner’s network than light users. In another context, this is just a variation of the point made above – that in a competitive marketplace, price signals must be allowed to allocate a scarce resource if overall consumer welfare is to be enhanced. Hopefully, the pro-net neutrality crowd won’t be allowed to derail such pricing experiments or plans if they prove to be a sound way to address network management issues and capacity constraints.