Deconstructing "Dismantling Digital Deregulation"

Free Press has issued a new report entitled "Dismantling Digital Deregulation: Toward a National Broadband Strategy," authored by Free Press Research Director S. Derek Turner. Alliteration is nice. That's one reason I call this blog "Deconstructing 'Dismantling Digital Deregulation.'"

But the most important reason is that Mr. Turner's 123-page report is deeply flawed. I anticipate that over the course of the next few weeks I will have something more to say about Mr. Turner's paper. Here I just want to identify a few statements that appear in the paper's introduction that are symptomatic of its flaws.

The whole premise of the report is that the deregulation of broadband Internet services – in many instances, in reality what has happened is not deregulation but relaxed regulation – that occurred during the Bush Administration years has led to the demise of "competition," competition that Mr. Turner says emerged and existed after the passage of the 1996 Telecommunications Act. So, for example, the report states that before deregulation "the average American consumer had access to more than a dozen ISPs." Indeed, the report cites as evidence of Internet service provider competition the claimed existence of 6000 ISPs in 2000. Accepting the validity of these figures here for the sake of argument, they indicate the very problematic nature of the vision which animates the entire report.

There is no doubt that these narrowband "competitors" were not facilities-based providers, but rather resellers of services that existed at the sufferance of the FCC price regulation of the providers that actually invested in the construction of facilities. The "dozen ISPs" to which the average American consumer presumably had access, and the 6000 ISPs writ large, had no incentive to invest in new facilities that would offer higher speeds or innovative applications and services. And they did not do so. That is why their services generally were referred to as "plain vanilla" ISP services.

The report bemoans the demise of forced line-sharing and mandated sharing requirements upon which the business models of the resale ISPs were based. The notion that these resellers were real competitors or provided any meaningful competition – the idea upon which so much of the report is premised -- is just wrong. Only competition among facilities-based providers has provided benefits to consumers that are sustainable over time.

After lauding the now largely abandoned forced unbundling and mandatory sharing regimes to which Mr. Turner seeks to return, this statement follows not much further along: "Before broadband, carriers were able to earn perhaps $20 per customer each month selling phone service. In today's converged world, a carrier can earn well over $100 on that same line by offering phone, TV and Internet services."

This should be an "Aha" moment as in: How did we as a nation get from a "before broadband" world to today's broadband world in which broadband is available to over 90% of the country's population at increasingly faster speeds and offers telephone, TV, and Internet over the same line? Answer: Massive capital investment.

And the bulk – not all, but the bulk -- of the investment occurred under a regime in which broadband facilities were not subject to the type of forced sharing regulations to which Free Press seeks to return. Recall that in the late 90s there was a strong push to subject the emerging cable broadband services to an "open access" forced sharing regime. Here is what William Kennard, President Clinton's FCC Chairman, had to say in September 1999 in rejecting the same proposals that Free Press now advocates:

"It is easy to say that government should write a regulation, to say that as a broad statement of principle that a cable operator shall not discriminate against unaffiliated Internet service providers on the cable platform. It is quite another thing to write that rule, to make it real and then to enforce it. You have to define what discrimination means. You have to define the terms and conditions of access. You have issues of pricing that inevitably get drawn into these issues of nondiscrimination. You have to coalesce around a pricing model that makes sense so that you can ensure nondiscrimination. And then once you write all these rules, you have to have a means to enforce them in a meaningful way. I have been there. I have been there on the telephone side and it is more than a notion. So, if we have the hope of facilitating a market-based solution here, we should do it, because the alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America."

The FCC refused to impose an open access mandate for cable under Bill Kennard's leadership and it has continued that deregulatory policy since. In response, the cable industry has invested $130 billion since passage of the 1996 Act to build out an increasingly high-speed two-way interactive broadband networks that incorporates fiber technology.

The same story is true with respect to telephone company-provided broadband as well. Since the FCC in 2004 abandoned the forced sharing regime that prevailed in the narrowband telephone world, capital investment in new broadband facilities has exploded. For example, by the end of 2010 Verizon will have spent over $20 billion alone building out its high-bandwidth FiOS service. AT&T has invested billions in building out its own broadband network infrastructure. In 2008 alone, AT&T says it invested approximately $20 billion in its wireline and wireless infrastructures.

For many years, most recently here, I have said that the call for net neutrality and open access mandates represents a call for imposition on broadband providers of the same kind of common carrier regulation that prevailed in the 20th Century's narrowband world. Mr. Turner's paper unabashedly advocates imposition of such a broadband common carrier regime.

Pervading the Free Press paper is the idea that the policymakers and regulators can establish and enforce a mandatory sharing and unbundling public utility regime to manage competition in a way that might allow the counting of new "competitors" a la the supposed 6000 ISPs that existed in 2000. In today's fast-changing technological and marketplace environment, the policymakers and regulators can't manage competition in a way that will lead to as much investment, innovation, and increased consumer welfare as the marketplace will provide. And they shouldn't try.