The FCC's Real Wrongs

PHILIP J. WEISER

Like monetary policy and antitrust regulation, telecommunications policy is a major driver of economic growth rarely debated in public. During the last presidential campaign, for example, issues related to the United States' technological leadership were either marginalized or ignored altogether. By highlighting the importance of this overlooked topic, Thomas Bleha ("Down to the Wire," May/June 2005) performs an important public service. Unfortunately, in criticizing Washington's approach to the issue, he misidentifies the challenge and offers a problematic solution.

TOKYO STORY

The essence of Bleha's argument is that under President George W. Bush, the United States dropped "the Internet leadership baton," allowing Japan to "pick it up" and guide broadband innovation. Bleha cites Japan's progress in spurring high-speed Internet access connections via both wires (using digital subscriber line [DSL] and fiber-optic technology) and wireless spectrum. He predicts that Japan and other technology-savvy countries, such as South Korea, will reap "the benefits of the broadband era" while the United States will be left behind.

It is beyond dispute that Japan has succeeded wildly in stimulating the rollout of DSL connections. Japan's recent regulatory policies, along with the entrepreneurial gusto of the venture-capital firm Softbank (which underwrote the investments made by Yahoo! BB), have brought faster, cheaper, and more innovative broadband services. The number of DSL connections in Japan surged from 100,000 in 2001 to more than 9 million just three years later, with the established providers offering only 40 percent of these. Regardless of whether this success owes more to government regulations or to Softbank's risky investments, Japan's experience is worth examining.

Bleha argues that the day of reckoning will come for Washington, not only because Japan's success has eclipsed U.S. progress but also because of what he describes as U.S. policy failures. Unfortunately, he misstates the record. Bleha blames Michael Powell, the former chair of the Federal Communications Commission (FCC), for making a series of convoluted regulatory decisions and for failing to encourage broadband deployment by requiring that all broadband networks be shared with competitors. Under Powell, the FCC did exempt telephone companies from having to share newly built fiber-optic connections with rivals, but it did so to encourage companies to invest the billions of dollars necessary to lay down the expensive cables in the first place. Bleha, moreover, overlooks the fact that to promote competition, Powell did support the Japanese model and a "line-sharing" policy that would have given new providers access to existing copper wires. Unfortunately, as part of a compromise designed to guarantee access to existing voice telephone networks, a majority of the FCC rejected Powell's position, making a policy mess. Contrary to Bleha's criticism of Powell, Washington failed to follow the Japanese model because it focused on the old voice network, not because Powell lacked the vision necessary to promote DSL competition.

OUT OF COMMISSION

As Bleha correctly notes, U.S. broadband policy focuses on encouraging platform rivalry, with DSL and cable modem providers taking the lead. Soon, however, they will face competition from wireless services such as next-generation mobile phones or fixed wireless technologies such as WiMax. According to Bleha, the Powell FCC failed to facilitate the rollout of such technologies; instead, he charges, the FCC "only tinkered with spectrum policy around the edges."

Once again, his indictment misses the mark. The current FCC is not to blame for the lack of spectrum available for wireless broadband; U.S. broadband policy is hamstrung by a series of protectionist decisions that Congress and earlier commissions made years ago to govern the transition from analog to digital television. These decisions, intended to protect U.S. television manufacturers from Japanese competition, dedicated large swaths of spectrum to television broadcasters, which now reach only approximately 15 percent of their viewers "over the air" (as opposed to via satellite or cable connections).

The challenges of reforming U.S. spectrum policy appear lost on Bleha. For starters, the United States remains committed to simultaneously broadcasting television shows in both the analog and digital formats, which requires reserving valuable spectrum even as fewer Americans watch over-the-air television. Worse, broadcasters cannot sell or lease to wireless broadband providers the spectrum they currently use, for example, for UHF stations. In other words, it is the rigid requirements (most mandated by Congress) restricting the use and transfer of spectrum that are stifling wireless broadband development today. If anything, the FCC deserves credit for taking, despite these conditions, a number of very important steps, including promoting secondary markets for spectrum, spurring the use of spectrum on an unlicensed basis for technologies such as WiMax, and calling for other innovative spectrum policy reforms, such as those designed to take advantage of software-defined radio technology.

CROSSED SIGNALS

Bleha's most troubling argument is his claim that the U.S. government should support certain technologies as part of its economic development strategy. To appreciate how risky the proposal is, consider the rise of advanced television and advanced mobile-phone service, both of which prompted regulatory strategies of the kind Bleha champions -- and both of which ultimately backfired.

It was the threat of Japan's rise in the 1980s that spurred the course toward digital television that the United States still follows today. Washington committed wide swaths of spectrum to digital television, leaving U.S. mobile-phone providers with less bandwidth than they needed and only about half the amount of their European counterparts. The entire effort assumed that Americans would continue to watch television shows broadcast over the air. Yet over the past two decades, more U.S. consumers have begun to watch cable and satellite television, undermining the rationale for this expensive policy, which has also delayed innovation and imposed unjustifiable costs on the nation.

Meanwhile, the European regulatory authority decided that the advent of digital, second-generation cell phones required governments to promote the technology known as the global system for mobile communications, or GSM, to ensure a compatible system throughout Europe. Wisely, the United States refused to favor any given technology and instead allowed marketplace experimentation to guide development. That strategy yielded the superior code division multiple access (CDMA) technology developed by the California company Qualcomm, which uses spectrum more efficiently. The transition to the next generation of mobile telecommunications standards (which are based on CDMA technology) will be much smoother for those U.S. companies that have adopted CDMA, such as Verizon Wireless and Sprint PCS, than for their European counterparts.

Bleha also urges Washington to commit to supporting the installation of ultra-high-speed fiber connections to one-third of U.S. households by 2010. But his proposal may be foolhardy: even though fiber appears to be a promising technology today, such technologies have failed in the past for a variety of reasons, leaving investors with little to show for their money. (Remember digital audio tape recorders?) The U.S. government should be leery of endorsing particular technologies -- or even certain transmission speeds -- before it knows more about them and whether the market can support them.

SAFE AND SOUND

Bleha correctly identifies an important and often overlooked concern: the critical role of technological development in the economy. The Bush administration has done too little to promote broadband development and adoption. But even though it should do more to support the migration to digital broadband technologies, the government should avoid picking and choosing among technologies. Instead, it should educate consumers about the opportunities that broadband presents and facilitate the development of new technologies (such as WiMax and software-defined radio) by reforming spectrum policy and funding basic research. Some government support may ultimately be necessary to help drive broadband, but the government should not rush to judge where, when, and how to support a particular technology. After all, Americans are adopting broadband faster than they have adopted almost any other technology in history. About 80 percent of Americans connected to the Internet already enjoy broadband access at work, and more subscribe to broadband services than to narrowband at home. Last year, the number of U.S. consumers and businesses adopting broadband jumped by 34 percent, to about 38 million lines.

To be sure, some aspects of U.S. regulatory policy are antiquated, and they may not be updated soon enough. The Telecommunications Act of 1996 did not even address the development of broadband. Although the FCC is working to create a regulatory framework that would promote technological innovation, it remains to be seen whether the effort will succeed. The commission is also trying to encourage flexibility and dynamism in spectrum policy, but its hands are tied by congressional decisions that, among other things, continue to support broadcast television that few Americans watch.

Over the next few years, Congress will revisit the decisions it made in 1996. To the extent that Bleha's argument spurs thoughtful deliberation and an appreciation for the significance of broadband technology, it will serve U.S. policymakers well. Unfortunately, it could just as well spark efforts, much like the sponsorship of digital television in the late 1980s and early 1990s, that could prove counterproductive.

PHILIP J. WEISER is Associate Professor of Law and Telecommunications at the University of Colorado and a former Senior Counsel at the Antitrust Division of the U.S. Department of Justice. He is a co-author of Digital Crossroads: American Telecommunications Policy in the Internet Age.

Bleha Replies

Philip Weiser and I agree on some basic matters. We both believe that broadband and wireless policies are important. We agree that these technologies can drive economic growth. We both think the Bush administration has done too little to promote broadband in the United States. And we agree that spectrum policy needs reform. Weiser did not address my central conclusion that Japan and its Asian neighbors will lead the broadband era and be the first to enjoy its economic and quality-of-life benefits. So we may agree about that as well.

Still, we have significant differences. We assess the FCC's record under Powell differently. As Weiser states, Powell did favor, although secondarily, promoting DSL competition. But it was Powell's failure to convince a majority of his fellow commissioners to go along with him that left the country with what Weiser calls (and I agree) "a policy mess." The mess was made worse by the Bush administration's refusal to appeal a court case that might have preserved some DSL competition. It was made still worse by a recent Supreme Court decision (in the case National Cable and Telecommunications Association v. Brand X Internet Services) that ruled out competitive access to residential cable television lines.

As for spectrum policy, Weiser credits the FCC for promoting (modest) secondary markets, spurring the use of unlicensed spectrum for new technologies, and other less important reforms. To my mind, these policies amount to minor tinkering. I agree that the Powell FCC was hamstrung by earlier decisions taken by Congress and other commissioners and that the challenges of reforming spectrum policy are formidable. But a presidential task force called for spectrum reform more than a year ago; it is past time for the government to take action. The Bush administration has shown that when it wants to, it can take momentous steps.

Weiser and I also disagree about the nature of the challenge the United States now faces. Weiser is far less concerned about how slow, expensive, and unreliable the basic broadband service currently available to American households (1-3 megabits per second) is. If I am right, four large new markets for Internet applications, products, services, and content will develop in the foreseeable future. These markets -- for high-speed broadband (10-50 megabits per second), ultra-high-speed broadband (up to 100 megabits per second), third-generation mobile videophones, and fourth-generation mobile broadband phones -- will emerge in countries where there are about ten million subscribers to each of these services. Markets for high-speed broadband and third-generation mobile phones already exist in Japan, and a third market for ultra-high-speed broadband is in the offing. The emergence of these markets is years away in the United States, however, because political leadership and a national strategy to promote them are lacking. Unless the United States adopts a new approach, it will forfeit the innovation, new jobs, international competitiveness, economic growth, and improved living conditions that come with these new markets.

Weiser warns against government support for a particular technology. Although this generally is a wise rule, I believe that deploying a fiber infrastructure should be an exception to it. New wireless technologies are only as fast as their link to the Internet. There are now thousands of WiFi hotspots capable of sustaining data transfer at 11 megabits per second and more that deliver only 1 megabit or so because they are limited by the capacity of the DSL line serving them. The same applies to WiMax. Creating new fiber connections would eliminate these constraints. Wired connections, preferably fiber, are also needed to handle long-distance mobile-phone services. Fiber, moreover, is the only type of connection that allows subscribers to be truly interactive: to upload as well as download data at ultrahigh speeds. But this is not to rule out other complementary technologies. The fiber infrastructure need not be brought directly to the premises. Population density might determine whether fiber is brought all the way to households and businesses, the curb, the neighborhood, or the region.

There are several ways to develop a fiber infrastructure, but most of them require significant government involvement to ease restrictions, create competitive conditions for new markets, and give tax incentives and even subsidies to companies that deploy it. I agree with Weiser that supporting a fiber infrastructure would involve some risk. But maintaining the present course is also risky: without government support, fiber rollout is likely to be slow and entail considerable duplication, and it is unlikely to reach rural and poor areas.

The government will also have to confront another fiber-related issue. The FCC's decision to exempt telephone companies from sharing their fiber networks has postponed consideration of what applications, products, services, and content these new fiber networks will transmit. Should Verizon or Comcast, for example, control all of the content on their fiber network? Is it reasonable to expect a family to subscribe to two or three networks so it can have access to the services and content it wants?

This brings me to a more profound difference: Weiser and I disagree on the extent of government involvement that is desirable. Weiser would limit the government's role to educating consumers about the benefits of broadband, reforming spectrum policy, funding basic research, and perhaps down the road modestly supporting broadband deployment. I believe the United States needs top-level political leadership, a national broadband strategy with bold deployment goals, and strongly competitive broadband markets now. Until the government moves decisively in this direction, the United States will continue to slide in global broadband rankings -- with unfortunate economic and social consequences. (The International Telecommunication Union recently announced that as of December 2004, the United States had slipped again, from 13th place to 16th place, in rankings of broadband usage worldwide.) President Bush has promised all Americans affordable broadband by 2007. The new FCC chair, Kevin Martin, says this goal is his top priority. Now the United States needs top-level political leadership to inject a sense of urgency into reaching these fine objectives.

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