The last issue of the Technology Review discussed successful business cases for rural broadband deployment, this month’s issue continues the broadband theme and discusses the various efforts the FCC and NTIA are using to promote broadband deployment and resolve issues relating to lack of regulatory parity.

This past week, the FCC launched a proceeding to promote greater deployment of broadband services. The FCC’s NPRM is the first step the FCC is taking to resolve a whole host of regulatory issues pertaining to Internet access over different technology mediums. Today Internet access is regulated differently depending on the type of network used to provide access and the backbone carrying that access. As such, several distinct regulatory frameworks exist depending on the technology medium being used. The rise, growth and popularity of the Internet has caused severe cracks to form in each of these frameworks. These regulatory frameworks were originally created to further specific policy goals, although the original policy goals have since been modified, the regulations behind these goals were never updated.

The problem with the FCC’s recent Notice of Proposed Rulemaking issued on February 14, 2002, which attempts to resolve the issues of two conflicting and different frameworks governing Internet access, is that instead of creating a totally new regulatory framework that crossed all sectors, wireless, common carrier (wireline), cable, broadcasting, and satellite, the FCC just tweaked the current framework by making several adjustments. This approach is similar to a band-aid approach and will never work as new holes will keep popping up requiring new bandages. The FCC seems intent on just trying to patch up the holes in the existing regulatory frameworks rather than work on creating an entirely new paradigm that would solve not only the Internet access issue, but also resolve future problems that will occur as the communications, broadcasting, computer, wireless, satellite, and cable industries converge on each other.

According to the Notice, the FCC believes, at least tentatively, that the transmission component for broadband services and for Internet access, should be offered outside of the statutory framework that applies to telecommunications carriers. If this is correct, we then must ask ourselves if Congress intended for certain network services to be removed from any regulation, universal service, or from consumer protection provisions? If this measure is implemented does it mean that competitors will no longer be able to obtain network elements to provide broadband Internet access? I think we can clearly say that this was not Congress’s intent.

In his dissenting opinion, Commissioner Copps lists a number of other consumer protection provisions in the Act that hinge on whether a service is regulated as a telecommunications service. Commissioner Copps stated it best when he said "I don’t pretend to have all of the answers to the troubling questions raised by the Notice. Nor do I pretend to have all of the questions that need to be asked. But I have enough of them to suggest that we’re not ready to go so far as this Notice takes us."

NTIA seems to have a better understanding of the problems caused by lack of regulatory parity. Regulatory parity is very difficult, even impossible, to achieve when using three different technology media and three different regulatory structures. FCC Commissioners Copps and Martin seem to favor creating a new regulatory framework rather than trying to modify the current one. Creating a framework cannot be done over night, especially if one is seeking a framework that can survive the test of time. The FCC’s NPRM seeks to find a quick solution where none exists.

Significant changes to the regulatory framework, such as concluding that wireline broadband services are information services, rather than telecom services, should be done with great care and only after the FCC selects a better definition for broadband and broadband services. Moreover, thought should also be given to how this new definition of broadband should evolve as well as any policy implications created by defining broadband in this fashion. Hellerstein & Associates believes that a definition of "broadband" or "broadband services" that all can agree on is a difficult task, but one that needs to be tackled first before any work commences on changing the current regulatory framework.

NTIA, supports this idea of first establishing a good definition of broadband before committing to any action that could permanently change the current regulatory framework. The question of how broadband should be defined was one of the several questions NTIA asked in its November 2001 Notice of Inquiry on broadband deployment.

The comments submitted to NTIA on this issue were far from unified on their definition of broadband, in fact, many of the suggestions could not have been farther apart from each other. Some commenters suggested that there be a different definition for consumers than for businesses, while others said it should refer not to a particular speed used, but to a broad category of services and applications that can be offered over the access network, While still others defined it as just a name for an intermediate service or transport medium prior to the creation and deployment of a next generation network. These commenters defined broadband as really consisting of two technologies, current technologies and next generation technologies. Some commenters also suggested the speed or bandwidth requirements for each of these two stages.

We see from the comments to NTIA’s inquiry, industry publications, consumer polls, and from the media that there is much debate about what "broadband and broadband services" really include. In light of this debate and uncertainty over this crucial definition of "broadband and broadband services" and until, the FCC, NTIA, or other governmental agency decides how it should be defined, work on creating a new regulatory framework or simply modifying an existing one, cannot and should not proceed. Regulatory parity is very difficult to achieve, even more so when the definition of broadband is cloudy or hazy.

Commissioner Copps put it best when he said, "before we commit ourselves, even "tentatively," to specific and potentially drastic changes to our precedent that carry with them enormous impacts in the market, we should better understand the implications of our conclusions. We have not done so here."

Unlike the FCC, creating a new regulatory framework is a top priority for NTIA, so much so that three out of five of the guidelines NTIA created to steer its broadband policy formulation, focus on this issue. These guidelines are: 1) The market, not the government, should drive broadband’s rollout. Government’s role is simply to remove regulatory roadblocks that impede efficient capital investment; 2) Rational facilities investment should be the ultimate goal of policies the government pursues; 3) Promote competition through a technology-neutral paradigm; 4) Recognize that the market might not always work well or at the same pace in all areas, particularly in rural and certain urban areas. In these cases, different regulatory policy options may be needed; 5) After a new regulatory framework has been established make sure it is backed up with enforcement measures with real teeth

Hellerstein & Associates strongly believes that competition, not regulation, holds the key to stimulating further deployment. This statement had been the hallmark of the FCC’s policy actions regarding local competition and it has been a repeated policy goal in many of the comments filed with NTIA. Dynergy, in particular stated that there is no demand or supply problem, it is just that the ILECs have slowed, or even stopped, deploying broadband because they lack direct DSL competitors. Dynergy stated that it felt the best policy to ensure widespread broadband deployment was for the Government to continue the existing regulations. Moreover, only by enforcing the Telecom Act’s local competition’s provisions and FCC rules could competitors to gain equal footing.

Hellerstein & Associates believes that the problems in broadband deployment and in offering of broadband services are not caused by any regulatory problems or hurdles, but because many incumbent carriers, be they cable or local exchange carriers, lack any direct competition in their technology. By this I mean, that ILECs lack competition from other DSL companies and cable companies lack competition from other cable Internet access companies.

Recent reports from the OECD and the European Union support this theory. The OECD report illustrates that where the incumbents, both in phone and in cable, have a monopoly and there is not much competition, broadband and other innovations take a back seat and do not get deployed in a reasonable and timely fashion. Where such competition was diminished because the local telephone provider was also a significant owner of cable networks, the level of competition and the growth of high-speed access on both cable and using DSL on the telephone network, appears to be significantly slower. As the OECD data shows, competition among service providers increases the quality of services made available to consumers.

To view the OECD and European Union reports click on the links below.

The challenge facing the industry is that despite almost widespread availability in most urban areas and in many rural areas, only a fraction of American consumers, about 10%, have chosen to subscribe to high-speed access services.

The US’s lower penetration rates as compared to those of Korea, Canada, and Japan are the result of several factors, lower prices for broadband services; strong government support for broadband deployment and services; and a continued education campaign to convince consumers of the benefits of broadband access. In Japan, lower prices for broadband access, about $22 a month, resulted in a 60% increase in new broadband subscribers in the last quarter alone, 875,000 new subscribers out of 1.5 million subscribers. This low price for broadband can also be found in Canada, Korea, and other countries. According to the latest figures from DSL Prime, Germany, Sweden, and Belgium have higher penetration rates for broadband subscribers than the US, while Japan will surpass the US by April 2002 if not earlier.

Today, with the demise of Napster and other similar music services on the web, many consumers in the US see no reason why they should pay and extra $50 a month to obtain broadband access. So while price is an issue, the lack of understanding why they need the higher bandwidth is also a real issue and points to a lack of education among consumers and small to mid-size businesses. The continued proliferation of digital photographic devices as well as other forms of entertainment, e.g., games, movies, that require higher bandwidth will gradually change people’s perceptions and lead to higher penetration rate even if the price of broadband remains at $50.

Hellerstein & Associates believes that technology will overcome any demand and supply side challenges facing companies as they deploy broadband. Instead of trying to find some magic regulatory or policy fix to speed the deployment of broadband access, we should instead look to technological solutions to solve the deployment and penetration problems. These same ideas were echoed by Bruce Mehlman, the Assistant Secretary of Technology Policy at the US Commerce Department in several recent speeches he has given.

Hellerstein & Associates believes that carriers should realize that tech-producing industries have driven about 1/3 of US GDP, produced 29% of all US exports, reduced overall inflation, accounted for about 28% of overall real economic growth between 1996-2000, and improved American productivity by contributing about 2/3 of US’s total productivity growth in the late 1990s. Moreover, even in this time of recession, productivity increases tied to technology continue albeit at a slower pace.

Innovative and new ideas resulting from a competitive environment are the keys to universal broadband deployment. Hellerstein & Associates has often urged carriers to deploy broadband and other new technologies because it is these new innovative products and services that act as a springboard to improved growth and productivity in the US economy. In light of today’s economic climate, now is not the time to slow down broadband deployment, by loosening regulations on ILECs and other carriers.

Numerous ILECs have long promised regulators and consumers that they would deliver universal broadband to all Americans. As far back as 1995, ILECs received funding from regulators to construct fiber optic networks to provide universal broadband service to consumers. These networks, however, were never completed. In 1999, SBC promised to provide universal broadband service, covering at least 90% of its territory as part of SBC’s and Ameritech’s concession in getting their merger approved. However, in late 2001, SBC claimed that regulatory burdens prevent it from deploying broadband. The same types of complaints come from Verizon. Today, only Bell South appears to be keeping its promise towards universal broadband deployment.

Carriers should stop pretending that the Government is preventing them from investing in their networks or in deploying DSL. They are not deploying broadband or investing in their networks because they have a higher valued alternative available elsewhere. This is why Hellerstein & Associates strongly believes that competition and competition alone hold the keys to stimulating further broadband deployment.

____________________________________________________________________________________________________________________

Hellerstein & Associates is a telecommunications and technology research group that provides its clients with a competitive edge through market research, competitive intelligence, and regulatory analysis on broadband access, competition policy, and wireless issues. We look forward to hearing from you and will strive to meet all topic requests. Redistribution of this newsletter is encouraged provided it includes this paragraph.