Subject: [NEXTEL-1] THE INEVITABILITY OF BIG BROADBAND- REED HUNDT

From: [email-masked]
Date: Fri, 12 Dec 2003 16:29:11 -0500

THE INEVITABILITY OF BIG BROADBAND- REED HUNDT
DECEMBER 10, 2003

Author’s Acknowledgment: An earlier version of this essay was presented by
Professor Hundt at a colloquium at Harvard Business School in April 2003 -- The
Bandwidth Explosion: Living and Working in a Broadband World – and will appear
in a forthcoming book with the same title. The author would like to thank
Professor Stephen Bradley of Harvard Business School. Another version will
appear in the Yale Journal of Regulation, December 2003 (forthcoming).
All new media, taught Marshall McLuhan, are destined to subsume and extend all
old media, and to use the old media as their content, much like large fish
filling their stomachs with small fish. The fish metaphor belongs to me, not
McLuhan, since he was rarely so dull in his imagery.

The big fish of today is Big Broadband – access to the Web at 10 to 100 megabits
per second for homes and 1 to 10 gigabits per second for businesses. The small
fish are broadcast, DSL, cable modem, and voice.
The questions are not whether Big Broadband will swallow the fish, and perhaps
the whole ocean, but how, when and by whom will the swallowing be done? Who will
create value and who will capture it? How much capital will regulation and
market failures cause to be wasted in the process? Lastly, will we include all
Americans in the new medium, so as to create community and greater social value?
And if all Americans, rich and not rich, urban and rural, are eventually weaved
into the fabric of Big Broadband, will that happen at more or less the same rate
for all, or will Big Broadband be distributed like the benefits of the Big Tax
Cuts of 2001 – that is, on a trickle down basis.

The answers to these questions will define not only Information and
Communications Technology (“ICT”) policy, but also a major part of America’s
domestic and economic policy.

Since the beginning of convergence, dated from about 1992 (plus or minus a
year), the battle to be the primary medium of at least the next decade – the one
we are in now – has raged among various antipodal rivals: content vs. conduit,
local vs. long distance, wireless vs. wire, data vs. voice also sort of known as
packet vs.  circuit, communications vs. computing, network vs. edge, and copper
vs. hfc (also known as telco vs. cable). Other, possibly lesser dialectics
include satellite vs.  terrestrial and broadcast vs. cable. Convergence
describes then a clash of networks, businesses, and even cultures.
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As the convergence story evolves, a synthesis emerges. It is the next generation
network that can be discerned in the fog of the future. Its lineaments are 10 to
100 megabits per second to the home, 1 to 10 gigabits a second to the
enterprise, IP protocols, packets of course but more edge-centric than
switch-centric in terms of control, wireless home and business LANs fanning out
like peacocks’ tails from the edge of the wire network, fiber fairly far to the
edge, computing everywhere, software gluing the contraption together, and myriad
handheld or hand-carried devices connecting all the time anywhere to the Net,
the Web, the world’s devices and users.

This is what I’m calling the Big Broadband network. In my shorthand it is 10/100
at home, 1/10 at work, and wireless all around.
It is not Little Broadband. Little Broadband is the thin stream of data sold as
DSL or cable modem, not amounting to much more than, if even equal to, 1 megabit
per second to a home. Big Broadband is to Little Broadband as a SUV is to a
motorcycle. Big Broadband can carry full motion video, download pictures of
Paris or Hilton Hotels or Paris Hilton (whoever that is), and provide web page
access that feels like flipping pages of a magazine.

Little Broadband can do voice over the Internet, but otherwise is painfully
slow. It is no more a new medium in comparison to narrowband than was, for
instance, the kinescope was as to still photographs.

Given the power of technological change, the Big Broadband network surely will
reach some people fairly soon. Indeed, it already exists within some college
campuses, some corporate parks, and in parts of Seoul and Tokyo.  But Little
Broadband is the concern of FCC policy. I think that’s wrong-headed. Big
Broadband is what we want to be focused on. It is the big fish that will swallow
all the little ones.

However, Big Broadband is the common if unstated theme of two topics that are
under discussion in government: namely, the so-called HDTV transition and the
VOIP threat to universal service.

All of us can readily agree that in order to distribute high definition video
and high quality voice the optimal physical medium is Big Broadband. Since the
FCC is bent on causing both high definition television and voice to be provided
to everyone in America at affordable prices, such that 95% of so take the
services, then plainly the cheapest way to get that result is to send the video
bits and the voice bits over the same high bandwidth network. Moreover, the Big
Broadband network would have plenty of capacity left over to permit end users to
obtain very high speed access to the Internet.

So that’s the result the FCC, the firms, the consumers, the country should want:
a Big Broadband network that will carry high definition broadcast channels for
free on the pipe instead of over the air, that will give every end user
limitless voice at very low cost, and that will provide high speed Internet
access at one or two orders of magnitude faster than commercially available
today.
3
This network would be optimally efficient. It would be a platform for new
innovative services, such as rich interactive gaming. It would greatly increase
e-commerce, producing higher gdp. It would create new jobs in the United States.
It would ensure broadcast penetration at nearly 100%, local voice penetration at
nearly 100%, and push Internet access at least to 90% if not 100%.  The key task
of the FCC should be to unwrite old rules and write a few new rules so as to
create clear incentives for existing network operators and service providers to
build a Big Broadband network.

Regulation negatively influences Big Broadband business plans. Currently federal
and state regulation causes consumers and taxpayers to pay staggering sums to
sustain old networks when much less money could pay for the same services plus
additional services and also for the cost of building Big Broadband to every
home and business. Because of regulation and market failures, the demand that
should fund Big Broadband does not create a supply of Big Broadband.  A
particularly discouraging example of the negative effect regulators are having
on Big Broadband was the FCC’s December 1, 2003 forum on Voice over the
Internet. The chair, and many others, talked about trying to balance regulation
and deregulation. But the invention of VOIP – voice over a high speed Internet
access connection – actually means that state and federal regulations that
subsidize and guarantee affordable local telephone service should be junked.
Instead, if state and federal authorities want to assure that everyone can buy
voice service, they should write rules to subsidize Big Broadband connections,
through which voice can be provided at a fraction of the cost of maintaining
today’s legacy networks.  Instead, based on what I heard from the December 1,
2003, forum, many heads nodded in collective agreement that VOIP might have to
be burdened with such out-of-date regulations as access charges in order to
generate money that could go to sustaining the soon-to-be-out-of-date legacy
voice network. And I did not hear that anyone said what should be said: let
governments describe how they can help firms move all voice traffic on to new
Big Broadband networks that reach all Americans, while maintaining or increasing
shareholder value and network reliability.

The current VOIP conversation at the FCC and in state commissions is as if
government responded to Henry Ford’s new invention of the automobile by
discouraging the construction of roads, and instead taxing cars in order to
subsidize canals and railroads. As a former government official I can only say:
We can do better.
How should government be working on what should be the convergence of Big
Broadband with existing voice, broadcast, and Internet access?

Let’s start with the math. It will show that Big Broadband does not require a
new
subsidy. The taxpayers and consumers do not need to pay more than what they
now pay for network services. They will be able to pay much less. Governments
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and firms just have to change both regulation and market structures in order to
make way for the new Big Broadband network.
Say every household today pays $40 a month for voice. That’s conservative. We
are all conservatives now. That totals $4 billion a month, or roughly $250
billion over five years. I am giving five years for firms -- they can be today’s
telephone or cable businesses -- to build a Big Broadband network. That $250
billion can help pay for VOIP over Big Broadband and of course for the
underlying physical network itself.

Next, thanks to our FCC, the taxpayer has given about $70 billion of free
spectrum to broadcasters and the consumer has been ordered to pay about $20
billion for over-the-air digital tuners for 200 million televisions over roughly
five years. That’s $90 billion out of pocket for taxpayers and consumers. It is
not too late to redirect that money toward paying for the Big Broadband network.
On that network broadcasters can get free high definition TV carriage. They have
that on analog cable; they are inside satellite packages. Why not give them free
access to the Big Broadband network. That should make broadcasters and TV
households happy. In return we can get back the high definition spectrum, sell
it, and use the proceeds to help pay for Big Broadband to high cost rural and
poor homes. And we could even repeal what I call the “tuner tax.” We are all
tax-cutters in Washington now.  We have still more money to deploy. On average
over the next five years, about 60 million households will pay about $25 a month
for Little Broadband – the low speed Internet access that we are being offered
instead of Big Broadband. The retail price may be higher and the penetration
rate may be higher, but we are all conservatives now. So that totals over five
years about $90 billion. All that can pay for Big Broadband, which subsumes
Little Broadband.  That totals $410 billion in money that as of now will be
dedicated to supporting a voice network from the 19th century, a broadcast
business from the mid 20th century, and broadband access technologies from at
least a decade ago. (That is even after I repealed the “tuner tax.”)

For probably one-fourth that sum, firms could build fiber to the fingertips of
everyone in America. Governments, and fir ms, need only to figure out how to let
the demand be aggregated in pursuit of Big Broadband and how suppliers can
cooperate to meet the demand.

Please notice customers would still have to pay for cable channels, advanced
communications services, and internet applications over the big Broadband
network, but that is what we want: value added services that grow the economy,
add jobs and increase productivity.

The high calling and critical task of federal and state government, then, is how
to
unwrite rules or write rules – in short how to create the new system – that
would
permit end users to pay for what they should be able to get for their money – a
Big
Broadband network that supplies all the voice, video and Net access anyone could

want. At the same time, the new system would free customers from the necessity
5

and obligation of paying to underwrite the maintenance of the old networks that
could so readily by subsumed by the new network.
You are all experienced Washington people. You know the math is close enough for
government work and the logic is sensible enough for policy. So of course you
are saying: this can never happen.

Why not? If Republicans can run huge deficits and Democrats are budget
balancers; if Republicans are internationalist and Democrats are isolationists;
if Republicans are spending trillions on new Medicare benefits and Democrats are
voting against the law – then certainly nothing is impossible in the new
Washington.

And I know you are troubled by the notion that our current system will make
customers spend $400 billion on yesterday’s networks when they could spend much
less to bring America into the forefront of the next generation networking of
the world. You are uneasy about letting the Koreans and Chinese lead the world
in the next iteration of the Internet, not because their people are smarter but
because their governments are. You don’t welcome the vision of America export
jobs to Asia to help them work out the solutions to the problems of advanced
networks.  I’ve proved that more than adequate demand exists to pay for Big
Broadband. Yet many market and regulatory failures stand in the way of the
deployment of Big Broadband. These problems are the reasons our federal and
state governments need to act.

The first problem is that the current two-firm market for Little Broadband
encourages both telephony and cable to build Little Broadband to every
household. But that means the total expense is twice what it needs to be. That
in fact discourages both firms building even Little Broadband every household.
The second problem stems from game theory. The Big Broadband network of course
can provide voice, video, and data. This is referred to as the “triple play.” As
in baseball the side that pulls it off makes the other side out. In other words,
if any firm produces such a triple play and is economically viable, then it
might be reasonably supposed that this firm will dominate communications,
technology, and even media markets. The question then is whether a firm that
makes its living in voice and one that makes it living in video inclined to go
for the triple play. Nash equilibriums are what lawyers like me are taught by
economists to describe the offsetting motives that produce a collective
unwillingness to proceed into fight-tothe death competition. In short, perhaps
the two-firm Little Broadband market lacks incentives for anyone to build the
Big Broadband network. In the two-firm market, then, each firm may well be very
cautious in trying for the triple play, given the fact that the price of defeat
may be elimination.

The third problem is that government is wrongly wedded to providing broadcast
over the air. Big Broadband and wi fi dispense with the technology of
transmitting
stations. It’s time for government to ‘get it’ – in Valley parlance – and to
move
video to the pipe. Nick Negroponte called it the ‘great switch’ more than a
decade ago, and it’s time to get on with it.
A fourth problem is that demand for fixed line local voice often cannot find
many different sellers: the market is not perfectly competitive. Moreover, until
very recently that demand could not obtain voice over the Internet. Now services
like Vonage and Skype are meeting the demand for voice over the Internet, and
most cable companies, as well as at least some telephone companies, do or soon
will over voice over the Internet. All the new demand for voice over the
Internet should be allowed to help pay for Big Broadband. Instead state and
federal government seems concerned to slow this burgeoning VOIP market. What
should happen is that government should permit VOIP demand to stimulate
broadband.  The fifth problem is that our existing universal service schemes
subsidize local voice for rural and poor populations. Instead they should
subsidize Big Broadband for those and all other populations that need a little
economic help in getting online, while getting their voice on the same line. A
policy for bringing all Americans into the experience of using a computer on the
Web can generate economic and social benefits, as well as provide a significant
stimulus to the economy. We might even see a rise in general happiness, since
surveys show that those on internet are even statistically more likely to be
happy than those off the internet.  If as many were online as those who watch
satellite and cable television – now nearly 90% of homes – many social benefits
could be distributed and many social needs served by on-line communication.
Political associations could be created more readily, thus increasing
participation in democracy. Health care and education could more efficiently be
distributed to target populations that are otherwise costly to reach, such as
shut-in’s, workers, or those geographically distant from medical centers and
schools.

But even if you do not agree that all should be on-line for various social
reasons, surely you agree that state and federal governments are likely to
maintain the policies that make local voice so affordable everyone buys it.
Therefore, why object if governments became wise enough to merge the so-called
universal voice policy with a universal Big Broadband policy? If we have to
spend taxpayer and consumer money to all sorts of new things – prescription
drugs and pipelines, the Iraqi coast guard and a Hooters in Louisiana – can’t we
at least get a bonus of Big Broadband for the same money we are certain to spend
anyhow? That way we can still get yesterday’s services but over tomorrow’s
network.  Since this is Washington, it would be unusual not to elevate means
over ends, at least at the end of the talk.

At least three possible models for implementing universal Big Broadband are
worth consideration; perhaps others would emerge from the Notice of Inquiry I’d
like the FCC to issue.

First, government could grant to every consumer an assignable tax credit. As I
said, the funds could come from the voice or broadcast subsidy programs that
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already exist; or if those could be eliminated, the funds could come from the
general treasury revenues that are being tapped for so many other technology
projects in the current budget. Consumers would grant that credit to any firm
that provided the requisite minimum 10 to 100 megabits per second of access.
Cable, telephony, and any other entrant, such as wireless, would compete for the
credit.  When a firm obtained enough credits, it could have adequate revenue
guaranteed to cover the cost of a Big Broadband network.

The broadband provider could charge whatever the market would bear. However, it
would not obtain the credit unless it won the customer. The credit would equal
the difference between willingness to pay and cost – not an easy calculation but
one that can be made by model and then adjusted by experience.  A second
proposal would be to have state utility commissions designate a preferred big
broadband provider. This firm would be obligated to provide a physical link of
at least ten megabits per second to every household in a designated geographic
area. Any technically qualified solution would be acceptable, so that wireless
and wire-based alternatives could compete for the state designation. The
preferred broadband firm would then auction its physical capacity to service
providers.

A third proposal is for government to order all existing universal service
programs for voice to be dedicated to providing VOIP as opposed to existing
voice over circuit. As part of that, cable and telephony could, if they chose,
merge their local access networks, thus saving each of them substantial costs.
As a condition they would keep their services separate and competitive, dividing
the physical infrastructure from the provision of service. This model resembles
the exemption from the antitrust laws passed by Congress to permit local
newspapers to share printing facilities in order to obtain economies of scale in
distribution while continuing to compete in the content business.

A final consideration is that wireless broadband access may be brought to the
market at a price and with functionality that obviates the need for a wire-based
Big Broadband network. If so, then the current HDTV plan is monumentally
foolish; the circuit voice network is under heavier siege than we know; and VOIP
still should not be lassoed into the current regulatory regime. Instead,
government should make any and all subsidies – I insist either none or hardly
any will be necessary – available both to wireless and wire-based Big Broadband
providers, and let the better network prevail.  A decade ago, John Malone,
perhaps the single most important builder of the American cable networks,
predicted that three inventions—the microprocessor, digitization, and fiber
optics—would revolutionize the media and communications industries, and drive
their convergence into a single market.  He foresaw a 500-channel universe. And
in late 1993, to capture the value of this triple revolution of technology, he
sought to merge his cable company, TCI, with the phone company, Bell Atlantic.
The two together promised to build an “information highway” to at least forty
percent of all homes in the United States.
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This highway would carry all voice and all video channels to each home. To
support this big pipe, the two huge companies would raise the capital necessary
to build fiber networks to homes. The merger plans collapsed in 1994.  Malone
did not close his deal. He did not predict the Internet. He didn’t predict that
the great content cornucopia would comprise not his ballyhooed five hundred
channels so much as the countless pages on the Web.  Yet Malone was right to
identify that the access network is key to innovation and growth in ICT. With
little broadband, the access bottleneck will be exasperating for years to come.
Current microprocessors are able to display in fractions of seconds movies or
videoconferences that the fiber can carry at the speed of light from anywhere in
the world. And at the screens of these informationhungry computers sit a hundred
million people who wait impatiently for still pictures and words to resolve
themselves slowly into recognizable form. Rather than waiting hours to download
a film, the consumer drives to Blockbuster for a rental. So we have a problem of
complementary products: no shoestrings, plenty of shoes; no access network,
plenty of services that would like to get across that network. We have skimpy
connection and plenty of computing potential that yearns for the big broadband
connection.  Many chapters of regulatory history counsel against government
policies that promote specific technologies. However, a high capacity physical
link is not so much a technology solution as a platform for innovation and a
basis for service level competition. It should be a basis for a future of
technology discovery, and the creation of a new common medium that can bind us
all together.
--30--
http://www.newamerica.net/Download_Docs/pdfs/Doc_File_207_1.pdf

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