Transcript Assessing the Need for More Incentives to Stimulate Next Generation Network Investment A Presentation at the 38th Annual Telecommunications Policy Research Conference Arlington, VA October.

Assessing the Need for More Incentives
to Stimulate
Next Generation Network Investment
A Presentation at the
38th Annual Telecommunications Policy Research Conference
Arlington, VA October 2, 2010
Rob Frieden, Professor of Telecommunications and Law
Penn State University
[email protected]
Web site : http://www.personal.psu.edu/faculty/r/m/rmf5/
Blog site: http://telefrieden.blogspot.com/
Regulatory Brinksmanship and Framing the Debate
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Politically adept stakeholders in telecommunications policymaking have
created a truism that any government regulation creates disincentives for
investments in essential (and job creating) next generation network
(“NGN”) infrastructure.
Legislatures and policy makers take this assertion as a given without
empirical proof.
The stakeholders also emphasize the existence of “robust” competition
which erode market share and profits, e.g., replacement of wireline
telephony with Voice over the Internet Protocol (“VoIP”) service
provided by cable television.
Might competitive necessity and the loss of core market revenues force
NGN investment even in the absence of government-created incentives?
Note that the same companies that condition investment on incentives
have needed no such incentives and have paid billions for the privilege of
making huge investments in NGN wireless plant.
These very same companies gladly take almost $9 billion in basic
telephone service subsidies, but largely have refused to participate in
rural and underserved broadband development programs.
This paper asks: what drives carrier investment decisions and when, if
ever, should government create NGN investment incentives?
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Local Loop Unbundling as a “Confiscation”
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In the horse trading leading up to enactment of the Telecommunications Act of
1996, incumbent wireline carriers agreed to provide new resale competitors with
unbundled access to switching and transmission capacity at below market rates in
exchange for new market access opportunities.
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The incumbents belatedly determined that they accepted a losing deal as long
distance telephone services generated low margins and profits. The incumbents
backed off their access commitments and claimed in litigation that local loop
unbundling (“LLU”) was an unconstitutional taking of property.
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While the Supreme Court rejected this claim, lower courts accepted arguments
that the FCC should use finely calibrated and granular efforts to jumpstart
competition . The courts accepts the argument that too generous resale
opportunities would remove incentives for market entrants to build their own
networks.
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How does this rationale jibe with the fact that over $1 trillion was invested in
telecommunications during the dotcom gold rush, including billions in fiber optic
plant? Bear in mind incumbents often acquired rights of way at near zero cost.
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Local Loop Unbundling as a “Confiscation” (cont.)
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As the Supreme Court noted, incumbent carriers never proved any network
sharing obligation was mandated at below cost rates.
FCC statistics show that incumbent carriers never had to invest in more plant to
accommodate reseller demand. Compulsory rentals from incumbents to
newcomers peaked at 12% and stood at 8% before the FCC stopped collecting
the data. See Trends in Telephone Service (Aug. 2008), at p. 8-8; available at
http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-284932A1.pdf.
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What Drives Carrier
Network Investment Decisions?
Incumbent carriers have framed NGN network investment as driven primarily by
regulations, as though the general business cycle, competitive necessity, the cost of
capital, new investment opportunities, technological innovation and declining
revenues in core markets did not matter. A change in regulatory climate does not
explain why Comcast wants to acquire NBC and Bell Canada seeks to increase to
100% its ownership of a major broadcast television network.
Sponsored researchers have claimed that when the FCC eliminated LLU
requirements, incumbent carriers expedited and vastly increased NGN investment.
But did deregulation solely cause this outcome? Might proven demand for broadband
have had a significant impact?
Just as wireless has provided incumbents with a revenue generating alternative to
wireline services, broadband demand surely has and will stimulate investment. But if
U.S. NGN investment or market penetration lags, what strategies should legislatures
and regulators use? U.S. policy concentrates on deregulation and additional incentive
creation through subsidies and other forms of supply-side stimulation.
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NGN Investment Stimulation
Requires Exact Calibration
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In a major shift in policy the Obama Administration and Congress have
targeted broadband development for $7.2 billion in subsidies. Without exact
calibration, government risks subsidizing projects that carriers would pursue
even without taxpayer underwriting.
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While best practices require nations to consider a variety of strategies for
stimulating NGN development, the U.S. government has become preoccupied
with “incentivizing.”
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Governments need to calibrate incentive creation and avoid tilting the
competitive playing field with inconsistent regulation, subsidies, grants, tax
credits, loans, loan guarantees and other incentives.
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NGN development has a substantial impact of a nation’s competitiveness in the
global economy and should not be the subject of regulatory brinksmanship.
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Until 2009 the U.S. Assumed a Robustly Competitive
Broadband Market Existed
Despite ample evidence to the contrary, until 2009 the U.S. government, including
the FCC saw no need to create broadband incentives based on evidence of global best
practices.
“[T]here is substantial competition in the provision of Internet access services.
Broadband penetration has increased rapidly over the last year with more Americans
relying on high-speed connections to the Internet for access to news, entertainment,
and communication. Increased penetration has been accompanied by more vigorous
competition. Greater competition limits the ability of providers to engage in
anticompetitive conduct since subscribers would have the option of switching to
alternative providers if their access to content were blocked or degraded. In
particular, cable providers collectively continue to retain the largest share of the mass
market high speed, Internet access market. Additionally, consumers have gained
access to more choice in broadband providers.” AT&T Inc. and BellSouth Corp.,
Application for Transfer of Control, Memorandum Opinion and Order, 22 FCC Rcd.
5662, 5724-25 (2007).
In 2008, John Kneuer, then Assistant Secretary for Communications and
Information and Administrator at the Commerce Department’s National
Telecommunications and Information Administration claimed the United States “has
the most effective multiplatform broadband in the world.”
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Suddenly in 2010 the FCC Recants
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The FCC now estimates that 1,024 out of 3,230 counties in the United States
and its territories are unserved by broadband, and between approximately 14
to 24 million Americans do not have access to any form of broadband
service.
The . . . [unserved] group appears to be disproportionately lower-income
Americans and Americans who live in rural areas. The goal of the statute,
and the standard against which we measure our progress, is universal
broadband availability. We have not achieved this goal today, nor does it
appear that we will achieve success without changes to present policies. The
evidence further indicates that market forces alone are unlikely to ensure
that the unserved minority of Americans will be able to obtain the benefits
of broadband anytime in the near future. Therefore, if we remain on our
current course, a large number of Americans likely will remain excluded
from the significant benefits of broadband that most other Americans can
access today. Given the ever-growing importance of broadband to our
society, we are unable to conclude that broadband is being reasonably and
timely deployed to all Americans in this situation.
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For Years the FCC Provided One Source Document for All the Positive News
on Broadband Penetration—Everything Else Constituted a “Trade Secret”
Necessitating Confidential Treatment
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Until 2010 the FCC Asserted that the U.S. Had 100% Broadband Penetration
With Consumers in 94.6% of All Zip Codes Having 4 or More Broadband
Choices
Source: FCC (2009)
100%
90%
Percent of Zip Codes with High-Speed Providers
80%
100%
70%90%
80%
60%70%
60%
50%50%
40%
40%30%
20%
30%10%
0%
20%
10%
Jun
2000
Jun
2001
Jun
2002
Jun
2003
One or More Providers
Jun
2004
Jun
2005
Jun
2006
Jun
2007
Four or More Providers
0%
One or More Providers
Four or More Providers
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The U.S. Ranks 15th Among OECD Nations in
Terms of Household Penetration
source: OECD (2009)
http://www.oecd.org/document/54/0,3343,en_2649_34225_38690102_1_1_1_1,00.html
OECD Broadband subscribers per 100 inhabitants, by technology, December 2008
40
Other
Fibre/LAN
Cable
DSL
35
30
25
OECD average
20
15
10
5
0
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The U.S. Lags Most Nations in Broadband Penetration
On the Basis of Per Capita GDP
source: OECD (2008)
OECD broadband penetration and GDP per capita
Broadband penetration, December 2008
40
Broadband penetration (subscribers per 100 inhabitants, Dec 2008)
GDP per capita, 2007
90,000
GDP per capita (USD PPP, 2007)
80,000
35
70,000
30
60,000
Simple correlation = 0.65
25
50,000
20
40,000
15
30,000
10
20,000
5
10,000
0
0
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source: Internetinnovation.org; http://internetinnovation.org/images/factbook/by_country.png.
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Who’s Statistics Are Most Credible?
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Most satellite and terrestrial wireless broadband options do not yet
provide true broadband service, yet the FCC reports that 32.1% of all
lines provided via satellite, terrestrial fixed or mobile wireless
advertized service at greater than 200 kbps; the percentage drops to
13.0% using the lowest rate proposed in the National Broadband Plan.
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The U.S. government and sponsored academics dispute the OECD
statistics as failing to include Wi-Fi hot spots, at work access, etc.
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Additional excuses include the lack of computer literacy and access,
having a large rural hinterland, adverse demographics, yet other nations
with similar disadvantages do better.
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Bear in mind that in 2010 the FCC determined that up to 24 million
Americans have no broadband access options, agreed that 200 kbps isn’t
really a broadband speed, migrated from zip code to census tract/county
measurements and acknowledged a gap between advertized versus
delivered bit rates.
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Reasons Why Incumbents Can Postpone Major
Broadband Investment
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Currently incumbents can “make their numbers” thanks
to still growing wireless revenues, generous universal
service funding, and the absence of competitive
necessity.
In the third quarter of 2009, Verizon reported that 58%
of its total revenues accrued from wireless service.
Most of the nearly $9 billion annually allocated for
universal service flows to incumbent local exchange
carriers.
U.S. broadband in many locales is comparatively slow
and expensive despite two platform options (DSL and
cable modem).
Until 2009, the U.S. had no targeted broadband
development funding.
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Global Best Practices in Broadband Development
Best practices does not require nations to “throw money at the problem,” but instead:
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Develop a vision and strategy;
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Promote digital literacy, i.e., the ability to use digital technologies to pursue
information, communications and entertainment interests;
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Invest in infrastructure, aggregating demand, and serving as an anchor tenant;
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Foster facilities-based competition;
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Create targeted incentives for private investment and disincentives for litigation and
other delay tactics;
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Offer electronic government services, including healthcare, education, access to
information, and licensing;
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Auction off universal service franchises that receive subsidies and grants; and
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Revise and reform governmental safeguards to promote a high level of trust, security,
privacy, and consumer protection in NGN services, including electronic commerce.
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Development Models
Top/Down
Nations emphasize expanding the supply of broadband capacity by
stimulating access through:
Expanded universal service obligation to include broadband
service;
Use of targeted financial stimulus tools such as grants, subsidies, and
tax credits;
Reallocated spectrum to expand available bandwidth useable for
broadband services; and
Supporting competition from multiple platforms, including retrofitted
fixed line telephone networks, cable television plant, white spaces and
other wireless options, fiber optic links, and the powerline grid.
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Development Models (cont.)
Bottom/Up
Nations emphasize stimulation of demand for NGN and the services
they deliver through government:
Becoming an early provider of NGN-mediated services and an underwriter of
programs designed to enhance digital literacy, i.e., the skills needed to use NGNs
for enhancing social and personal utility;
Offering access to e-government services ;
Offering free or subsidized computers and support for the creation of digital
content;
Funneling grant money to “community champions” and broadband demand
aggregators in addition to carriers; and
Addressing consumer protection issues including, privacy, network reliability,
security and neutrality, and competition policy issues.
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