Out of Control

This notion must change if we are to see the benefits of broadband in any timely way. Unfortunately, regulators – and the activist groups, such as the Consumer Federation and Media Access Project, that have their attention -- still approach the industry as if it were a collection of vertical monopolies.

We saw this in the drawn-out opposition to mergers between incumbent phone companies and cable companies. The fear that has been expressed in the AT&T-SBC merger and the Comcast-Time Warner-Adelphia deals, was that a merged SBC would dominate the telephone business and the Comcast and Cox would dominate cable. Opponents of these mergers framed their arguments as if consumers still purchased phone service exclusively from the phone companies, cable service from the cable companies and wireless service from the wireless companies.

No doubt many still do, but that is not the status quo. The measureable trend is that consumers are looking at the entire group of phone, cable and wireless providers, not to mention local WiFi shops and IP applications providers such as Vonage, for the integrated package that best suits their individual needs. They will switch between and among them to get what they want.

There is no more phone “industry” in and of itself, just as there is no more cable “industry.” Even if AT&T could own every phone line to the home, it still could not dominate the market because there is demand for other types of communications services, such as video, that are provisioned through other means. Likewise, Comcast could control every cable hook-up, but they would still lack a wireless component that is becoming essential.

The latest example of compartmentalized regulation is the call for network neutrality. The “fear” is that a facilities-based provider would cut off access to the Internet at large and limit users to a “walled garden” of favored applications and services. In response to this fear, regulators are being asked to draw a thick line between broadband applications and the undergirding infrastructure that supports them. Commoditization thus is mandated over customization. What's lost in this regulation, however, is the value proposition that makes broadband something more than just bandwidth.

Furthermore, the worries behind net neutrality are misplaced. Full access to the Web is a baseline consumer expectation. No service provider is going to be silly enough to block the Internet. Nor has any service provider attempted to do so.

However, the quality and diversity of a “walled garden,” offered as part of a broadband package, stands to be a major competitive differentiator. Wireless companies already practice this as part of their own mobile Internet offerings – content providers such as Yahoo!, Time Warner, Disney and Fox all pay for placement on Web portals proprietary to the competing wireless companies.

Again, if the broadband market is to function well, service providers will need this freedom to collaborate and partner – and yes, give some content and applications priority over others. By packaging services creatively, service providers can attract more customers. More customers mean higher revenues. Higher revenues mean more money to invest and greater economies of scale. Greater economies of scale create lower prices. Lower prices attract more users. And so on.

The regulatory task, then, is to ensure a dynamic market where there are low barriers to entry, yet give companies the freedom to bundle and price services as they see fit. Indeed, we are in a market environment where a consumer can buy a package of wireless, cable TV, Internet and phone from one company cheaper than he could if he were to buy a la carte. Yet the regulatory regime--when for purposes of economic or price regulation, it limits bundling or forces companies to “break out” the "baseline" cost of individual services, usually for the purpose of levying discriminatory taxes or surcharges—treats this scenario as if it were a bad thing.

I am pessimistic about the regulatory direction. The healthy broadband market will combine integration and customization. Most of the “reforms” proposed, up to and including the Barton-Dingall bill, stubbornly cling to mandates of compartmentalization and commoditization. This is the wrong route.

The U.S is not 13th in the world in terms of broadband penetration because of “duopolies,” incumbent greed, or market failure. The U.S. is 13th because the federal, state and local regulatory regime is doing its damndest to prevent the industry from evolving to a sustainable group of national integrated service providers in a position to leverage respective strengths that can deliver cheap universal broadband.

In this environment, centralization and the opportunity for customer capture are necessary and should be understood in the context of the new generation of integrated services and applications they will support. All of our policy goals – universal and affordable broadband access, high-quality service, consumer choice and high value are achievable if the competitive broadband market were allowed to function on its own terms.