Monday, February 02, 2009

Collectivist Broadband

WSJ tech editorialist L. Gordon Crovitz is unhappy that the monstrous spending bill (aka stimulus, bailout, etc) currently making its way through Congress fails to allocate massive spending for expanding and improving broadband in the U.S. Crovitz had envisioned a project modeled after Eisenhower’s interstate highway system.

Alas, instead of $100 billion, new government spending on broadband will amount to somewhere between $6 billion and $9 billion. Most of that will go to expanding bureaucratic systems instead of creating incentives for private investment in broadband technologies.

Crovitz laments that the US “now ranks 15th in the world for broadband penetration,” and that those that are lucky enough to have broadband access in the US have maximum transfer speeds “one-tenth that of top-ranked Japan. This means a movie that can be downloaded in a couple of seconds in Japan takes half an hour in the U.S.”

What Crovitz doesn’t say is that most of the countries that outrank us for broadband penetration are much more densely populated. (Think Japan and Hong Kong.) Their infrastructure requirements are reduced to a drastically smaller footprint. The U.S. population centers have ubiquitous broadband access. But the 30% of the population that lives in the 70% of outlying areas has little broadband access, mainly due to the high cost of bringing broadband to these widely dispersed areas.

Still, as Crovitz notes, broadband speed in the U.S. moves at a snail’s pace compared to many other countries. So, where is the problem? Is the government not spending enough on the broadband issue?

The real problem, Crovitz explains, “is that there is an effective broadband duopoly in the U.S., with most communities able to choose only between one cable company and one telecom carrier. It's this lack of competition, blessed by national, state and local politicians, that keeps prices up and services down.” As is the case in so many other instances of underserved consumers, we have government sponsored stifling of competition.

Crovitz makes the interesting observation that “technology gets built by private capital and initiative and not by government.”

This is not to say that government can never provide the boost for technology development to occur. For example, more than 1,500 products have been spawned by the U.S. space program. These products range from running shoes and golf ball aerodynamics to semiconductor cubing and virtual reality. Many other products have started with military applications or academic research. But it was not the government that brought these products to the consumer market. It took private enterprise to do that.

In his article, Crovitz draws an analogy between broadband technologies and highway infrastructure. This leads us to think of a system that is built and maintained by government for the common use of all. But it can also bring to mind a system with many portions that are inadequate, congested, antiquated, and crumbling.

The broadband system is actually more akin to telecommunication infrastructure. In fact, it is quite intertwined with the telecommunication system. This is more like an eclectic public-private partnership. Most new technological developments are brought to market and implemented via the private pieces of this system.

What needs to happen to improve our broadband offerings, then, is for the playing field to be leveled so that healthy competition can ensue. For that to happen, government would need to drop many of its current cozy relationships with broadband providers. You can bet that the providers would scream over having their special privileges revoked, but such is the road to competition.

We would all love to have broadband as fast and accessible as it is in Japan. Moving in that direction requires a different approach than massive government spending. It requires real competition.


Jesse Harris said...

The biggest barrier to broadband competition has been over a century of government-supported monopolies which has created powerful entrenched incumbencies. Cable isn't as bad as telco, but they frequently negotiate exclusive franchise agreements for any market they enter. Both have worked hard to create a regulatory environment that's complex enough to discourage new entrants and lax enough to let them get away with nearly anything they want.

Another big barrier to entrants is the cost to deploy. Pole attachments and trenching are usually 50% or more of the total cost of installation and deploying to existing neighborhoods (often called "brownfields") can cost thousands of dollars per address passed. Most of these systems need a take rate in the 35-40% range to break even, so you can barely support the existing incumbents plus one new entrant before the market is saturated.

Attempts to increase competition from the publicly-funded infrastructure have also been a failure. Incumbents, unwilling to open their networks as promised under the Telecommunications Act of 1996, often thwart competitors using their network through billing errors, illegal disconnections, repair delays and frivolous legal and legislative action.

It's really time for local communities to be given the ability to find new models on their own. Palo Alto is looking at a public/private partnership that waives pole attachment fees in exchange for operating the network with competing service providers and turning it over to city ownership in 30 years. It's probably one of the more interesting muni models to pop up despite all eyes being focused on systems like UTOPIA.

Scott Hinrichs said...

Thanks for the insight, Jesse. In the real world, it will take public-private partnerships to significantly improve broadband. As experience shows, it is difficult to navigate this type of affair without creating perverse incentives.