Assessing the Need for More IncentivesAssessing the Need for More IncentivesAssessing the Need for More Incentives Assessing the Need for More Incentives to Stimulate to Stimulate

Next Generation Network InvestmentNext Generation Network InvestmentNext Generation Network InvestmentNext Generation Network Investment

A presentation at the:

KATP-CITI International Joint Symposium

Ultra-broadband Smart Networks for a Smarter Society: Exploring the Policy and Business

Directions”Directions

24June, 2011

Rob Frieden, Professor of Telecommunications and LawPenn State University

rmf5@psu.eduWeb site : http://www.personal.psu.edu/faculty/r/m/rmf5/

Blog site: http://telefrieden.blogspot.com/

Regulatory Brinksmanship and Framing the Debate

Politically adept stakeholders in telecommunications policymaking have created a truism that any government regulation risks creating disincentives for investments in essential (and job creating) next

i k (“NGN”) i fgeneration network (“NGN”) infrastructure.Legislatures and policy makers take this assertion as a given without empirical proof.Th k h ld l h i h i f “ b ” i iThe stakeholders also emphasize the existence of “robust” competition which erode market share and profits, e.g., replacement of wirelinetelephony with Voice over the Internet Protocol (“VoIP”) service provided by cable televisionprovided by cable television.Might competitive necessity and the loss of core market revenues force NGN investment even in the absence of government-created incentive creation?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.Thi k h t d i i i t t d i i d h if

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This paper asks: what drives carrier investment decisions and when, if ever, should government create NGN investment incentives?

Local Loop Unbundling as a “Confiscation”Local Loop Unbundling as a Confiscation

In the horse trading leading up to enactment of the Telecommunications Act of 1996 incumbent wireline carriers agreed to provide new resale competitors with1996, 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.

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.unbundling ( LLU ) was an unconstitutional taking of property.

While the Supreme Court rejected this claim, lower courts accepted arguments that the FCC should use finely calibrated and granular efforts to jumpstart

i i Th h h lcompetition . The courts accepts the argument that too generous resale opportunities would remove incentives for market entrants to build their own networks.

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?

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Local Loop Unbundling as a “Confiscation” (cont.)A th S C t t d i b t i d t kA th S C t t d i b t i d t kAs the Supreme Court noted, incumbent carriers never proved any network As the Supreme Court noted, incumbent carriers never proved any network sharing obligation was offered at below cost rates.sharing obligation was offered at below cost rates.FCC statistics show that incumbent carriers never had to invest in more plant to FCC statistics show that incumbent carriers never had to invest in more plant to accommodate reseller demand. Compulsory rentals from incumbents to accommodate reseller demand. Compulsory rentals from incumbents to p yp ynewcomers peaked at 12% and stood at 8% before the FCC stopped collecting newcomers peaked at 12% and stood at 8% before the FCC stopped collecting the data. See Trends in Telephone Service (Aug. 2008), at p. 8the data. See Trends in Telephone Service (Aug. 2008), at p. 8--8; available at 8; available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOChttp://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC--284932A1.pdf. 284932A1.pdf.

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What Drives Carrier What Drives Carrier Network Investment Decisions? Network Investment Decisions?

Incumbent carriers have framed NGN network investment as driven primarily by Incumbent carriers have framed NGN network investment as driven primarily by regulations, as though the general business cycle, competitive necessity, the cost of regulations, as though the general business cycle, competitive necessity, the cost of capital, new investment opportunities, technological innovation and declining capital, new investment opportunities, technological innovation and declining revenues in core markets did not matter. A change in regulatory climate does revenues in core markets did not matter. A change in regulatory climate does notnotexplain why Comcast wants to acquire NBC and Bell Canada now owns 100% of a explain why Comcast wants to acquire NBC and Bell Canada now owns 100% of a major broadcast television network. major broadcast television network.

Sponsored researchers have claimed that when the FCC eliminated LLU Sponsored researchers have claimed that when the FCC eliminated LLU requirements, incumbent carriers expedited and vastly increased NGN investment. requirements, incumbent carriers expedited and vastly increased NGN investment. But did deregulation solely cause this outcome? Might proven demand for broadband But did deregulation solely cause this outcome? Might proven demand for broadband g y g pg y g phave had a significant impact?have had a significant impact?

Just as wireless has provided incumbents with a revenue generating alternative toJust as wireless has provided incumbents with a revenue generating alternative toJust as wireless has provided incumbents with a revenue generating alternative to Just as wireless has provided incumbents with a revenue generating alternative to wireline services, broadband demand surely has and will stimulate investment. But if wireline services, broadband demand surely has and will stimulate investment. But if U.S. NGN investment or market penetration lags, what strategies should legislatures U.S. NGN investment or market penetration lags, what strategies should legislatures and regulators use? U S policy concentrates on deregulation and additional incentiveand regulators use? U S policy concentrates on deregulation and additional incentive

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and regulators use? U.S. policy concentrates on deregulation and additional incentive and regulators use? U.S. policy concentrates on deregulation and additional incentive creation through subsidies and other forms of supplycreation through subsidies and other forms of supply--side stimulation.side stimulation.

NGN Investment Stimulation R i E C lib iRequires Exact Calibration

In a major shift in policy the Obama Administration and Congress have In a major shift in policy the Obama Administration and Congress have j p y gj p y gtargeted broadband development for $targeted broadband development for $77..2 2 billion in subsidies. Without exact billion in subsidies. Without exact calibration, government risks subsidizing projects that carriers would pursue calibration, government risks subsidizing projects that carriers would pursue even without taxpayer underwriting. even without taxpayer underwriting.

While best practices require nations to consider a variety of strategies for While best practices require nations to consider a variety of strategies for stimulating NGN development, the U.S. government has become preoccupied stimulating NGN development, the U.S. government has become preoccupied with “incentivizing ”with “incentivizing ”with incentivizing.with incentivizing.

Governments need to calibrate incentive creation and avoid tilting the Governments need to calibrate incentive creation and avoid tilting the competitive playing field with inconsistent regulation subsidies grants taxcompetitive playing field with inconsistent regulation subsidies grants taxcompetitive playing field with inconsistent regulation, subsidies, grants, tax competitive playing field with inconsistent regulation, subsidies, grants, tax credits, loans, loan guarantees and other incentives.credits, loans, loan guarantees and other incentives.

NGN development has a substantial impact of a nation’s competitiveness in theNGN development has a substantial impact of a nation’s competitiveness in theNGN development has a substantial impact of a nation s competitiveness in theNGN development has a substantial impact of a nation s competitiveness in theglobal economy and should not be the subject of regulatory brinksmanship. 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 Despite ample evidence to the contrary, until 2009 2009 the U.S. government, including the U.S. government, including the FCC saw no need to create broadband incentives based on evidence of global best the FCC saw no need to create broadband incentives based on evidence of global best

practices.practices.pp

“[T]here is substantial competition in the provision of Internet access services. “[T]here is substantial competition in the provision of Internet access services. Broadband penetration has increased rapidly over the last year with more Americans Broadband penetration has increased rapidly over the last year with more Americans relying on highrelying on high--speed connections to the Internet for access to news, entertainment, speed connections to the Internet for access to news, entertainment, and communication. Increased penetration has been accompanied by more vigorous and communication. Increased penetration has been accompanied by more vigorous competition. Greater competition limits the ability of providers to engage in competition. Greater competition limits the ability of providers to engage in anticompetitive conduct since subscribers would have the option of switching toanticompetitive conduct since subscribers would have the option of switching toanticompetitive conduct since subscribers would have the option of switching to anticompetitive conduct since subscribers would have the option of switching to alternative providers if their access to content were blocked or degraded. In 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 particular, cable providers collectively continue to retain the largest share of the mass market high speed, Internet access market. Additionally, consumers have gained market high speed, Internet access market. Additionally, consumers have gained access to more choice in broadband providers.” AT&T Inc. and BellSouth Corp., access to more choice in broadband providers.” AT&T Inc. and BellSouth Corp., Application for Transfer of Control, Memorandum Opinion and Order, Application for Transfer of Control, Memorandum Opinion and Order, 22 22 FCC Rcd. FCC Rcd. 56625662, , 57245724--25 25 ((20072007).).

In In 20082008, John Kneuer, then Assistant Secretary for Communications and , John Kneuer, then Assistant Secretary for Communications and Information and Administrator at the Commerce Department’s National Information and Administrator at the Commerce Department’s National Telecommunications and Information Administration claimed the United States “has Telecommunications and Information Administration claimed the United States “has

77the most effective multiplatform broadband in the world.”the most effective multiplatform broadband in the world.”

Suddenly in 2010 the FCC Recants

The FCC now estimates that The FCC now estimates that 11,,024 024 out of out of 33,,230 230 counties in the United States counties in the United States d i i i d b b db d d b i ld i i i d b b db d d b i l 1414and its territories are unserved by broadband, and between approximately and its territories are unserved by broadband, and between approximately 14 14

to to 24 24 million Americans do not have access to any form of broadband million Americans do not have access to any form of broadband service. service. The . . . [unserved] group appears to be disproportionately lowerThe . . . [unserved] group appears to be disproportionately lower--income income Americans and Americans who live in rural areas. The goal of the statute, Americans and Americans who live in rural areas. The goal of the statute, and the standard against which we measure our progress, is universal and the standard against which we measure our progress, is universal b db d il bilit W h t hi d thi l t d d itb db d il bilit W h t hi d thi l t d d itbroadband availability. We have not achieved this goal today, nor does it broadband availability. We have not achieved this goal today, nor does it appear that we will achieve success without changes to present policies. The appear that we will achieve success without changes to present policies. The evidence further indicates that market forces alone are unlikely to ensure evidence further indicates that market forces alone are unlikely to ensure that the unserved minority of Americans will be able to obtain the benefitsthat the unserved minority of Americans will be able to obtain the benefitsthat the unserved minority of Americans will be able to obtain the benefits 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 of broadband anytime in the near future. Therefore, if we remain on our current course, a large number of Americans likely will remain excluded current course, a large number of Americans likely will remain excluded from the significant benefits of broadband that most other Americans canfrom the significant benefits of broadband that most other Americans canfrom the significant benefits of broadband that most other Americans can from the significant benefits of broadband that most other Americans can access today. Given the everaccess today. Given the ever--growing importance of broadband to our growing importance of broadband to our society, we are unable to conclude that broadband is being reasonably and society, we are unable to conclude that broadband is being reasonably and timely deployed to all Americans in this situationtimely deployed to all Americans in this situation

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timely deployed to all Americans in this situation.timely deployed to all Americans in this situation.

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)

Percent of Zip Codes with High-Speed Providers90%100%

80%

90%

100%

60%70%80%

20%

30%

40%

50%

60%

70%

40%50%60%

0%

10%

20%

Jun2000

Jun2001

Jun2002

Jun2003

Jun2004

Jun2005

Jun2006

Jun2007

One or More Providers Four or More Providers10%20%30%

One or More Providers Four or More Providers

0%10%

1010One or More Providers Four or More Providers

The U.S. Ranks 14th Among OECD Nations in Terms of Wireline Household PenetrationTerms of Wireline Household Penetration

source: OECD (2010); source: OECD (2010); http://www.oecd.org/dataoecd/21/35/39574709.xls http://www.oecd.org/dataoecd/21/35/39574709.xls

35

40Other Fibre/LAN Cable DSL

OECD Fixed (wired) broadband subscriptions per 100 inhabitants, by technology, June 2010

http://www.oecd.org/dataoecd/21/35/39574709.xls

25

30

35

OECD average

15

20

0

5

10

1111

The U.S. Lags Most Nations in Broadband Penetration On the Basis of Per Capita GDPOn the Basis of Per Capita GDP

source: OECD (2010); source: OECD (2010); http://www.oecd.org/dataoecd/21/57/39574824.xls http://www.oecd.org/dataoecd/21/57/39574824.xls

OECD b db d t ti d GDP it

100 000

120,000

35

40 Fixed broadband penetration (subscribers per 100 inhabitants, June 2010)

GDP per capita (USD PPP, 2009)

Broadband penetration, June 2010 GDP per capita, 2009OECD broadband penetration and GDP per capita

80,000

100,000

25

30

Simple correlation = 0.70

40,000

60,000

10

15

20

0

20,000

0

5

1212

1313

source: Internetinnovation.org; http://internetinnovation.org/images/factbook/by_country.png.

Who’s Statistics Are Most Credible?Who’s Statistics Are Most Credible?

Most satellite and terrestrial wireless broadband options do not yet Most satellite and terrestrial wireless broadband options do not yet provide true broadband service, yet the FCC reports that provide true broadband service, yet the FCC reports that 3232..11% of all % of all li id d i t llit t t i l fi d bil i lli id d i t llit t t i l fi d bil i llines provided via satellite, terrestrial fixed or mobile wireless lines provided via satellite, terrestrial fixed or mobile wireless advertized service at greater than advertized service at greater than 200 200 kbps; the percentage drops to kbps; the percentage drops to 1313..00% using the lowest rate proposed in the National Broadband Plan.% using the lowest rate proposed in the National Broadband Plan.

The U.S. government and sponsored academics dispute the OECD The U.S. government and sponsored academics dispute the OECD statistics as failing to include Wistatistics as failing to include Wi--Fi hot spots, at work access, etc.Fi hot spots, at work access, etc.gg p , ,p , ,

Additional excuses include the lack of computer literacy and access, Additional excuses include the lack of computer literacy and access, ha ing a large r ral hinterland ad erse demographics et other nationsha ing a large r ral hinterland ad erse demographics et other nationshaving a large rural hinterland, adverse demographics, yet other nations having a large rural hinterland, adverse demographics, yet other nations with similar disadvantages do better. with similar disadvantages do better.

Bear in mind that in Bear in mind that in 2010 2010 the FCC determined that up to the FCC determined that up to 24 24 million million Americans have no broadband access options, agreed that Americans have no broadband access options, agreed that 200 200 kbps isn’t kbps isn’t really a broadband speed, migrated from zip code to census tract/county really a broadband speed, migrated from zip code to census tract/county

1414

y p g p yy p g p ymeasurements and acknowledged a gap between advertized versus measurements and acknowledged a gap between advertized versus delivered bit rates.delivered bit rates.

Reasons Why Incumbents Can Postpone Major Broadband Reasons Why Incumbents Can Postpone Major Broadband I t tI t tInvestmentInvestment

Currently incumbents can “make their numbers” thanks Currently incumbents can “make their numbers” thanks to still growing wireless revenues, generous universal to still growing wireless revenues, generous universal service funding, and the absence of competitive service funding, and the absence of competitive

ititnecessity.necessity.In the third quarter of In the third quarter of 20092009, Verizon reported that , Verizon reported that 5858% % of its total revenues accrued from wireless serviceof its total revenues accrued from wireless serviceof its total revenues accrued from wireless service.of its total revenues accrued from wireless service.Most of the $Most of the $7 7 billion annually allocated for universal billion annually allocated for universal service flows to incumbent local exchange carriersservice flows to incumbent local exchange carriersservice flows to incumbent local exchange carriers.service flows to incumbent local exchange carriers.U.S. broadband in many locales is comparatively slow U.S. broadband in many locales is comparatively slow and expensive despite two platform options (DSL andand expensive despite two platform options (DSL andand expensive despite two platform options (DSL and and expensive despite two platform options (DSL and cable modem).cable modem).Until Until 20092009, the U.S. had no targeted broadband , the U.S. had no targeted broadband

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, g, gdevelopment funding.development funding.

Global Best Practices in Broadband DevelopmentGlobal Best Practices in Broadband Development

Best practices does not require nations to “throw money at the problem,” but instead:Best practices does not require nations to “throw money at the problem,” but instead:

•• Develop a vision and strategy;Develop a vision and strategy;

•• Promote digital literacy, i.e., the ability to use digital technologies to pursue Promote digital literacy, i.e., the ability to use digital technologies to pursue information, communications and entertainment interests;information, communications and entertainment interests;

•• Invest in infrastructure, aggregating demand, and serving as an anchor tenant;Invest in infrastructure, aggregating demand, and serving as an anchor tenant;

•• Foster facilitiesFoster facilities--based competition;based competition;

•• Create incentives for private investment and disincentives for litigation and other Create incentives for private investment and disincentives for litigation and other delay tactics;delay tactics;

•• Offer electronic government services, including healthcare, education, access to Offer electronic government services, including healthcare, education, access to information, and licensing; information, and licensing;

•• Auction off universal service franchises that receive subsidies and grants; andAuction off universal service franchises that receive subsidies and grants; and

•• Revise and reform governmental safeguards to promote a high level of trust, security, Revise and reform governmental safeguards to promote a high level of trust, security, i d i i NGN i i l di l ii d i i NGN i i l di l i

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privacy, and consumer protection in NGN services, including electronic commerce.privacy, and consumer protection in NGN services, including electronic commerce.

Development ModelsDevelopment ModelsT /DT /DTop/DownTop/Down

Nations emphasize expanding the supply of broadband capacity byNations emphasize expanding the supply of broadband capacity byNations emphasize expanding the supply of broadband capacity by Nations emphasize expanding the supply of broadband capacity by stimulating access through:stimulating access through:

Expanded universal service obligation to include broadbandExpanded universal service obligation to include broadbandservice;service;

Use of targeted financial stimulus tools such as grants, subsidies, and Use of targeted financial stimulus tools such as grants, subsidies, and tax credits;tax credits;

Reallocated spectrum to expand available bandwidth useable for Reallocated spectrum to expand available bandwidth useable for broadband services; andbroadband services; and

Supporting competition from multiple platforms including retrofittedSupporting competition from multiple platforms including retrofitted1717

Supporting competition from multiple platforms, including retrofitted Supporting competition from multiple platforms, including retrofitted fixed line telephone networks, cable television plant, white spaces fixed line telephone networks, cable television plant, white spaces and other wireless options, fiber optic links, and the powerline grid.and other wireless options, fiber optic links, and the powerline grid.

Development Models (cont.)Development Models (cont.)Bottom/UpBottom/Uppp

Nations emphasize stimulation of demand for NGN and the services Nations emphasize stimulation of demand for NGN and the services they deliver through government:they deliver through government:they deliver through government:they deliver through government:

Becoming an early provider of NGNBecoming an early provider of NGN--mediated services and an underwriter of mediated services and an underwriter of programs designed to enhance digital literacy, i.e., the skills needed to use programs designed to enhance digital literacy, i.e., the skills needed to use NGNs for enhancing social and personal utility;NGNs for enhancing social and personal utility;

Offering access to eOffering access to e--government services ;government services ;

Offering free or subsidized computers and support for the creation of digitalOffering free or subsidized computers and support for the creation of digitalOffering free or subsidized computers and support for the creation of digital Offering free or subsidized computers and support for the creation of digital content; content;

Funneling grant money to “community champions” and broadband demand Funneling grant money to “community champions” and broadband demand aggregators in addition to carriers; andaggregators in addition to carriers; and

1818Addressing consumer protection issues including, privacy, network reliability, Addressing consumer protection issues including, privacy, network reliability,

security and neutrality, and competition policy issues.security and neutrality, and competition policy issues.