Internet Internet Access as Essential as Essential Infrastructure: Public Utility, Private Infrastructure: Public Utility, Private

Utility or Neither?Utility or Neither?

A Presentation at The Legal and Political Debate

Over Network Neutrality

University of San Francisco School of LawJanuary 26, 2008

‘

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/

22

Absent Market Failure Should Governments Stimulate Broadband Investment, Subsidize Service,

or Become a Carrier?

Few would dispute the view that broadband access contributes to regional and global Few would dispute the view that broadband access contributes to regional and global competitiveness, especially in the hinterland where distance insensitivity has a greater competitiveness, especially in the hinterland where distance insensitivity has a greater impact, e.g., cheap telecom promotes outsourcing.impact, e.g., cheap telecom promotes outsourcing.

““This country needs a national goal for…the spread of broadband technology. We This country needs a national goal for…the spread of broadband technology. We ought to have…universal, affordable access for broadband technology by the year ought to have…universal, affordable access for broadband technology by the year 2007, and then we ought to make sure as soon as possible thereafter, consumers have 2007, and then we ought to make sure as soon as possible thereafter, consumers have got plenty of choices when it comes to [their] broadband carrier.” President George got plenty of choices when it comes to [their] broadband carrier.” President George W. Bush, March 26, 2004 W. Bush, March 26, 2004 http://www.whitehouse.gov/infocus/technology/economic_policy200404/chap4.htmlhttp://www.whitehouse.gov/infocus/technology/economic_policy200404/chap4.html

The Internet provides a case study of successful government incubation, anchor The Internet provides a case study of successful government incubation, anchor tenancy and privatization.tenancy and privatization.

Governments historically have operated public utilities, or conferred lavish financial Governments historically have operated public utilities, or conferred lavish financial benefits to private utilities.benefits to private utilities.

Even non-utilities, e.g., local exchange telephone companies, have qualified for Even non-utilities, e.g., local exchange telephone companies, have qualified for generous subsidies, e.g., over $7 billion in universal service funding annually.generous subsidies, e.g., over $7 billion in universal service funding annually.

33

Using Current Broadband Statistics, One Can Reach Using Current Broadband Statistics, One Can Reach Vastly Different Vastly Different Conclusions About Conditions About Conditions

in the U.S.in the U.S.

The broadband marketplace in the U.S. is doing The broadband marketplace in the U.S. is doing well and could do better if government well and could do better if government deregulated further to remove regulatory deregulated further to remove regulatory uncertainty and disincentives for investment.uncertainty and disincentives for investment.

versus

True broadband, i.e., 786 kilobits per second or True broadband, i.e., 786 kilobits per second or greater, shows marketplace failure in many greater, shows marketplace failure in many regions where two or less facilities-based regions where two or less facilities-based carriers operate.carriers operate.

44

Lines by Information Transfer Rates in the Faster Direction as of December 31, 2006 (Includes only lines exceeding 200 kbps in both directions)

Source: FCC (2007); available at: http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/hspd1206_tables.xls

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 Dec 2006

37.0%

4.7%

58.3%

> than 200 kbps, < than 2.5 mbps

≥ than 2.5 mbps, < than 10 mbps

≥ than 10 mbps

55

The U.S. Has 100% Broadband Penetration With Consumers in 84% of All Zip Codes Having 4 or More Broadband Choices

Source: FCC (2007); available at: http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/hspd1206_tables.xls

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 Dec 2006

One or More Providers Four or More Providers

66

The U.S. Ranks 15th Among OECD Nations in Terms of Household Penetration

source: OECD (2007) www.oecd.org/sti/ict/broadbandsource: OECD (2007) www.oecd.org/sti/ict/broadband

0

5

10

15

20

25

30

35

DSL Cable Fibre/LAN Other

OECD Broadband subscribers per 100 inhabitants, by technology, June 2007

OECD average

77

0

5

10

15

20

25

30

35

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Broadband penetration (subscribers per 100 inhabitants, J une 2007)

GDP per capita (USD PPP, 2006)

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

source: OECD (2007) www.oecd.org/sti/ict/broadbandsource: OECD (2007) www.oecd.org/sti/ict/broadband

88

Case Study: Port Matilda, PA

The FCC reports I have nine broadband options (source: FCC, Number of The FCC reports I have nine broadband options (source: FCC, Number of Holding Companies Reporting High-Speed Subscribers by Zip Code as of June Holding Companies Reporting High-Speed Subscribers by Zip Code as of June 30, 200630, 2006available at: http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-available at: http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/hzip0606.pdf at p. 569)State_Link/IAD/hzip0606.pdf at p. 569)

The options range from DSL (Verizon not available in my neighborhood, but The options range from DSL (Verizon not available in my neighborhood, but presumably somewhere in the zip code) at $14.99 (up to768 kbps downstream/ presumably somewhere in the zip code) at $14.99 (up to768 kbps downstream/ up to128 Kbps upstream) to Satellite (Wild Blue $79.95 up to 1.5 Mbps up to128 Kbps upstream) to Satellite (Wild Blue $79.95 up to 1.5 Mbps downstream/ up to 256 kbps upstream, plus $368.95 hardware, installation and downstream/ up to 256 kbps upstream, plus $368.95 hardware, installation and activation fees).activation fees).

99

Case Study: Port Matilda, PA (cont.)

Making an “apples-to-apples” comparison, which factors in actual Making an “apples-to-apples” comparison, which factors in actual price cross elasticity, there are three distinct market segments:price cross elasticity, there are three distinct market segments:

1)1) Non-mobile residence and businesses that can access cable and possibly DSL service; Non-mobile residence and businesses that can access cable and possibly DSL service; available for as a low as $14.99 for DSL (with a 1-2 yr. service commitment) up to available for as a low as $14.99 for DSL (with a 1-2 yr. service commitment) up to $37.99 (no service commitment for up to 3 Mbps downstream/ up to768 kbps $37.99 (no service commitment for up to 3 Mbps downstream/ up to768 kbps upstream); cable modem service ranges from $27.99 for up to768 kbps upstream); cable modem service ranges from $27.99 for up to768 kbps downstream/up to128 kbps upstream) to $42.95 for up to 6 Mbps downstream/ up to downstream/up to128 kbps upstream) to $42.95 for up to 6 Mbps downstream/ up to 128 kbps upstream) for customers that currently subscribe to Comcast Cable or 128 kbps upstream) for customers that currently subscribe to Comcast Cable or Comcast Digital Voice. Without bundling: $59.95;Comcast Digital Voice. Without bundling: $59.95;

2)2) Users that want mobile access; Users that want mobile access; service available for as a low asservice available for as a low as $26.95 for 10 Mbps plus about $10 in surcharges and fees (no throughput specified, but GPRS and Edge do not come close to wireline speeds); up to $59.95 (one-two year service commitment 5 GB quota and throughput of up to 600 kbps – 1.4 Mbps and at claimed average upload speeds of 500 Kbps – 800 kbps); and

3)3) Non-mobile rural users lacking access to cable modem or DSL; Non-mobile rural users lacking access to cable modem or DSL; satellite service satellite service available for as low as $49.95 for up to 512 kbps downstream/up to 128 kbps available for as low as $49.95 for up to 512 kbps downstream/up to 128 kbps upstream, plus $368.95 hardware, installation and activation fees; $79.95 for up to upstream, plus $368.95 hardware, installation and activation fees; $79.95 for up to 1.5 Mbps downstream/ up to 256 kbps upstream, plus $368.95 hardware, installation 1.5 Mbps downstream/ up to 256 kbps upstream, plus $368.95 hardware, installation and activation fees.and activation fees.

1010

33.3830.5630.44

28.7126.75

25.2924.13

22.8822.1821.9821.9321.6621.2221.0220.7520.09

19.3418.5918.1417.92

16.9916.7916.5416.1515.82

14.9910.75

7.746.06

5.80

Czech Republic

Korea

Iceland

Mexico

Portugal

Luxembourg

Italy

Austria

Hungary

Canada

Norway

Australia

J apan

Germany

Poland

Spain

Greece

Belgium

Ireland

Finland

France

Sweden

United Kingdom

New Zealand

Slovak Republic

United States

Turkey

Netherlands

Denmark

Switzerland

321.8850.93

79.38157.52

91.7190.83

54.44102.33

166.9497.63

163.04108.45

131.5745.19

132.48233.64

90.4372.66

154.0349.04

74.0189.60

62.76119.70

266.93199.99

117.1887.68

72.6252.15

1.00 10.00 100.00 1000.00

Czech RepublicKorea

IcelandMexico

PortugalLuxembourg

ItalyAustria

HungaryCanadaNorw ay

AustraliaJapan

GermanyPolandSpain

GreeceBelgiumIrelandFinlandFrance

Sw edenUnited Kingdom

New ZealandSlovak Republic

United StatesTurkey

NetherlandsDenmark

Sw itzerland

Broadband price ranges, October 2007, all platforms, logarithmic scale, USD PPP

U.S Broadband Rates: Quite Cheap to Some and Quite Expensive to Others (source: OECD 2007)

1111

Average broadband monthly price per advertised Mbit/s, Oct 2007, USD PPP

97.4363.8929.13

28.1425.03

22.8522.22

21.3419.59

18.5518.4017.7017.6617.54

16.7515.2614.9214.31

13.4512.60

11.529.81

8.448.17

7.315.965.29

4.613.70

3.09

TurkeyMexicoGreeceCanadaPolandSpain

IcelandAustralia

Slovak RepublicBelgium

Sw edenDenmark

AustriaCzech Republic

New ZealandNetherlands

IrelandHungary

FinlandUnited States

PortugalNorw ay

GermanySw itzerlandLuxembourg

KoreaUnited Kingdom

ItalyFranceJapan

U.S Broadband Rates: Moderate to Many (source: OECD 2007)(source: OECD 2007)

1212

The Current Strategies Do Not Appear Ideal

e-rate subsidies have achieved modest goals at great expense and e-rate subsidies have achieved modest goals at great expense and inefficiency. inefficiency.

Municipal wi-fi networks have mixed records; compare Blackburg, Municipal wi-fi networks have mixed records; compare Blackburg, Va. with Philadelphia.Va. with Philadelphia.

Reserving to an incumbent wireline carrier a right of first refusal Reserving to an incumbent wireline carrier a right of first refusal does not offer an optimal national strategy.does not offer an optimal national strategy.

Regulatory forbearance based on “robust competition” ignores Regulatory forbearance based on “robust competition” ignores evidence that over 96% of the national broadband market served by evidence that over 96% of the national broadband market served by two types of carriers (cable modem and DSL).two types of carriers (cable modem and DSL).

A broad geographic footprint does not constitute a “perfect storm.”A broad geographic footprint does not constitute a “perfect storm.” Failure to apply Failure to apply CarterfoneCarterfone policies to wireless carriers passes up a policies to wireless carriers passes up a

lawful and inexpensive catalyst. lawful and inexpensive catalyst.

1313

Strategies Worth Considering

Adopt best practices evident in other nations, e.g., Canada, Korea, Japan.

– capping government project funding to a percentage of total cost; – creating incentives for demand aggregation;– one time project funding rather than recurring discounts; – promoting innovation and creativity in projects, including technologies that provide greater efficiency

and lower recurring costs, e.g., wireless;– auctioning off subsidies; and– blending government stewardship and vision with financial incentives for private stakeholders to

pursue infrastructure investments.

Apply Wireless Carterfone.

Allow e-rate beneficiaries to serve nearby residents.

Adopt spectrum allocation and management rules favoring market entry rather than warehousing and incumbency.