The Digital Advantage: How Nations Win and Lose the Silicon Sweepstakes The Digital Advantage: How Nations Win and Lose the Silicon Sweepstakes Rob Frieden, Pioneers Chair and Professor of Telecommunications Penn State University web site: blog site: A Presentation at the December 5, 2008

2 The Law of Unintended Results Converging technologies and markets in information, communications and entertainment (“ICE”) present new regulatory and development challenges. Converging technologies and markets in information, communications and entertainment (“ICE”) present new regulatory and development challenges. Despite demonstrating global best practices in some areas the United States woefully lags in others, including: Despite demonstrating global best practices in some areas the United States woefully lags in others, including: broadband infrastructure access and affordability—the U.S. ranks th globally in terms of market penetration; a “Digital Divide” persists; regulatory reform—Congress and the Federal Communications Commission (“FCC”) have created a regime that either deregulates prematurely, or imposes uneven regulatory burdens on competitors; and competition—false estimates of market competitiveness support bogus justifications for approving mergers and acquisitions.

3 Stakes and Mistakes Politics, economic doctrine, lobbying and sponsored research combine to erode this nation’s comparative advantage in ICE technologies and services. Politics, economic doctrine, lobbying and sponsored research combine to erode this nation’s comparative advantage in ICE technologies and services. The conventional wisdom and party line belies the facts that: The conventional wisdom and party line belies the facts that: The FCC has expanded its regulatory wingspan instead of reducing it; The U.S. ICE wired and wireless infrastructure lacks competition and technological superiority; The FCC has triggered a lack of parity in regulatory burdens between competitors; Excessive deregulation in some areas, coupled with excessive oversight in other areas combine to erode opportunities for startup ventures and little known content providers to reach critical mass.

6 Expanded FCC Regulatory Wingspan While the FCC has deregulated (possibly too aggressively) in some areas, e.g., telephone services, the Commission ironically expands its Internet reach on questionable legal grounds. The FCC must apply service definitions that create a dichotomy between regulated telephone services and largely unregulated information services. Despite a regulatory safe harbor for information services, the Commission has invoked “ancillary jurisdiction” to impose burdens on Internet Service Providers (“ISPs”). The FCC recently rejected Comcast’s claim of a right to thwart, delay and degrade service as legitimate “network management” even when congestion did not exist. The Commission invoked Title I of the Communications Act as well as several specific sections specified as applying to telecommunications, or cable service providers. The FCC recently rejected Comcast’s claim of a right to thwart, delay and degrade service as legitimate “network management” even when congestion did not exist. The Commission invoked Title I of the Communications Act as well as several specific sections specified as applying to telecommunications, or cable service providers.

7 Limited Competition in the Wired and Wireless Infrastructure At every opportunity the FCC claims the U.S. has robust competition. Ample empirical evidence disproves this claim, but the government, and sponsored researchers attempt to “shoot the messenger.” Vertically integrated cable television and telephone companies control 90+% of wired broadband access. Four national wireless carriers control 88%+ of the market and true broadband does not exist in this country despite the iPhone hype. Congressionally mandated efforts to promote local telephone service competition have failed and ratepayers contribute over $7 billion annually to remedy market failure and promote universal service.

8 Lack of Regulatory Parity The FCC expresses concern about tilted competitive playing fields, yet it blunts competitive advantages. Cable television operators bear regulatory burdens not applied to telephone company provided video services. The FCC applies most telephone service regulations on Internet startup ventures like Vonage, even though these ventures have minimal market share, no market power and arguable qualify for the information service safe harbor. A 1968 policy that entitled consumers to own and attach telephones to networks does not apply to wireless subscribers. Skillful players can exploit regulatory arbitrage opportunities, e.g., rural Iowa telephone companies offer “free” international long distance and conference calling.

9 Impact on Content Providers Positive Impact Positive Impact Despite bad policy, Congress and the FCC cannot prevent the Internet from providing great new opportunities to eliminate gate keepers/intermediaries and to showcase talent, e.g., streaming WWOZ via the Web; live webcasts of JazzFest and Mardi Gras events. Web creators and consumers often can resort to legal or illegal “self help.” The information service classification creates a presumption of limited regulation that has spawned innovation, entrepreneurship and creativity. Negative Impact “Walled Gardens” of easy access to content not likely to support struggling new artists. “Walled Gardens” of easy access to content not likely to support struggling new artists. Last mile domination by two operators with incentives to favor affiliates and more effectively recoup their Internet investment. Unclear whether the FCC has lawful authority to require non-discrimination and remedy abuses.