Best Practices in Broadband Development Without Unnecessary Incentives A Presentation at the 32 nd Annual Conference of the Pacific Telecommunications Council Honolulu, Hawaii January 17-20, 2010 ‘ Rob Frieden, Professor of Telecommunications and Law Penn State University Web site : Blog site:

2 Incentive Creation and Disincentive Avoidance in Broadband Development While best practices require nations to consider a variety of strategies for stimulating Next Generation Network development, the U.S. FCC has become preoccupied with “incentivizing.” While best practices require nations to consider a variety of strategies for stimulating Next Generation Network development, the U.S. FCC has become preoccupied with “incentivizing.” Politically adept stakeholders have gamed the legislative and regulatory process to secure premature deregulation, financial subsidies, and incentives even where competitive necessity would stimulate investment. Politically adept stakeholders have gamed the legislative and regulatory process to secure premature deregulation, financial subsidies, and incentives even where competitive necessity would stimulate investment. Governments need to calibrate incentive creation and avoid tilting the competitive playing field with inconsistent regulation, subsidies, grants, tax credits, loans, loan guarantees and other incentives. Governments need to calibrate incentive creation and avoid tilting the competitive playing field with inconsistent regulation, subsidies, grants, tax credits, loans, loan guarantees and other incentives. NGN development has a substantial impact of a nation’s competitiveness in the global economy and should not be the subject of regulatory brinksmanship. NGN development has a substantial impact of a nation’s competitiveness in the global economy and should not be the subject of regulatory brinksmanship. In the U.S., it appears that the most financially secure, incumbent carriers, are playing a game of “chicken” with Congress and the FCC over NGN development; major incumbents have refrained from submitting proposals to use a portion of the $7.2 billion available for NGN development, probably because of network neutrality requirements. In the U.S., it appears that the most financially secure, incumbent carriers, are playing a game of “chicken” with Congress and the FCC over NGN development; major incumbents have refrained from submitting proposals to use a portion of the $7.2 billion available for NGN development, probably because of network neutrality requirements.

3 Until 2009 the U.S. Assumed a Robustly Competitive Broadband Market Existed Despite ample evidence to the contrary, until 2009 the U.S. government, including the FCC saw no need to create broadband incentives based on evidence of global best practices. “[T]here is substantial competition in the provision of Internet access services. Broadband penetration has increased rapidly over the last year with more Americans relying on high-speed connections to the Internet for access to news, entertainment, and communication. Increased penetration has been accompanied by more vigorous competition. Greater competition limits the ability of providers to engage in anticompetitive conduct since subscribers would have the option of switching to 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 market high speed, Internet access market. Additionally, consumers have gained access to more choice in broadband providers.” AT&T Inc. and BellSouth Corp., Application for Transfer of Control, Memorandum Opinion and Order, 22 FCC Rcd. 5662, (2007). In 2008, John Kneuer, then Assistant Secretary for Communications and Information and Administrator at the Commerce Department’s National Telecommunications and Information Administration claimed the United States “has the most effective multiplatform broadband in the world.”

4 The FCC Provides One Source Document for All the Positive News on Broadband Penetration—Everything Else Constitutes a “Trade Secret” Necessitating Confidential Treatment

5 The U.S. Has 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 Providers

6 Lines by Information Transfer Rates in the Faster Direction as of June 30, 2008 (Includes only lines exceeding 200 kbps in both directions) Source: FCC (2009); Total “High Speed” Lines (theoretical bitrate exceeds 200 kbps in 1 direction) High-Speed Lines by Technology as of June 30, 2008 Total High-Speed Lines

7 source: OECD (2009) The U.S. Ranks 15 th Among OECD Nations in Terms of Household Penetration source: OECD (2009)

8 source: OECD (2008) The U.S. Lags Most Nations in Broadband Penetration On the Basis of Per Capita GDP source: OECD (2008)

9 source: Internetinnovation.org;

10 Who’s Statistics Are Most Credible? Most satellite and terrestrial wireless broadband options do not yet provide true broadband service, yet the FCC reports that 16.5% of all lines provided via satellite, terrestrial fixed or mobile wireless. Offered service at greater than 200 kbps. Most satellite and terrestrial wireless broadband options do not yet provide true broadband service, yet the FCC reports that 16.5% of all lines provided via satellite, terrestrial fixed or mobile wireless. Offered service at greater than 200 kbps. Wall Street Journal tests of the cutting edge, Apple iPhone 3G measured actual data speeds in the kbps range. Wall Street Journal tests of the cutting edge, Apple iPhone 3G measured actual data speeds in the kbps range. The U.S. government and sponsored academics dispute the OECD statistics as failing to include Wi-Fi hot spots, at work access, etc. The U.S. government and sponsored academics dispute the OECD statistics as failing to include Wi-Fi hot spots, at work access, etc. Additional excuses include the lack of computer literacy and access, having a large rural hinterland, adverse demographics, yet other nations with similar disadvantages do better. Additional excuses include the lack of computer literacy and access, having a large rural hinterland, adverse demographics, yet other nations with similar disadvantages do better.

11 Reasons Why Incumbents Can Postpone Major Broadband Investment Currently incumbents can “make their numbers” thanks to still growing wireless revenues, generous universal service funding, and the absence of competitive necessity. Currently incumbents can “make their numbers” thanks to still growing wireless revenues, generous universal service funding, and the absence of competitive necessity. In the third quarter of 2009, Verizon reported that 58% of its total revenues accrued from wireless service. In the third quarter of 2009, Verizon reported that 58% of its total revenues accrued from wireless service. Most of the $7 billion annually allocated for universal service flows to incumbent local exchange carriers. Most of the $7 billion annually allocated for universal service flows to incumbent local exchange carriers. U.S. broadband in many locales is comparatively slow and expensive despite two platform options (DSL and cable modem). U.S. broadband in many locales is comparatively slow and expensive despite two platform options (DSL and cable modem). Until 2009, the U.S. had no targeted broadband development funding. Until 2009, the U.S. had no targeted broadband development funding.

12 Global Best Practices in Broadband Development 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 information, communications and entertainment interests;Promote digital literacy, i.e., the ability to use digital technologies to pursue 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 facilities-based competition;Foster facilities-based competition; Create incentives for private investment and disincentives for litigation and other delay tactics;Create incentives for private investment and disincentives for litigation and other delay tactics; Offer electronic government services, including healthcare, education, access to information, and licensing;Offer electronic government services, including healthcare, education, access to 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, privacy, and consumer protection in NGN services, including electronic commerce.Revise and reform governmental safeguards to promote a high level of trust, security, privacy, and consumer protection in NGN services, including electronic commerce.

13 Development Models Top/Down Nations emphasize expanding the supply of broadband capacity by stimulating access through: Expanded universal service obligation to include broadband service; Using financial stimulus tools such as grants, subsidies, and tax credits; Reallocated spectrum to expand available bandwidth useable for broadband services; and Supporting competition from multiple platforms, including retrofitted fixed line telephone networks, cable television plant, wireless, fiber optic links, and the powerline grid.

14 Development Models (cont.) Bottom/Up Nations emphasize stimulation of demand for NGN and the services they deliver through government: Becoming an early provider of NGN-mediated services and an underwriter of programs designed to enhance digital literacy, i.e., the skills needed to use NGNs for enhancing social and personal utility; Offering access to e-government services ; Offering free or subsidized computers and support for the creation of digital content; Funneling grant money to “community champions” and broadband demand aggregators in addition to carriers; and Addressing consumer protection issues including, privacy, network reliability, security and neutrality, and competition policy issues.