Broadband Policy and the Future of American Information Technology

Mr. Chairman, members of the Committee, thank you for the opportunity to discuss U.S. telecommunications policy.

On September 11, 2001, because it was judged unsafe for President Bush to return to Washington, DC, he conferred with his advisors over a secure videoconferencing link, a technology that will be critical to managing future national crises ranging from terrorist attacks to energy supply interruptions. Broadband technology is also critical to economic performance and national welfare. Yet the United States now ranks approximately 20th worldwide in broadband deployment, and is falling further behind. Although this industry is phenomenally complex, the sources of this problem are ultimately quite simple: broadband services are hostage to the self-interest and inefficiency of powerful incumbent firms, and Federal policy has failed to create a modern, competitive, open architecture local broadband industry.

Let me begin with the still under-appreciated importance of broadband services. First, most terrorist threats involve significant transportation disruptions and/or quarantines, with broadband telecommunications required to replace physical transportation during the crisis. Second, videoconferencing and other broadband services are now critical to managing problems such as the cost and quality of health care, maintaining economic growth while limiting pollution and global warming, and surviving any future energy shock related to Mideast politics. And third, broadband services are critical to restoring and maintaining U.S. economic performance in an Internet-driven global economy.

And yet the United States, which invented the Internet and pioneered the commercial Internet revolution ten years ago, is performing exceptionally poorly in broadband deployment, and more generally in local telecommunications services. Every other digital information technology industry – semiconductors, personal computers, disk drives, computer servers, software, consumer electronics, local area and corporate networking, fiberoptics, telecommunications equipment, long distance services – all of these industries deliver to their users exponential improvement in performance per dollar, ranging from 40% per year to 75% per year. There is, however, one exception: U.S. local telecommunications services, ranging from voice telephone service to broadband service, have displayed low or in some cases even zero or negative rates of improvement over the last decade.

Furthermore, while the United States has one third of the world’s computers, it has only 14% of the world’s DSL lines. As of year-end 2003, the United States had 4.8 DSL lines per 100 telephones, versus for example 5.1 for China, 9.6 for France, 10.9 for Canada, 12.3 for Israel, 14.4 for Japan, and 21.4 for Taiwan. China and Japan both now have more DSL lines than the United States. World broadband deployment is growing 78% per year, while U.S. broadband deployment is growing only 35% per year. On a price-performance basis, U.S. broadband service is twice as expensive as China, eight times as expensive as South Korea, and thirty times more expensive than in Japan.

This quite stunning situation generates many problems. First, as all information technology becomes more Internet-dependent, all IT products, services, industries, and applications are increasingly hostage to the local broadband bottleneck. This affects the health of the U.S. high technology sector and reduces productivity growth throughout the U.S. economy, perhaps by as much as 1% per year. Second, the high cost and low performance of U.S. broadband services is a driver of outsourcing, causing higher unemployment and downward pressure on U.S. wages, which have now stagnated in real terms for several decades. Third, local broadband costs are now the dominant source of the “digital divide,” the growing inequality of information access between wealthy and average Americans. Because computers continuously become more powerful and less expensive, over a five year period broadband costs are now greater than personal computer costs. And fourth, America suffers more than necessary with regard to health care costs, medical accidents, lack of preparedness for terrorist attacks, pollution, and vulnerability to energy price shocks.

This situation has developed and persisted because the dominant providers of local telecommunications have blocked true competition and the development of a modern, open-architecture industry. This is rational on their part: competition and technical progress in broadband services would undercut local telephone companies’ traditional voice and data businesses, and threatens the video distribution monopolies of the cable industry. Yet Federal policy, particularly under the Bush Administration, has been ineffective or even counterproductive. As a result, the industry remains insufficiently competitive. In the residential broadband market, only two thirds of users have any choice at all, and even then they face at best a duopoly of one telephone company and one cable provider. These residential broadband services are also designed to impede, rather than promote, Internet telephony, advanced video delivery, and videoconferencing. Most other local telecommunications markets, including much of the business broadband market, are dominated by a single incumbent. And despite many public statements by the incumbent telephone companies implying that it would be rational for them to invade each other’s territories, not a single incumbent has ever competed against another, in any market. These companies literally spend more money every year on lobbying, litigation, and expert witnesses than they do on R&D.

However, the nations now leading the world in broadband deployment all share two characteristics: a strong national policy, and enforcement of truly competitive industry conditions based on unbundling and open access to local facilities. Some nations also have subsidies, which however are designed to reward deployment, competition, and technical progress, rather than simply handing money to inefficient incumbents.

Thus, Mr. Chairman, and members of the Committee, I must conclude on a pessimistic note. In regard to telecommunications policy, Federal policy is failing the American people, with serious consequences. To remedy this problem, I would recommend the following:

1. A national broadband policy with the primary goals of establishing a competitive, open architecture industry; providing universal broadband service; and providing continuous improvements that keep pace with the information technology sector.

2. True mandatory unbundling of existing telephone and cable television local loops, including open-architecture access points analogous to those used in the Internet. Access rights should be expanded to all potential providers, rather than being restricted to common carriers as is the case under the 1996 Act.

3. Subsidies may be helpful. However, they must be linked to actual broadband use, and possibly restricted to services provided by non-dominant carriers. For example, a subsidy for each unbundled loop used for new broadband service, in exchange for low loop resale rates, would potentially be helpful.

4. Antitrust investigations and actions directed at the incumbent telephone firms should be seriously considered.

5. Reform of the FCC, DOJ antitrust division, and other Federal regulatory systems to improve the political independence, efficiency, and high technology expertise of Federal regulation and policymaking.

For those interested in much further detail, and possibly also something to put them to sleep, Brookings Press has just published my book, The Broadband Problem. Thank you.