This piece was written and submitted to me from one of our regular readers. It highlights some concerns in how government intervention has effected this particular industry. Thank you “Common Sense” for your contribution. Enjoy!
“Change.” A plurality of American voters asked for it last Fall, and that is exactly what we are now all being forcibly fed by the Obama Administration. While there is a significant amount of media coverage these days on the “Major Changes” Obama is enacting (Healthcare, Financial Regulation, the Afghan War), not much attention has been placed on the myriad of smaller topics on his fast-paced agenda that, when summed, have major implications to the daily lives of all Americans.
One such topic is using the FCC to intervene in the free market for Broadband Services in hopes that further regulation of this market will yield greater broadband coverage at more affordable prices. Fundamentals and historical evidence (to be discussed below) prove that free market action, not government intervention, drives the growth and competition that raise service levels and lower prices for the consumer. Government simply lacks the foresight and responsiveness required to react to the rapidly changing market for communication technology.
The FCC is contemplating 3 possible actions: (1) Double the $7 billion dollar phone subsidy “Universal Service Fund.” (2) Revive open access rules, applying the 1996 Telecommunications Act to Broadband. (3) Broadening internet access through the easing of regulation of “white space” in unused analog TV frequencies.(2)
The first option would extend taxation to broadband internet service providers, who would then pass along that taxation to the current consumers of broadband. The real driving force behind this tax increase is the fact that the tax base for the fund has been drying up ever since its inception in 1997, despite adding VoIP to the tax rolls in 2006(3). In addition to the recent cost reduction in telecommunication itself, the taxation of established technologies discourages further investment in them, in lieu of newer technologies not yet taxed by the government. Since government is always 2 steps behind the free market, this fund will never generate the expected revenues, and hence will never achieve the mission of truly “universal service” to every American.
As this fund is a subsidy to rural areas, government has effectively unbalanced the already unbalanced telecom market. In Iowa’s (712) area code, for example, the Incumbent Local Exchange Carriers (ILECs) can offer free international calling, while maintaining healthy profit margins due to the government subsidy(4). Empowering this fund with additional tax revenues will lead to further corruption.
Proponents for applying the open access rules of the Telecommunications Act of 1996 need to re-examine the effect this strategy had on the telecom market of the time. Since the divestiture of the Bell System (the old AT&T) in 1982(5), the market was comprised of Incumbent Local Exchange Carriers (ILECs)(6) and a new group, the Competitive Local Exchange Carrier (CLEC)(7). CLECs were responsible for laying much of the fiber optic networks (brand new technology) at the time. CLECs in the decade from 1985 to 1995 had developed much of the infrastructure they needed to be profitable in the free market. When the Telecommunications Act of 1996(8) was passed and open access was allowed, a host of CLECs sprang up without any infrastructure investment. This was made possible through IPOs and private investment by equipment vendors. As history proved, the number of CLECs in competition post 1996 was more than the market could handle, and the telecom bubble of the late 90’s was born. This bubble led to the telecom bust of 2001-2, where the entire industry went through an enormous correction.
The lesson learned here is not that the free market failed. Instead, the government intervention to produce competition caused a disaster when the new entrants had little or no investment in infrastructure to lose. The CLECs that had made investments in infrastructure largely survived the correction. Those with none ceased to exist. This open access strategy not only failed to create universal service, it set the entire industry back decades.
A fundamental rule of economics is that where there is demand, there will be supply. If it is unprofitable to bring broadband to certain areas with current technology, then it should not be forcibly accomplished via subsidies. Instead, the free market will develop new solutions that are economically viable for both the provider and consumer. And perhaps the free market has already done so in utilizing “white spaces.”
White Spaces(9) refer to frequencies in the broadcast spectrum that are not utilized by local broadcasting stations. Recently an incredible amount of open bandwidth has been created with the switch from analog to digital television broadcasting. The White Spaces Coalition was formed to develop and deliver high speed broadband internet access in these white spaces beginning in 2009. The group is comprised of Microsoft, Google, Dell, HP, Intel, Philips, EarthLink, and Samsung Electro-Mechanics. Despite successful demonstrations of the technology and approval from the FCC, this initiative is currently mired in the court system by lawsuits filed by the National Association of Broadcasters (NAB) and the Association for Maximum Service Television, Inc. (MSTV). White space broadband represents the free market ingenuity to apply new technology to an existing infrastructure with the goal of universal access. Of the 3 contemplated by the current FCC, it is this option that stands the best chance to expand broadband access to all with fair market pricing for both investors of the infrastructure and consumers.
This industry has been shaped by mergers, anti-trust suits, and ever-changing government regulation. The only constant has been the advancement in newer technologies that challenge and overtake the old. This force, developed through imagination and free market ingenuity, has driven broadband to more people than could possibly be achieved via government mandate or manipulation. This issue is larger than expanding access, limiting consumer cost, and regulating provider profits. The question is how to achieve all three simultaneously. The answer to this question is the free market.
References
(1) Digital divide. (n.d.) Retrieved November 29, 2009 from Wikipedia: http://en.wikipedia.org/wiki/Digital_Divide
(2) Schatz, A.(2009, November 18). Feds Mull Rules, Fees to Spur Net Access. The Wall Street Journal. Retrieved from: http://online.wsj.com/article/SB125850641299752981.html
(3) Universal Service Fund (n.d.) Retrieved November 29, 2009 from Wikipedia: http://en.wikipedia.org/wiki/Universal_Service_Fund
(4) Saunders, A. (2006, October 11). What’s With the 712 Area Code? Saunderslog.com. Retrieved from: http://saunderslog.com/2006/10/11/whats-with-the-712-area-code/
(5) Bell System divestiture. (n.d.) Retrieved November 29, 2009 from Wikipedia: http://en.wikipedia.org/wiki/Bell_System_divestiture
(6) Incumbent local exchange carrier. (n.d.) Retrieved November 29, 2009 from Wikipedia: http://en.wikipedia.org/wiki/ILEC
(7) Competitive local exchange carrier. (n.d.) Retrieved November 29, 2009 from Wikipedia: http://en.wikipedia.org/wiki/Competitive_local_exchange_carrier
(8) Telecommunications Act of 1996. (n.d.) Retrieved November 29, 2009 from Wikipedia: http://en.wikipedia.org/wiki/Telecommunications_Act_of_1996
(9) White spaces (radio). (n.d.) Retrieved November 29, 2009 from Wikipedia: http://en.wikipedia.org/wiki/White_Space_(coalition)
-Common Sense
