FreedomWorks

Hon. Brandt Hershman
State Senator
PO Box 189
Monticello, IN 47960-9494

Dear Senator Hershman:

On behalf of the 12,000 members and supporters of FreedomWorks in Indiana, I urge the committee to pursue efforts to promote a truly competitive market for telecommunications while avoiding unnecessary regulatory burdens that limit the ability to bring new technologies and services to consumers at the lowest prices possible. With the growth of the Internet, the explosion in wireless service, and the recent introduction of Voice over Internet Protocol (VoIP), the telecommunications market has changed dramatically. Just ten years ago, as Congress passed the Telecommunications Act of 1996, the market was 90 percent voice, 5 percent wireless, and 5 percent data. Today it is 40 percent voice, 30 percent wireless, and 30 percent data. The emerging broadband market requires regulators to reassess past policies as the market now contains new players. Wireline service is only one provider in a market that includes cable, satellite, wireless, and, potentially, even power companies. SB 245 is a major step forward for telecommunications in Indiana. The legislation eliminates outdated regulations to create an open and competitive market for all telecommunications services.

Today, with both wireless and cable networks challenging the primacy of the old copper loops, we have reached the point where increasing competition has called into question the value of continued economic regulation. A “triple threat”—voice, data, and video—is driving technology. In the future, the communications market will be even broader, with satellite companies and perhaps even electric utilities playing significant roles. It’s time to revisit the role of regulation. For the long run, the goal should be establishing a framework of open competition that encourages investment and innovation while providing consumers access to new technologies and services. Choices do exist for consumers; the issue is now eliminating artificial barriers that restrict competition among potential providers. SB 245 is an important step toward establishing a more competitive communications sector in Indiana.

Why do we need reform? Perhaps the largest shortcoming of current telecommunications regulations in Indiana is its provincial view of the marketplace. In large part, this is due to the focus on creating competition within existing local networks while disregarding powerful new sources of competition external to the old networks. In this sense, Indiana has followed the national trend, implementing a complex set of rules to foster competition in an artificial market that is not sustainable in the long run. Even worse, these rules hamper investment and innovation while restricting consumer choice in the marketplace.

This is why, as applied in the real world, the regulatory regime of managed competition has failed. It has ultimately stifled investment in critical last-mile connections at the residential level. Innovation and investment have been held at bay, while true facilities-based competition has failed to materialize. It is not difficult to understand why. First, competitors have little
incentive to invest in their networks or upgrade their technologies if these advantages are passed on to their competitors at rates that do not allow them to recoup their investments. Second, competitors have little incentive to invest in their own facilities if they can gain market share through subsidized access to the existing network. In the end, regulation has created an artificial form of competition based on arbitrary definitions of the market that is unsustainable over time. Regulation has segmented different companies that provide nearly identical services into categories determined by their platform (cable, telephone line, satellite, etc.) or historical market position (Bell companies and new local phone competitors). However, such distinctions no longer apply in a dynamic technological landscape where cross-platform competition is emerging.

New players and new technologies have altered the marketplace, and regulatory policy must adapt to promote a vibrant market that promotes competition between all providers of broadband technologies. Unnecessary regulations should be eliminated so that all providers can compete, and the regulatory framework should give way to market forces whenever possible. SB 245 attempts to limit economic regulation to basic phone service, with everything else provided on a competitive basis. Moving forward, it may be useful to clarify the limits of economic regulation to ensure that regulations do not expand to services that are more appropriately provided in a competitive market.

In addition, concerns over access to old networks should not overwhelm the fact that competition in today’s market occurs across platforms that were traditionally viewed as independent of one another and regulated with different rules. Such competition has been a driving force in the emerging market for telecommunications services. SB 245 significantly reduces the degree of economic regulation that has burdened the telecommunications sector while encouraging the cross-platform competition that is emerging between cable, wireline, and wireless providers.

In addition to reforming the old rules of governing wireline phone service, SB 245 also paves the way for new entrants into both the telephony market and the video programming market. The revolution in telecommunications is breaking down barriers and monopoly providers no longer have the protection and guaranteed profits that once existed. Wireless telephone service is surpassing land lines, cable companies are providing telephone services, and now phone companies want to provide video services. Given this degree of competition, entering new markets entails a risk that did not exist in the world of regulated monopolies. Today’s markets are more appropriately characterized as competitive rather than monopolistic.

While companies race to offer consumers the best telecom has to offer, they are hamstrung by laws written for a different time and a different technology. The worst of these are franchise laws, which artificially constrain the number of providers serving consumers in any given area. These outdated rules are relics of the past, when only cable providers offered video services. In the video programming market, cable system operators are granted a franchise, or special privilege, that allows access public rights-of-way in exchange for agreeing to provide specific services for the local government. These agreements go beyond simply providing video programming to the local community. In fact, local franchise agreements can exact costs large enough to deter entry into the local market. For example, franchise agreements typically require channels for public, educational, and government programming as well as requirements to provide video, voice, and data facilities for schools or local governments. Franchise agreements provide a wide degree of discretion for local franchising authorities, including the ability to collect franchise fees up to 5 percent of a cable company’s gross revenue.

It should be noted, however, that the future raises important questions about the relevance of franchising and the revenues generated through franchises. Technology is not static, and new Internet applications already are generating alternatives to existing video programming models. SB 245 attempts to simplify the franchising process through the grant of statewide licenses that require service providers to pay 5 percent of their gross revenues in fees. While this may be welcomed by local franchise authorities, it would be more prudent to disentangle questions of revenue collection from the regulation of technology. The goal of effective tax policy should be to collect the revenues required to support government functions in a transparent and neutral manner. This is best handled through the legislative process with public participation. Relying on video programming providers to collect revenue distorts this process, and more important can distort innovation and consumer choice. This is particularly true in a dynamic market, where competition and technology have led to significant deviations from the traditional franchise model. Elevating the franchise fee to the state level may simplify the process, but it continues to distort the market and create a degree of fiscal illusion for taxpayers.

Unfortunately, franchise regulations continue to keep new technologies out of the hands of ordinary Americans. Cable is still dominated by near monopoly providers with local franchises. Given that the market is no longer a monopoly, it makes little sense to apply the old rules to new entrants. Cable claims that the market is not a monopoly and is already competitive due to satellite providers. But if a little competition is good, why stop there? The FCC has found that head-to-head competition provides incentives for the incumbent cable operators to lower prices, provide additional channels at the same monthly rate, improve customer service, or add new services. Why not, then, open the way for new competitors as well, providing even more options for consumers? The real goal should be customer choice.

If the rationale behind franchising is based on theories of natural monopoly, recent technological advances in video programming have eliminated many of the original concerns about the possibilities of effective competition in the video programming market. Telephone companies are eager to compete. Video programming over high-speed broadband connections requires less overbuilding than a traditional cable operator, which makes entry easier and provides a source of real competition. Not only will this put downward pressure on prices as rivals battle to attract the most customers, but advances in video programming will offer a host of new customized and interactive video offerings. Customers will have more control over what they want to watch, when they want to watch it, and perhaps even the camera angle through which they’d like to watch it. The success of TiVo has shown the demand for customized and interactive television; allowing IPTV into the market could create exciting new technologies for consumers’ benefit.

As the Indiana legislature moves forward with its efforts to redefine the regulatory framework of the future, it is important to keep in mind that the future is broadband, and it is competitive. New technologies continue to erode the segmentations of the old telecommunications sector, and the legacy regulations of a wireline monopoly are not suited to the competitive markets of the future. The rules for local phone service were appropriate for opening old networks that were built when the phone system was a protected monopoly; they were never meant to apply to dynamic new markets. Applying the old, monopoly-based rules to the emerging market of broadband technologies runs the risk of reducing the pool of capital required to build the next generation networks, which can delay or deny the tremendous consumer benefits of ubiquitous broadband deployment. SB 245 offers substantive reforms that replace much of the existing regulatory structure with open and competitive markets. This is important not only for encouraging the investment necessary to build the communications networks of the future, but also for bringing consumers the most innovative products at the lowest prices.

In order to increase the quality of technology available and foster a thriving telecommunications market, government cannot stand in the way of investment in this dynamic sector of the economy. Telephone companies, wireless providers, cable companies, Internet Service Providers, and others are striving to provide the next generation of services for consumers. An open and competitive marketplace is the best guarantee that consumers will have the latest innovations at the lowest prices, and SB 245 should foster and promote this competition.
Sincerely,

Richard K. Armey
Co-Chairman, FreedomWorks