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Press Release

Tech Bytes - Tid Bits in Tech News: If You Build It, Will They Come?

06/04/2001

If there is one thing Scott McNealy, Larry Ellison, and Bill Gates can all agree on, it is that the paucity of broadband has strangled growth in the high-tech sector. The “last-mile” bottleneck has compromised innovation and slowed investment spending to a trickle.

Without the requisite number of broadband subscribers, next-generation software applications and hardware consoles cannot reach enough consumers to recover their development costs or prove profitable. Similarly, without the necessary bandwidth, the marginal value of new computer hardware, software, and other high-tech gadgets declines, as does the consumer demand for these new products.

To put the challenge simply, consumers will not upgrade to faster semiconductors to cut down on the time it takes to save a Word document and high-tech firms won’t mass-market the advanced applications that would entice hardware upgrades without enough broadband subscribers to recover development costs and offer prices palatable to consumers.

To further complicate matters, the current price for residential broadband access – near $50 per month for cable or DSL offerings – does not seem attractive to consumers, while lower prices may not be able to recover the cost of broadband deployment.

While these problems may seem intractable, it is important to note that public policy has played an enormous role in restricting the level and direction of investment flows. The current regulatory regime punishes broadband investment by requiring the Regional Bell Operating Companies (Bells) to unbundle new infrastructure at incremental cost rates – the fixed cost of the deployment plus the long-run incremental maintenance costs.

No care is given to the risk inherent in such deployment. If the investment is successful, the Bells will at best be able to recover their costs through government-set terms of access. If not, the Bells will lose their investment in its entirety.

Tomorrow, the House Judiciary Committee will hear testimony on H.R. 1542, “Internet Freedom and Broadband Deployment Act of 2001,” sponsored by Commerce Committee Chairman W.J. (Billy) Tauzin (R-LA) and Ranking Democrat John Dingell (D-MI). Although the bill already passed the House Commerce Committee, sequential referral was granted to Judiciary thanks to a 12-page request by Chairman James Sensenbrenner (R-WI).

The bill would reform current regulations and relieve the Bells of unbundling requirements on new investment.

Some characterize H.R. 1542 as a “special interest” bill because it is directed only at the Bells. This argument says nothing of the bill’s merits because the Bells are the only industry group that faces the current unbundling mandate and inter-LATA service ban.

These critics continue their “special interest” harangue by citing that the Bells have been intensely lobbying for the bill’s passage. While this is certainly true, as is the fact that long-distance companies, Competitive Local Exchange Carriers (CLECS), and some cable companies have been as intense in their opposition to the bill, this should not cast H.R. 1542 in a negative light. In fact, policy makers should regard the Bells’ keen interest in the bill’s passage as welcome news.

Once the Bells put the new fiber optics in the ground, or upgrade their copper wires, there will be no way to recover the investment without attracting traffic. But there is no guarantee that consumer demand will exist at the price necessary to recover the deployment costs.

In addition, the progress of technology virtually guarantees significant economic depreciation. The cost of fiber optic transmission has dropped two orders of magnitude in the past 10 years, and with fixed wireless, satellite, electrical transmission, and even aircraft-supported broadband either here or on the horizon, there is even more reason to believe the Bells’ broadband deployment could be an anachronism in less than 24 months.

But once rival facilities are in place, their owners will have no choice but to compete for businesses. This will have an intense downward pressure on prices and, in all likelihood, dramatically increase subscribership.

Consider the implication: The Bells are lobbying Congress to allow them to put billions in irreversible investment into technology that may soon be outdated and inefficient. The rationale for passage of H.R. 1542 grows even stronger when considering that the technology in which the Bells wish to invest – broadband – is that which is so essential to renewed vitality in the high-tech sector.

In its current form, H.R. 1542 could possibly re-ignite a round of capital goods spending and infrastructure expansion like nothing the nation has seen since the dawn of the railroads. And the more facilities in place, the greater the competitive pressure to lower prices. If the Judiciary committee acts to undermine the bill, it will be at the expense of consumers and the economy as a whole.