Achieving bandwidth abundance: the three policy levers for intensifying broadband competition.

• Author: Levin, Blair

TABLE OF CONTENTS I. INTRODUCTION 398 II. THREE QUESTIONS TO UNDERSTAND THE POLICY LEVERS FOR INTENSIFYING BROADBAND COMPETITION 400 A. What Do We Want Broadband Competition to Accomplish? 400 B. Where Does Broadband Competition Come from? 402 C. Given the Current Market, What Are the Appropriate Government Levers to Intensify Competition at This Part of the Cycle? 408 1. Lever One: Spectrum 411 2. Lever Two: Lower Deployment Costs 412 3. Lever Three: Wi-Fi Based Mobile Entry 416 III. CONCLUSION 419 I. INTRODUCTION

Broadband competition generates many discussions and speeches. In the last couple years, the three most important speeches were by current Federal Communications Commission (FCC) Chairman Tom Wheeler, (1) then-FCCGeneral Counsel Jon Sallet, (2) and then-Assistant Attorney General Bill Baer for the Department of Justice's Antitrust Division. (3) All three made policy pronouncements on regulatory approaches and merger analysis consistent with their official positions and actions. (4)

This Article represents a progress report from the field, deriving its data from game theory and lessons learned while working in the government on both the Telecommunications Act of 1996 and the National Broadband Plan, (5) as well as broadband competition initiatives such as Gig.U and Republic Wireless. (6) While my thoughts are consistent with those speeches, (7) they are in conflict with a great deal of what others have said about competition and broadband.

Two illustrations of that conflict:

1. Techdirt blogger Karl Bode's article argued that Google Fiber proved the worthlessness of the National Broadband Plan, (8) ignoring how the Plan stimulated the Google's Fiber effort, how both Google and the Plan made similar recommendations for policy changes, and most of all, how his own proposal--unbundling--would have killed Google Fiber; (9) and

2. Former FCC chairman Julius Genachowski's speech articulated the need for Gigabit networks, (10) but did not offer any analysis as to why these networks nor any strategy for getting them deployed are in place, other than to "challenge" cities and states to build them, (11) as if the only thing preventing such development was his personal failure to challenge cities or the only power the FCC had was to request such action.

   There are critiques on the substance of these pieces elsewhere, (12) but in short, what Mr. Bode and Chairman Genachowski have in common is a belief in the magic of words, as if the incantation of the word "competition" or "gigabit," if said enough, or loudly enough, is a substitute for a realistic plan followed by concrete steps to achieve it. (13)

   Sadly, much of the commentary on the topic suffers from a similar flaw. (14) This fundamental aspiration error (15)--the mere statement of aspiration correlates to the desired change--affects much of the debate about broadband. Those who commit this error only wish to own a narrative, instead of owning the problem.

   Actual change starts with owning a problem, which requires starting with a framework, engaging in action, allowing for experimentation and course correcting in light of evidence.

   The trial and many errors of my own work have led me to believe in the following bottom line: the highest priority for government broadband competition policy ought to be to lower input costs for adjacent market competition and network upgrades. (16) The greatest opportunity to do so is to create a virtuous cycle of upgraded mobile stimulating low-end broadband to upgrade, which in turn stimulates an upgrade of high-end broadband, which uses its assets to enter mobile and accelerates the need for mobile to further upgrade.

   2. THREE QUESTIONS TO UNDERSTAND THE POLICY LEVERS FOR INTENSIFYING BROADBAND COMPETITION

   My purpose in this Article is to move the broadband competition discussion away from aspirational statements to focus on the reality of how to create incentives for enterprises to invest in the faster, cheaper, better delivery of bits. In order to address this reality, this Article will focus on the following three questions:

1. What do we want broadband competition to accomplish?

2. Where does broadband competition come from?

3. Given the current market, what are the appropriate government levers to intensify competition at this part of the cycle?

   1. What Do We Want Broadband Competition to Accomplish?

      Competition is generally thought of as the means, not the ends, of improving consumer welfare. (17) That is, competition is the most likely means to deliver the optimal goods and services. (18)

      In the debate leading up to and in the implementation of the Telecommunications Act of 1996, the vision was of increased competition in all communications markets, but most of the debate focused on the voice market. (19) The outcome sought was clear: lower prices. (20)

      Broadband is different. There are a number of variables competition should deliver. (21) The two most prominent are lower prices and improved performance. (22) However, ubiquity, security, privacy protection, and providing a platform for free and diverse speech, among others, are also desired outcomes. (23)

      Optimizing broadband for multiple factors complicates its policy decision making than when aiming for a single goal. (24) Different policies can deliver better outcomes on some metrics and worse outcomes on others, requiring decisions about priorities and trade-offs for which there may be no "right" answer. (25) This makes competition more important as competition can optimize for multiple factors according to what customers want more adroitly than a policy process.

      At this point, competition should deliver the elimination of bandwidth as a constraint to innovation, economic growth, and social progress. (26) As the global economy moves from being primarily about the manipulation and transportation of atoms to knowledge exchange, bandwidth becomes our commons of collaboration and bandwidth constraints would present a major obstacle to economic and social progress. (27)

      That goal is likely to be achieved when there are at least two nextgeneration networks with viable upgrade paths capable of answering all foreseeable needs for the next decade. With only one network, economic forces would price the marginal use of bandwidth at a level that constrains growth and progress. Thus, multiple networks are needed to upgrade to next generation networks.

      In short, competition can help move us from today's world, where the dominant business model focuses on how to allocate bandwidth scarcity, to the world we need, where there is competition over who can best deploy bandwidth abundance. (28)

   2. Where Does Broadband Competition Come from?

      There are two potential and related origins of broadband competition. (29) The first goes to the nature of the competitive enterprise, and the second involves an economic equation.

      Both existing competitors and new entrants are capable of intensifying competition in an industry. New entrants typically come in three varieties:

1. Greenfield entrants, constituting new ventures;

2. Adjacent market entrants, constituting existing ventures who bring asymmetric assets and interests into the market; (30) and

3. Resale entrants who depend on inputs sold on a wholesale basis, which may include regulated access to unbundled elements. (31)

   The competition that emerges from all of these enterprises follow similar economic patterns.

   First, intensified competition always requires a new capital allocation decision by one of those four kinds of enterprises. Every time a company shifts its capital allocation from one purpose to the purpose of providing or upgrading a communications service, the result is intensified competition. (32)

   Second, the new capital allocation decision follows a change in the same formula. The reason that greater competition has not occurred yet in the broadband industry is because the new or incremental capital (C) and operating expenses (O) of a network capable of intensifying competition are greater than the total of risk adjusted (1-r) new or incremental revenues (R), the benefits to the system (SB), (33) and the risk of lost revenues due to competition (CL). (34) These variables represented in an equation are:

   C + O > (1-r)R + SB+ (-CL)

   Thus, to intensify competition, the math needs to change to cause, where possible, capital expenditures (cap ex), operating expenses (op ex), and risk to go down while revenues, system benefits, and competition go up. This change is represented in the equation below.

   [ILLUSTRATION OMITTED]

   Third, historically, the biggest changes in the competitive landscape in communications result from changes in the formula, which themselves result directly from changes in government policy. (35) There are a few examples of companies reallocating capital to intensify competition that demonstrate how policy affects capital allocation and competition. They also suggest not all elements of the equation are equal in producing long-term competitive effects.

1. Cable intensified competition with broadcast television when government rules lowered its cap ex and op ex through pole attachment rules and copyright rules. These rules increased its access to programming; (36)

2. Direct broadcast satellite (DBS) intensified multichannel video programming distributor (MVPD) competition when the government lowered its op ex by granting non-discriminatory access to programming. Telecommunications companies (telcos) did so as well when the government prohibited local franchising monopolies and adopted state franchising, lowering costs for the telcos; (37)

3. Wireless began competing with wireline voice when the government both enabled more wireless competition with the PCS spectrum auctions and lowered its op ex by reducing the terminating access charges wireless had been paying wired providers; (38)

4. Cable began competing with the telcos' dial-up Internet service when faced with the loss of revenue due to intensified video...