Communications policy for 2006 and beyond.

• Author: Hundt, Reed E.

1. INTRODUCTION II. ACCESS NETWORK COMPETITION A. Spectrum Policy to Develop Access Networks B. Access Network Competition and Unbundling C. Competing Access Networks Require Interconnection III. SERVICE COMPETITION A. Openness B. VolP as a Case in Point IV. NETWORK EFFECTS, ECONOMIES OF SCALE, AND UNIVERSAL SERVICE A. More Valuable for All Users B. Most Efficient V. PRACTICAL PROCESS A. National Versus State Jurisdiction B. FCC Organization 1. Staff 2. Gathering Data 3. Culture C. Antitrust Enforcement VI. CONCLUSION I. INTRODUCTION

   The key goal of communications policy is to promote the welfare of our citizens, primarily through productivity gains. These productivity gains will increase business productivity and increase the benefits to consumers through access to better products and services and through lower prices. Much of the gains will come from decreases in prices of transmission and increases in the amount of information that can be cheaply and rapidly moved from place to place. These efficiency goals can be combined with other social and political goals such as universal access and make achievement of such goals much less costly.

   The best means to achieve these goals of communications policy is to maximize the operations of markets. We prefer markets, as opposed to state-owned or state-managed communications businesses, because markets collect and distribute information about what sellers are willing to offer and buyers are willing to purchase in many ways better than the state. However, markets in communications industries may not produce optimal results for at least two principal reasons that may also apply to other industries. First, competition-winning firms tend to obtain market power and may have incentives and ability to deter new entry. In addition, winning firms have different incentives than new entrants that may affect the introduction of new products and services. Second, regulators seeking to distribute communications services to everyone in the nation, for very laudable social and economic reasons, have tended to interfere in ways that diminish the responsiveness of the market as well as the magnitude and speed of the introduction of new goods and services.

   The United States currently has a communications policy in place that does not state clearly its own goals, yet applies regulations that greatly affect outcomes. Not surprisingly, the result appears to be deficient in both economic and social benefits. A better communications policy would substitute markets for regulation as a way to determine both what is sold and what price is paid while continuing to be conscious of specific market-power concerns and obtaining any desired social benefits in the most efficient manner possible. Such a wise policy must assure that new entrants, armed with a different sense of what can be sold and who might be persuaded to buy, should be able to challenge even the largest incumbents. An attribute of this policy would be that all could enjoy the social and economic benefits of ubiquitous and all-inclusive access to the network (i.e., allowing everyone the chance to communicate with everyone else all the time) without detracting materially from the price-setting and competitive mechanisms of markets or imposing an unnecessary cost burden on the overall economy.

   One of the metrics for judging communications policy is whether the creation of new networks, goods, services, and markets is keeping pace with rapid technological advances. An important example of success in this respect is the proliferation of wireless communications. Apparently, the absence of retail price regulations, presence of cheap interconnection mandated by government, and existence of multiple providers have all led to high growth, high usage, high penetration, and high rate of technological change for wireless services. (1) This is especially true since the additional competition from the introduction of Personal Communications Services ("PCS") services and the development of Nextel's service around the same time increased the number of competitors in each geographic area from two to five or more. (2) Communications policy should aspire to replicate this success story for wireline and communications services.

   By contrast, broadband in the United States may be viewed by some as a frustrating disappointment both from the perspective of service providers and users of broadband networks. For reasons that trouble, and to a degree mystify many, in Japan and Korea, among other countries, broadband providers offer customers much higher bandwidth (i.e., speed) at much lower prices than in the United States and achieve much greater penetration rates. (3) This is true even in densely populated areas of the United States that have similar demographic characteristics as large cities in the other countries.

   Follow-on effects from higher broadband penetration include the development of new products and services. Social benefits to areas such as education and health care may also become quite significant. Meanwhile, in the United States, broadband penetration rates are growing substantially, but nevertheless are still at levels below those in Japan and Korea. (4) Moreover, it is not certain that broadband providers will soon offer the much higher speed services of 8 to 40 megabits per second per household that are evidently being offered in Seoul, Tokyo, and other Asian cities. (5) A wise communications policy would assess the state of American broadband provisions, define goals, and lay out sensible means to achieve the desired outcomes.

   Communications in the modern world often involve sending information across national boundaries, yet networks by definition always have a local, physical manifestation and local, social, and economic impact. It should follow that sensible policy creates both new jobs and productive work because employees can use innovative techniques to build, maintain, and utilize networks. So, another test of the wisdom of policy should be whether productive new jobs are created as a result of that policy. At the same time, it must be admitted that less productive, old jobs may be replaced and the sheer number of jobs in the business of providing service may decline as new technologies permit any employee to do more work than was possible in previous years.

   As set forth in more detail below, communications policy should extend the operation of market forces more fully to wireline and broadband communications markets. It would assure that new firms with new technologies can easily enter and provide service. And, it would obtain universal participation in communications markets by techniques that do not undercut either of these two goals. To these ends, Congress and the Federal Communications Commission ("FCC") in 2006, as well as every state regulatory commission, must change many existing laws and regulations. Although the prescriptions herein are legitimately subject to debate, they are not fundamentally ideological in their content. Therefore, it is reasonable to ask that the Bush administration and Congress agree to create a bipartisan and independent commission to suggest a complete overhaul of the law and policy for communications, and to do so as soon as possible. This Article is aimed at starting the sort of discussion such a commission would pursue. While, as the architect Mies van der Rohe famously said, "God is in the details," (6) it is also true that blocking out the main issues is not an unworthy first step and certainly is as much as this Article hopes to achieve.

2. ACCESS NETWORK COMPETITION

   The fundamental problem of all communications policy is the access network, also called the last mile or local loop. In the context of the household, the access network is the economically powerful but visually humble line that typically stretches from the house along the driveway to the telephone pole, where it is tied to other telephone lines and carried down the street until it hits a box in a building called a central office. In some cases, the access network is wireless so the traffic is collected from wireless signals and relayed to a central office either through wires or through additional wireless connections.

   More than half of households have two primary wireline access lines--the wire-based telephone company and a cable television company. (7) In some areas, there is only a single network. In the future, power lines may be a cost-effective way to provide alternative wire-based access, but today scarcely any homes have such a service. (8)

   At the central office, traffic is combined and signals are directed where the sender wishes. Calls originate from an access network and terminate on an access network, which may have a different proprietor (9) or different architecture (10) than the originating network. Any time a network is accessed calls are both originated and terminated (e.g., e-mails are both sent and received, Web sites are accessed or information is downloaded from a Web site). Calls are directed through a specialized computer called a switch; a router directs communications that occur via the Internet. A more complicated and hence more precisely accurate description can be provided, but this suffices as a means to describe the economic issue: a firm incurs a fairly large cost to build an access network and a minimal cost for each use of it. To put the same point in numerical terms, a telephone company, or for that matter a cable company installing a modern access network capable of serving video in addition to communication services, has to spend between $1000 and $3000 to string the lines from switch to house, or in the case of cable, head-end to house for a typical suburban area with buried plant. (11)

   Every call on a wireline network requires little if any extra capital expenditure and minimal incremental cost. For wireless networks, the capacity of the access network correlates more...