Rethinking broadband internet access.

• Author: Spulber, Daniel F.

TABLE OF CONTENTS I. INTRODUCTION II. OVERVIEW OF THE REGULATION OF ACCESS TO BROADBAND NETWORKS A. A Brief Description of the Leading Broadband Technologies B. The Early Regulation of Digital Subscriber Lines C. The Early Regulation of Cable Modem Systems D. The Current Regulatory Status of Last-Mile Broadband Networks III. THE INAPPLICABILITY OF THE TRADITIONAL RATIONALES FOR REGULATING TELECOMMUNICATIONS TO LAST-MILE BROADBAND NETWORKS A. Natural Monopoly B. Network Economic Effects C. Vertical Exclusion D. Ruinous and Managed Competition IV. EVALUATING THE DIFFERENT TYPES OF ACCESS TO BROADBAND NETWORKS A. Fundamental Principles in the Economics of Networks B. Applying the Framework to Last-Mile Broadband Networks 1. Retail Access 2. Wholesale Access 3. Interconnection Access 4. Platform Access 5. Unbundled Access V. CONCLUSION I. INTRODUCTION

Over the past few years, the technological environment surrounding the Internet has undergone a fundamental transformation. The widescale deployment of broadband technologies now allows end users to enjoy unprecedented speeds. (1) The increase in bandwidth has allowed the relatively simple applications that dominated the narrowband Internet, (2) such as e-mail and web browsing, to give way to more sophisticated and bandwidth-intensive multimedia applications, such as streaming video, music and movie downloads, and virtual worlds. At the same time, competition in last-mile Internet service has increased dramatically. (3) Cable modem service, which emerged as the early leader in the broadband industry, has faced increasing competition from digital subscriber line ("DSL") and fiber-based services provided by local telephone companies. Even more dramatic has been the rise of mobile wireless broadband technologies, which grew from having no subscribers as of the end of 2004 to capturing 35% of the market for high-speed lines by June 2007. (4) The planned 2011 redeployment of spectrum previously dedicated to broadcast television to wireless Internet services promises to intensify last-mile broadband competition still further.

The emergence of competition has rendered inapplicable the traditional justifications for regulating telecommunications networks, which have typically focused on the problems of natural monopoly, vertical exclusion, network economic effects, and the supposed dangers of ruinous competition. At the same time, the academic commentary on the economics of regulation has grown increasingly skeptical of the efficacy of regulations based on these justifications, questioning their implementability and identifying ways such regulations can end up harming rather than promoting consumer welfare.

Furthermore, the basic paradigm for regulating network industries has shifted from traditional rate regulation, in which regulators dictate the terms under which network owners sell outputs to consumers, to a new approach known as access regulation, under which regulators control the terms under which network owners must lease key inputs to competitors. This shift is perhaps best exemplified by the landmark Telecommunications Act of 1996, which requires telephone companies providing local service when the statute was enacted (which the statute calls "incumbent local exchange carriers" or "ILECs") to provide competitors with access to key elements of their networks. (5) Access regulation has also emerged as a dominant feature in the regulation of a wide range of other network facilities, including cable television systems, utility poles, natural gas pipelines, and electric power distribution grids. (6)

Unfortunately, policymakers have not yet fully incorporated the implications of these changes into our nation's broadband policy. When asked between 1998 and 2002 which regulatory regime should apply to broadband, the Federal Communications Commission ("FCC") temporized, repeatedly declining to address the issue. (7) The FCC's initial attempt to resolve the proper regulatory classification of broadband prompted three additional years of litigation that ultimately had to be resolved by the Supreme Court, and even then the FCC stopped short of determining the precise regulatory mandates that might be imposed. (8) A subsequent 2005 FCC decision did not completely resolve the issue, (9) which is now the subject of an ongoing Notice of Inquiry. (10)

As a result, whether the government should mandate access to last-mile broadband systems emerged as an issue in the wave of mega-mergers that swept through the cable and telecommunications industries between 1999 and 2007. (11) Requests to mandate access to broadband networks also drew congressional attention, playing a key role during the consideration of major telecommunications reform legislation in 2006. (12) Concerns about unequal access to last-mile broadband networks also led the FCC to sanction Comcast for its network management policies in 2008. (13) On the academic side, scholars have advocated requiring nondiscriminatory access to last-mile broadband networks first under the rubric of "open access to cable modem systems" (14) and more recently as part of the debates over "network neutrality." (15) As support for their proposals, these advocates have based their arguments on two regulatory precedents (commonly known as Carterfone (16) and the Computer Inquiries (17)) that imposed nondiscriminatory access requirements on the local telephone networks then monopolized by AT&T. (18)

To date, the debate over these issues has failed to take into account the transformative forces discussed above. As an initial matter, in proposing extending previous regulatory regimes to broadband, access proponents have failed to appreciate the extent to which technological convergence and the emergence of competition have undercut the rationales traditionally invoked to justify regulation of telecommunications networks. In addition, the existing commentary has also largely failed to consider the insights into the practical and theoretical limits of the tools used to implement access that regulators have amassed through their experience overseeing access mandates.

Equally importantly, existing scholarship has treated broadband networks as relatively simple phenomena, either by failing to take into account the configuration of the elements that make up a particular network or by simply analyzing the cost of individual network elements, which effectively treats the network elements as if they existed in isolation. Both approaches fail to capture the fact that networks are complex systems whose behavior can only be understood after considering the particular way that various network elements interact with one another. (19) Indeed, one of the most distinctive characteristics of networks is their ability to reroute traffic along alternate pathways to compensate for changes in traffic flow. Although this process of accommodation and redirection can alleviate the impact of any unanticipated changes in volume, it can also have side effects that are sharply discontinuous and unpredictable. For example, rerouting traffic may degrade network performance in other portions of the network located quite far from the point of disruption. The interaction among network components can only be understood if networks are analyzed in light of an overarching theory of how different network components interact with one another in the context of an integrated system.

This Article seeks to address these shortcomings. Part II reviews the manner in which the leading last-mile broadband technologies have been regulated. Part III describes the theories invoked to justify mandating access to telecommunications in the past--including natural monopoly, network economic effects, vertical exclusion, and ruinous/ managed competition--and evaluates their applicability to last-mile broadband networks. It concludes that each of these previous theories has little bearing on an industry characterized by vibrant inter-modal competition, rapid customer growth, and dynamic technological change. Part IV employs a five-part conceptual framework that we have developed based on a branch of mathematics known as graph theory to analyze the impact of various types of access in a more systematic manner. This framework illustrates the divergent impact that the different types of access can have on networks and how mandating access to last-mile broadband networks can have negative effects on network configuration, cost, capacity, reliability, and performance. It also shows how mandating access can exacerbate the problems caused by the lack of competition by deterring both incumbents and new entrants from investing in deploying the new network capacity. Part V briefly concludes that the regulations previously applied to narrowband communications should not apply to broadband.

2. Overview of the Regulation of Access to Broadband Networks.

   This Part describes the leading broadband technologies and traces the development of the regulatory regime governing broadband technologies, beginning with DSL service and then proceeding to cable modem service. In particular, it notes how DSL was subject to extensive access regulation from which cable modem service was largely immune. This system of asymmetric regulation drew criticism from access proponents and opponents alike for its lack of fairness as well as its tendency to produce a regulatory bias in favor of one technology over another. (20) The asymmetric regulation applied to cable modem and DSL service does provide for an interesting real-world experiment into the likely impact of access regulation on investment incentives.

   1. A Brief Description of the Leading Broadband Technologies

      Until recent years, two technologies have dominated the market for broadband service, which the FCC has long defined as the capability of providing speeds of at least 200 kbps in both directions. (21) The first technology, known as digital subscriber line...