reed hundt on "big" broadband

A recent piece from Reed Hundt on his view of big and little broadband, regulation, services, etc. One may or may not agree with him (I don't), but it offers interesting commentary by someone who was clearly in the kitchen in the last decade. (thanks for the note Dwayne)

THE INEVITABILITY OF BIG BROADBAND
REED HUNDT
NEW AMERICA FOUNDATION
DECEMBER 10, 2003

Author's Acknowledgment: A form of this piece was originally written
by Professor Hundt for a colloquium at Harvard Business School in
April 2003, The Bandwidth Explosion: Living and Working in a
Broadband World, and will appear in a forthcoming book with the same
title. The author would like to thank Professor Stephen Bradley of
Harvard Business School. Still another form will appear in the Yale
Journal of Regulation, December 2003.

All new media, taught Marshall McLuhan, are destined to subsume and
extend all old media, and to use the old media as their content, much
like large fish filling their stomachs with small fish. The fish
metaphor belongs to me, not McLuhan, since he was rarely so dull in
his imagery.

The big fish of today is Big Broadband - access to the Web at 10 to
100 megabits per second for homes and 1 to 10 gigabits per second for
businesses. The small fish are broadcast, DSL, cable modem, and voice.
The questions are not whether Big Broadband will swallow the fish,
and perhaps the whole ocean, but how, when and by whom will the
swallowing be done? Who will create value and who will capture it?
How much capital will regulation and market failures cause to be
wasted in the process? Lastly, will we include all Americans in the
new medium, so as to create community and greater social value? And
if all Americans, rich and not rich, urban and rural, are eventually
weaved into the fabric of Big Broadband, will that happen at more or
less the same rate for all, or will Big Broadband be distributed like
the benefits of the Big Tax Cuts of 2001 - that is, on a trickle down
basis.

The answers to these questions will define not only Information and
Communications Technology ("ICT") policy, but also a major part of
America's domestic and economic policy.

Since the beginning of convergence, dated from about 1992 (plus or
minus a year), the battle to be the primary medium of at least the
next decade - the one we are in now - has raged among various
antipodal rivals: content vs. conduit, local vs. long distance,
wireless vs. wire, data vs. voice also sort of known as packet vs.
circuit, communications vs. computing, network vs. edge, and copper
vs. hfc (also known as telco vs. cable). Other, possibly lesser
dialectics include satellite vs. terrestrial and broadcast vs. cable.
Convergence describes then a clash of networks, businesses, and even
cultures.

As the convergence story evolves, a synthesis emerges. It is the next
generation network that can be discerned in the fog of the future.
Its lineaments are 10 to 100 megabits per second to the home, 1 to 10
gigabits a second to the enterprise, IP protocols, packets of course
but more edge-centric than switch-centric in terms of control,
wireless home and business LANs fanning out like peacocks' tails from
the edge of the wire network, fiber fairly far to the edge, computing
everywhere, software gluing the contraption together, and myriad
handheld or hand-carried devices connecting all the time anywhere to
the Net, the Web, the world's devices and users.

This is what I'm calling the Big Broadband network. In my shorthand
it is 10/100 at home, 1/10 at work, and wireless all around.
It is not Little Broadband. Little Broadband is the thin stream of
data sold as DSL or cable modem, not amounting to much more than, if
even equal to, 1 megabit per second to a home. Big Broadband is to
Little Broadband as a SUV is to a motorcycle. Big Broadband can carry
full motion video, download pictures of Paris or Hilton Hotels or
Paris Hilton (whoever that is), and provide web page access that
feels like flipping pages of a magazine.

Little Broadband can do voice over the Internet, but otherwise is
painfully slow. It is no more a new medium in comparison to
narrowband than was, for instance, the kinescope was as to still
photographs.

Given the power of technological change, the Big Broadband network
surely will reach some people fairly soon. Indeed, it already exists
within some college campuses, some corporate parks, and in parts of
Seoul and Tokyo.

But Little Broadband is the concern of FCC policy. I think that's
wrong-headed. Big Broadband is what we want to be focused on. It is
the big fish that will swallow all the little ones.

However, Big Broadband is the common if unstated theme of two topics
that are under discussion in government: namely, the so-called HDTV
transition and the VOIP threat to universal service.

All of us can readily agree that in order to distribute high
definition video and high quality voice the optimal physical medium
is Big Broadband. Since the FCC is bent on causing both high
definition television and voice to be provided to everyone in America
at affordable prices, such that 95% of so take the services, then
plainly the cheapest way to get that result is to send the video bits
and the voice bits over the same high bandwidth network. Moreover,
the Big Broadband network would have plenty of capacity left over to
permit end users to obtain very high speed access to the Internet.

So that's the result the FCC, the firms, the consumers, the country
should want: a Big Broadband network that will carry high definition
broadcast channels for free on the pipe instead of over the air, that
will give every end user limitless voice at very low cost, and that
will provide high speed Internet access at one or two orders of
magnitude faster than commercially available today.

This network would be optimally efficient. It would be a platform for
new innovative services, such as rich interactive gaming. It would
greatly increase e-commerce, producing higher gdp. It would create
new jobs in the United States. It would ensure broadcast penetration
at nearly 100%, local voice penetration at nearly 100%, and push
Internet access at least to 90% if not 100%.

The key task of the FCC should be to unwrite old rules and write a
few new rules so as to create clear incentives for existing network
operators and service providers to build a Big Broadband network.
Regulation negatively influences Big Broadband business plans.
Currently federal and state regulation causes consumers and taxpayers
to pay staggering sums to sustain old networks when much less money
could pay for the same services plus additional services and also for
the cost of building Big Broadband to every home and business.
Because of regulation and market failures, the demand that should
fund Big Broadband does not create a supply of Big Broadband.

A particularly discouraging example of the negative effect regulators
are having on Big Broadband was the FCC's December 1, 2003 forum on
Voice over the Internet. The chair, and many others, talked about
trying to balance regulation and deregulation. But the invention of
VOIP - voice over a high speed Internet access connection - actually
means that state and federal regulations that subsidize and guarantee
affordable local telephone service should be junked. Instead, if
state and federal authorities want to assure that everyone can buy
voice service, they should write rules to subsidize Big Broadband
connections, through which voice can be provided at a fraction of the
cost of maintaining today's legacy networks.

Instead, based on what I heard from the December 1, 2003, forum, many
heads nodded in collective agreement that VOIP might have to be
burdened with such out-of-date regulations as access charges in order
to generate money that could go to sustaining the
soon-to-be-out-of-date legacy voice network. And I did not hear that
anyone said what should be said: let governments describe how they
can help firms move all voice traffic on to new Big Broadband
networks that reach all Americans, while maintaining or increasing
shareholder value and network reliability.

The current VOIP conversation at the FCC and in state commissions is
as if government responded to Henry Ford's new invention of the
automobile by discouraging the construction of roads, and instead
taxing cars in order to subsidize canals and railroads. As a former
government official I can only say: We can do better.

How should government be working on what should be the convergence of
Big Broadband with existing voice, broadcast, and Internet access?
Let's start with the math. It will show that Big Broadband does not
require a new subsidy. The taxpayers and consumers do not need to pay
more than what they now pay for network services. They will be able
to pay much less. Governments and firms just have to change both
regulation and market structures in order to make way for the new Big
Broadband network.

Say every household today pays $40 a month for voice. That's
conservative. We are all conservatives now. That totals $4 billion a
month, or roughly $250 billion over five years. I am giving five
years for firms -- they can be today's telephone or cable businesses
-- to build a Big Broadband network. That $250 billion can help pay
for VOIP over Big Broadband and of course for the underlying physical
network itself.

Next, thanks to our FCC, the taxpayer has given about $70 billion of
free spectrum to broadcasters and the consumer has been ordered to
pay about $20 billion for over-the-air digital tuners for 200 million
televisions over roughly five years. That's $90 billion out of pocket
for taxpayers and consumers. It is not too late to redirect that
money toward paying for the Big Broadband network. On that network
broadcasters can get free high definition TV carriage. They have that
on analog cable; they are inside satellite packages. Why not give
them free access to the Big Broadband network. That should make
broadcasters and TV households happy. In return we can get back the
high definition spectrum, sell it, and use the proceeds to help pay
for Big Broadband to high cost rural and poor homes. And we could
even repeal what I call the "tuner tax." We are all tax-cutters in
Washington now.

We have still more money to deploy. On average over the next five
years, about 60 million households will pay about $25 a month for
Little Broadband - the low speed Internet access that we are being
offered instead of Big Broadband. The retail price may be higher and
the penetration rate may be higher, but we are all conservatives now.
So that totals over five years about $90 billion. All that can pay
for Big Broadband, which subsumes Little Broadband.

That totals $410 billion in money that as of now will be dedicated to
supporting a voice network from the 19th century, a broadcast
business from the mid 20th century, and broadband access technologies
from at least a decade ago. (That is even after I repealed the "tuner
tax.")

For probably one-fourth that sum, firms could build fiber to the
fingertips of everyone in America. Governments, and firms, need only
to figure out how to let the demand be aggregated in pursuit of Big
Broadband and how suppliers can cooperate to meet the demand.

Please notice customers would still have to pay for cable channels,
advanced communications services, and internet applications over the
big Broadband network, but that is what we want: value added services
that grow the economy, add jobs and increase productivity.

The high calling and critical task of federal and state government,
then, is how to unwrite rules or write rules - in short how to create
the new system - that would permit end users to pay for what they
should be able to get for their money - a Big Broadband network that
supplies all the voice, video and Net access anyone could want. At
the same time, the new system would free customers from the necessity
and obligation of paying to underwrite the maintenance of the old
networks that could so readily by subsumed by the new network.
You are all experienced Washington people. You know the math is close
enough for government work and the logic is sensible enough for
policy. So of course you are saying: this can never happen.

Why not? If Republicans can run huge deficits and Democrats are
budget balancers; if Republicans are internationalist and Democrats
are isolationists; if Republicans are spending trillions on new
Medicare benefits and Democrats are voting against the law - then
certainly nothing is impossible in the new Washington.

And I know you are troubled by the notion that our current system
will make customers spend $400 billion on yesterday's networks when
they could spend much less to bring America into the forefront of the
next generation networking of the world. You are uneasy about letting
the Koreans and Chinese lead the world in the next iteration of the
Internet, not because their people are smarter but because their
governments are. You don't welcome the vision of America export jobs
to Asia to help them work out the solutions to the problems of
advanced networks.

I've proved that more than adequate demand exists to pay for Big
Broadband. Yet many market and regulatory failures stand in the way
of the deployment of Big Broadband. These problems are the reasons
our federal and state governments need to act.

The first problem is that the current two-firm market for Little
Broadband encourages both telephony and cable to build Little
Broadband to every household. But that means the total expense is
twice what it needs to be. That in fact discourages both firms
building even Little Broadband every household.

The second problem stems from game theory. The Big Broadband network
of course can provide voice, video, and data. This is referred to as
the "triple play." As in baseball the side that pulls it off makes
the other side out. In other words, if any firm produces such a
triple play and is economically viable, then it might be reasonably
supposed that this firm will dominate communications, technology, and
even media markets. The question then is whether a firm that makes
its living in voice and one that makes it living in video inclined to
go for the triple play. Nash equilibriums are what lawyers like me
are taught by economists to describe the offsetting motives that
produce a collective unwillingness to proceed into fight-to-the death
competition. In short, perhaps the two-firm Little Broadband market
lacks incentives for anyone to build the Big Broadband network. In
the two-firm market, then, each firm may well be very cautious in
trying for the triple play, given the fact that the price of defeat
may be elimination.

The third problem is that government is wrongly wedded to providing
broadcast over the air. Big Broadband and wi fi dispense with the
technology of transmitting stations. It's time for government to 'get
it' - in Valley parlance - and to move video to the pipe. Nick
Negroponte called it the 'great switch' more than a decade ago, and
it's time to get on with it.

A fourth problem is that demand for fixed line local voice often
cannot find many different sellers: the market is not perfectly
competitive. Moreover, until very recently that demand could not
obtain voice over the Internet. Now services like Vonage and Skype
are meeting the demand for voice over the Internet, and most cable
companies, as well as at least some telephone companies, do or soon
will over voice over the Internet. All the new demand for voice over
the Internet should be allowed to help pay for Big Broadband. Instead
state and federal government seems concerned to slow this burgeoning
VOIP market. What should happen is that government should permit VOIP
demand to stimulate broadband.

The fifth problem is that our existing universal service schemes
subsidize local voice for rural and poor populations. Instead they
should subsidize Big Broadband for those and all other populations
that need a little economic help in getting on-line, while getting
their voice on the same line. A policy for bringing all Americans
into the experience of using a computer on the Web can generate
economic and social benefits, as well as provide a significant
stimulus to the economy. We might even see a rise in general
happiness, since surveys show that those on internet are even
statistically more likely to be happy than those off the internet.

If as many were online as those who watch satellite and cable
television - now nearly 90% of homes - many social benefits could be
distributed and many social needs served by on-line communication.
Political associations could be created more readily, thus increasing
participation in democracy. Health care and education could more
efficiently be distributed to target populations that are otherwise
costly to reach, such as shut-in's, workers, or those geographically
distant from medical centers and schools.

But even if you do not agree that all should be on-line for various
social reasons, surely you agree that state and federal governments
are likely to maintain the policies that make local voice so
affordable everyone buys it. Therefore, why object if governments
became wise enough to merge the so-called universal voice policy with
a universal Big Broadband policy? If we have to spend taxpayer and
consumer money to all sorts of new things - prescription drugs and
pipelines, the Iraqi coast guard and a Hooters in Louisiana - can't
we at least get a bonus of Big Broadband for the same money we are
certain to spend anyhow? That way we can still get yesterday's
services but over tomorrow's network.

Since this is Washington, it would be unusual not to elevate means
over ends, at least at the end of the talk.

At least three possible models for implementing universal Big
Broadband are worth consideration; perhaps others would emerge from
the Notice of Inquiry I'd like the FCC to issue.

First, government could grant to every consumer an assignable tax
credit. As I said, the funds could come from the voice or broadcast
subsidy programs that already exist; or if those could be eliminated,
the funds could come from the general treasury revenues that are
being tapped for so many other technology projects in the current
budget. Consumers would grant that credit to any firm that provided
the requisite minimum 10 to 100 megabits per second of access. Cable,
telephony, and any other entrant, such as wireless, would compete for
the credit. When a firm obtained enough credits, it could have
adequate revenue guaranteed to cover the cost of a Big Broadband
network.

The broadband provider could charge whatever the market would bear.
However, it would not obtain the credit unless it won the customer.
The credit would equal the difference between willingness to pay and
cost - not an easy calculation but one that can be made by model and
then adjusted by experience.

A second proposal would be to have state utility commissions
designate a preferred big broadband provider. This firm would be
obligated to provide a physical link of at least ten megabits per
second to every household in a designated geographic area. Any
technically qualified solution would be acceptable, so that wireless
and wire-based alternatives could compete for the state designation.
The preferred broadband firm would then auction its physical capacity
to service providers.

A third proposal is for government to order all existing universal
service programs for voice to be dedicated to providing VOIP as
opposed to existing voice over circuit. As part of that, cable and
telephony could, if they chose, merge their local access networks,
thus saving each of them substantial costs. As a condition they would
keep their services separate and competitive, dividing the physical
infrastructure from the provision of service. This model resembles
the exemption from the antitrust laws passed by Congress to permit
local newspapers to share printing facilities in order to obtain
economies of scale in distribution while continuing to compete in the
content business.

A final consideration is that wireless broadband access may be
brought to the market at a price and with functionality that obviates
the need for a wire-based Big Broadband network. If so, then the
current HDTV plan is monumentally foolish; the circuit voice network
is under heavier siege than we know; and VOIP still should not be
lassoed into the current regulatory regime. Instead, government
should make any and all subsidies - I insist either none or hardly
any will be necessary - available both to wireless and wire-based Big
Broadband providers, and let the better network prevail.

A decade ago, John Malone, perhaps the single most important builder
of the American cable networks, predicted that three inventions-the
microprocessor, digitization, and fiber optics-would revolutionize
the media and communications industries, and drive their convergence
into a single market. He foresaw a 500-channel universe. And in late
1993, to capture the value of this triple revolution of technology,
he sought to merge his cable company, TCI, with the phone company,
Bell Atlantic. The two together promised to build an "information
highway" to at least forty percent of all homes in the United States.
This highway would carry all voice and all video channels to each
home. To support this big pipe, the two huge companies would raise
the capital necessary to build fiber networks to homes. The merger
plans collapsed in 1994.

Malone did not close his deal. He did not predict the Internet. He
didn't predict that the great content cornucopia would comprise not
his ballyhooed five hundred channels so much as the countless pages
on the Web.

Yet Malone was right to identify that the access network is key to
innovation and growth in ICT. With little broadband, the access
bottleneck will be exasperating for years to come. Current
microprocessors are able to display in fractions of seconds movies or
videoconferences that the fiber can carry at the speed of light from
anywhere in the world. And at the screens of these information-hungry
computers sit a hundred million people who wait impatiently for still
pictures and words to resolve themselves slowly into recognizable
form. Rather than waiting hours to download a film, the consumer
drives to Blockbuster for a rental. So we have a problem of
complementary products: no shoestrings, plenty of shoes; no access
network, plenty of services that would like to get across that
network. We have skimpy connection and plenty of computing potential
that yearns for the big broadband connection.

Many chapters of regulatory history counsel against government
policies that promote specific technologies. However, a high capacity
physical link is not so much a technology solution as a platform for
innovation and a basis for service level competition. It should be a
basis for a future of technology discovery, and the creation of a new
common medium that can bind us all together.

Comments

[Steve Cisler]

This is the same guy who predicted the telecomm industry would evolve like the baking industry. Several big players and lots of small ones. In other words Wonder bread for the masses, and $4/ loaf boutique breads for the elite.
Not my idea of equity.

[John Doe]

Slashdotted... bye bye server?

[B. Smith]

One consideration, Big Broadband needs high, bi-directional bandwidth, not just traditional "downstream" bandwidth.

I don't want 100mbps downstream and 128kbps upstream!

Everyone should be able to be a content PROVIDER as well as a consumer!

[M. Smith]

I have a question, who would be tapped to maintain this huge beast?

Would it be the existing ILECs?
Look what happened the last time a big ILEC had been given such a
responsibility (Verizon in PA).

The government?
and if so, would the federal government be responsible for connectivity
to the home or the local municipality in which
one lives?

A new company formed by the government?
like financially-beleagured AmTrak?

The current incumbent Cable company in a particular area?
There are already enough complaints about price gouging as it is, do you
want to add all who now only use broadcast television and basic telephone
service to that mix?

Some additional ramblings:
What about competition?
What ensures that smaller providers would be able to play ball on this field and provide greater diversity of services like is possible now for DSL but generally not Cable?
I would assume that current Cable and Satellite providers could fall back on their roles as competitive gatekeepers to for-pay content and I'd bet they would just love to shed their costly-to-maintain infrastructure. Current ILECs and other Telephony providers would have to learn to live in a new world of VoIP.
Where would government taxes be levied? from the monthly service fee of having the line? If so, why should broadcast television get free carriage over that? Isn't that tantamount to giving away the over-the-air band for free at that point? They innundate the American public with advertisements and base their business model on collection of revenue from advertisements. Shouldn't the broadcast of their content over this new broadband system be subsidized by some of that revenue for the privilege of reaching that American public?
What of the huge telecomms workforces that would have to be retooled to work with this new infrastructure? It should be a reasonably small change from what is done now but it should be considered.

[Ethan Stock]

See commentary at Onotech

[Cary Menage]

Citizens themselves should build the network, and demand from the dirty politicians that they give them the right of ways to do it. Let each community at the neighborhood level pay for the install and decide who will do the actual work. Some would organize on a voluntary basis, others may choose to support their local union workers etc….Then the communities could charge the big corporations for access to their network.

[Anonymous]

Wouldn't this attitude have been more helpful while he was still at the FCC?

[Randy Crawford]

Outstanding!

An aggressively constructive telecommunications policy is exactly what the US needs to address a host of negative trends.

For example, outsourcing will continue to eat US jobs broadly and deeply, and pretty much forever, unless we can adaptively organize our workforce more rapidly than the competition and react to market changes faster than the competition, thereby making business, government, and each of us more efficient. Only a bottom-up participatory-enabling technology can do that. That's Big Broadband. We can use it to spontaneously create far flung teams of people who have the right skills to serve new tasks. We can use it to retrain workers. We can dominate the rising industries of interactive gaming, movies into the home, telecommunication-based (re)education, videophone and teleconferencing, and a hundred new technologies and industries that *will* accompany Big Broadband.

Hasn't the explosive rise of the Net and the WWW already demonstrated the importance and inevitability of this technology? What in the hell are we waiting for?

[MH]

Wouldn't it be nice if people actually looked into the history of high speed internetworking , telecom, and catv before making blanket statements about how they're the visionary?
Reed - 3 words:
Western Integrated Networks. $1.2B in initial funding to do exactly what you're describing.
Single-mode, 10/100MBps bi-directionally ip over ethernet to the side of the home. 80% take rate on services. Maybe Reed should hook up with Gore and invent a big WAN to help people in different parts of the world communicate.

[Mark Archer]

Fiber and big bandwidth to every home and business ASAP would secure our global economic dominance for the next 50 years. Highway building funds are another possible way to cover the expense. If we could take 20% of the traffic off our existing highway system by telecommuting (hey, let's all work one day a week at home), we would't need new roads. We would just have to maintain what we have. All the new road funding should more than pay for universal fiber access.