June/July 2012
Volume 32 No. 4

June 2012
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Broadband Revolution – Only With Regulation

By Dom Serafini

On March 21, 2010, five days after U.S. regulatory agency, the FCC, announced the development of a National Broadband Plan, The New York Times came out with two editorials about the need to regulate broadband in the U.S. The first was by guest commentator Yochai Benkler, a professor at Harvard Law School, who basically stated that, “The FCC’s new plan doesn’t force broadband companies to compete.”

The second piece, “A Plan for Broadband,” came from the Times’ own editorial board, and advocated more regulatory power for the FCC. Stated the newspaper: “The FCC’s authority to police broadband is already limited and is being challenged in court.”
Broadband is of vital importance to show business because the future of the whole entertainment industry depends on a clear broadband policy or, as it’s called in Europe, a well-defined “Digital Agenda.”

Only a few executives nowadays — mainly U.S. TV broadcasters — still ignore the fact that, soon, entertainment via electronic media will be transmitted exclusively over broadband: One Internet protocol standard for all units, be it a TV receiver, a computer screen or a palm-held device. The standard will allow for “anywhere, any place” mobile or home viewing, and for various formats: standard or high-definition; 2D or 3D. If the FCC will take advantage of the current pro-regulations environment, it even has a chance to impose anti-obsolescence provisions, where consumers finally won’t have to discard perfectly functioning electronic units due to compatibility issues with newer models. Deregulation has created a situation where radio and TV sets built in the early 1940s are still functioning, while a computer screen built four years ago is rendered useless by built-in obsolescence. Undoubtedly, this aspect will be opposed by software and hardware companies that are making billions with obsolescence.
However, in this respect, the FCC has not set a clear goal, stating only that it “has a mandate to change rules to ensure a competitive and innovative video set-top box market.”
Nevertheless, the fact that “A Plan for Broadband” is long overdue — and not only in the U.S., but worldwide — is acknowledged by virtually all sides: the one that favors more stringent regulations, and those who would like to see the rules further relaxed.

There are also different approaches to this issue, with Europe aiming at a “Digital Agenda,” with the apparent goal of regulating the utilization (for example achieving a “single digital market”), rather than the various components of the system itself, and “Digital Britain” attempting to create more regulations in order for the regulator, Ofcom, to gain new power.

On the other hand, the problem with proposals like those expressed in the Times, is that they’re mostly limited: they only focus on the actual broadband aspects — meaning the brick-and-mortar elements — without taking into account all the other multifaceted characteristics that comprise the broadband universe. Indeed, it is impossible to regulate broadband networks without tackling content operators and service providers. Fortunately, the FCC partially recognized this when it stated: Many international broadband plans emphasize speeds and networks. We must also strive to use these networks more efficiently and effectively.”
For example, the Times lamented the fact that “fewer than 27 percent of Americans have broadband service, compared with 38 in the Netherlands. The average advertised download speed [in the U.S.] is eight Mbps; in France it’s 51.” Furthermore, the Times, declared that “the FCC needs Congress to approve a plan to repurpose 120 MHz of surplus TV spectrum for mobile broadband.” But the FCC’s plan also calls for revaluating multi-casting by digital broadcasters, since many TV stations have shown little interest in taking full advantage of the extra spectrum.

Naturally, these latest provisions are contrasted by the U.S. broadcasting sector, which claims that multicasting is only at an embryonic stage, and that broadcasters already gave up 108 MHz of their spectrum when they switched to digital. Totally ignored is the fact that less than 15 percent of U.S. households actually receive TV via aerials — and they’re decreasing every day — therefore that spectrum is not necessary for broadcasting, but much needed for wireless broadband. The U.S. needs at least 500 MHz of spectrum to develop a better wireless broadband system by 2020 (300 MHz by 2015). Naturally, in order to gain access to that spectrum, broadband operators (with the help of the government that is licensing that spectrum at a fee) will have to provide TV services to those few TVHH still with aerials.

In his editorial, Prof. Benkler complained, “Prices [for broadband in the U.S.] are three to five times [higher than in France] and the highest prices among advanced economies.”
All of this is accurate. But where he errs is about the notion of “open access policy.” According to Benkler, companies that build networks should sell access to rivals then compete on the network. In some views, the arrangement proposed by Benkler would actual stifle competition, delay innovation and create stimulus for Wall Street-dictated vertical integrations for speculative purposes (which are also a threat to economies and national securities). Interestingly enough, is that Benkley himself explained this latter point. “ [telcos like] AT&T and Qwest have largely abandoned their goal of bringing fiber to the home, leaving the highest-speed tiers to the cable companies.”

A more rational view is that telcos and other backbone (or pipeline) providers would be allowed to build, operate and exclusively exploit their own broadband networks in exchange for divesting from any other Internet-related businesses like content supplier and/or service provider.

In addition, broadband providers shouldn’t be horizontally integrated. For example, a cable broadband network operator should not be in the fixed broadband business and the wireless sector in the same market. In this case competition for broadband would arise from different network operators: Cable MSOs, Telcos’ DSL, Wi-Fi/Wi-Max, power lines and satellite.
However, in order to optimize their investments, broadband providers will also need to have the option to operate the last mile and thus be the billing center.

This proposal would solve the “net neutrality” problems, since broadband providers will operate “dumb networks” and no-longer have to carve off bandwidth for their own TV services. Plus, a competing environment between carriers will take care of whether or not the network providers should charge a “toll” for priority service or simply provide a non-discriminatory service. In effect, good regulations will ultimately results in fewer regulations.

To achieve a broadband policy that will be effective for the next 50 years — like it lasted for the TV business before being highjacked by President Bill Clinton’s 1996 Telecommunications Act — is not as complicated as one might think. The roadblocks only exist because, right now, there are conflicting interests that created them.

In a comparable situation, let’s imagine one company that owns a highway, a trucking company and rest areas on the same route. Would this company be willing to have other trucking companies crisscross its road or have independently-owned rest stops? Would this company facilitate the construction of competing parallel roads? And, finally, would the consumer benefit from this company also owning rail transport in the same route?

Broadband is in a similar situation. Once this type of highway (in our case, a network or a backbone) is spun off from all other conflicting activities, companies will focus on the core business of monetizing the most effective and most efficient superhighway.

One current example of the business model envisioned for broadband is offered by the electrical utility sector, which prior to 1990 was made up of vertically integrated monopolies. This sector was split into power suppliers (power plants or generators), transmission lines, and distribution providers (the equivalent of the last-mile in the broadband business). In general financial terms, transmission cost represents seven percent of the total energy bill, while distribution cost is 24 percent.

One past example is offered by the television business prior to deregulation, when the role of each player was well defined, regulated and protected (indeed, it was like having a license to print money). Under that scheme all the companies made money: The TV networks by selling advertising without financial risks on programs licensed from producers. Producers made money on syndication, utilizing a daypart carved out of the network schedule.

The FCC has set 2020 as the U.S. goal for a nationwide broadband system at download speeds of 100 Mbps. Providing broadband nationally is very feasible, since today 290 million Americans (95 percent of the population) have access to terrestrial, fixed broadband infrastructure with a minimum download speed of four Mbps.
The goals of any broadband agenda should be at least tenfold:

1. Increase competition.
2. Fair competition.
3. Spearhead innovation.
4. Open standards, interoperability and anti-obsolescence.
5. Open and neutral Internet.
6. Robust broadband service.
7. Optimize resources.
8. Monetize all levels and stimulate investment.
9. Security: Against fraud and man-made disasters, like nuclear blasts, which paralyze digital transmissions, and cyber-terrorism. Plus, Consumer protection (also called “digital user rights”) that includes anti speculative rides on basic infrastructures.
10. Copyright clearance and management, including limiting content exclusivity contracts (in order to prevent de-facto cartels or dominant positions).

Basically, in order to achieve the best results on all sides, the broadband business has to be clearly defined and divided and without crisscrossing financial interest by:
I) The broadband highway itself (meaning the network also called the backbone or pipeline).
II) The content providers: Producers, distributors, aggregators, search engines, P2P services and press.
III) The service providers: ISPs, telephone companies (audio and video), virtual stores.
This way, all companies will have the possibility of making money and everyone will be interested in providing the best product at the lowest possible price.

Such a well-defined structure would result in better management of the illegal distribution of copyright-protected content over the Internet. Plus, it would solve the “fair competition” issue, like, for example, when broadband providers bundle other services, like voice and video, at a below-market costs in order to generate more broadband subscribers and drive out voice and video competition.

When multinational-multimedia corporations invoke the unwritten rules of “convergence,” it’s a smoke screen to obfuscate progress for the opportunity to make a quick buck to satisfy their Wall Street-dictated quarterly agendas. Convergence should not be the excuse for keeping an inefficient vertically and horizontally structured system that is also in constant danger of speculative raids. In order for broadband and digital technology to be heading towards the 21st Century, the key word has to be “divergence,” which is a great tool to succeed in any core businesses.

For example, since TV stations don’t need terrestrial frequencies any longer, they have to decide if they want to be in the content or in the wireless broadband business. Cable companies and telcos have to decide if they want to be in the content, service or “pipeline” business. ISPs (e.g., AOL) have to choose between being content or service providers.
Under such a well-regulated structure, the consumers, would subscribe to a broadband network (the “pipeline”) of choice (based on price, speed, download allowance and convenience), be it cable, wire or wireless.

Once connected on broadband, consumers can then subscribe (for free or FEE, according to the various services’ business models) to an Internet provider, which offers various Web services (these are companies such as AOL, Yahoo, etc.) and can also offer voice and video telephone services. Similarly, consumers can subscribe to a content service (for free or fee).

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