in todays wsj.
The Broadband Economy
Needs a Hero
By George Gilder and Bret Swanson. Mr. Gilder, editor of the Gilder
Technology Report, is author of "Telecosm: How Infinite Bandwidth
Will Change Our World." Mr. Swanson is a technology analyst at the
Gilder Technology Report.
Dear Mr. Powell:
Whether you know it or not, your leadership and decisions over the next
four years will have more impact on the economy than those of Federal
Reserve Chairman Alan Greenspan.
Surely, our stock-market swoon of 2000 and stagnating economic growth
in 2001 are partly due to the Fed's inexplicable liquidity leash combined
with the highest tax burden since World War II. But the chief threats to the
21st-century economy are the politicians, bureaucrats and Silicon Valley
know-nothings responsible for America's broadband connectivity crisis.
We owe Les Vadasz of Intel an apology for
making fun of his prediction that narrowband links
would prevail into the 21st century. The Internet as
we know it is about seven years old, yet fewer
than 7 million of 100 million American homes
enjoy broadband and its wealth of social,
commercial and educational opportunities.
Contrary to popular belief, the chief obstacle to
progress is not entrenched Bell operating
companies, but a regulatory regime that presumes
to "level the playing field," "equalize access," and
"promote competition." The only result of these
policies has been the effective nationalization and
paralysis of broadband.
The 1996 Telecommunications Act ruled that in exchange for the right to
enter the long-distance telephone business, the Bells must open their
residential copper lines to competitors, as well as allow these competitors
to locate equipment in Bell central offices and offer digital subscriber line
(DSL) services over Bell-owned copper. In November 1999, the FCC
issued a further decree forcing the Bells to stop dragging their feet and
cooperate.
The FCC actions spawned a new category of start-ups known as
broadband competitive local exchange carriers (CLECs), which planned to
compete with the Bells. Funded by billions of dollars in Silicon Valley
venture capital and public offerings, companies like Rhythms, Northpoint,
Covad and Jato earned praise from "libertarians" in both Washington and
Palo Alto, Calif. Northpoint even had freedom-loving former FCC
Chairman Reed Hundt on its board.
But despite all good intentions, these were not high-tech start-ups. They
became venture capital-funded lobbying and litigation shops intent on
forcing the Bells to share their copper. With more press releases on new
lawsuits than on new subscribers, one of the companies epitomized the
strategy: "Rhythms continues successful regulatory litigation." The result of
all this lawyering? The CLECs won everything. Access to copper
wherever they sued. Multimillion-dollar awards from the Bells. And
bankruptcy. Bankruptcy?
Late last year, Northpoint filed for Chapter 11 after Verizon withdrew an
$800 million investment. Jato closed its doors. Rhythms cut its staff by
23%. Covad is slashing 800 jobs and closing 260 central offices. Of
Covad's 274,000 lines in service, 92,000 are not "recognizing revenue."
And all of this is happening in the face of massive consumer demand for
broadband services.
The problem is that DSL is risky and hard. Some studies have reported
that 50% of DSL hook-ups fail on the first try. Even amicable relationships
between CLECs and Bells are a software nightmare, with a different billing
and provisioning system for each service provider. Such difficulties render
DSL not a matter of will and politics but of technical and entrepreneurial
risks. Companies are forced to invest heavily in research and engineering
personnel, but have few opportunities for outsized rewards.
That's because Congress and the FCC set up an awkward scheme in
which everyone got a piece of the action but no one could make any
money. Often barred from carrying signals across long-distance
boundaries, the Bells hand off traffic to other long-distance carriers.
CLECs rent lines from the Bells. And Internet service providers end up
doing costly customer service and marketing to get people signed up in the
first place. In short, as many as four parties routinely battle for low- or
negative-margin chunks of $40-monthly bills.
By summoning new competition and then mandating the rivals cooperate in
open access, the government effectively privatized the risks and socialized
the profits. By December, the Bells had signed up 1.8 million users and the
CLECs 600,000, combining for just 2.4 million DSL subscribers among
the 120 million or so copper-connected U.S. homes and businesses.
Cable modems, with 4.9 million subscribers at year-end, have done better,
but AOL Time Warner and AT&T, America's two cable behemoths, are
bogged down by the same open-access nonsense that plagues DSL. Over
the past two years, AT&T CEO Michael Armstrong acquired $140 billion
in cable assets while watching his company's $184 billion market
capitalization plummet to $81 billion.
Just last month the Federal Trade Commission ruled that AOL Time
Warner must offer "at least one non-affiliated cable broadband ISP
[Internet Service Provider] service on Time Warner's cable system before
AOL itself begins offering service, followed by two other non-affiliated
ISPs within 90 days and a requirement to negotiate in good faith with
others after that." The nation's second-largest ISP, EarthLink, will now get
access to AOL's expensive cables pretty much for free.
This regulatory morass treats the most dynamic, technically creative, and
transformative industry in the world economy as if it were some static
commodity market for corn or pork bellies.
Mr. Chairman, in a recent speech you made the key point that innovation is
more important than price competition. When it comes to leading-edge
services and technologies, narrow price competition is almost meaningless.
Internet innovation means qualitative change, order-of-magnitude price
reductions and constantly changing services that always constitute
monopolies when first launched.
No Internet advantage can last more than a couple of years. In 1999 and
2000, over 150 million kilometers of optical fiber were laid world-wide,
enough to stretch to the sun. Hundreds of billions of dollars have already
been invested by metropolitan fiber-optic network builders (Metromedia
Fiber, Level 3 Communications), optical hardware companies (Avanex,
ONI, Sorrento) and optical service providers (Yipes, Cogent, Sphera).
These companies are already rendering the metropolitan DSL debate moot
with thousand-fold increases in price performance over existing
technology. Similar breakthroughs are on the way in residential wireless.
But none of these deployments, including fiber to the home, can flourish
under a regime of forced sharing of entrepreneurial assets and profits.
In this environment, let the Bells compete in long-distance and extort any
temporary profits they can from their local copper cages. Let the cable
companies capitalize on their advantage for the few years it will last. Allow
the infinite spectrum of air and fiber to be exploited in any way its owners
wish. Then, sit back, and nostalgically recall those early days of the
Internet, when we naively thought a 5% economic growth rate was really
something. The broadband economy needs a hero. President Bush and
Mr. Greenspan need a technology savior. You are the man best equipped
to play that role. |
