Letter to the Bush Administration on Broadband Deployment
Citizens for a Sound Economy
December 4, 2001
Letter to the Bush Administration on Broadband Deployment
Dear Sirs:
As you know, the Information Technology (IT) sector of the economy has experienced sharper and more extended declines over the past year than the economy as a whole. While lower interest rates and tax cuts will help restore growth in this sector, we believe that excessive and unwise telecommunications regulation is playing a significant role in the IT sector’s decline. Accordingly, we are writing to urge you to do everything possible to accelerate the process of deregulating the telecommunications business.
To summarize the points below, we believe:
Growth of the IT sector was crucial to the economic expansion of the late 1990s, and its decline is a key element of the current slowdown.
Current Federal Communications Commission rules create substantial disincentives to needed investment in the telecommunications infrastructure.
Upgrades to the telecommunication infrastructure are important to the IT sector because they will allow it to create and market "next generation" products and services that can only be made available over broadband connections.
The Administration should aggressively promote steps to eliminate disincentives to investment by accelerating telecom deregulation as rapidly as possible.
We elaborate on each of these points below, and would of course be pleased to provide additional information at your request.
1. Growth of the IT sector was crucial to the economic expansion of the late 1990s, and its decline is a key element of the current slowdown.
While the IT sector accounts for a relatively small proportion of GDP, in recent years it has accounted for more than a quarter of GDP growth. Equally important, increasing use of information technology throughout the economy is the primary cause of the acceleration in productivity growth that occurred in the late 1990s.
Much of the IT sector’s contribution has been felt through business investment in new capital. Such investment has taken the form of new computer hardware, new software systems to enable e-commerce, smart manufacturing, and investment in the telecommunications and Internet infrastructure. Last year, information processing hardware and software accounted for over $675 billion (60 percent) of $1,170 billion in real private business investment.
Just as IT led the economic expansion, it is now leading the decline. Business capital spending has fallen in six of the past seven quarters, and private domestic investment has dropped $182 billion, or 10 percent, from its peak in mid-2000. Technology spending alone this year has dropped $75 billion, or 15 percent at an annual rate. And unemployment in the IT sector has more than doubled in the past year, from under two percent to nearly five percent in the third quarter of 2001.
2. Regulations imposed by the Federal Communications Commission impose substantial disincentives on investment in the telecommunications infrastructure.
It may be true, as some have argued, that some portion of this decline represents a natural adjustment after the very rapid growth of the IT sector during the late 1990s. And, in any case, we would be the last to argue that government should step in to subsidize or provide other special assistance to any particular economic sector of the economy. On the other hand, government does have an obligation to examine areas in which regulatory or other policies may be retarding growth without creating commensurate benefits, and it is all the more urgent to do so when the economy is in decline. When the industry involved is as central to our nation’s prosperity as the IT sector, the case for removing counterproductive regulations is especially compelling.
The regulations we have in mind in this case are those imposed by the previous administration on investment in new facilities by telecommunications carriers, specifically incumbent local exchange carriers. These regulatory burdens, particularly mandatory facilities sharing requirements, reduce the incentives of telecom companies to invest in new or modernized facilities, including those needed to provide affordable broadband services to homes and small businesses. Further, they reduce the incentive of new entrants and other competitors to risk investing in their own infrastructures, since they can lease parts of the incumbents’ networks at regulated prices.
The impact of mandatory sharing rules on competition and investment is well understood. As Justice Breyer said in his opinion in the AT&T v. Iowa Utilities Board case (in which he criticized the FCC’s sharing regulations): "It is in the unshared, not the shared portions of the enterprise that meaningful competition would likely emerge. Rules that force firms to share every resource or element of a business would create not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms." Intel Corporation put it even more concisely in a recent submission to the FCC: [When] "regulation gives the telephone companies 100 percent of the risk where investments do not pan out and effectively caps the upside return where they prove successful, they will invest more cautiously."
The adverse impact of the current regulatory regime is not just theoretical: Real companies are making real decisions on where they should invest, and infrastructure investment is in fact being deterred. On October 22, for example, SBC announced that "[p]rimarily because of its regulatory environment, SBC will slow its build-out of a broadband network that is capable of delivering high-speed Internet access to more neighborhoods and towns."
3. Upgrades to the telecommunication infrastructure are important because they will allow the IT sector to create and market "next generation" products and services that can only be made available over broadband connections.
The current telecommunications infrastructure is a significant barrier to IT sector growth. The Internet, in its current form, has reached a plateau in terms of functionality and value to consumers: There is only so much can do with a static web page accessed at dial-up speeds. The next generation of IT sector growth thus depends on the widespread availability of broadband connections to enable consumers to access new services such as streaming music and video, voice-over-IP telephony, next generation video games and other products as yet unimagined.
As Microsoft Chairman Bill Gates put it in September: "The broadband problem is particularly frustrating, because it is the one piece of the physical infrastructure of computing that is limiting a 'miracle environment' of new applications, thanks to ever-increasing computer speed, power and video-display capabilities." Intel has expressed the same sense of frustration, and proposed a national goal that by year-end 2002, 80 percent of U.S. homes should be able to get at least 1.5 Mbps capacity and 50 percent of U.S. homes should be able to get 6 Mbps from at least two providers, with the even more ambitious goal providing 100 million homes and small businesses with 100 Mbps of broadband capacity by the end of the decade.
We believe the market should be the ultimate arbiter of how much is invested in the broadband infrastructure and how many consumers choose to utilize such services – hence our support for eliminating market-distorting regulations. It is worth noting, however, that economists Robert Crandall and Charles Jackson estimate the economic benefits from widespread diffusion of high-speed Internet access at between $100 billion and $500 billion per year in increased consumer and producer surplus, and in testimony before a congressional committee last April, Douglas Ashton, managing director at Bear Sterns, said it will likely cost over $200 billion to modernize the "last mile" infrastructure of telephone companies so that broadband services can be rolled out. The magnitude of such estimates suggests that accelerated telecom deregulation would have a significant impact on overall economic growth.
4. The Administration should aggressively promote steps to eliminate disincentives to investment by accelerating telecom deregulation as rapidly as possible.
The importance of deregulating investment in broadband facilities appears to be recognized by the current Federal Communications Commission. At a press conference on October 23, 2001, FCC Chairman Michael Powell declared that "the widespread deployment of broadband infrastructure has become the central communications policy objective today," and that "it is widely believed that ubiquitous broadband deployment will bring valuable new services to consumers, stimulate economic activity, improve national productivity, and advance many other worthy objectives." Chairman Powell emphasized in his October 23 remarks that "[s]ubstantial investment is required to build out the [broadband] networks and we should limit regulatory costs and regulatory uncertainty." Indeed, he concluded that "broadband service should exist in a minimally regulated space."
Chairman Powell’s remarks aside, the Commission has thus far taken no determinative steps to alter the underlying regulatory regime facing the incumbent telecom companies, and the Administration has been virtually silent on the issue. And while it is clear many in Congress would be prepared to vote for deregulatory legislation, key members have been successful in delaying action, perhaps indefinitely, on the key legislative proposals.
We believe it is time for the Administration to end its silence on telecom deregulation and take a stance squarely in favor of eliminating disincentives to investment in broadband infrastructure. There are many specific steps open to the FCC to move in this direction, and the Administration should urge – in a proper and public way – that it do so. It should also support legislation, modeled after bills introduced by Reps. Tauzin and Dingell in the House and Sen. Brownback in the Senate, to give clear statutory guidance to the FCC and minimize the prospect that deregulation could be further delayed by litigation.
In the wake of the September 11 tragedy, the Administration is right in seeking every opportunity to remove barriers to economic prosperity and promote a quick recovery. Restoring growth to the IT sector is essential to that goal, and eliminating current regulations on telecom is an important step that could be taken quickly. We urge you to do everything possible, in word and in deed, to speed the process of deregulating telecommunications and allowing the market to work.
We appreciate your attention to our views on these issues, and of course stand ready to engage in further discussions or answer any questions you might have.
Respectfully,
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