Economic Development: The Race for Bandwidth

Is America being hamstrung by outdated telecommunications policies and practices as it competes in the global market ?

by / November 30, 1997
A few years ago, no one could have imagined that high-tech firms would account for 40 percent of America's annual growth in gross domestic product; or that an upstart called Intel, run by a Hungarian immigrant, would be about as profitable as General Electric; or that more than a quarter of Americans would
be using the Internet; or that Silicon Valley and Seattle would be as vital to our economy as Detroit or New York.

U.S. Department of Commerce Secretary William M. Daley, speaking at the Economic Strategy Institute recently said, "Our economy is the strongest in the world, and no country is better positioned to thrive in the growing global economy. We are challenged -- but not threatened -- by competitors, and the only way we can falter in the global economy is if we keep ourselves out of the game."

Yet that is not quite the picture that emerged recently at the Progress & Freedom Foundation's fourth annual "Cyberspace and the American Dream" conference in Aspen, Colo. Executives from the computer and telecommunications industries met to discuss what many see as the major impediment to America's effective competition in the new information-driven, global economy.

Looming Crisis

According to the White House, world trade -- involving computer software, entertainment products, information services (such as databases and online newspapers), technical information, product licenses, and professional services -- has been growing rapidly over the past decade and now accounts for well over $40 billion of U.S. exports.

Most people in the high-tech industry now believe that computer networking is the future of computing -- for not only direct commerce over the Internet, but also because of a growing reliance on networks by businesses determined to maintain a competitive edge in global markets. Many in the high-tech and economic-policy analysis fields worry that America is not keeping up with a vital element of network computing -- bandwidth.

"We need bandwidth now, we need it instantly and we are not going to wait around," John Gage, director of the science office at Sun Microsystems Inc., stated emphatically. "We've got six terabits chunking along fiber these days, with nice dispersion characteristics, so the signal carries a long way. The implication of that is that, as a big company, we can stick our equipment over in Malaysia, where there are minimal regulatory problems and where we can save a lot of money, and all that means to our operation is a quarter of a second delay."

Gage says the growing need for bandwidth will be unrelenting in the years ahead and his company simply can't wait around for America to get its act together. "I'll go buy the gigabit spread spectrum military radios; I'll go buy the Cisco gigabit switch, which is a chip; I'll put them together and give gigabit backbone connectivity. Catch up, US West. Then I'll take these megabit wireless modems that let me start doing commerce or locational base computing and install them in the 15 million new cars made each year, which will be embedded in the network.

"Our world is not the small world of Intel," Gage continued. "Forty or 50 million chips a year, who cares? Let's go talk to Mitsubishi, let's go talk to Samsung -- 30 million chips a month embedded in every vehicle, every sensor, every air-conditioning unit, everything that is going to be on the Net, requiring this bandwidth. That is why bandwidth is going to be inexorable."

To bring the point home, Tim Regan, vice president and director of Federal Government Affairs for Corning Inc., the world's leading provider of fiber-optic cable, tossed a piece of 100-strand cable on the table. His company has a contract with the largest phone company in the world to install this capacity cable overseas. "We are talking about 1.28 pedabits over this one fiber-optic cable," Regan explained. "But this is not going to be deployed in the U.S. It is going to be deployed elsewhere. There are implications for this country if we don't have this kind of capacity and bandwidth out there available for Americans when our competitors in the world are going to have it. Now they are operating under a different system than we are. We have a competitive system, but let us have a system that allows all the major players to play. We are not going to have the technological capacity we need as long as we constrain certain parties and prevent them from being able to play."

Regan refers here to the historic regulatory quagmire that is now serving to curtail investment in the same kind of high-bandwidth infrastructure for America that is being installed elsewhere in the world. Specifically, the regulatory history of both telecommunications and the wireless spectrum are now inhibiting investment.

Fettered By Phone Service

American telecom policy for most of the last century -- in large measure unchanged by the 1996 Telecom Act -- has been shaped by the political pressure for universal, price-averaged, below-cost residential service. "This is the powerful political reality," explained Peter Huber, a senior fellow at The Manhattan Institute for Policy Research and a partner at the firm Kellogg, Huber, Todd & Evans in Washington, D.C. "Residential phone service is very cheap, and it is delivered pretty much at the same price to a house in rural Idaho as to an apartment in New York City. This has been our nation's policy, for better or worse."

This has had profound implications on the entire structure and development of the network. The national average price for a residential phone is about $15 a month for line and dial tone. The cost, averaged nationally, to provide this service is about $25 a month.

"The phone companies aren't the tooth fairy," explained Huber. "We all pay for the difference -- a couple of dollars a month is taken from long-distance charges, a couple dollars from short-distance toll calling, a couple dollars a month from services like caller ID and call waiting -- which are priced way above cost -- a couple from business to residence, and so on."

Added to this, phone companies that operate the local loop -- the connections into homes and businesses -- are often required to resell loop access to other phone companies at below their subsidized costs.

As a result, there is no incentive for the phone line owners to invest more money into them. "Every time you pour money into them, you lose more money," explains Huber. "Why would anybody do that? It is certainly why MCI and AT&T aren't building new infrastructure. And the other guys certainly aren't going to try and compete to build a $15 line that costs $25 dollars to provide."

"There is a small bar in Anchorage, Alaska," Huber continued, "that has a big sign outside that says, 'We cheat the other guy and pass the savings on to you.' That is the entire philosophy of pricing in the phone network today. That is national policy. It is administered by 2000 employees of the FCC under a budget of $200 million a year, and it is administered by tens of thousands of their counterpart state regulators."

Hoover's Spectrum Hoarding

In the wake of the 1927 Radio Act, Herbert Hoover nationalized the wireless spectrum, because he thought, quite incorrectly as it turns out, that spectrum was inherently scarce, and because, up to that point, organization of spectrum had been a mess. After 1927, nobody could own spectrum in America except the federal government. The dominant social purpose of that spectrum, when looking at the way regulatory policies have developed, boils down to one thing -- to deliver one-way, free television. This purpose has been so dominant that it, in effect, has corrupted everything else.

Free television was considered so important, in fact, that for decades the federal government simply hung on to great swaths of spectrum -- hundreds and hundreds of megahertz -- that nobody could use just in case a new city emerged where you had to have free television. "As a national resource, it is an incredible waste every year that spectrum isn't used," said Huber.

Beginnings of Change

For all the criticisms thrown at the FCC and current national policy, something very real was achieved in the last two years. "Huge amounts of spectrum have been moved back into the private sector and they are never going back to the federal government," explained Huber. "That was the one saving grace of the spectrum auctions. Having put so much money on the table, it would seem unfair to take that back, resulting in a tremendous leap forward.

"You have to understand how much the free television doctrine has affected everything," Huber continued. "Because we had to have free, universal television, when cable came along, they developed 'must carry' rules. Cable in every city and county across the country is used to carry the same programs as over-the-air broadcast. This is completely obligatory national policy because otherwise it would threaten free television. And not only that, but since 1992, it has been price-regulated. So for five years, that curtailed investment."

The FCC estimated some years ago that if it simply took two UHF stations in Los Angeles and de-zoned their bandwidth, these stations would immediately stop carrying I Love Lucy reruns and immediately start using the bandwidth for mobile services like messaging, paging or voice telephony.

"A former FCC employee, at one point, had the idea that old taxi licenses might be bought up and re-zoned for other uses," added Huber. "He persuaded the FCC to re-zone that spectrum and created Nextel -- a wonderful, productive, imaginative thing to do. If you are an FCC insider and know the ropes, you can sometimes pull it off.

"But the number of labyrinthine obstacles to doing something like this go on for thousands of pages in the federal register. For instance, say you have six megahertz that you think you can make better use of than providing a little bit of television programming. You say you are going to time-broker that spectrum -- carry anybody's traffic. That's illegal. If you are a broadcaster you have to occupy that channel 100 percent yourself."

Huber pointed to one charismatic example of how spectrum might be better utilized -- the Direct Broadcast Satellite (DBS) model. "DBS spectrum was being released by the Reagan FCC, and it went into and out of court, but they finally gave DBS their spectrum to do with as they wished -- broadcast, common carrier, contract carriage or whatever. And this has been wonderfully fertile. It has attracted capital, but it is the exception on the rule."

New Alliances For Investment

One telecommunications solution raised at the Aspen conference was that digital communications might be separated from voice phone services and unregulated. "If these [were] clearly separated out, and if digital services were both unregulated and no longer had to be made available to low-cost competitors, then yes, this would definitely encourage the needed investment. Absolutely," said Ed Young, vice president for external affairs and associate general counsel for Bell Atlantic.

At the Aspen conference, possibly, the first step toward a much needed solution was accomplished -- a new coalition between the telecommunications and computer industries.

"Traditionally the telcos, the cable TV companies and the computer industry have been at loggerheads with each other, and they shouldn't be because the business models of these are exactly the same," said Phil Burgess, president of the Center for the New West, an independent market-oriented think-tank focusing on trade, technology and the enterprise economy. "All these industries will collapse if they don't get the needed bandwidth.

"I think the computer industry picked the wrong enemy when it picked the telcos," added Burgess. "George Gilder made a comment that no industry in America had ever been deregulated. The regulation just has been made obsolete. I think in the case of telecommunications -- whatever Washington decides -- the technology is going to rapidly overwhelm the regulation and make much of this discussion obsolete. As we move toward greater competition, and as new technologies come in, increasingly, the pricing structures are going to have to start reflecting the architecture of the system."

However, the question is: How fast this will occur? And, if, in the process, America loses the bandwidth race.

December Table of Contents
Blake Harris Contributing Writer