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The November 14, 2001 Issue Provided by System Dynamics Inc.
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Columbia Seminar: "The Broadband Economy"

On October 26, we attended a day-long seminar "The Broadband Economy: The Emerging Market System in Bandwidth" at Columbia University. Organized by the Columbia Institute for Tele-Information (CITI), a research center for communications economics at the Business School, the day was largely devoted to the prospects for deployment of and investment in residential broadband. The focus was mostly on the US incumbent local exchange carriers (ILECs). ( www.citi.columbia.edu )

The day had some real highlights (especially the treat of hearing Fred Kahn's keynote) and was generally quite stimulating. It had its share of specialized academic work, like James Alleman's talk on "the real options approach", which made us realize how little we know about economics.

The emphasis of the session was strongly biased toward the US and ILECs. We were concerned that it reflected little understanding of cable operators or of broadband outside the US. However, the session was influential in providing us a better appreciation for the obstacles faced by the ILECs as they pursue broadband deployment and gave us some sympathy for their desire to change the current rules.

The most interesting talks were those related to broadband public policy:

  • John Thorne, a Lecturer at Columbia Law School and Senior VP and Deputy General Counsel at Verizon (one of the US ILECs) gave a talk on "The 1996 Telecom Act - What Went Wrong and Protecting the Broadband Buildout". The Act established a new policy framework for US telecommunications, with the intention of promoting competition and reducing regulation. Not surprisingly, Thorne blames the FCC for mis-managing the implementation of the Act in such a way as to create and then destroy the competitive carriers (CLECs). His key point was well made: forcing the ILECs to unbundle network elements and then sell them to the CLECs at a price at or below the cost of new construction removed any incentive for the CLECs to build their own physical infrastructure. Thorne also asserted that the disparity in regulation between the ILECs and the cable operators gives the latter a substantial advantage which they have exploited to gain the dominant share of broadband customers. ( www.verizon.com )
  • Jerry Hausman of MIT gave a closely related talk on "Competition and Regulation for Internet-related Services: Results of Asymmetric Regulation". He argued that there was no broadband monopoly in the US (cable operators and ILECs share the market), and that asymmetric regulation gives a strong advantage to the cable operators: cable is unregulated whereas ILECs are required to sell unbundled network elements to competitors at a discounted price. He blamed "incorrect regulation" for the bankruptcy of the broadband CLECs. He recommended that both ILECs and cable operators be required to provide non-discriminatory access, and that prices should be set by the market rather than regulators. ( www.mit.edu )
  • Alfred Kahn, Prof. Emeritus at Cornell, was the keynote speaker. Perhaps the most influential advocate for deregulation in the U.S. (he is credited with airline deregulation during the late 1970s), he referred to several of his books and articles including the recent "Whom the Gods Would Destroy, or How Not To Deregulate" (see www.aei.brookings.org/publications/books/kahn.pdf ). In his talk, he accused the FCC of "misguided consumerism" and blamed it for excessive regulation in the name of deregulation. ( www.cornell.edu )

While we don't agree that asymmetric regulation is the main reason MSOs have more US broadband market share than ILECs, we came away more sympathetic to the idea that "old wires/old rules, new wires/new rules" would be a reasonable regulatory principle to apply to ILECs going forward. That is, the present rules should continue to be applied to analog telephony and DSL delivered over the existing physical telephone plant, while a new set of rules should be devised to give the ILECs incentives to build a new broadband infrastructure without having to unbundle its elements. The issue will be how to account for "old" and "new" to avoid cross-subsidy.

At the same time, we sympathize with Jerry Hausman's position recommending moving toward more symmetrical regulation - in particular, that cable operators should provide non-discriminatory access at market-determined prices.