Continued: On broadband competition...

As I noted last week at the end of my post, the testimony from the Congressional hearing on net neutrality boiled down to the issue of competition. Will banning broadband companies from access-tiering through legislation better serve consumer welfare? Well, that all depends on how much competition currently exists in the telecom industry. The logic goes that if there is ample competition, then the market will regulate itself, and any actions that internet providers take that harm consumer welfare will be deterred by the threat of losing customers to competition. If there is NOT ample competition then that opens up the potential for all sorts of abuses.

The question of competition, however, is different from whether or not access-tiering is a legitimate business model for internet providers... its more accurately articulated as an issue of whether access-tiering, if implemented, will become the ONLY business model available. If that happens then, as many commentators have written, innovation and the very values that have driven the internet will be threatened.

Much of this debate centers around the effects of the telecommunication mega-mergers of SBC/AT&T and Verizon/MCI. As Consumer Union, a consumer advocacy non-profit writes,

"“By allowing the top two telecommunications giants to buy up their competitors, the Justice Department told consumers they deserve little to no choice when it comes to phone, wireless and high-speed Internet providers," said Mark Cooper, Consumer Federation of America research director.

The groups also said the mergers will stymie the competition of Voice Over Internet Protocol (VOIP), which uses high-speed Internet connections to offer consumers other choices in the local and long-distance market.

"These small companies that are aggressively trying to offer alternative phone service will be big-footed by the new AT&T and Verizon,” Cooper said. For the two-thirds of American consumers who can't afford or do not take the bundle of voice, video and data services these companies package together, prices for each of these services are likely to climb."”

So by the looks of it, there may not be sufficient competition, especially for lower-income families and rural areas (a Free Press report with the straightforward title "Telco Lies and the Truth About Municipal Broadband Networks" goes through erroneous claims against community and local broadband providers made by telecom corporations and the responses). And if there is little choice, then there's also little recourse from access-tiering and monopoly pricing schemes. Particularly disturbing is Verizon/MCI's domination of the underlying backbone of the internet. According to a June 2005 report by Consumers Union entitled "Broken Promises and Strangled Competition", AT&T protested against the Verizon merger, recognizing,

[T]he hierarchical nature of the business makes it possible for top-level suppliers who become dominant in terms of installed based to turn erstwhile "competitors" (e.g. secondary peering backbones) into "customers." Any competitor that can be transformed into a customer when it is convenient to do so is a poor candidate for the type of alternative supplier that could defeat a monopolistic price scheme.

So Verizon/MCI can essentially control the business model of the internet because it controls the cables that its competitors use. Competition, therefore, needs to happen at the backbone level, not just at the provider level. Attorney General Eliot Spitzer explains the implications:

The core risk in this regard is that, post-merger, Verizon will have an Internet backbone that carries its own products in first class, while competitors ride in coach - or, indeed, never get to ride at all. As noted above, Verizon plans to utilize the Internet backbprovides provie "IP connectivity for VoIP services today and other IP-based services tomorrow." This approach dovetails with MCI's own pre-merger strategy of "converging Internet, data, and voice onto a common IP backbone... The sort of products envisioned by this Verizon strategy consumes relatively large amounts of Internet bandwidth. And a combined Verizon/MCI entity would be well positioned to create an Internet infrastructure that could severely diminish the capacity available to competitive providers of these services that need to use Verizon's Internet backbone... there exists today a process known as "tagging," which allows a provider to use rule-based and policy-based filtering to limit the flow of data packets... Using tagging, Verizon could assign a higher transit priority - first class status - to data packets originating on its own system, while relating a lower priority - coach status - to data packets from outside traffic that needs to access Verizon's backbone.

Doc Searls (whose article "Saving the Net" I reference often) believes that the first/second class separation that the merger presents is a symptom of a greater and more threatening vision of the telecoms. He believes that such companies are trying to impose a cable television model on internet access, where consumers lack control at every level of infrastructure (the underlying pipe level, the content level, and the access point [i.e. cable box]). Searls writes in "Net Neutrality vs. Net Neutering",

Specifically, by provisioning big bandwidth downstream and narrow bandwidth upstream, while blocking ports 25 and 80--in crass violation of the Net's UNIX-derived network model, in addition to the end-to-end principle--the carriers prevent customers from running their own mail and Web servers and whatever server-based businesses might be possible. Again, all the carriers can imagine is Cable TV. That's been their fantasy from the beginning.

So, while pro-Net advocates wish to liberate the Net by burning neutrality into law, anti-Net advocates wish to neuter the Net by preserving the current regulatory regime--or by otherwise re-regulating it to favor the Cable TV model they've built their infrastructure for since the beginning.

...but I'm digressing from the competition issue. I went into the issue of broadband competition with a fairly open mind. I figured from what I'd read that broadband was basically controlled by a couple large corporations that owned the underlying backbone of the internet, but I assumed that the net neutrality advocates vastly underestimated the competition that exists between DSL, cable, and wireless. And its true, cable (led by Comcast and Time Warner) has outstripped DSL in popularity... suggesting a fairly robust market in urban areas, and growing access and competition in rural areas. However these figures don't tell the whole story of the cable v. DSL war. For one, despite the so-called "price war" in 2005, internet access actually cost MORE for the average consumer (the same is predicted for 2006). And second, a combination of defensive tactics by the telecoms, and sluggish progress towards laying fiber, have deterred a more competitive market. Thomas Bleha explores this in a May/June 2005 Foreign Affairs article entitled "Down to the Wire." Taking a long excerpt, Bleha explains why the United States hasn't progressed further and faster,

Unfortunately, vigorous multiplatform competition is unlikely to emerge soon. True, there are signs of competition between the cable-modem broadband offered by cable television companies and the DSL service offered by telephone companies. Comcast plans to provide reliable Internet-based telephone service by doubling the speed of its broadband offerings from 1.5 megabits to 3 megabits per second over the next three years. Verizon and SBC Communications have dropped the cost of their broadband service to about $30 a month. And to compete directly with cable, some phone companies have begun to talk of developing their own Internet telephone service and providing higher broadband speeds to deliver video.

But these new services will probably appear only slowly, and competition between the telephone and cable companies will remain limited. The reasons are simple: cheap, high-speed broadband would lead to widespread use of Internet telephones and thus threaten the phone companies' lucrative voice-telephone business, and more inexpensive broadband would multiply outside video and movie offerings and endanger the cable companies' profitability. So, although both the telephone and cable companies could provide cheap, high-speed broadband if they chose to, they are not rushing to develop it.

The lack of strong incentives to encourage competition has, in other words, doomed broadband in the United States to remain much slower and more expensive than in Japan. Over the next five years, service is likely to get only marginally faster and cheaper. Meanwhile, at current transmission speeds, the next "killer" application -- Internet telephone service -- will remain shaky and unreliable.

The development of ultra-high-speed fiber broadband service, which is just beginning to appear in the United States, will also lag. Barely more than 600,000 U.S. offices and homes had fiber connections at the end of 2003. Verizon plans to bring fiber to 3 million of the United States' 115 million households by the end of this year, with speeds ranging from 5 to 30 megabits per second. SBC Communications, which dominates the Midwest and Southwest markets, and BellSouth, the leader in the Southeast, are also laying fiber, although at a much slower rate. But they plan to stop the work after spending about $10 billion (the estimated cost of bringing fiber close to about 10 million U.S. homes and offices) and then examine whether further investment is justified. As a result, the pace of rollout will be slow. And the emergence of the substantial market needed to inspire innovative new products and services for those with fiber Internet access remains years away.

Last year, another Brookings economist, Charles Ferguson, argued that perhaps as much as $1 trillion might be lost over the next decade due to present constraints on broadband development.

Bleha's most important point here is connecting the lack of competition to a decline in United States internet access (and, therefore, a decline in global economic power). This is not new news- in fact an FCC report on telecommunication competition reports that "we still lag behind many foreign countries in [internet] penetration rates."

This may very well be the argument that wins over a lot of voters and politicians.