More Regulation Needed to Spur Broadband Competition? Really?

The U.S. Federal Communications Commission should consider regulations for broadband providers in an effort to increase competition, says Lawrence Strickling, National Telecommunications and Information Administrationassistant secretary, as reported by IDG News Service.

"We urge the Commission to examine what in many areas of the country is at best a duopoly market and to consider what, if any, level of regulation may be appropriate to govern the behavior of duopolists," Strickling says.

With all due respect for Strickling, who is a smart, experienced regulatory type who knows the terrain, and without disagreeing in full with the full content of his filing on behalf of NTIA, the notion that competition somehow is so stunted that new regulatiions are required likely would lead to greater harm, despite its good intentions.

Here's the argument. Consider, if you will, any large industry with critical implications for the entire U.S. economy. Now consider the following mandate: "you will be forced to replace 50 percent of your entire revenue in 10 years."

"During that time, for a variety of reasons, incumbents will be forced to surrender significant market share to competitors, so that in addition to replacing half of the industry's revenue, it also will have to do so with dramatically fewer customers."

"After that, in another decade, the industry will be required to replace, again, another 50 percent of its revenue. All together, the industry will required to relinquish at least 30 percent of its market share, in some cases as much as half, and also will be required to replace nearly 100 percent of its revenue, including the main drivers of its profitability."

Does that sound like the sort of industry that desperately needs additional competition? Really?

Nor is the argument theoretical. Over a 10-year period between 1997 and 2007, the U.S. telephone industry was so beset with new technology and competition that almost precisly half of its revenue (long distance), the revenue driver that provided nearly all its actual profit, was lost.

The good news is that the revenue was replaced by wireless voice. Then, because of the Internet, cable company entry into voice and the Telecommunications Act of 1996, market share began to wither. That, after all, is the point of deregulation: incumbents are supposed to lose market share to competitors.

Now we have the second decade's project, when mobile voice revenues similarly will have to be replaced, in turn, as IP-based voice undermines the high-margin voice services that have been the mainstay of the mobile business.

If you follow the telecom industry as a financial matter, you know that service providers have maintained their profitability only partly by growing topline revenues. They also have been downsizing workforces and slashing operating costs.

If you talk to ex-employees of the telecom industry, they will tell you the industry seems no longer to be a "growth" industry. That's why millions of people who used to work in telecom no longer do so.

So what about the other big incumbent industry, cable TV operators. As you clearly can see, and can read about nearly every day, there are huge questions about the future business model for what used to be known as "cable TV." Many observers already predict that such services will move to Internet delivery, weakening or destroying the profitability of the U.S. cable industry.

Industry executives, no dummies they, already have moved into consumer voice and data communications, and now are ramping up their assault on business communications. Why? They are going in reverse for the core video business.

Imposing regulatory burdens on incumbents--either telco or cable--that are losing their core revenue drivers on such a scale might not be wise. Few industries would survive back-to-back decades where the core revenue drivers must be replaced by "something else."

Imagine the U.S. Treasury being asked to replace virtually 100 percent of its revenue with "something else" in about 20 years. Imagine virtually any other industry being asked to do the same.

The point is that industries asked to confront such challenges and surmount them are not typically the sort of industries that need to have additional serious obstacles placed in their way.

Granted, they are niche suppliers, but Strickling also is well aware there are two satellite broadband providers battling for customers, plus five mobile broadband providers, and then hundreds of independent providers providing terrestrial fixed wireless access or packaging wholesale capacity to provide retail services.

Granted, only cable, satellite, telcos and several mobile providers have anything like ubiquitous footprints, but that is a function of the capital intensity of the business. Most markets will not support more than several suppliers in either fixed or wireless segments of the business.

One can argue there is not more facilities-based competition because regulation is inadequate, or one can argue investment capital no longer can be raised to build a third ubiquitous wired network.

The point is that wired network scarcity might be a functional of rational assessments of likely payback. Cable TV franchises are not a monopoly in any U.S. community. But only rarely have third providers other than the cable TV or incumbent phone companies attempted to build city-wide third networks. Regulatory barriers are not the issue: capital and business potential are the problems.

Also I would grant that mobile broadband is not a full product substitute for fixed broadband. But where we might be in five to 10 years cannot yet be ascertained. And we certainly do not want to make the same mistake we made last time.

The Telecommunications Act of 1996, the first major revamping of U.S. telecom regulation since 1934, was supposed to shake up the sleepy phone business. But the Telecom Act of 1996 occurred just as landline voice was fading, and the Internet was rising.

If you wonder why virtually every human being with a long enough memory would say their access to applications, services, features and reasonable prices is much better now than before the Telecom Act of 1996, even assuming it has completely failed, the answer is that the technology and the market moved too fast for regulators to keep up.

The Telecom Act tried to remedy a problem that fast is becoming irrelevant: namely competition for voice services. In fact, voice services rapidly are becoming largely irrelevant, or marginal, as the key revenue drivers for most providers in the business.

Yes, there are only a few ubiquitous wired or wireless networks able to provider broadband. But that might be a function of the capital required to build such networks, the nature of payback in a fiercely-competitive market and a shift of potential revenue away from "network access" suppliers and towards application providers.

It always sounds good to call for more competition. Sometimes it even is the right thing to do. But there are other times when markets actually cannot support much more competition than already exists. Two to three fixed broadband networks in a market, plus two satellite broadband providers, plus four to five mobile providers, plus many smaller fixed wireless or reseller providers does not sound much like a "market" that needs to stimulate more competition.

There's another line of reasoning one might take, but would make for a very-long post. That argument would be that, judged simply on its own merits, the availability and quality of broadband services, in a continent-sized country such as the United States, with its varigated population density, is about what one would expect.

Even proponents of better broadband service in the United States are beginning to recognize that "availability" is not the problem: "demand" for the product is the key issue.