Subject: [NEXTEL-1] Dr. Charles H. Ferguson, Brookings Institution- Testimony Before the Senate Commerce Committee, April 28, 2004

From: [email-masked]
Date: Thu, 29 Apr 2004 11:36:32 -0400

Broadband Policy and the Future of American Information Technology
Testimony Before the Senate Commerce Committee, April 28, 2004

Dr. Charles H. Ferguson, Brookings Institution

Email:  [email-masked]; http://brookings.edu/scholars/cferguson.htm

Mr. Chairman, members of the Committee, thank you for the opportunity to
discuss U.S. telecommunications policy.
On September 11, 2001, because it was judged unsafe for President Bush
to return to Washington, DC, he conferred with his advisors over a
secure videoconferencing link, a technology that will be critical to
managing future national crises ranging from terrorist attacks to energy
supply interruptions.  Broadband technology is also critical to economic
performance and national welfare.  Yet the United States now ranks
approximately 20th worldwide in broadband deployment, and is falling
further behind.  Although this industry is phenomenally complex, the
sources of this problem are ultimately quite simple:  broadband services
are hostage to the self-interest and inefficiency of powerful incumbent
firms, and Federal policy has failed to create a modern, competitive,
open architecture local broadband industry.

Let me begin with the still under-appreciated importance of broadband
services.  First, most terrorist threats involve significant
transportation disruptions and/or quarantines, with broadband
telecommunications required to replace physical transportation during
the crisis.  Second, videoconferencing and other broadband services are
now critical to managing problems such as the cost and quality of health
care, maintaining economic growth while limiting pollution and global
warming, and surviving any future energy shock related to Mideast
politics.  And third, broadband services are critical to restoring and
maintaining U.S. economic performance in an Internet-driven global
economy.

And yet the United States, which invented the Internet and pioneered the
commercial Internet revolution ten years ago, is performing
exceptionally poorly in broadband deployment, and more generally in
local telecommunications services.  Every other digital information
technology industry - semiconductors, personal computers, disk drives,
computer servers, software, consumer electronics, local area and
corporate networking, fiberoptics, telecommunications equipment, long
distance services - all of these industries deliver to their users
exponential improvement in performance per dollar, ranging from 40% per
year to 75% per year.  There is, however, one exception:  U.S. local
telecommunications services, ranging from voice telephone service to
broadband service, have displayed low or in some cases even zero or
negative rates of improvement over the last decade.

Furthermore, while the United States has one third of the world’s
computers, it has only 14% of the world’s DSL lines.  As of year-end
2003, the United States had 4.8 DSL lines per 100 telephones, versus for
example 5.1 for China, 9.6 for France, 10.9 for Canada, 12.3 for Israel,
14.4 for Japan, and 21.4 for Taiwan.  China and Japan both now have more
DSL lines than the United States.  World broadband deployment is growing
78% per year, while U.S. broadband deployment is growing only 35% per
year.  On a price-performance basis, U.S. broadband service is twice as
expensive as China, eight times as expensive as South Korea, and thirty
times more expensive than in Japan.

This quite stunning situation generates many problems.  First, as all
information technology becomes more Internet-dependent, all IT products,
services, industries, and applications are increasingly hostage to the
local broadband bottleneck.  This affects the health of the U.S. high
technology sector and reduces productivity growth throughout the U.S.
economy, perhaps by as much as 1% per year.  Second, the high cost and
low performance of U.S. broadband services is a driver of outsourcing,
causing higher unemployment and downward pressure on U.S. wages, which
have now stagnated in real terms for several decades.  Third, local
broadband costs are now the dominant source of the “digital divide,” the
growing inequality of information access between wealthy and average
Americans.  Because computers continuously become more powerful and less
expensive, over a five year period broadband costs are now greater than
personal computer costs.  And fourth, America suffers more than
necessary with regard to health care costs, medical accidents, lack of
preparedness for terrorist attacks, pollution, and vulnerability to
energy price shocks.

This situation has developed and persisted because the dominant
providers of local telecommunications have blocked true competition and
the development of a modern, open-architecture industry.  This is
rational on their part:  competition and technical progress in broadband
services would undercut local telephone companies’ traditional voice and
data businesses, and threatens the video distribution monopolies of the
cable industry.  Yet Federal policy, particularly under the Bush
Administration, has been ineffective or even counterproductive.  As a
result, the industry remains insufficiently competitive.  In the
residential broadband market, only two thirds of users have any choice
at all, and even then they face at best a duopoly of one telephone
company and one cable provider.  These residential broadband services
are also designed to impede, rather than promote, Internet telephony,
advanced video delivery, and videoconferencing.  Most other local
telecommunications markets, including much of the business broadband
market, are dominated by a single incumbent.  And despite many public
statements by the incumbent telephone companies implying that it would
be rational for them to invade each other’s territories, not a single
incumbent has ever competed against another, in any market.  These
companies literally spend more money every year on lobbying, litigation,
and expert witnesses than they do on R&D.

However, the nations now leading the world in broadband deployment all
share two characteristics:  a strong national policy, and enforcement of
truly competitive industry conditions based on unbundling and open
access to local facilities.  Some nations also have subsidies, which
however are designed to reward deployment, competition, and technical
progress, rather than simply handing money to inefficient incumbents.

Thus, Mr. Chairman, and members of the Committee, I must conclude on a
pessimistic note.  In regard to telecommunications policy, Federal
policy is failing the American people, with serious consequences.  To
remedy this problem, I would recommend the following:

1. A national broadband policy with the primary goals of establishing a
competitive, open architecture industry; providing universal broadband
service; and providing continuous improvements that keep pace with the
information technology sector.

2. True mandatory unbundling of existing telephone and cable television
local loops, including open-architecture access points analogous to
those used in the Internet.  Access rights should be expanded to all
potential providers, rather than being restricted to common carriers as
is the case under the 1996 Act.

3. Subsidies may be helpful.  However, they must be linked to actual
broadband use, and possibly restricted to services provided by
non-dominant carriers.  For example, a subsidy for each unbundled loop
used for new broadband service, in exchange for low loop resale rates,
would potentially be helpful.

4. Antitrust investigations and actions directed at the incumbent
telephone firms should be seriously considered.

5. Reform of the FCC, DOJ antitrust division, and other Federal
regulatory systems to improve the political independence, efficiency,
and high technology expertise of Federal regulation and policymaking.

For those interested in much further detail, and possibly also something
to put them to sleep, Brookings Press has just published my book, The
Broadband Problem.  Thank you.

 Attachment:  Selected Broadband Deployment Data
Source:  www.dslforum.org

Global Ranking
31 December 2003
 Country
 DSL Subscribers
31 December 2003
 Telephone lines 2001/02
(ITU)
 DSL per 100 phone lines 31 December 2003

1 South Korea 6,435,955 23,257,000 27.7
2 Taiwan 2,800,000 13,099,416 21.4
3 Hong Kong 690,000 3,842,943 18.0
4 Belgium 789,677 5,132,427 15.4
5 Japan 10,272,052 71,149,000 14.4
6 Denmark 473,481 3,739,247 12.7
7 Singapore 242,000 1,927,200 12.6
8 Israel 380,000 3,100,000 12.3
9 Finland 336,600 2,850,000 11.8
10 Canada 2,170,243 19,962,072 10.9

USA:  4.8 DSL lines per 100 phones, less than half of Canada, which is
#10; even China is already ahead of the U.S., w/ 5.1 DSL lines per 100
phones, & its DSL use is growing much faster (over 300% per year); As a
result, by year-end 2003 China and Japan already had more DSL lines in
absolute terms than the U.S., which is now #3

USA falling further behind:  35-40% US annual DSL growth rate vs. 78%
world growth rate; US will soon be far behind several nations even in
absolute terms (e.g. China, Japan, Korea); see national rankings by
total DSL lines as of 12/31/03:

Global Ranking
Country
 DSL Subscribers
31 December 2003
 DSL per
100 phone lines
31 December 2003
1  China 10,950,000 5.1
2  Japan 10,272,052 14.4
3  USA 9,119,000 4.8
4  South Korea 6,435,955 27.7
5  Germany 4,500,000 8.4
6  France 3,262,700 9.6
7  Taiwan 2,800,000 21.4
8  Italy 2,280,000 8.3
9  Canada 2,170,243 10.9
10  UK 1,820,230 5.2

 http://commerce.senate.gov/pdf/ferguson042804.doc

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