Subject: [NEXTEL-1] The Testimony of Mr. George Gilder Senior Fellow, Technology and Democracy Project, Discovery Institute

From: [email-masked]
Date: Thu, 29 Apr 2004 11:06:41 -0400

Telecommunications Policy: A Look Ahead
Wednesday, April 28 2004 - 9:30 AM - SR - 253

The Testimony of Mr. George Gilder Senior Fellow, Technology and
Democracy Project, Discovery Institute

(Gilder Technology Report)

Mr. Chairman and Senator Hollings, thank you for the opportunity to
appear before your committee today. Your selected topic is crucial to
the well-being of the U.S. and global economies, and I appreciate your
deep interest in the subject.

Overthrowing matter and media with the new worldwide web of glass and
light and air should be a happy and defining event in the history of
man. Global information networks offer unprecedented potential
opportunities for economic growth, cultural revival, and individual
freedom and empowerment. Yet the United States has in large part blocked
the path of the technologies and companies needed to consummate this
vast new infrastructure of chips, fiber optics, antennae, digital
storage, and software.
Although American companies invented almost all the technologies crucial
to the Internet, we have fallen behind many other nations in the
deployment of these technologies.

The U.S. now ranks eleventh internationally in residential “broadband”
access. Using the FCC’s silly 200-kilobit-per-second definition, some
now say that 25 percent of American homes have broadband. But by the
standards of Asia—where most citizens enjoy access speeds 10 times
faster than our fastest links—U.S.  residences have no broadband at all.
U.S. businesses have far less broadband than South Korean residences.
South Korea, for instance, has 40 times the per capita bandwidth of the
U.S. Japan is close behind Korea, and countries from China to Italy are
removing obstacles to the deployment of vDSL, fiber-to-the-home, and
broadband wireless networks.

Asian broadband also proves there was no Internet “bubble.” Today, Korea
runs over the net between a three and five times larger share of its
economy than we do. Riding the bus to work, Koreans watch television
news and exchange video mail over their mobile phones. They enjoy
full-motion video education and entertainment in their homes. Many of
the dot-coms that failed in America due to the lack of robust broadband
links are thriving in Korea. Consider that by this time next year
Verizon Wireless’s 38 million customers will enjoy faster Internet
access via their mobile phones than through their Verizon DSL
connections to their homes. Only the most severe disincentives to invest
could have yielded such a result, which defies the laws of physics. The
American Internet “bubble” was actually a crisis of policy.

The Telecom Act of 1996 was meant to “deregulate” America’s telecom
infrastructure and technologies, the most dynamic sectors in the entire
world economy. But after the usual lobbying and horse-trading, the Act
turned into a million-word re-regulation of the industry. Regulatory
actions by the FCC and the 51 state utility commissions greatly
exacerbated the bad parts of the Act and distorted many of the good
parts. As I predicted the day after it was enacted, the result was a
carnival of lawyers, micro-mis-management by bureaucrats, price
controls, the socialization of infrastructure, the screeching halt of
innovation and investment in the “last-mile” local loop—and the Great
Telecom and Technology Crash of 2000-2003.

In the last year or so, the FCC has partially reversed some of its most
egregious errors. Some are still being adjudicated in the courts. But
U.S. telecom remains a highly regulated, highly taxed sector of our
economy.  The mistakes of the last 10 years have greatly harmed the U.S.
economy, and continued gridlock and inaction threaten to shift American
leadership in technology to Asia, which has embraced the Internet with
open arms.

Today, just as the telecom and technology sectors exit a three-year
depression, we are in danger of repeating the very worst mistakes of the
1996 Telecom Act, but this time on an even grander scale. In today’s
testimony I will address and refute one particular proposal that is
being offered as the basis for the new telecom legislation.  In doing so
I hope also to offer an alternative vision.

The new “big idea” in telecom regulation comes from a host of learned
and experienced telecom thinkers: the likes of former FCC authority
Kevin Werbach, Stanford law professor and technology author Lawrence
Lessig, industry analyst Roxanne Googin, and IPioneer Vint Cerf, to name
just a few.

The idea is mandated “open access” to the logical layers of the network,
and it is embodied in a new legislative proposal by MCI, “A Horizontal
Leap Forward: Formulating a New Public Policy Framework Based on the
Network Layers Model.” A horizontal layers approach would supposedly be
a radical shift from the “vertical silos” approach now used, where
telephony, cable, and wireless, for example, are regulated based on
historical industry definitions, not generic functional categories. The
common denominator of Internet Protocol (IP)—supposedly the basis for
all future communications networks—is said to necessitate the new
layered regulatory approach.

Barely recovering from the FCC’s TELRIC and UNE-P “open access” mandates
that chopped up and assigned ownership rights to the physical
infrastructure—the hardware—of the Net, we now face the prospect of
rigid reassignment of content, applications, services, and protocols,
too.

Whatever it is called, it represents more micromanagement of a dynamic
industry in the midst of major technological transitions.
The new proposal feeds on fear—fears that cable TV companies or the
Bells might seek to leverage their broadband networks by wrapping
content into their conduits, or that Microsoft might keep “tying” new
applications into Windows, or that Google might monopolize information
on the Net (yes, there is already an organized effort to turn Google
into a public utility). MCI’s layering proposal defines rigid boundaries
between content (voice, text, video), applications (e-mail, browsers,
VoIP), protocols (TCP/IP, HTTP, FTP), and infrastructure (wires,
switches, spectrum, PCs, handsets). In a paper entitled “Codifying the
Network Layers Model,” MCI proposes to “quarantine” major providers of
one of the layers within that layer, and to prohibit them from
vertically integrating into another layer unless they offer wholesale
open access to all competitors. Lessig, MCI, and company worry that the
“end-to-end” nature of the Internet—where any terminal attached to the
net can be reached from any other terminal--will be threatened if these
new layering rules are not adopted.

Layering proponents, however, make a fundamental error. They ignore ever
changing trade-offs between integration and modularization that are
among the most profound and strategic decisions any company in any
industry makes. They disavow Harvard Business professor Clayton
Christensen’s theorems that dictate when modularization, or “layering,”
is advisable, and when integration is far more likely to yield success.
For example, the separation of content and conduit—the notion that
bandwidth providers should focus on delivering robust, high-speed
connections while allowing hundreds of millions of professionals and
amateurs to supply the content—is often a sound strategy. We have
supported it from the beginning. But leading edge undershoot products
(ones that are not yet good enough for the demands of the marketplace)
like video-conferencing often require integration.

Metaphors from the Telecosm help explain the fluid nature of these
layers that MCI wants to preserve in concrete. Consider Corvis, our
favorite optical equipment company and national fiber optic bandwidth
provider.  It blows apart the MCI approach on several fronts. First is
CEO David Huber’s architecture of an all-optical network, devoid of
electronic regenerators and protocol readers, which unites content and
conduit by using colors of light both to bear the message and to
determine the path of the circuit. It radically collapses the top layers
of the OSI (Open Systems Interconnection) stack used in the Sonet voice
and data networks of the past, not so much redefining the interfaces as
transcending them. A “switchless” web of always-on fixed lambdas
(wavelengths of light) can function as both the physical and logical
layers of the Net because the intelligence is embedded in the path.
There will be some controlling devices at the edge of the network, and
IP will still be widely used, but the heyday of IP packet switched
networks may well be over. Typically government enshrines the past in
the name of progress. In uniting Corvis, a cutting edge equipment
provider, with Broadwing, an infrastructure builder and service
provider, Huber is also betting that IP networks are not inherently
modular, where equipment from a thousand providers can easily be cobbled
together to deliver high-bandwidth, low-latency services, but that
networks are still in fact in an era of undershoot where an integrated
provider can deliver a superior product at a much lower cost.

Our favorite digital chip company, EZchip, also explodes the idea that
the layers of the Net can always be defined and “quarantined.” Where
until now data flowing through the seven layers and numerous sub-layers
were parsed and modified by a gaggle of hundreds of chips connected by
thousands of wires and glue-logic galore, EZ puts all seven layers of
the OSI stack onto one-chip, performing all the essential functions of
an Internet router on a single sliver of silicon. The “layers” are once
again transcended when EZ’s software tools allow programmers to tell the
chip what to do without even referring to the rigid layers,
channelizations, protocols, and interfaces used in the previous software
environment. Is this fair? Should EZchip be allowed to invade someone
else’s turf, perhaps that of Cypress’s high-end content addressable
memories (CAMs) or Broadcom’s Silicon Spice communications processors or
the sacred code of the OSI idol? Or to blow apart someone’s whole field,
like EZ could one day do to the many providers of communications ASICs
(applications specific integrated circuits), or to Internet router king
Cisco itself? It might be said that the “layering” proposals now in
circulation are yet another (if more clever) attempt by competitors to
target the Bell telephone and cable TV companies. Indeed, MCI’s own
paper implies the cable companies (bundling network, ISP, and content)
and the Bells (bundling network, ISP, and voice) are already stomping
all over the layers, creating a muddy (and hopefully one day illegal!)
mishmash of vertical integration. What a coincidence that the activities
of its rivals violate MCI’s framework and cry out for cleansing and
re-ordering (read structural separation, consent decrees, price
controls, divestiture) by new teams of FCC horizontalawyers and IPolice.

But if the proposals are meant as anything more than political
lobbygagging of rivals, if the proponents really mean their model
legislation as a principled, generic set of rules, then we must consider
the logical consequences of such new laws. If applied dispassionately,
how would such general rules affect the rest of the Internet,
communications, and technology industries?

Should Google be able to leverage search into Gmail, or to supply
content using its proprietary algorithms and its physical network of
100,000 servers? Shouldn’t any rival search provider be able to feed off
of Google’s advanced infrastructure? After all, wouldn’t it be
impossible to recreate Google’s massive web of global intelligence?
Doesn’t Google’s superior infrastructure exhibit “market power”? Might
Google actually evolve into a general provider of web-based information
management services, rivaling the PC-based Microsoft, or should Google
be “quarantined” as a search provider? Or maybe we should structurally
separate Google into three companies: an infrastructure provider (its
100,000 networked servers plus algorithmic IP), a content/advertising
company, and an information services company (Gmail plus future
knowledge management applications).  Surely FCC bureaucrats can make
these easy distinctions and explain the resulting penalties to weary
entrepreneurs who have just spent 10 years of their life building a new
service that people really like.

Should Sony be able to demand that its PlayStation gamers get access to
Microsoft’s Xbox Live online video game network? Should Amazon be able
to aggregate and make searchable the text of hundreds of thousands of
books? Should Sprint PCS or
Verizon Wireless be allowed to develop specialized content delivery
platforms or applications that take advantage of their superior wireless
data networks? Sprint was the first to build its own photo-sharing
platform, and it is apparently the most user-friendly wireless
photo-sharing system. Can we let such infrastructure-leveraging stand?
What if Equinix (the data center company that almost defines of the
integration of the physical, protocol, application, and content layers
of the Net) succeeds in becoming the overwhelming meeting place (peering
point) for the world’s network, e-commerce, and content providers?
Network economics suggest the concentration of all the largest Internet
players in Equinix facilities is possible, or even likely. If Equinix
achieves such “market power,” are we to assume that other “virtual data
centers,” like the CLECs before them, could force Equinix to “open up”
its hosting facilities so that the new virtual competitors can offer
services over infrastructure they did not build? Why should anyone build
risky and expensive new infrastructure if it can be readily used by
competitors. What about Microsoft integrating easy-to-use voice-over-IP
software into its next operating system? Should Microsoft rival Real
Networks be barred from aggregating music and video for download with
its RealPlayer multimedia suite? All of these are, to one degree or
another, inter-layer integrated products and services.

Proponents of “layering, or “Net neutrality,” or a free Internet
“commons,” assume there is one network, that it is sufficient and
timeless, that no new networks are possible or needed. They want
innovation on the edge, in the form of software apps and Wi-Fi
attachments. Innovation in the core is either assumed or ignored. The
logical conclusion, however, is that since the “best network”—the free
commons—cannot make any money, there will be no network. And just how
much innovation at the edge will there be if there is no innovation—no
bandwidth—in the core? MCI’s “horizontal leap” asks authorities to
pursue vigilantly those who would exploit “network choke points” or take
advantage of “network effects.” In industries where “entities seek to
obtain market power” (i.e., seek to make money in a business
enterprise), policymakers need to ensure four things: “open
architecture, open access, universal access, and flexible access.” When
imposed by regulators or courts in a national capital, these four
euphemisms boil down to one hard reality: socialization and
micromanagement of the “architectures” and “access” networks built by
others.

The ability to tie and merge and break apart and outsource products,
services, and technologies are the very stuff of business. As is the
ability to pursue an unguaranteed return on one’s risky investment. As
is the decision how to price these products and services. Some services
will be bundled. Some will be free, loss leaders to leverage the
purchase at another point of sale. But the entire system cannot be free.
Everybody else’s product or service, except one’s own, cannot be a
commodity, barred from bundling or profit.

The companies that enable this broadband world will be able to charge
for it during the years that they provide the optimal service. Their
initial margins will be high. When communications becomes a commodity,
as it eventually will, the margins will drop. This is not a catastrophe.
No one has a right to high margins for a commodity service. But the
Telecosm is still an arena of innovators, such as Corvis, EZChip,
Qualcomm, Verizon Wireless, Essex, AFCI, Agilent, and hundreds of
others, who will enjoy large monopoly rents until their inventions are
standardized and commoditized and the leading edge moves elsewhere. The
telecom industry is nowhere near some mythical paradox of perfection or
cul de sac bargain basement of commoditization. It is still engaged in a
thrilling adventure of putting together worldwide webs of glass and
light that reach from your doorstep or teleputer to every other person
and machine on the planet. It is long distance and it is local, it is
packetted and circuited, it is multithreaded and aggregated, it is
broadband and narrowcast, all at once. These crystal palaces of light
and air will be hard to do and the world will reward the pioneers who
manage to build them. The real threat to monopolize and paralyze the
Internet is not the communications industry and its suppliers, but the
premature modularizers and commoditizers, the proponents of the dream of
some final government solution for the uncertainties of all life and
commerce.

http://commerce.senate.gov/hearings/testimony.cfm?id=1166&wit_id=3340
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