Just six years ago, Congress enacted the Telecommunications Act of 1996, promising competition in local telephone markets and cable TV services. The forthcoming competition would provide consumers with better services and lower prices.

Today, the competitive landscape is checkered. The incumbent telephone companies continue to provide 91 percent of all local access lines. Competitive local exchange carriers (called CLECs) provide the remaining access lines (mostly to businesses), while several cable TV operators are providing two-way, interactive voice communications. An estimated 1.3 million consumers received basic telephone services from cable operators in 2001.

The strongest competition to the incumbent cable operators for video services has come from the rapidly growing direct-broadcast TV satellite systems (DBS). DBS has 20 percent of the pay-for-TV market and continues to grow at a steady rate but has not yet had much effect in tempering the rise in cable rates. “Cable television prices rose at more than twice the rate of inflation for the year ended July 1 (2001),” according to an FCC report.

Was the ’96 Act flawed? Or were public expectations unrealistic? The answer is “yes” to both questions.

Robust competition between entrenched, incumbent monopoly providers in the cable TV and local telephone markets simply did not happen. Instead, we have witnessed a
rash of industry consolidations and mergers during the past six years. The seven regional Bell operating companies became four. SBC merged with Pacific Bell, and then with Ameritech. Bell Atlantic merged with Nynex and then with GTE, to become Verizon.

Quest bought U.S. West and, after declining in stock value 77 percent in the past year, appears to be in trouble financially. AT&T bought two of the nation’s largest cable companies, to form a broadband division that now is being merged with Comcast. WorldCom bought MCI, was blocked by antitrust regulators from buying Sprint, and now also is in trouble financially.

Advocates for the CLECs have viewed these mergers as dark clouds on the horizon, hinting that we are headed for the re-monopolization of telecommunications. This bleak assessment may be premature. Robust competition has continued in long-distance services and has emerged in such new services as wireless telephony, data transport, and access to the Internet.

Most significantly, these new services are substituting for the old ones. An understanding of this seismic shift explains why telecommunications policy is so important to state and local leaders, so hopelessly complex for federal and state regulators, and so fascinating for the rest of us. Instead of competing against each other to provide traditional services, the incumbent telephone and cable TV companies are competing to gain new customers for advanced services in the form of broadband access to the Internet.

The New Supplants the Old
Six national companies compete to provide wireless telephony. A recent offering to consumers includes a free phone and battery charger, 600 any-time minutes, and 3,000 evening/weekend minutes per month, with no roaming charges and no extra charge for long-distance calls. All for $39.99 per month, with the first month free.¹ This is a better deal for many consumers than the cost of traditional services with a landline telephone.² Voice traffic is growing faster on wireless systems than on wireline networks.

The shift of voice from analog to digital transmission illustrates the same theme. Voice was once carried as an analog signal through circuit switches over telephone lines. Increasingly, voice can be sent in small packets of data (those digital 1s and 0s). This is called voice-over-Internet protocol (VoIP). Six percent of international telephone calls last year were VoIP because data transport evades the steep international tariffs imposed by other nations on traditional calls placed through common carriers.

VoIP is growing rapidly, despite its inferior quality, because it is so cheap. Companies that lease virtual private networks for data transport to multiple locations have been the pioneers in installing IP phones for voice communications. Leading this transition in the home, Microsoft’s latest operating system, Windows XP, “permits computer users to talk to each other via an Internet telephone.”³ Voice traffic is projected to grow at 6 to 8 percent a year, while data traffic will increase at 40 percent annually in the coming decade.⁴

Telecommunications Convergence
“Bits are bits,” proclaims Nicholas Negroponte, the director of the MIT Media Laboratory. All forms of social communications can be transmitted as digital 1s and 0s through various networks throughout the globe, at lightning speed. In the competitive context of the ’96 Act, convergence meant the use of one pipe to deliver all forms of communications services. Indeed, convergence in telecommunications means that a variety of providers, using either pipes or the air, will be able to transmit all manner of voice, data, and video signals to our homes and businesses.

Billion-dollar bets are being wagered on which technologies and networks will produce the advanced telecommunications services that the public will be willing and eager to consume. The weakest link remains the first 100 feet from the home.⁵ Placing huge bets on building these networks to reach our homes, without knowing what consumers will be willing to pay for, is a high-risk business proposition.⁶

In fact, the word “convergence,” has three distinct meanings. An example of technical convergence is a handheld unit that combines the functions of a computer and a telephone. An instance of corporate convergence is the combination of communications and entertainment services into a single source of provision, such as voice, data, cable TV, or Internet services. The AOL Time Warner merger of 2001 represents this form of convergence, the marriage of content and conduit. And third, industrial convergence occurs when different providers “slide” into each other’s businesses, such as electric utilities and telecommunications companies. Electric utilities, controlling their own ubiquitous wired networks, have the potential to compete in many telecommunications markets, and a few are beginning to do just that.

Advanced Telecommunications Capacity Is Vital to Our Communities
What does all this mean for local and state government officials? Why should they be expected to understand telecommunications policy debates? Specifically, what should local government officials do to influence these deliberations on behalf of their communities?

Following are three reasons why telecommunications policy is important to community leaders:

1. The quality and reliability of telecommunications services is essential to community economic development. High-quality telecommunications services increase the efficiency of production for existing firms and make a community more attractive to new firms. These services link your community with the digital economy, overcome distance barriers, and enable workers to obtain skills that are necessary for better-paying jobs.⁷
2. Advanced telecommunications capacity in your community will enable your local government and other primary institutions, like hospitals and schools, to develop electronic means of providing information and essential services to the public. Telemedicine and distance learning are just two applications that require advanced telecommunications capacity. E-government must not be constrained by poor infrastructure.
3. The opportunity to succeed in the digital future should not be left to chance.  Private companies will invest where the market looks promising. Local government officials must ensure that their communities are not left behind. Information technologies and the people with the skills to use them well will join educational achievement to rank as the key variables that will determine success in the 21st-century digital economy. Organizations with these advantages will prosper. Those without them will not.

Broadband Communications
Broadband has to do with the speed at which a large amount of data can be transmitted via telecommunications. The FCC defines advanced telecommunications capacity as “infrastructure capable of delivering a speed of 200 Kilobits per second (Kbps) in each direction,” while it defines as high-speed “those services with over Kbps capacity in at least one direction.” Cable-modem service, which already has 7.2 million subscribers, offers a distinct advantage for the residential market. The telephone companies are pushing the Digital Subscriber Line (DSL), which employs the higher frequency of the copper loop, in this emerging broadband market. Unfortunately, it can only work for consumers within 18,000 feet of a central office switch.⁸ DSL currently serves about 3.5 million consumers.

Broadband access to the Internet can also be provided by satellite and through fixed wireless technologies. Optimists hope that the third generation (3G) of wireless technologies can achieve broadband capability, although the lack of available spectrum for 3G will slow its development. (And the Pentagon will not be giving up that spectrum anytime soon.)

Last, on the scene, in means of broadband access, is WI-FI, the community use of the unregulated spectrum (the 802.11b standard), which can provide 11 megabits per second of Web speed to users within 50 to 150 meters of each radio beacon. WI-FI is growing rapidly in airports, Starbucks cybercafes, and college communities, but it may never achieve the security level of the more established telecommunications conduits.

In most communities, broadband competition will be limited to the cable TV operators and the incumbent telephone companies. The good news is that most consumers will have a choice. The bad news is that the choice so far is so limited. And this has prompted the current policy debate about the federal regulation of broadband access.

Deregulating Broadband
The Federal Communications Commission ruled on March 14, 2002, that
cable-modem services were “information services,” not telecommunications ones. This important distinction means that cable operators will not have to comply with the traditional common-carrier responsibilities imposed on the telephone companies. Pending at the FCC is a rule-making procedure to define broadband via wireline as information services, removing DSL from the phone companies’ common-carrier responsibilities.

Both actions are intended to promote broadband development by minimizing regulatory burdens on the dominant providers, and both represent a substantial loss in public revenues to state and local governments. The National League of Cities has estimated that the FCC ruling will cost cities and counties $135 million in lost franchise fees. NLC, the National Association of Counties, and other organizations are challenging this FCC ruling in federal court.

Similarly, the states will lose tax revenues if the FCC defines DSL as information services, as it is expected to do this summer. Currently defined as a telecommunications service, DSL now is subject to the same state excise taxes as typical telephone services. Hence, the FCC redefinition of both as information services would place them squarely under the protection of the federal moratorium on state and local taxation of Internet access, which was extended last fall to October 2003.
 

What Is the Elusive “Public Interest”?
The rationale for public regulation of the telecommunications industry traditionally has involved two basic objectives: to protect consumers from the market power of dominant providers; and to promote diversity of information, voice, and opinion in a democratic society. Proponents of deregulating broadband access to the Internet argue that this would stimulate private investment in deploying broadband.

The FCC is seeking public comment on the proposed rule-making procedures to deregulate broadband and will rule on these issues later this year. Should the FCC deregulate broadband completely or impose rules to protect consumers, promote competition, and ensure nondiscriminatory access to these broadband networks?

DSL is currently treated as a basic telecommunications service. As common carriers, the telephone companies must “unbundle” their data services in two ways:

1. Unbundle physical loops so that competitive rivals (CLECs) can implement DSL for direct sale to the public.
2. Unbundle their DSL service so that ISPs (Internet service providers) can sell Internet access over the incumbents’ network.⁹

Consumer advocates and public-interest attorneys have asked how waiving these rules would affect consumers: Could rival CLECs obtain access to the incumbent network to offer competing DSL services to the public? Under what terms? Could independent ISPs gain access to the incumbent’s network? Again, under what terms?

Unlike the telephone companies, the cable operators have never had common-carrier responsibilities. They are governed by the terms of their local franchise agreements, which include local content requirements (through public, education, and government channel provisions) and federal law (Title VI of the Communications Act). Hence, the cable operators do not have to offer their transmissions to the public on a nondiscriminatory basis; nor are they required to provide access to their networks to rival ISPs.

The open-access controversy, which began in 1999, now has reached the doorstep of the FCC. Advocates had sought to impose access obligations, similar to those of common carriers, on cable systems that offered access to an Internet service provider. Before AOL’s merger with Time Warner, AOL was the most prominent advocate of forcing cable providers to open their systems to rival ISPs. Incumbent cable operators did not want to share access to rival ISPs and still do not.

Portland, Oregon, and Broward County, Florida, were among the first local governments to impose open-access obligations on their cable operators, asserting their authority as the grantor of the cable franchise agreement. These open-access obligations were challenged in federal court. And the courts were not sympathetic to the municipal arguments. This March FCC ruling, if upheld by the courts, would prevent local franchising authorities from imposing open-access requirements. The venue for policy making is clearly the FCC.

Indeed, the March ruling by the FCC sought comments on whether cable operators should be required to provide access to multiple Internet service providers. Not so long ago, advocates of open access were told that could not be done for technical reasons. At least, that argument can be laid to rest. AOL Time Warner has already given rival ISPs access to its cable network in some markets because the antitrust enforcers made this access a condition of the merger agreement. In the spring of 2002, Earthlink obtained access to some of the cable systems owned by AT&T. Cable operators, nevertheless, will continue to lobby the FCC hard to avoid the imposition of open-access obligations.

Competition or Duopoly?
The strongest argument for federal deregulation becomes clear when consumers have plenty of choices. Unfortunately, broadband alternatives to cable modems and DSL are stronger in theory than in today’s reality. Star-Brand Communications had attracted 40,000 subscribers by April 2002 for its Internet access via satellite, yet it is losing money.

In 2001, Sprint and AT&T both abandoned their fixed wireless services, which provided both TV and Internet access. And the deployment of 3G and 4G wireless systems requires that large blocks of spectrum be made available. The weakness of these broadband alternatives as viable competitive threats to the cable modems and DSL argues for a stronger regulatory posture by the FCC, at least in the short term.

Competition limited to just two giant telecommunications providers will not ensure high quality and modest prices for broadband. And there is much history to explain why.

When a few firms dominate a specialized market, the providers adopt similar strategies. Either they offer an inferior product at suppressed prices (to discourage rival firms from entering the market), or they provide high quality service at prices higher than could be sustained in a competitive market. Either way, consumers do not get such a great deal.

The Bells increased the price of DSL by 20 percent in the spring of 2001, immediately after the collapse of newer, upstart firms specializing in this broadband service. Firms in a duopoly also use strategies other than quality and price to discourage new entrants. Comcast discouraged RNC from competing effectively in cable services in Philadelphia by buying a local sports team and refusing to make that team’s coverage available to its new rival.

Firms in the computing and communications industries adroitly use their strategic advantages to protect, enhance, and promote their own proprietary systems. Microsoft leveraged its dominance in computer operating systems to “cut off the air supply” of Netscape’s browser, a competitive threat. Before its merger with Time Warner, AOL refused to share its proprietary Instant Messaging (IM) system with other firms. Federal agencies, however, imposed a future interoperability requirement on the IM system as a condition of the merger.

Corporations have a responsibility to their shareholders to act strategically to maximize their short-term profits and the long-term value of their assets. Should we expect the public interest to emerge in broadband communications, like Adam Smith’s invisible hand, after the unchecked consolidation of the computing and communications industries?

Nondiscriminatory Access To Broadband Networks
Having no federal rules governing broadband, argue public-interest advocates, would give the dominant providers too much control over content and enable them to favor their own proprietary interests and partners, to discriminate against competitive rivals, and to become the new gatekeepers to the Internet. The absence of a nondiscriminatory access provision regulating broadband, they fear, would result in the end of the Internet as a collective commons.

Some federal regulation of broadband may be appropriate. Regulating broadband to require open access to rival ISPs would provide more consumer choice and diversity.

Ensuring nondiscriminatory access to on these proprietary systems may be of equal or greater concern to local government officials. Many people have heard the story of the owner of the famous bookstore, Powell’s in Portland, Oregon, using Excite’s browser to find “books.” As reported in the Washington Post, “A banner ad for Amazon.com beckoned. He clicked on ‘shopping.’ Amazon again.”¹⁰

Proprietary networks can serve many functions well, but promoting local economic development and enhancing civic participation in community affairs may be expecting too much of them.

One might hope that a federal rule would not be necessary to ensure that the Web sites of local businesses, government agencies and services, libraries, museums, and other community institutions can be easily found by local citizens on proprietary broadband networks. A book shopper in Portland should be able to find the Web site for Powell’s Bookstore using a cable modem. The local transit authority should have an easily accessible Web site listing bus schedules. Locations and hours of the libraries and museums should be easy to find. Proprietary networks should not thwart e-government.

But notice how the Web has changed since the dot-com bubble burst in March 2000. More firms are paying for prominent listings. Fewer advertising dollars are subsidizing free services. More Web sites are charging fees for content and services. Pay-for-placement is becoming the norm among portals, search engines, and opening screens of the ISPs.

Electronic commerce continues to grow, as does Web shopping. Firms with the largest volumes get the best deals for Web services and business partnerships. Local government officials might do well to favor a federal provision that guarantees nondiscriminatory access for local businesses and community resources on broadband networks.

Building Digital Democracy into Our Communities
At its best, the future of broadband communications will provide high-speed access to more and better information; connect our communities with global resources; boost local and national economies; stimulate learning; and improve the delivery of essential public services. None of these public benefits, however, can be taken for granted.

The dominant providers of broadband do not want onerous federal regulations. They certainly do not want to share their networks with rival firms. Most of all, they do not want the heavy regulatory hand of common-carrier responsibilities on their networks. Perhaps, a lighter touch would work better, accelerating broadband deployment and serving the public interest.

The FCC will be promulgating the new rules for cable-modem services and for DSL later this year. The policy challenge is to respect market forces and to promote digital democracy in our communities. The new federal rules for broadband should protect fair competition, allow access to rival ISPs to give consumers more choices and enhance diversity, and ensure nondiscriminatory access to local businesses and community resources.

Local government officials should be concerned about preserving a civic space for their local institutions, businesses, and citizens. Convergence in telecommunications, federal regulation of broadband, and local efforts to stimulate infrastructure investment will dominate these policy discussions for many years to come. The FCC and Congress should be eager to hear how local officials define their vision of building a vibrant digital democracy in their communities.

Tom Bonnett is a public policy consultant and writer in Brooklyn, New York. His last book, Competing in the New Economy: Governance Strategies in the Digital Age, was published in 2000. His e-mail address is Twbparkslo@aol.com.
 
 

Look to ICMA Cable Challenges: Convergence and Competition is a Special Data Issue based on data from a 1999 ICMA survey. The report provides case studies that demonstrate how proactive, well-crafted policies and agreements can help local governments meet community needs and the cable-telecommunications challenge (Item number 42625; $29.75). Communications Planning Report. Upgrading local government communications? This Clearinghouse Report from Champaign, Illinois, concentrates on three areas: voice systems; audio visual and multimedia systems; and wide/metropolitan area networks (Item number 42654; $18.00). Access: Making Your Community Internet-Ready is an IQ Report that examines infrastructure issues, service pricing, and Internet readiness while discussing when government should compete and when it should cooperate with the private sector. (Item number 42597; $14.95). More information on these publications is available online at bookstore.icma.org. Secure ordering is available online at the bookstore site, or call ICMA’s distribution center at 800/745-8780.

 

Publication Shows How State and Local Governments  Can Get—and Stay—Up to Speed The book Competing in the New Economy: Governance Strategies for the Digital Age, written by public policy consultant Thomas Bonnett, describes how information technologies affect public policy choices. A short excerpt of the book is available online at www2. xlibris.com/bookstore/bookdisplay.asp?bookid=2139. The book is sold in bookstores and online through amazon.com, borders.com, and barnesandnoble.com.