A No-Risk Non-Policy From The Administration On Broadband

The “21st Century High Tech Forum” was held in the Eisenhower Executive Office Building in Washington last Thursday. Meeting at a time of such headlines as “Sprint Cuts Forecast for Phone Business” (WSJ) and “Lucent confesses revenues are back in free fall” (FT), the barons of the New Economy gathered to learn what their government plans to do for them.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />

Mostly, they thirsted to hear the president's policy on deployment of high-speed Internet service. Tech companies of all kinds are convinced that broadband is the key to their future fortunes. Only in a wired nation will the demand for telecommuting and conferencing, distance medicine and education, security services, and entertainment translate into a demand for a flow of hardware, software, and content that will revive the glory of the old days (of two years ago) in Silicon Valley.

The need is not just for broadband at the speeds currently available over telephone lines, cable TV, or satellite, which top out at 1.5 Megabits per second, though widespread availability of this service is an indispensable first step. Tech industries are thinking in terms of 100 Mbs, which is necessary for true interactivity, but which requires the extension of optical fiber into every nook and cranny of the nation, at a cost that can be measured only in Gigabucks.

They left EOB with thirst unslaked. They got a position paper on how much the administration has done for tech, and a 22-minute presidential speech mostly on homeland security. It did contain four paragraphs on broadband in which the audience learned that the president is in favor of it and — here was the meat — that he is sure that the FCC is going to do a great job on the issue.

This shows a fine sense of presidential priorities. Those of us who work near probable ground zero for D.C. want our president figuring out how to keep people from blowing us up, not immersing himself in issues of line-sharing requirements under the Telecom Act of 1996.

But it also leaves a bit of problem. There are two barriers to deployment of broadband: business risk and political risk. The business risk is the standard one facing every capitalist enterprise: Can we deliver a service that people will pay enough for to cover our costs, including the cost of the risk that we may flop and lose our stake?

The political risk is the debris of 75 years of government regulation of telecommunications, which shielded companies from the business risks of loss and, in symmetry, capped the possible payoffs. Now, deregulation has removed the shield, and companies are free to fail. But investment decisions are skewed because the possible returns on the upside are uncertain. Regulators, federal and state, maintain an elaborate network of price controls and cross subsidies and requirements that facilities be shared.

At the moment. the sharing requirements apply to the incumbent Bell companies, but they threaten everyone else as well. Cable-TV providers have been forced to share in individual proceedings involving mergers, though the commission recently announced it would spare them any general requirement, at least for the moment. It reserved the right to change its mind.

Other players are also at risk, because, while the FCC says it favors market processes its various pronouncements make clear that this dedication is shallow. The FCC regards “the market” not as an ultimate value, the bedrock of an efficient economy and a free society, but as simply one of the tools it can use in its process of central planning. If “the market” fails to produce the results desired by commission, whatever these may be this month, it will happily overrule it. And perhaps overrule the overruling next month, or year.

As result, every potential investor in telecom systems is surrounded by ravening competitors who can, if outclassed in the marketplace, spend their capital on political bagmen who can help them appropriate a share of any successful investment. They need not volunteer to share losses, of course, so the system is one in which everyone has a free option on the investments made by everyone else. Privatizing losses and socializing gains is not a prescription for major risk taking or investment.The only way the tech industries will get their desire for broadband is by dismantling this destructive regulatory structure. We do not need or want a land-a-man-on-the-moon program to force broadband, but we do need to stop preventing it if the market is willing to give it to us.

Michael Powell, chair of the FCC, is thought to be a believer in these truths. But he is also aware of the strength and viciousness of the political forces at work, the narrowness of his support from other commissioners, the molasses-like inhibitions of an agency staff that has pro-regulatory views infused into its collective bones like Strontium 90, and the cynicism of the many members of Congress who regard regulatory policy as simply tasty pork.

For the White House to send Powell alone into the battle to achieve what must be done to allow broadband to happen would be like sending his father against the Iraqis without air support. So despite the claims on the president's time, the Department of Commerce and the Executive Office as an institution need to step up here, decree a national policy of deregulation, and give Powell the support he needs, and get 15 seconds of presidential verbiage.

Scuttlebutt has it that this is another case in which the political side of the White House operation is steering the president away from politically controversial actions, either to maintain support for the war or simply to hoard the capital of his high approval rating. The tech industries would be well-advised to point out to the staff that principle is sometimes the best politics, and that hoarded capital sometimes evaporates.