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Weekly Column

Game Over: The U.S. is unlikely to ever regain its broadband leadership.

Status: [CLOSED] comments (88)
By Robert X. Cringely

The question we were left with two weeks ago was "Why has America lost its broadband leadership?" but it really ought to have been "Whatever happened to the Information Superhighway?"

It died.

This column has been around long enough that I actually covered terms like "Information Superhighway" and "National Information Infrastructure" back when they were commonly in use and may actually have meant something. That was pre-2000, I'd say, because once the Internet bubble began to burst, followed of course by the 9/11 terrorist attacks, people simply got interested in different things. And just when the population as a whole gets interested in different things is when -- at least in American culture -- a lot of shady business begins to happen.

What we are talking about here is the Telecommunications Act of 1996, the first real rewrite of the Communications Act of 1934 that established the Federal Communications Commission (FCC) in the first place. The 1996 Act was primarily the work of Senator and then Vice President Al Gore, who may not have invented the Internet but sure helped push it into commercial operation. The Telecommunications Act of 1996 was intended to open up communication services to broad competition on the most basic level, so of course the nation has since 1996 gone from 15 national broadband ISPs to five and a dozen big landline telephone companies to three.

When it comes to government policy things hardly ever work out the way you expect them to.

In 1996 I had 384-kilobit-per-second (kbps) symmetrical DSL while my TV production partners in the UK had nothing at home and 128-kbps ISDN at the office. America was the top broadband country in the world. But now we're in the middle of the pack among developed countries and there are nine DEVELOPING countries that have more and better broadband service than does America according to the Organisation for Economic Co-operation and Development (OECD). To those who say this is BS and that we're actually ahead of the world if you control for rural populations, family size, the effect of Wi-Fi hotspots, etc., I say that is simply wrong: we are behind and losing ground. And the countries ahead of us, a diverse lot including France, Iceland, Japan, Korea, Switzerland, the UK, and even Canada, are for the most part growing faster than we are in large part because of this IT advantage.

There are many reasons for this change of circumstance, but much of it comes down to government policy or lack of it and some of it comes down to pure luck. In large part we've been locked in our own little world where government and business feed on each other in ways that are always symbiotic and often destructive, but this time the rest of the world just passed us by while we were distracted by other things.

Two weeks ago I mentioned, for example, that my friend Ira in Yokohama, Japan pays less than $30 per month for 100-megabit-per-second fiber-to-the-home Internet service. Well it turns out that in Japan such plans can cost as little as $10 per month, which is less than what our telephone companies claim it costs simply to maintain their billing infrastructure. If it costs $10 per month per subscriber for our telephone companies to stay in business without even pushing electrons over the wires, how can they charge that little for 100-mbps Internet service in Japan? What do they know that we don't know?

Japan is an instance where I believe luck was actually a factor in the country's broadband success. Most things cost more in Japan than they do in the U.S., not less. The country's export-based economy was built on selling the same goods for more in the country where they were made than they sold for in Peoria. Sometimes this price differential was absurd, too. In the mid-1990s I had an Internet start-up (it later failed) and wanted to place one of my PC-based servers in Japan. So I went to NTT, the big Japanese phone company, and asked for space in one of its data centers where the company then maintained most of Japan's Internet resources. It was reasonable for me to do this because NTT was an investor in my company. But they told me that while they would love to host my little server (I was building a content distribution network with features that have still not been matched by any subsequent service), as a regulated monopoly they would have to charge me the full retail price for rack space and bandwidth -- $75,000 per month!

What changed for Japan was a new government policy fostering competition in a very similar manner to our own Telecommunications Act of 1996. In fact the Japanese policy was inspired by the U.S. law. But this policy would have been meaningless in Japan, a country even more corrupt than the U.S., had not one ISP decided to push the new rules to their limit. SoftBank BB took a multi-billion dollar risk and began offering broadband service in Japan at ridiculously low prices using the NTT infrastructure. The company was literally throwing money away, which a regulated monopoly could never do but SoftBank could, selling most of its U.S. operations along the way to support this expensive habit. For 2-3 years the company was so stretched by the service that simply paying to NTT the disconnect fees for getting out of the business would have been enough to throw SoftBank into bankruptcy. It was simply luck that SoftBank's broadband ISP turned to profitability before the company was completely broke. And once it was profitable, SoftBank BB suddenly had lots of competitors. Ira has his choice of nearly 20 ISPs willing to pump photons into his apartment in Yokohama.

These services are NOT run at a loss.

SoftBank BB and Japan set a standard that has been replicated in most of the countries that have better broadband penetration and service than the U.S. The model is a single connection to the home managed by a utility but with Internet bandwidth and services provided over that connection by any of a number of competitors. We had that, too, for a while in the 1990s but the big telcos, the incumbent local exchange carriers (ILECs), hated it and worked to undermine their new competitors, the Competitive Local Exchange Carriers (CLECs). And none of those competitors had the deep pockets or the willingness to assume risk of a SoftBank BB, which literally broke the Japanese monopoly.

Part of the reason why we didn't stay on a similar path is because of the highly developed U.S. cable TV industry, which is unique in its scale. The telephone companies generally didn't care about the cable companies because they were in different businesses. Until one day the cable folks started installing DOCSIS cable modems and suddenly they were in the same business, which the telcos hated, but it was too late. Worse still, by then the cable companies had as much clout with the government as the telephone companies did and maybe more because cable companies had relations with every city and town government as well as with states and the FCC. The cable companies weren't going away, their eyes locked on stealing voice service from the local phone companies.

The way the U.S. has embraced ISP diversity is different than in most of the rest of the world. Where the 14 OECD countries ahead of us on the list generally use telco infrastructure to provide Internet bandwidth, we use a combination of telco and cable. There's a problem with that from an efficiency standpoint. In the U.S. we're supporting two completely separate and different technical infrastructures, two billing systems, two service departments, two head offices, two corporate jets. There are economies of scale as our cable and telephone companies consolidate, sure, but they'll never become one and the prospect that the telcos would continue to be forced to share their infrastructure with competitors is being removed by the transition to fiber, because those advanced pipes are exempt from sharing under a subsequent revision of the Telecommunications Act.

It is very doubtful, almost impossible, that we'll catch up to those countries ahead of us in broadband penetration. They are too far ahead and our native demand is simply less because our Internet economies are developing more slowly. Absent some miracle, the game is already over.

As I wrote two weeks ago, the situation is likely to improve somewhat over the next year or two as the telephone companies sacrifice a little to lock us in before we switch to DOCSIS 3 cable modems and the cable companies, in turn, offer incentives to jump to their voice products. But these companies don't think at all in international terms and they simply don't care about international competitiveness or the growth of our economy. They should, but they don't. And they don't because they have never had to. Though they are required to operate in the public interest and to provide public services, these monopolies have never been forced to consider our place in the world.

If there's a solution to this problem it isn't wireless. U.S. mobile carriers are as far behind their foreign counterparts as U.S. ISPs are generally. For all the companies' talk of unlimited mobile broadband, three Slingboxes can take down an EVDO cell. What would happen if AT&T gave every iPhone as much bandwidth as it could easily use? Gridlock. And WiMax is effectively useless too, because the sweet spot in cell size is so large that no ISP can provision enough bandwidth to serve even a quarter of the people who might potentially sign up. They could do it with smaller cells, but then the companies wouldn't make money.

These are moving targets of course, but nothing is going to change without a dramatic new policy or the entry of a deep-pocketed competitor with a death wish like SoftBank, and I don't see even them ever doing it again.

Comments from the Tribe

Status: [CLOSED] read all comments (88)

Let's face it: The government will do anything to keep the People from getting together, let alone having a voice in their government. In a real democracy, or anything like it (as opposed to our fascist state, the private province of large corporations and behind-the-scenes operators (think Carlyle Group, e.g.), citizen participation is seen as a good thing. Here in the good ol' US of A, everything is done to keep voters from voting, to keep citizens informed, to prevent mass movements or citizen action. Of course we don't have decent braodband, and of course it's kept too expensive for millions of us, but not too expensive for the rich and powerful.

Mick | Aug 10, 2007 | 2:26PM

Hi Bob,

You've got many parts of the story right, but a couple of small but critical details are missing or misstated.

You write that "The Telecommunications Act of 1996 was intended to open up communication services to broad competition on the most basic level, so of course the nation has since 1996 gone from 15 national broadband ISPs to five and a dozen big landline telephone companies to three." Of course those fifteen were themselves the byproducts of the previous decade's pro-competitive regulatory intervention, i.e., the 1984 AT&T breakup. That's where the US parted ways with the rest of the world -- by separating "long distance" assets and "value-added services" from "basic telecom", i.e., local service and last-mile facilities. That first intervention created the conditions of possibility for the Internet itself (or at least for it to become more than just an inter-campus experiment). The second intervention was merely intended to extend the achievements of the first, by further eroding the power of bottleneck last-mile facilities owners to hobble, co-opt, and preempt innovation and market entry by anyone/everyone else. Ultimately the scheme failed because the key ingredient that permitted the whole Internet economy to get started in the first place -- i.e., political will, skill, and determination to create and sustain a competitive market in telecom services, i.e., the essential building blocks of Internet service delivery -- gradually disappeared.

Then you write that the US is permanently crippled by the existence of parallel/redundant access facilities -- copper and coax -- for at last two-thirds of US households. This is a great rebuttal to the mantra of "facilities-based competition" (itself just a special case of our current fetish for investment for investment's sake), but a bit overstated I think. Platform competition is likely to keep each type of facility weaker than it might have been in isolation (food for thought for wireless-oriented developing countries), and nothing could be be more wasteful and self-destructive than to compel would-be new entrants to build additional redundant facilities platforms -- each of which (that survive) will ultimately be capable of carrying many orders of magnitude more bandwidth than any individual or household could ever require, even into the distant (e.g., fully immersive HD VR) future. The colossal, Carl Sagan scale waste that will go into such redundant platforms will be the price we all pay for our collective failure to make sensible use of the political tools that democracy has provided us, to establish and police a sane competition policy.

You also write that US telcos and MSOs never cared or even thought much about about the US' role in the world. Knowledge and understanding are certainly not lacking (anyone who recalls and understands the mid-1990s global settlements rebalancing crisis can attest to this). And the implicit contrast you set up between Japanese and US telcos is false. NTT did not happily or patriotically enter into the (TCA96-inspired) facilities unbundling arrangements that made Softbank/YahooBB and Japan the market it is today. Bwtween 1997-1999, the Japanese regulator attempted to foster innovation and competition (in what was then the most expensive telecom market on Earth) with a US/1984-style structural reorg, breaking NTT into two regional operating companies plus a long-haul, value-added operator. When (c. early 2001) that ultimately failed to change incentives/behaviors enough to relieve the critical access facilities bottleneck, Japanese government leaders stepped in and exercised their equity power as NTT's largest shareholder, and "strongly advised" NTT management to offer unbundled metro and local access facilities on commercially viable terms. SoftBank was merely the largest, fastest, and best capitalized player to take advantage of the new opening -- and the rest is history.

I continue to try to imagine a future where wireless access will be sufficiently competitive with terrestrial-based networks on cost, capacity, and performance terms to make the exercise of political judgment and will unnecessary. Unfortunately, I have a much easier time imagining a future where the "standard basket of online content and services" continues to grow in bandwidth and performance requirements at a pace far greater than improvements in wireless technology. Maybe it's just a failure of imagination. If not, and we as citizens continue to be beholden to the prevailing pure-market fantasy, then your pessimism is likely to be a lot more persuasive before 2018, when history suggests we'll get another turn at the regulatory wheel...

Tom Vest | Aug 10, 2007 | 6:58PM

This whole broadband dilemma is akin to the affordable housing problems we are witnessing here in the US. Overall, it seems to me that the giant providers of the above services are more conscience of profits and serving a select group of people(wealthy), than they are of meeting the needs of the population, in full. In my area, an extra $99+ is needed to upgrade to BB.
That's quite a hike for a working class retiree.
Houses start at $450,000, apartments rent from close to $2,000 a month, for a 1 BR. This is my point ... BB providers are, in reality, separating classes, and in the long run, losing potential clients. As such, how can they be equal to overseas groups, whose aim is to please a broader range of clients?

Thank you for your very educational, well-written column.

JOHN | Aug 12, 2007 | 11:52AM