Our broadband fiasco: high-speed connectivity in the U.S. is rolling out in slow motion. Whose fault is it?

Chief Executive, The, Oct, 2005 by Peter Galuszka

Dianah Neff, Philadelphia's chief information officer, bristled in frustration when she reviewed the broadband penetration rates for her 135-square-mile city. Broadband, or high-speed Internet, was reaching only 58 percent of the City of Brotherly Love in total, although 90 percent of nearby affluent neighborhoods had been linked.

The reason? Local telecoms and cable firms, specifically Verizon and Comcast, were setting up broadband networks at their own pace and discretion, she says. They were targeting places where they could bundle separate services and sell them at greater profit margins. Low-income sections and some industrial parks supporting small and middle-sized businesses simply had to wait. "The Digital Divide is very real in Philadelphia," says Neff.

Miffed, Neff helped put together "Wireless Philadelphia," an $18 million public-private project to blanket the city with a hybrid wireless coverage called Wi-Fi, short for wireless fidelity. For a fee through links with Internet providers, anyone with a Wi-Fi-enabled computer would be able to access broadband.

In swift retaliation, Verizon led a charge in the state legislature to ban governments from setting up competitive broadband systems. The gambit worked, up to a point. The state legislature passed the law, but Philadelphia's mayor worked out a deal to exempt his city.

The Philadelphia story is part of the explanation for why the U.S. is slipping badly in the introduction of broadband. The U.S. gave birth to both the Internet and broadband, but has fallen to 12th place among advanced industrial nations in broadband's deployment, a survey last December by the Organization for Economic Co-operation and Development (OECD) showed. South Korea led in the number of broadband subscribers per 100 inhabitants, and Japan, which was nowhere with broadband just five years ago, shot up to eighth position, thanks in large part to a state-sponsored industrial policy called "E-Japan" to introduce broadband on a massive scale.

Absent from the leadership list was the U.S., whose world ranking by other estimates may be as low as 16th. Such mediocre performance is alarming CEOs and policymakers. "I don't think it's really that important whether our number is 11, 12 or 13," says Andy Mattes, president and CEO of Siemens Communications. "The fact of the matter is we still have room to grow and to grow in comparison to other economies around the globe."

Losing Our Competitive Advantage

That's putting it politely. Whether they realize it or not, America's CEOs face a major competitive hurdle because of the broadband mess, says Charles H. Ferguson, visiting scholar at the Massachusetts Institute of Technology. Ferguson says the tardy deployment of broadband could cost the U.S. economy as much as $1 trillion over a decade. "Certainly, it's going to have an effect on overall American economic growth, and it is bound to have an effect on the comparative advantage in the U.S.," he says.

The fact of the matter is that some American businesses are being denied the most advanced communications tools--and their ability to innovate is damaged as well. Japanese and Korean competitors, for example, have clear advantages in testing and developing new products because their national infrastructures are more developed.

What happened? To be sure, the U.S. is harder to wire because its population is distributed over a vast geographic area. It's much easier to link businesses and households in more compact countries such as Korea, Japan or Holland. And, the Net reaches more U.S. customers than any other nation--more than 37 million, compared to 19 million in Japan and 11 million in Korea, the next runners-up.

Still, the biggest problems are of America's own making--getting wired is a complicated mess because of the century-old system of providing telephone service. Traditional telephone companies, such as Verizon, BellSouth and SBC, own about 90 percent of the basic infrastructure, including switches and wire links to customers. As stipulated in the Telecommunications Act of 1996, phone companies have been forced to let broadband suppliers, such as firms offering digital subscriber lines (DSL), piggyback on their networks, but they often balk at doing so. In a new twist, the Federal Communications Commission ruled in August that telephone companies no longer had to share their lines at government-set rates. It is unclear whether this ruling will spur greater investment in broadband or lawsuits or both.

Big cable firms such as Cox and Comcast, which had to pitch their services and win franchises from thousands of big and little towns, offer broadband service, but there are questions over whether they will allow upstart companies to use their systems to offer competing services. A U.S. Supreme Court ruling in June gave the upper hand to the cable operators, saying they had a right to decide who made use of their systems.

The incumbent companies that could provide broadband also are subject to a slew of regulations and taxes that upstart broadband suppliers don't have to bother with, at least, so far. Verizon-type legacy firms, called incumbent local exchange carriers, or ILECs, have to bill customers for state and local taxes along with federal charges, including one that dates back to the Spanish-American War, more than 107 years ago. In addition, they must contribute to the so-called universal service fund through which the federal government collects money that it redistributes to help telephone companies make sure poor inner city and rural areas have adequate service. Incumbents must make sure that their lines can handle 911 emergency calls and can be tapped legally by law enforcement agencies.