Bandwidth for the People

Policy Review, Oct/Nov 2004 by Crandall, Robert, Hahn, Robert, Litan, Robert, Wallsten, Scott

Different rates of adoption across the world, moreover, do not necessarily mean that one country is adopting broadband "too slowly." One reason for different rates of diffusion is that the U.S. has a much lower population density than Korea, Japan, or most European countries, making new network investments in broadband more costly per subscriber in the U.S. than elsewhere. Another reason may be differences in the demand for broadband in different markets.

Broadband policy in the U.S.

THE U.S. BROADBAND market is increasingly competitive, especially with the rollout of wireless broadband. According to the FCC, at least two companies provide high-speed service in nearly 75 percent of all zip codes. As telephone companies upgrade their networks and cable companies continue to expand their cable capacity, more and more Americans have a choice of service from these two sources. In some cities, more than one cable company offers broadband. Moreover, new technologies, such as wireless access, are increasing competition even further.

Although high-speed Internet access through cable and DSL are similar services, providers of these services face completely different regulations. Local telephone companies supply DSL through standard telephone lines. The FCC therefore classifies DSL as a telecommunications service subject to regulation. Local cable TV companies supply broadband through their coaxial cables. The FCC has attempted to classify cable broadband as an "information service," thus leaving it largely unregulated, but it has been rebuffed by a federal appeals court. This decision, if upheld, could potentially subject cable broadband providers to the same regulations currently facing DSL providers. The FCC has asked for a stay of the ruling and is currently preparing for an appeal to the Supreme Court. As of this writing, the future status of cable regulation is unresolved, but cable companies' broadband services are not currently regulated by the states or the federal government.

Telephone companies' DSL services have been regulated at the wholesale and retail levels. Retail DSL rates are subject to regulation at both the federal and state levels, although such regulation is not currently exercised in most jurisdictions. More important, under the theory that telephone companies control a "monopoly bottleneck" facility, they have been required to lease their networks to competitors. The regulatory environment has favored cable and has deterred broadband investment by telecommunications firms. Perhaps for this reason, as of June 2.003, DSL providers held about 33 percent of the consumer market to cable providers' 5 8 percent. Yet it is noteworthy that in the first half of 2,004, following changes in FCC regulations and court rulings, local telephone companies added more high-speed lines than cable companies did.

Policy options

ECONOMIC POLICY SHOULD address market failures. One type of market failure can arise if a firm has a dominant position that gives it the ability to block entry by competitors. A second type of market failure could arise if a critical mass of users is needed to make it worthwhile to develop new applications that would make use of broadband's faster service. Even if such market failures exist, however, government should intervene only when the expected benefits of doing so outweigh the potential costs. That is, government should try to correct a market failure only when the risks of "government failure" are low.