Thursday, May 05, 2005

Is America stuck in a ditch on the Information Superhighway?

During the New Economy era of the 1990s, most people believed that Internet was going to change the way we shopped, lived and worked. Among the numerous issues that tempered the enthusiasm of the New Economy, bandwidth certainly caused plenty of headaches. Today, the capabilities of our technological infrastructure are getting closer to the promise of what the New Economy was supposed to do for us. As of April 2005, broadband penetration in the U.S. is up to 57% of all internet users with the total internet penetration at about 75% of the total U.S. population.
While it looks like America is on the road to becoming a completely wired nation, two writers, one in Foreign Affairs magazine and the other on the Brookings Institution website, tend to think otherwise. Thomas Bleha best sums up both arguments in that the United States, once a world leader in Internet innovation, “has fallen far behind Japan and other Asian states in deploying broadband and the latest mobile-phone technology. Japan and its neighbors are positioning themselves to be the first stages to reap the benefits of the broadband era: economic growth, increased productivity, and a better quality of life.” The warning signs are evident in that the writers cite:
· While the U.S. has one third of the world's computers, it has only 14% of the world's DSL lines
· World broadband deployment is growing 78% per year, while U.S. broadband deployment is growing only 35% per year
· U.S. broadband service is twice as expensive as China, eight times as expensive as South Korea, and thirty times more expensive than in Japan
· The United States dropped from 4th to 13th place in global rankings of broadband Internet usage
· U.S. local telecommunications services have displayed low or in some cases even zero or negative rates of improvement over the last decade.
Both writers believe that core to the problem is that the United States is the only country among all the industrialized nations that does not have a specific national strategy that deals with increasing broadband access to its population. In particular, they hold the current administration responsible for the U.S.’s decline. In a fast paced global economy where the speed at which information is transferred is key to a country where services comprise of an ever growing segment of its GNP, the United States needs to regain its edge. The question is, does the United States have a broadband strategy to regain the lead and remain competitive with the rest of the world or will stay stuck in the ditch?
What, if anything should the U.S. government do? First, let’s take a look at what the competition out there is doing. Four years ago, Japan was behind the U.S. in the broadband race and had no real strategy. The government created a competitive framework with a goal to become the “world's leading it [information technology] nation by 2005” and “making ultra-high-speed access (up to 100 megabits per second) available to ten million Japanese households.” They aggressively pursued this goal reaching it two years early in 2003. How did they get there? The Japanese government's strategy included:
· Devising significant incentives to persuade Japanese companies to invest in new ultra-high-speed cable, especially in rural areas
· Using tax breaks, debt guaranties, and partial subsidies
· Towns and villages willing to set up their own ultra-high-speed fiber networks received a government subsidy covering approximately one-third of their costs
· Removing many regulatory obstacles while at the same time having antitrust authorities ensure that the regional telephone companies did not create obstacles for their competitors
Should the U.S. government play such a large roll in molding the competitive dynamics of the American broadband industry? There is no doubt that there will be economic and social benefits with a faster, more comprehensive broadband infrastructure. Broadband plays an increasing role in the U.S. economy because all IT products, services, industries, and applications are increasingly hostage to the local broadband bottleneck. This affects the health of the U.S. technology sector and reduces productivity growth throughout the U.S. The current administration's plan, not surprisingly, allows the unfettered use of federal land to run fiber-optic lines, includes an economic security package that will speed depreciation schedules, removes regulatory barriers via the FCC and increases government spending in R&D. What it doesn’t do is set out any real timetables, provide a strategic framework or give a real sense of urgency to the problem that the United States if facing. There are a few analysts that believe that the Bush administration is on the right path and their writings are here, here, here, and here.
These writers put forth good arguments as to why the government should stay out of the fray. Markets do tend to adjust to the needs of the consumers and there have been instances where government regulation of an industry has strangled competition instead of safeguarding the public good. Still, something does not feel right. Yes, markets do adjust. The problem is, this process can take a very long time. In this case, broadband requires a huge infrastructure investment by the private sector. Just giving providers access to government land and tax breaks does not mean the U.S. will be ready to compete with the rest of the world anytime soon. In the past, the U.S. government had to take the lead in laying down the infrastructure to make sure the private sector moved quickly. Examples abound: the first transcontinental railroad, the New Deal, the national highway system and the space race. The initiatives the government put through in each of these instances made sure that the U.S. remained ahead of the rest of the world scientifically, economically and culturally. Just sitting idly on the side of the road while the rest of the world speeds down the fast lane of the Information Superhighway will not make us the global broadband leader any time soon.
Another concern we have is whether or not real competition actually exists across the country. When living in New York City, the area I lived in, the Upper West Side had only one cable provider and one local telephone service. If you lived below a certain street, you had another cable provider and maybe the same local phone service. The same problem existed in other areas like New Jersey and Long Island. If your only choices were broadband via cable or DSL, that isn't real competition and the pricing was set up that way. In other words, not cheap. While the situation is a bit better here in the Midwest, there are no price wars between multiple providers trying to get your business.
The U.S. is relying more and more on information and the speedy transfer of information. In order for businesses in the U.S. to remain competitive with businesses around the world and in order for the U.S. to regain its preeminence, changes have to me made. The government has to take the lead and help in improving the national infrastructure and prod the private sector to deploy more quickly. The government also has to make the environment truly competitive. Some suggestions to help move this along are:
· Establishing a competitive, open architecture industry; providing universal broadband service; and providing continuous improvements that keep pace with the information technology sector.
· Unbundling of existing telephone and cable television local loops, including open-architecture access points analogous to those used in the Internet.
· Subsidies linked to actual broadband use, and possibly restricted to services provided by non-dominant carriers.
· Antitrust investigations and actions directed at the incumbent telephone firms should be seriously considered.
· Reform of the FCC, DOJ antitrust division, and other Federal regulatory systems to improve the political independence, efficiency, and high technology expertise of Federal regulation and policymaking.
While watching all the fast cars go by can be fun, we need to get out of the ditch and get ourselves into the fast lane. Life might be a bit more interesting there.

George Maurice
Kathy Liao
Evrim Erdim

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