TCS Daily

Content, Competition Are Key To Spreading Broadband; Not Relief For Bell Monopolies

By James K. Glassman - September 10, 2001 12:00 AM

Building broadband communications` pipelines isn`t enough, Harris Miller, president of the Information Technology of America Association, tells Tech Central Station host James K. Glassman. "We need to figure out how to get more demand there," Harris says. One key to faster use is content; another is competition, he argues. "We think the Tauzin-Dingell bill, which is primarily designed to allow the Bell operating companies to perpetuate their monopoly by allowing them into long distance and data without allowing competition in the local market, is exactly the wrong way to go," he says. Miller would encourage companies and government to beef up security to encourage consumer use of the Internet. He also believes IT investment would get a boost if government would stop its consideration of imposing withholding taxes on stock options.

James K. Glassman: Everyone knows that the information technology sector has been a great success story, and its advances have brought the personal computer and the Internet. But fast Internet access with broadband was supposed to be the next leap forward. What`s happened?

Harris Miller: I think there`s been a false assumption all along here, Jim, to borrow a phrase from the movie, Field of Dreams, "build it and they will come." The assumption was that as long as we build it that people would equate availability with the actual use of it. So what we need to do now is to focus on what we can do to create more demand.

Glassman: How do you create more demand?

Miller: There was a phrase during the first Clinton campaign: "It`s the economy, stupid." I think for the broadband debate we may have to focus on a new phrase called, "It`s the content, stupid." We need to figure out how to get more demand there. Over 70% of U.S. households have access to cable modem service, and it`s going to grow to 90% by 2005. DSL is available to 45% of homes today, and that`s going to grow to 74% by 2005. So there`s a lot of availability. But only about 15% of all those households actually take advantage of it.

Glassman: In my own experience, there really are three of reasons why I`ve seen people not taking advantage of broadband. One of them is application, or content, but also there are extreme service problems. It`s very difficult to get hooked up with this kind of fast Internet access. And in addition, it`s become very expensive. Do you agree that those are problems?

Miller: I think the service problem has been real. Worse, though, the perception is even worse than the reality. You do hear a lot of horror stories about scheduling appointments and rescheduling appointments, people coming and not coming. This particularly causes some frustration when you`re trying to hook up with a third-party carrier, a DSL provider, and the local Bell operating company. You hear all these stories, and whether it`s intentional or not, it really does create frustration. I think the companies have realized that unless they can deliver service when people want it and how they want it, their chances of picking up any kind of market share are very, very slim because people get very, very frustrated.

Glassman: What about price?

Miller: The pricing issue is an interesting one because the companies are trying to offer less-costly services. And, of course, they`re trying to bundle services together, including your telephone service. Many companies haven`t done a particularly good job yet of explaining that if you put together all the services that you`re using, including your basic voice service as well as your data service, it`s actually not that expensive. Companies have to be more adroit in explaining to people that it really isn`t that much more expensive than what they`re used to paying now. But if they treat it in isolation, as one simple charge all by itself, it does look like a lot of money.

Glassman: Do you think that consumers are sufficiently familiar with the technologies that broadband can deliver to them? Or is it simply a question of a lack of content having been developed?

Miller: I think we do have a challenge in consumer awareness. Certain consumers seem to be very aware -- telecommuters for example, because it`s directly relevant to their everyday lives. They spend a huge part of their days online, and the absolute frustration of having a 28.8 (megabytes per second) connection simply makes their ability to work effectively almost impossible. So they`re very much driven to find a superhighway through broadband connection, whether it`s cable modem or DSL or, even now, some satellite availability coming online, because it relates to them everyday.
But for a lot of other people, it still is a curiosity. They haven`t really become aware of what they can do, beyond the e-mail applications that they`re used to. For many people, as far as the e-mail applications are concerned in their basic text form, they think what they`ve got is OK, and they really don`t need to spend that much more money for extra e-mail. So we need to find applications and educate consumers about additional benefits that they can obtain that make the time and effort to get broadband available really worth their while.

Glassman: How does your group feel about the Tauzin-Dingell bill, which would make changes in the Telecommunications Act of 1996 supposedly to speed up broadband deployment?

Miller: We`re opposed to the Tauzin-Dingell bill. Basically, what we see in this is an attempt by the local Bell operating companies to eat their dessert before they eat their vegetables. The deal everyone made in 1996, and we think it`s still the most important part of the deal, is that if the long-distance carriers open their markets to competition, then they should be allowed into the local markets so we can get some real competition. Similarly, the local carriers should be allowed into the long distance and data markets and others when they allow competition in the local markets. But what we`re seeing is that the Bell operating companies are trying to make it extremely difficult to have any competition in the local market. A lot of the problems we talked about earlier, about people signing up for DSL, for example, appear to be because the local Bell operating companies make it very difficult for the new entrants -- the new DSL companies, -- to actually hook up their customers. So the customers get frustrated, and they don`t use DSL at all. Also, when the long distance companies and other competitors want to come into the local markets and offer competitive local prices to consumers, the local Bell operating companies charge rates to these secondary markets that simply are not viable in a competitive marketplace. While we`ve seen long distance rates continually drop over the last 10 years, we`ve seen local phone rates continue to increase because there is no real competition. We think the Tauzin-Dingell bill, which is primarily designed to allow the Bell operating companies to perpetuate their monopoly by allowing them into long distance and data without allowing competition in the local market, is exactly the wrong way to go.

Glassman: And you think the right way to go is more competition?

Miller: Competition is what is driving this market. See, Jim, where there are cable companies that begin to offer broadband service, almost magically, overnight the local Bell operating company is offering DSL. But where there is no competition from the local cable company, for some reason the local phone company doesn`t seem to offer DSL service either. They react to competition. As long as they`re able to protect their monopoly position in the local market -- and they have access to virtually every household in the United States and continue to control over 92% of the local phone market -- we`re going to see situations where prices remain high, where there is not competition. With the move to broadband, particularly, what a lot of people call the last mile - but what I prefer to call the first mile because from the consumer`s point of view, it`s the first mile -- it`s the on-ramp. It`s just going to be very, very difficult, whether you`re a small business or whether you`re an individual, because the local Bell operating company really has no incentive to try to offer you that service until competition comes to their local marketplace.

Glassman: Just one follow up question on that, you talked about cable competition. If Tauzin-Dingell passes, and if the so-called C-LECs -- competitive local exchange carriers that sprang up with the Telecom Act in 1996 to compete with the Bells -- go out of business, as many expect, will there be enough competition simply from the cable companies to nurture the kind of lower prices and better services that you talk about?

Miller: The cable companies can offer some competition in the data space. Obviously, it`s very difficult, but not impossible, for them to offer some competition in the voice space because that becomes a much bigger challenge. We also have a situation where, in many cases, the local cable companies are also operating under monopolistic conditions. But they are also operating under strict local government controls on prices that they can charge because they are heavily regulated by local government. So the competition, in theory, should be there, but again, I think, the basic rule of market economics is the more the merrier.

Glassman: So the presence of the C-LECs is very important in bringing the dissemination of broadband?

Miller: The C-LECs are important, as are the long-distance carriers. There`s no reason that WorldCom, AT&T, Sprint, Cable & Wireless and others shouldn`t also be going into those local markets. But what they find when they go in and try to compete is the local Bell operating company offering them rates at a wholesale level that simply don`t make any economic sense. That`s why some of the long-distance carriers and some of the C-LECs have been advocating that the local Bell operating companies should be split into retail and wholesale lines of business.

Glassman: What would that accomplish?

Miller: If that were done, the local Bell operating company would then have to offer the same wholesale rates to its own sister retail company that its offering to AT&T, WorldCom, or one of the competitive local exchange carriers, rather than what appears to be the situation now, where they don`t offer the same wholesale rates. That situation`s just the opposite of what`s happening in the long-distance market. In that market, the long distance carriers have seen intense competition grow up because they do offer very low wholesale rates to resellers. And those resellers are able to attract a lot of new customers. That`s what brings competition. Just the opposite is happening in the local marketplace because the Bells are maintaining their monopolistic power.

Glassman: And you think that, perhaps, a structural separation -- dividing the Bells into wholesale and retail arms -- would be one solution to getting competition?

Miller: Yes. It`s one obvious solution. That the Bells claim they`re offering the same wholesale rates to the competitive local exchange carriers that they offer to their own sister organizations, well, let`s prove that in the marketplace. They`ve, in essence, been given a monopoly at the wholesale level because they do have access to 99% of American homes. Given that huge market advantage, why should they care whether the company that delivers the actual service to the home is their sister retail association or a competitive local exchange carrier or a local company or the local energy company, for that matter? Right now, as long as they`re able to bundle together their wholesale and retail, and set prices internally at one level while selling to other competitive local exchange carriers at another level, it becomes virtually impossible to develop any local competition.

Glassman: In an article you wrote last month, you called for senior-level attention and a worldwide approach to Internet security. What is at stake in Internet security?

Miller: The Internet`s at stake in a very fundamental way. ITAA has done two surveys over the last year, man- and woman-on-the-street surveys, surveying over 1,000 Americans. One asked them about security in electronic commerce. And one asked them about security in e-government. Both showed that one of the greatest inhibitors to both e-commerce -- that is people buying business services online -- and e-government -- that is people communicating with their government online -- is their concerns about security. People feel uncomfortable about sharing information. In the case of e-commerce, it`s usually information about their credit card or other financial information. In the case of government, it could be sensitive information about their income or their health or benefits they`re entitled to. People are not willing to share that information, and they won`t really get into e-commerce or e-government the way they might if they continue to have concerns about security. Yet, people don`t seem to be concerned about walking into a restaurant and handing a waiter, whom they`ve never met in their lives, their credit card, and feeling that that`s not going to lead to the theft of credit card information. People seem to be willing to pick up the telephone and order products and give out their credit card information. But people are still very concerned that somehow the Internet`s www doesn`t stand for World Wide Web, but for the Wild Wild West. They`re afraid if they give information out that it`s going to end up in the wrong hands because there`s not enough security.

Glassman: You mentioned e-government. How is the federal government doing in adopting e-government for itself?

Miller: The answer is it`s slow. Government historically had been a trendsetter in the use of information technology since the invention of the computer. In fact, the government, particularly at the federal level, was the prime mover in the development of the computer and the development of the Internet. Unfortunately, it`s become a laggard in terms of its own internal operations, and in terms of federal, the state and local government delivery of services to citizens. To the extent government is using the Internet much for services of citizens, it`s basically just billboard advertising. That`s sort of where the Internet was four or five years ago.

Glassman: Is anyone doing it well?

Miller: Some states are doing better. Virginia and a few others offer tremendous amounts of services online directly to citizens, so you don`t go stand in physical lines and waste parts of your day getting your car license registration renewed. We have even some localities doing things online. But the federal government is not doing very well. In fact, President Bush in a recent radio address to the nation remarked on how, unlike the corporate sector, government has not realized the benefits that it should from the Internet and from e-government. We are pleased that the president has appointed a very senior person at the Office of Management Budget, Mr. Mark Forman, who has worked in government, on the Hill, and in industry, to really try to be a change agent and get the e-government initiative at the federal level moving. In fact, the administration has requested additional funds from the Congress in the amount of $20 million for next fiscal year to help move these initiatives along. It`s not a lot of money, but it is a step forward. Unfortunately, Congress doesn`t even seem to be willing to give them that much. They`re only talking about $5 million, which will make Mr. Forman`s challenges even tougher.

Glassman: According to the Commerce Department, the IT industry has contributed about half of the productivity gains and a third of all the real economic growth during the second half of the 1990s. But it does appear the industry is maturing, at least in the U.S. Is there a single trait that will define the IT industry as it ages?

Miller: Yes, it`s maturing, but I still think there is another step upward that we haven`t seen yet, and that is in the world of mobile and ubiquitous commerce. It`s a little hard to speculate precisely when that next step will occur. Most of our applications that we can relate to the Internet are still based on a landline system, or even more so on a personal computer system, where you`re sitting at your desk working at your personal computer.
The idea is that we`re going to have IT in everything and on everything -- personal digital assistants, watches, your car, your radio, your television set, your refrigerator -- that you`ll have tremendous ability to not only get information but send information. We`re really just at the cutting edge of that right now. We`ve seen a little bit more in Japan with their DoCoMo I-Mode system, where they now have 20-some million subscribers to that system. While initially the knock on that was it was just a bunch of teen-age girls sending Internet messages back and forth, in fact, now it`s become clear that many people are actually doing business using their I-Mode. Companies stay in touch with their sales and delivery people. People are able to track each other, order tickets on line. So I think we`re seeing the glimmer of that. When that hits, over the next three to five years, I think that`s going to step up IT again. We`re going to see the next phase of the revolution.

Glassman: Your organization has said rejuvenation of the IT economy needs zero withholding of taxes on stock options. Can you explain that?

Miller: The whole issue is that this has really been the consistent interpretation for a long time -- that withholding is not really essential to the collection of taxes. After all, the tax collector -- the government -- knows very well what people are getting because all this information is reported in very great detail. We`re not talking about some kind of underground economy here, where people are being paid on the side, and no one knows about it. This is very public information. For some reason, some people at the IRS think that we need to have some kind of a new withholding system. But they haven`t presented any evidence that there is a problem that they`re trying to solve. If government`s going to make a major change in policy like this, which affects the lives of tens of thousands of people, there should be some kind of justification. They haven`t provided any justification that there`s a failure to report or to pay taxes by individuals who are involved in exercising their stock options. Without any kind of a proof of a problem, we don`t see any need to make any kind of change. By making a change, it would create an administrative burden for many companies, an administrative burden for many individuals, which we simply don`t think is necessary and appropriate. I didn`t see the IRS complaining about this in the year 2000, when individuals who obviously were doing very well in the dot-com economy were making a lot of money by taking stock options and paying their taxes and driving up the federal revenue beyond the IRS` expectations. Why now are they suddenly coming along and saying we need to start this practice of withholding?

Glassman: Thank you, Harris Miller.


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