TCS Daily

Demand vs. Supply

By Duane D. Freese - March 13, 2002 12:00 AM

Sometimes backing up can help you forge ahead.

To the disdain of some supporters of the so-called Tauzin-Dingell Act (TD) that passed the House Feb. 27, the Bush administration has not fallen all over itself endorsing that particular rewrite of the Telecommunications Act of 1996. Instead of freeing the Bells of their 1996 promise to open their local networks to competitors before getting into long distance service, Bush administration officials seem to be looking a bit deeper at broadband's problems -- the lack of consumer demand.

According to its supporters, TD's main reason for being is to spur deployment in broadband, the high-speed connections to the Internet.

But as President's Council of Advisors on Science and Technology (PCAST) Co-chairman John Marburger told reporters March 4: "It turns out that the access to existing broadband... is not being exploited by consumers." PCAST hopes by June to recommend steps the Bush administration can take to boost that demand.

Commerce Department Secretary Donald Evans two days later echoed Marburger's remarks: "We're going to have to do what we can to develop a demand side."

Those comments drew a rebuke from the Competitive Enterprise Institute, which supports TD as a deregulation bill. Calling the Bush administration the "Elephant Missing From the (Broadband) Circus," CEI's weekly newsletter said: "In two speeches ..., [Evans] stressed that broadband would be a priority for the Bush administration. And, he stressed increasing broadband demand and of tax relief. But nothing was said about regulatory change, leaving that for another day... It's unclear what made the administration stop short here... inter-agency squabbling, caution about offending important industries, waiting for better timing for the media, a broken photocopy machine... Whatever the reason, it would be regrettable if the delay means the Bush administration loses its opportunity to lead on broadband reform."

But maybe, just maybe, Evans and the administration realize you don't jump into deregulation for one group of telecommunication players - the local phone monopolists - without first and foremost unburdening those who would compete against them.

After all, the local Bells still get billions of dollars in access revenue from other telecom providers, in particular long distance carriers, as well as billions more in mandated fees from the public. In addition, the Bells upstart competitors for local service -- competitive local exchange carriers, or CLECS - face huge hurdles in everything from financing to access to rights of way in trying to build out their own networks. And what is true for the wired telephone platform is applicable as well for wireless platforms that try to enter the broadband fray.

At Bloomberg's Telecom Day on March 6, FCC Commissioner Kathleen Abernathy, a Bush appointee, said, "One of the FCC's goals would be facilitating the development of third and fourth broadband pipes to consumers. Wireless and satellite services offer significant promises of complementary and competitive broadband providers."

But as Jonathan Cox reported for Bloomberg regarding those technologies, the FCC still has to deal with allocation of spectrum to allow for high-speed services. It has yet to decide whether satellite companies can use their spectrum for other services, such as mobile phones. It needs to set up rules on leasing arrangements between wireless providers so they can meet their needs for space without constantly asking Uncle Sam for permission.

Thus, it is good that FCC Chairman Michael Powell told CompTel last week that the FCC's proposed rulemaking providing further regulatory relief to the Bells on provisioning Internet service isn't written in stone. Racing to deregulate the Bells makes no sense until other deregulation is in place. It is the hard shell of that regulation of new competitors that needs cracking first before giving the monopoly Bells more advantages to crow about.

Besides, as Eli Noam, director of Columbia Institute of Tele-information at Columbia University, indicates, demand is the big issue for broadband. Noam, who has expressed some support for further deregulating the Bells to allow them into long distance, nonetheless told attendees of an Economic Strategy Institute forum on Capitol Hill Monday, that the "focus on the supply side," as expressed by supporters of TD, might be misplaced. The Bells have to respond to the marketplace anyway, he said, meanwhile, "every supply needs demand." And there are too many reasons, right now, for most people not to use broadband.

Those reasons?

  • Price resistance - broadband at $50 to $70 is not cheap for most households. Only increased competition will help lower costs and TD doesn't help foster competition.

  • No network effects - not enough users now or for a few years to make it worthwhile

  • "No strong reason to have it" -- consumers ask: "What's it used for?"

Certainly, for some people - those who use the net a lot, or with enough disposable income to not worry about the cost of faster downloads - current broadband offers something they like. A case also could be made that broadband, by allowing readier examination of merchandise over the Internet, is a kind of "Price Club" investment, albeit a pricey one. But the "killer applications" - instantaneous video on demand, for example -- have yet to materialize in a manner to justify the price.

Thus, the Bush administration's examination of demand issues seems the right target. Tauzin-Dingell supporters are missing the forest for a single tree. They, too, need to step back to see a bigger picture.

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