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Telephone company entry into cable television
Telephone company entry into cable television A reply
Leland L. Johnson and David P. Reed
Contlnulng technological advance reinforces the conclusion In our earlier study that constructlon of Integrated broadband networks (IBNs) conslstlng of flbre-to-thshome systems will not be the most promlslng way for local telephone companies to compete wlth Incumbent cable televlslon provlders during thls decade. Whether flbre-to-thekerb systems prove to bs viable for competitive entry Is also questlonable. In our vlew, the success of telephone companies as cable competitors during the 1990s Is as likely to depend on other flbre network architectures or on whether vldeo compresslon techniques can be perfected for vldeo services over exlstlng local telephone networks. Our analysis hlghllghts the dangers of public pollcles that seek to promote a particular technology, as proponents of flbre-based systems have urged, to strengthen the US telecommunications Infrastructure. Leland Johnsonis a senior economist with the RAND Corooration. 1700 Main Street. Santa Monica,‘CA 90407, USA (Tel: 316 393 0411). David Reed is a telecommunications policy analyst with the Dffice of Plans and Policy, Federal Communications Commission, Washington, DC, USA (Tel: 202 653 5940) The opinions expressed in this paper are those of the authors and do not necessarily reflect the views or policies of their employers. ‘Matthew Goodman, Kevin Lu, William Sharkey, Padmanabhan Srinagesh and Neal Stolleman, ‘Telephone company entry into cable television: a re-evaluation’, Telecommunications Policy, Vol 17, No 2, March 1993, pp 156-162; commenting on L.L. Johnson and D.P. Reed, ‘Telephone continued on page 235
234
In the last issue of this journal Matthew Goodman and colleagues comment upon an earlier article of our own.’ Their thoughtful remarks deserve a brief response; we reply by emphasizing three points.
Fibre-based systems and competition with cable First, the key question is not whether telephone companies will install fibre in their local distribution networks, but rather how far into the network the installation of fibre is justifiable on economic and technical grounds. Goodman et al note that the action of installing fibre all the way to the home has been replaced by fibre to the kerb (FTTK) systems for ‘initial IBN development’. However, we judge even this more limited use of fibre to be questionable. Although this approach is attractive in permitting greater sharing of electronics, it has three troubling attributes: the additional cost of fibre systems suitable for broadband services, the placement of potentially vulnerable broadband electronics in highly decentralized locations, and the need to supply electrical power - including emergency power - to them.’ The central trade-off associated with extending fibre closer to the home is the additional cost versus the added flexibility to provide higher-bandwidth services. Thus whether F’ITK systems will be viable depends upon the marketability of the additional services that they permit.3 Goodman et al note that if the subscriber chooses enough video on demand - six hours a week - the additional revenues, based on our estimates, would more than cover incremental cost. But one must keep in mind that such additional viewing would come largely with a reduction of viewing of other programmes, including today’s pay-perview offerings and pay movie channels, that the network might also carry. Thus it is net revenue to the network operator that is key. Substitutability among services is especially important, at least in the USA, where households may already be tuned to television to near saturation. Moreover, cable operators are adopting these same new technologies to strengthen their competitive positions. Using fibre optics in its trunk lines (‘fibre to the neighbourhood’), Time Warner has in experimental 0306-5961/93/030234-02
@ 1993 Butterworth-Heinemann
Ltd
Telephone company entry into cable television: a reply
operation in Queens, New York, a cable system with 150 channels for
‘near’ on-demand video. TCI has announced its planned use of video compression and digital transmission to expand capacity to 500 or so channels, with installation starting in 1!~?94.~ We do not want to imply that such cable ventures will succeed, since, for cable operators as well, uncertainty remains about whether a strong enough market exists to cover the cost of expanded services. However, these developments do suggest that telephone companies, which often appear focused upon installing fibre to the kerb or home in a single step, would be better served by marketing efforts to identify the appropriate mix of services necessary to support the phased introduction of new technologies such as fibre.
Other technological advances
continued from page 234 company entry into cable television: an evaluation’, Telecommunications Policy, Vol 16, No 2, March 1992, pp 122-133. 2A,c Goodman et al note, a great deal of uncertainty exists about future equipment costs, as well as the installation, operation and maintenance of these systems in the local loop environment. In our article we omstted our sensitivity analysis. Without affecting the conclusions in our article,an extensive sensitivity analysis was reported in David P. Reed, Residential Fiber Optic Networks, Artech House, Boston, MA, 1991, Ch 5. 3For example, in its application to the FCC to construct a FlTK system in Dover Township, New Jersey, Bell Atlantic assumes that over 50% of revenues in 1997 will come from video services not available to most households today: Section 214 Application of New Jersey Bell Teleohone Comoanv, WPC-6640, submitted io the Dom&k~Facilities Division of the Federal Communications Commission, 15 December 1992. 4Ttle potential of fibre-to-theneighbourhood architecture appears sufficiently attractive that one telephone company, US West, has issued a request to equipment suppliers for information on this type of architecture: Cab/e World, 7 September 1992, pp 1, 6. sFCC, ‘New local multipoint distribution service proposed’, news release, 10 December 1992. 6See, for example, H. Geller, Fiber Optics: An Opportunity for a New Policy?, Annenberg Washington Program, Communications Policies Studies, Northwestern Univarsity, 1991; H. Selander, Stalled on the Way to the Home: An Assessment of F&v-to-the-Subscriber Economics, Braxton Associates, Boston, MA, 4 June 1990. 7FederaI Communications Commission, Second Report and Order, Recommendation to Congress and Second Further Notice of Proposed Rulemaking, CC Docket No 67-266, released 14 August 1992.
TELECOMMUNICATIONS
Second, successful entry into multichannel television may depend on technological advances having little to do with fibre. Experimentation is underway to determine whether, with video compression, satisfactory video transmission is feasible on existing telephone lines. If reception is acceptable and if the necessary equipment at the ends of the telephone line is available at reasonable cost, telephone companies would be in a position to offer switched video services. Experiments are also underway with wireless transmission as the final link to the home. For example, a wireless technology using spectrum above 28 GHz has been proposed for use in the local 10op.~ While this technology is still in early development, spectrum availability will not be a constraint on the services that could be distributed. Much depends on the propagation characteristics of signals at these very high frequencies, about which a good deal remains to be learned. Moreover, use of wireless techniques may not differentially benefit telephone companies, because they will be obliged to compete with traditional cable operators and others for spectrum licences.
Public policy and telecommunications
infrastructure
Third, the basic lesson from our analysis is that public policy should not be grounded in terms of promoting any one technology as being better than others in a field as highly dynamic as this one. We find disquieting the widespread touting of fibre-based residential networks as holding such great promise in contributing to US infrastructure that they deserve public subsidy - either directly or through special tax treatment.6 Relaxing legal barriers to telephone company participation in video is a step forward in encouraging exploration of numerous technological paths - with public benefits all the more likely if participants are not biased in favour of particular paths as a consequence of special regulatory or fiscal constraints. In this light, we think that the FCC is on a sound track in its recent video dial tone decision when it emphasized that: It is not our intent, nor proper role, to specify the technology, network architecture, or functions that a telephone company would offer under video dial tone. Given the rapid pace of technological development in this area, our policy initially sets only the necessary broad regulatory framework and relies upon the technical and market creativity of those in the private sector responding to market demand and economics to determine the substance of telephone company video dial tone offerings.7
POLICY April 1993
Leland L. Johnson and David P. Reed
Contlnulng technological advance reinforces the conclusion In our earlier study that constructlon of Integrated broadband networks (IBNs) conslstlng of flbre-to-thshome systems will not be the most promlslng way for local telephone companies to compete wlth Incumbent cable televlslon provlders during thls decade. Whether flbre-to-thekerb systems prove to bs viable for competitive entry Is also questlonable. In our vlew, the success of telephone companies as cable competitors during the 1990s Is as likely to depend on other flbre network architectures or on whether vldeo compresslon techniques can be perfected for vldeo services over exlstlng local telephone networks. Our analysis hlghllghts the dangers of public pollcles that seek to promote a particular technology, as proponents of flbre-based systems have urged, to strengthen the US telecommunications Infrastructure. Leland Johnsonis a senior economist with the RAND Corooration. 1700 Main Street. Santa Monica,‘CA 90407, USA (Tel: 316 393 0411). David Reed is a telecommunications policy analyst with the Dffice of Plans and Policy, Federal Communications Commission, Washington, DC, USA (Tel: 202 653 5940) The opinions expressed in this paper are those of the authors and do not necessarily reflect the views or policies of their employers. ‘Matthew Goodman, Kevin Lu, William Sharkey, Padmanabhan Srinagesh and Neal Stolleman, ‘Telephone company entry into cable television: a re-evaluation’, Telecommunications Policy, Vol 17, No 2, March 1993, pp 156-162; commenting on L.L. Johnson and D.P. Reed, ‘Telephone continued on page 235
234
In the last issue of this journal Matthew Goodman and colleagues comment upon an earlier article of our own.’ Their thoughtful remarks deserve a brief response; we reply by emphasizing three points.
Fibre-based systems and competition with cable First, the key question is not whether telephone companies will install fibre in their local distribution networks, but rather how far into the network the installation of fibre is justifiable on economic and technical grounds. Goodman et al note that the action of installing fibre all the way to the home has been replaced by fibre to the kerb (FTTK) systems for ‘initial IBN development’. However, we judge even this more limited use of fibre to be questionable. Although this approach is attractive in permitting greater sharing of electronics, it has three troubling attributes: the additional cost of fibre systems suitable for broadband services, the placement of potentially vulnerable broadband electronics in highly decentralized locations, and the need to supply electrical power - including emergency power - to them.’ The central trade-off associated with extending fibre closer to the home is the additional cost versus the added flexibility to provide higher-bandwidth services. Thus whether F’ITK systems will be viable depends upon the marketability of the additional services that they permit.3 Goodman et al note that if the subscriber chooses enough video on demand - six hours a week - the additional revenues, based on our estimates, would more than cover incremental cost. But one must keep in mind that such additional viewing would come largely with a reduction of viewing of other programmes, including today’s pay-perview offerings and pay movie channels, that the network might also carry. Thus it is net revenue to the network operator that is key. Substitutability among services is especially important, at least in the USA, where households may already be tuned to television to near saturation. Moreover, cable operators are adopting these same new technologies to strengthen their competitive positions. Using fibre optics in its trunk lines (‘fibre to the neighbourhood’), Time Warner has in experimental 0306-5961/93/030234-02
@ 1993 Butterworth-Heinemann
Ltd
Telephone company entry into cable television: a reply
operation in Queens, New York, a cable system with 150 channels for
‘near’ on-demand video. TCI has announced its planned use of video compression and digital transmission to expand capacity to 500 or so channels, with installation starting in 1!~?94.~ We do not want to imply that such cable ventures will succeed, since, for cable operators as well, uncertainty remains about whether a strong enough market exists to cover the cost of expanded services. However, these developments do suggest that telephone companies, which often appear focused upon installing fibre to the kerb or home in a single step, would be better served by marketing efforts to identify the appropriate mix of services necessary to support the phased introduction of new technologies such as fibre.
Other technological advances
continued from page 234 company entry into cable television: an evaluation’, Telecommunications Policy, Vol 16, No 2, March 1992, pp 122-133. 2A,c Goodman et al note, a great deal of uncertainty exists about future equipment costs, as well as the installation, operation and maintenance of these systems in the local loop environment. In our article we omstted our sensitivity analysis. Without affecting the conclusions in our article,an extensive sensitivity analysis was reported in David P. Reed, Residential Fiber Optic Networks, Artech House, Boston, MA, 1991, Ch 5. 3For example, in its application to the FCC to construct a FlTK system in Dover Township, New Jersey, Bell Atlantic assumes that over 50% of revenues in 1997 will come from video services not available to most households today: Section 214 Application of New Jersey Bell Teleohone Comoanv, WPC-6640, submitted io the Dom&k~Facilities Division of the Federal Communications Commission, 15 December 1992. 4Ttle potential of fibre-to-theneighbourhood architecture appears sufficiently attractive that one telephone company, US West, has issued a request to equipment suppliers for information on this type of architecture: Cab/e World, 7 September 1992, pp 1, 6. sFCC, ‘New local multipoint distribution service proposed’, news release, 10 December 1992. 6See, for example, H. Geller, Fiber Optics: An Opportunity for a New Policy?, Annenberg Washington Program, Communications Policies Studies, Northwestern Univarsity, 1991; H. Selander, Stalled on the Way to the Home: An Assessment of F&v-to-the-Subscriber Economics, Braxton Associates, Boston, MA, 4 June 1990. 7FederaI Communications Commission, Second Report and Order, Recommendation to Congress and Second Further Notice of Proposed Rulemaking, CC Docket No 67-266, released 14 August 1992.
TELECOMMUNICATIONS
Second, successful entry into multichannel television may depend on technological advances having little to do with fibre. Experimentation is underway to determine whether, with video compression, satisfactory video transmission is feasible on existing telephone lines. If reception is acceptable and if the necessary equipment at the ends of the telephone line is available at reasonable cost, telephone companies would be in a position to offer switched video services. Experiments are also underway with wireless transmission as the final link to the home. For example, a wireless technology using spectrum above 28 GHz has been proposed for use in the local 10op.~ While this technology is still in early development, spectrum availability will not be a constraint on the services that could be distributed. Much depends on the propagation characteristics of signals at these very high frequencies, about which a good deal remains to be learned. Moreover, use of wireless techniques may not differentially benefit telephone companies, because they will be obliged to compete with traditional cable operators and others for spectrum licences.
Public policy and telecommunications
infrastructure
Third, the basic lesson from our analysis is that public policy should not be grounded in terms of promoting any one technology as being better than others in a field as highly dynamic as this one. We find disquieting the widespread touting of fibre-based residential networks as holding such great promise in contributing to US infrastructure that they deserve public subsidy - either directly or through special tax treatment.6 Relaxing legal barriers to telephone company participation in video is a step forward in encouraging exploration of numerous technological paths - with public benefits all the more likely if participants are not biased in favour of particular paths as a consequence of special regulatory or fiscal constraints. In this light, we think that the FCC is on a sound track in its recent video dial tone decision when it emphasized that: It is not our intent, nor proper role, to specify the technology, network architecture, or functions that a telephone company would offer under video dial tone. Given the rapid pace of technological development in this area, our policy initially sets only the necessary broad regulatory framework and relies upon the technical and market creativity of those in the private sector responding to market demand and economics to determine the substance of telephone company video dial tone offerings.7
POLICY April 1993