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Public policy for fibre-to-the-home
Comment Public policy for fibreto-the-home Bruce L. Egan
Integrated broadband networks are very costly, but many US industry analysts befieve their introduction to the residential sector should be a national policy goal. Unfortunately current policy towards fibre-to-thehome is inherently unstable, and pits public and private needs against one another. A choice must be made between a public infrastructure approach, in which social costs and benefits are given greatest weight, and a private market paradigm, where communications networks develop according to market forces. This article examines some of the implications of each approach. Bruce L. Egan is an independent industry consultant and researcher at the Center for Telecommunications and Information Studies, Columbia University, Graduate School of Business, 809 Uris Hall, New York, NY 10027, USA (Tel: 212-854 4222; Fax: 212-932 7816). The author would like to thank Eli Noam, Martin Elton and Michael Botein for their comments on earlier drafts.
Many teleconlnltunicatJons analysts believe that a state-of-the-~,rt comlllunicatioI1 infrastructure requires integrated bro:tdb;md networks {IBNs) capable of St,l'q'~lying all ctustonlcr setvices on a single high-speed tligit~d fibre access line. Achieving this go:d is very costly, and implicates a variety of pt,l+lic policy uptions. Policy m:tkcrs must decide whether IBNs arc useful cnot,gh for the pt,l+lic to w a r r a n t their extensive capital costs, which depend p:trti:tlly on tile pressure behind their construction th;ut is, throtugh natur:d market forces or in a regulated (common c;trricr or otherwise) environment. E:tch possibility requires ;u different strategy for cost-efficient deph+yment t)f IBN technoh>gy ;uultl ;i scp;tr;flc pul~lic policy to support it. Figurc 1 illustrates the range <+f policy options for deployment of fibrc-tolhc-ht+n~c. They range from a private free-market approacla to a pul~lic "infrastructure" approach. The middle, mixed-market str;utcgy represents equal Clllph;isJs. A common-carrier apf~ro;ich would be on the right bec;.itlse it is likely to inw+lvc significant rcgul;,tory oversight. Thc current institutiona,I and policy e n v i r o n m e n t lies between the middle and the right on the diagra,m because rcgt, latcd telephone utilities cnjuy effective (but not legal) local monopoly status. SItIIII?; qtlo
l listorically, the devch~pmcnt of the
TELECOMMUNICATIONS
POLICY
December
1990
cc~mmunications infrastructure has b e e n guklcd by standardization and regulation. The last several dccatlcs have seen illcrc;tsctl CtllllpCtitiOtl, the growth of pt'ivatc networks and tile
development of diverse st;mdards ;,s wcll ;is t|ctwork pruto¢ols. This fragllletlts puhlic C(+llllllUlliClttit+tlSinto suImctworks using diIIcrcnt Iechnt)h+gics, each oplimizcd for a specific service applic;flhm. The trcm.I tt~war,.Is Ir,igmcntation of nct,,,¢orks and their t,:,crgroups results from the prt+liIcr;ttitm of pu-b]at¢ networks, many ¢>I which ;trc inctmq~atil'd¢ bccaunc they c;Jnnot " i n t c r w o r k ' ¢flicicntly with ¢;Ich othcr. ()bvious recent ¢x;uuplcs include the incoml~:dilfilhy of computer nutw,nrks, l'~lcctroni,.: mail or file transfc,is often difficult, largely bcc;tusc of
pr()prictary network tlcviccs :u'td interface signalling and protoctds. Thc sanIt is happening tt) advancctl tclcphone networks. A lack of stand:urds d e l a y e d c¢'lluhtr d c v c h ) p m c n t for many years, and the Sillll¢ is h:,pl~cning to integrated services digit:,l networks (ISI)N). ('urrently in;my narrowband [SI)N networks and equipIll,dull do UlOl interwork, resulting in only local network ft, nctionulitv. Until deployment is widespread, 1SDN tlemand will be limited duc It+ the lack t)f end-to-end service. This places the USA at a pul+lic policy crossrouds at which frcc-m;trkct competitors arc busy buihJing private networks within a possibly outdated regulatory structure.
457
('OftllTtt'ltl
Private (Market)
Status quo _ _ (Mixed)
Figure 1. Policy options.
d o m . and m a n y of w h i c h had inconsistent policy objectives. Nevertheless,
458
/
_
Public (Infrastructure)
Current US policy
Today's mixed-market approach stems from past regulatory and legislative actions, s o m e of w h i c h w e r e ran-
'Current policy is inherently unstable, and pits public and private needs against one another'
;,'< _
these decisions have affected the industry structure dramatically, through strt,ctural bifurcation of the video and telecomnlunications media as well as asymmetrical policies regarding information content and creation. If there truly are Io|lg-ternl cost adwmtages to integrating conl|uunicatitms services, this situation may be inefficient and rest, It in artificially high levels of network fragnlentation. The ct, rrcnt Cllvironnlcnt encot, rages political manoeuvring among illdt,stry segments interested ill preserving their share of the n|arkct, and in the absence of a clear policy direction decision making among it|cuml~ent firms and potential entrants becomes either risky or impossible. For exan|pie, a significant concern is whether new laws or rcgtflations will prohibit certain bt,sincsses front constructing broadband networks. Major regulated and unregtdated tirnls mr,st fight legal and political battles to protect their entrenched interests, resulting ill seriot,s delays ill technology atdoption. W i t h o u t clear policy goals tile potential for achieving an efficient transition to technologically adva,lccd ptthlic commt, nications capability may bc foregone through continued fragmentation of networks. This trend may eventually result ill unequal setvice. Efficient, high-quality private networks may exist for those who cat,| afford to buikl or access them; a relatively low-quality, high-cost public network nlay serve everyone else. The major problem is not necessarily the existence of separate networks, but rather that various user groups may not interact bccattse t h e y c a n l l o t conlmunicate with each other. R a t e - b a s e r e g t , [ a t i o n a n d dcprcciation-:,ccounting rules currently favour telephone utilities, which represent tile infrastructure approach to technology adoption. Current regula-
tion allows local telephone companies to increase their depreciation rates for existing c o p p e r plant, which is reco-
vered from subscriber rates. Cash flow from these annual depreciation charges supports digital fibre construction, which will also be charged to the st, bscriber base in the future. This is allowable under current regulation as a reasonable return on investment. Regulation thus favours deployment of fibre-to-the-honle by telephone c o m p a n i e s , r a t h e r than by o t h e r businesses who do not tlave ;, ratebase to support tile financing of hirgcscale constrt,ction. ('urrent policy is inherently unstable, and pits pttblic and private needs against one another. The n;.,tion callnot enjoy tile best of both worlds: a private n|arkct paratligm, where comnnmications networks develop according to m:lrkct forces: and a public market p:tradigm, where social costs alld benefits prcdonfi|l:lte. Public policy prescriptions for achieving these goals :ue quite different. If the country continues the status quo it risks Lmguishing in a workl of inefficient technology ill which monopoly public tltilitics "compete' ag:tinst unreguhtted entrants. The resulting tug-of-war between entrenched interests and their political constituencies puts politics rather than societal issues at tile forefront of the policy debate. Policy makers nltlSt reassess tile current situation with an eye to chane,in,,~a present rcgt,[atory structures.
l'uhlic infra.~tructure ~q~proach For policy nlakers to ft, rthcr tile infrastructure approach, they shol,ld remove inlpedinlents to telephone cornpanics and cable comp:,nics - both of which arc infrastrt,cturc players - hy allowing even higher d e p r e c i a t i o n rates, removing business restrictions a n d the like. TI~e i n f r a s t r u c t t , re approach involves at least partial regulation of infr,tstructure firms. A n o t h e r possibility is requiring some firms to be only c o n l n l o n carriers.
TELECOMMUNICATIONS
P O L I C Y D e c e m b e r 1990
(~OtlqtFlt'tIl
'The industry must be required to adopt some generic network and device compatibility standards for their firms to follow'
and communications benefit only the private sector. Public policy would discourage inefficient investment in public infrastructure by local telephone companies or cable operators. For example, one could de-average telco book depreciation reserves by category of plant use (eg businesJ residence) to allow more accurate matching of asset revenue and cost streams. This would discourage internal cross-subsidies between noncompetitive and competitive lines of business. The decision to deploy fibreto-the-home would be driven by net present value in a business setting. Market alternatives should abound and should have no central control. Cost efficicncies would depend on private intlovation and strt,gglc for competitive advantage. New market development would drive much of the innovation. A dcrcgt, latory policy would prevail. l+ventually, traditional telephone regulation would bc climinatcd. I)t,ring the deregulation phase, incuml~cnt infrastructure firms wtntld bc limited to their public utility ol~ligations atltl operations. If local telephone cornpanics could not subsidize new technology with revenues from regulated custotncrs, they would then have nt) competitive advantage over rival entrants. Policies encouraging industry cooporation o n st;mdards and intcrconncction would continue. Public policy would stress comp,ntil~ility standards, so that private firms could take advantage of production and consumption economies. Ct)operativcs of priwttc firms might bc allowed to expand the possible syncrgics of R&I) talent, dea v a i l a b l e - cg t a x c r e d i t s o r i n t e r e s t sign and nlanufacturing capabilities to rate subsidies, and loan guarantees to infrastructure firms. For example, the d e v e l o p n e t w o r k p r o t o t y p e s . A Rural Electrification Administration 'Japanese model' would be encourand the Rural Telephone Bank use aged; this would allow firms to equity-based financing, which pro- cooperate, subject to competition vidcs incentives for loan rccipicnts to from other cooperatives. The private invest wisely. Infrastructure politics sector cot, ld receive tax breaks, R&D should stimulate cooperative pul~lic/ incentives, governnlent intcrcst subprivate efforts for infrastructure de- sidics or loan guarantees. These incenfives would bc offered to :,I1 firms on velopment. the same terms. The business sector would regard Private market approach such policies as a cat:,lyst, suggesting For those policy makers preferring a that a "trickle-down" of new tcchnoh+private market approach, information gy will occur to society's benefit. This
Under the infrastructure approach, public interference in markets may admittedly restrict the product and service options offered by an otherwise competitive market. However, this is a small problem compared to the need for the social benefits of infrastructure development. Cost efficiency under the public infrastructure approach arises first through technology push, resulting from mass economies of scale and subsequent demand stimulation brought on by network compatibility. To stimulate private market efficiency under this scenario and to avoid future increases in crosssubsidies, new strategies for incentive regulation may be considered, such as changes in depreciation accounting rules, price-caps and open network architecture. Cost-sharing is one regulatory way of recognizing nct public benefits. which arc prcst,mal~ly grcater than the stttll of private benefits, largely bcCatlSC o f network externalities. The encouragement of industry standards is also important. Regulators sht>uld not set these directly; instep,d, the industry must bc required to adopt some generic network and device COml+atil+ilitystandards for their firms to follow. The standards would not bc exclusive, however, and any noninfrastructure firm would bc frcc to pursue other options. Relaxed operating restrictions may allow ctmtributions f r o m non-rcgul,ttcd lines of business to flow to the regulated infrastructure. Of course, one potential problem is that cross-subsidies will flow the other way. A number of tax and investment incentives arc also
TELECOMMUNICATIONS POLICY December 1990
459
(~UvttttlL'ttt
may be questionable, however, due to past failure of supply-side, trickledown policies. In recent years income and education gaps have grov, n under such policies; the risk is that the informationJ'communication rich will get richer while the poor get poorer.
Corwlusiotz It is important to reach a public con-
460
sen,',us on the proper goals of comm u n i c a t i o n policy: the status quo alternative mav be neither privately nor publicly efficient. In fact it mav further e x a c e r b a t e the technology/ polic,v crisis. Residential broadband networks may never have a chance if the political tug-of-war between free marketeers and infrastructure factions leaves us ~vith no public policy.
T E L E C O M M U N I C A T I O N S POLICY December 1990
Integrated broadband networks are very costly, but many US industry analysts befieve their introduction to the residential sector should be a national policy goal. Unfortunately current policy towards fibre-to-thehome is inherently unstable, and pits public and private needs against one another. A choice must be made between a public infrastructure approach, in which social costs and benefits are given greatest weight, and a private market paradigm, where communications networks develop according to market forces. This article examines some of the implications of each approach. Bruce L. Egan is an independent industry consultant and researcher at the Center for Telecommunications and Information Studies, Columbia University, Graduate School of Business, 809 Uris Hall, New York, NY 10027, USA (Tel: 212-854 4222; Fax: 212-932 7816). The author would like to thank Eli Noam, Martin Elton and Michael Botein for their comments on earlier drafts.
Many teleconlnltunicatJons analysts believe that a state-of-the-~,rt comlllunicatioI1 infrastructure requires integrated bro:tdb;md networks {IBNs) capable of St,l'q'~lying all ctustonlcr setvices on a single high-speed tligit~d fibre access line. Achieving this go:d is very costly, and implicates a variety of pt,l+lic policy uptions. Policy m:tkcrs must decide whether IBNs arc useful cnot,gh for the pt,l+lic to w a r r a n t their extensive capital costs, which depend p:trti:tlly on tile pressure behind their construction th;ut is, throtugh natur:d market forces or in a regulated (common c;trricr or otherwise) environment. E:tch possibility requires ;u different strategy for cost-efficient deph+yment t)f IBN technoh>gy ;uultl ;i scp;tr;flc pul~lic policy to support it. Figurc 1 illustrates the range <+f policy options for deployment of fibrc-tolhc-ht+n~c. They range from a private free-market approacla to a pul~lic "infrastructure" approach. The middle, mixed-market str;utcgy represents equal Clllph;isJs. A common-carrier apf~ro;ich would be on the right bec;.itlse it is likely to inw+lvc significant rcgul;,tory oversight. Thc current institutiona,I and policy e n v i r o n m e n t lies between the middle and the right on the diagra,m because rcgt, latcd telephone utilities cnjuy effective (but not legal) local monopoly status. SItIIII?; qtlo
l listorically, the devch~pmcnt of the
TELECOMMUNICATIONS
POLICY
December
1990
cc~mmunications infrastructure has b e e n guklcd by standardization and regulation. The last several dccatlcs have seen illcrc;tsctl CtllllpCtitiOtl, the growth of pt'ivatc networks and tile
development of diverse st;mdards ;,s wcll ;is t|ctwork pruto¢ols. This fragllletlts puhlic C(+llllllUlliClttit+tlSinto suImctworks using diIIcrcnt Iechnt)h+gics, each oplimizcd for a specific service applic;flhm. The trcm.I tt~war,.Is Ir,igmcntation of nct,,,¢orks and their t,:,crgroups results from the prt+liIcr;ttitm of pu-b]at¢ networks, many ¢>I which ;trc inctmq~atil'd¢ bccaunc they c;Jnnot " i n t c r w o r k ' ¢flicicntly with ¢;Ich othcr. ()bvious recent ¢x;uuplcs include the incoml~:dilfilhy of computer nutw,nrks, l'~lcctroni,.: mail or file transfc,is often difficult, largely bcc;tusc of
pr()prictary network tlcviccs :u'td interface signalling and protoctds. Thc sanIt is happening tt) advancctl tclcphone networks. A lack of stand:urds d e l a y e d c¢'lluhtr d c v c h ) p m c n t for many years, and the Sillll¢ is h:,pl~cning to integrated services digit:,l networks (ISI)N). ('urrently in;my narrowband [SI)N networks and equipIll,dull do UlOl interwork, resulting in only local network ft, nctionulitv. Until deployment is widespread, 1SDN tlemand will be limited duc It+ the lack t)f end-to-end service. This places the USA at a pul+lic policy crossrouds at which frcc-m;trkct competitors arc busy buihJing private networks within a possibly outdated regulatory structure.
457
('OftllTtt'ltl
Private (Market)
Status quo _ _ (Mixed)
Figure 1. Policy options.
d o m . and m a n y of w h i c h had inconsistent policy objectives. Nevertheless,
458
/
_
Public (Infrastructure)
Current US policy
Today's mixed-market approach stems from past regulatory and legislative actions, s o m e of w h i c h w e r e ran-
'Current policy is inherently unstable, and pits public and private needs against one another'
;,'< _
these decisions have affected the industry structure dramatically, through strt,ctural bifurcation of the video and telecomnlunications media as well as asymmetrical policies regarding information content and creation. If there truly are Io|lg-ternl cost adwmtages to integrating conl|uunicatitms services, this situation may be inefficient and rest, It in artificially high levels of network fragnlentation. The ct, rrcnt Cllvironnlcnt encot, rages political manoeuvring among illdt,stry segments interested ill preserving their share of the n|arkct, and in the absence of a clear policy direction decision making among it|cuml~ent firms and potential entrants becomes either risky or impossible. For exan|pie, a significant concern is whether new laws or rcgtflations will prohibit certain bt,sincsses front constructing broadband networks. Major regulated and unregtdated tirnls mr,st fight legal and political battles to protect their entrenched interests, resulting ill seriot,s delays ill technology atdoption. W i t h o u t clear policy goals tile potential for achieving an efficient transition to technologically adva,lccd ptthlic commt, nications capability may bc foregone through continued fragmentation of networks. This trend may eventually result ill unequal setvice. Efficient, high-quality private networks may exist for those who cat,| afford to buikl or access them; a relatively low-quality, high-cost public network nlay serve everyone else. The major problem is not necessarily the existence of separate networks, but rather that various user groups may not interact bccattse t h e y c a n l l o t conlmunicate with each other. R a t e - b a s e r e g t , [ a t i o n a n d dcprcciation-:,ccounting rules currently favour telephone utilities, which represent tile infrastructure approach to technology adoption. Current regula-
tion allows local telephone companies to increase their depreciation rates for existing c o p p e r plant, which is reco-
vered from subscriber rates. Cash flow from these annual depreciation charges supports digital fibre construction, which will also be charged to the st, bscriber base in the future. This is allowable under current regulation as a reasonable return on investment. Regulation thus favours deployment of fibre-to-the-honle by telephone c o m p a n i e s , r a t h e r than by o t h e r businesses who do not tlave ;, ratebase to support tile financing of hirgcscale constrt,ction. ('urrent policy is inherently unstable, and pits pttblic and private needs against one another. The n;.,tion callnot enjoy tile best of both worlds: a private n|arkct paratligm, where comnnmications networks develop according to m:lrkct forces: and a public market p:tradigm, where social costs alld benefits prcdonfi|l:lte. Public policy prescriptions for achieving these goals :ue quite different. If the country continues the status quo it risks Lmguishing in a workl of inefficient technology ill which monopoly public tltilitics "compete' ag:tinst unreguhtted entrants. The resulting tug-of-war between entrenched interests and their political constituencies puts politics rather than societal issues at tile forefront of the policy debate. Policy makers nltlSt reassess tile current situation with an eye to chane,in,,~a present rcgt,[atory structures.
l'uhlic infra.~tructure ~q~proach For policy nlakers to ft, rthcr tile infrastructure approach, they shol,ld remove inlpedinlents to telephone cornpanics and cable comp:,nics - both of which arc infrastrt,cturc players - hy allowing even higher d e p r e c i a t i o n rates, removing business restrictions a n d the like. TI~e i n f r a s t r u c t t , re approach involves at least partial regulation of infr,tstructure firms. A n o t h e r possibility is requiring some firms to be only c o n l n l o n carriers.
TELECOMMUNICATIONS
P O L I C Y D e c e m b e r 1990
(~OtlqtFlt'tIl
'The industry must be required to adopt some generic network and device compatibility standards for their firms to follow'
and communications benefit only the private sector. Public policy would discourage inefficient investment in public infrastructure by local telephone companies or cable operators. For example, one could de-average telco book depreciation reserves by category of plant use (eg businesJ residence) to allow more accurate matching of asset revenue and cost streams. This would discourage internal cross-subsidies between noncompetitive and competitive lines of business. The decision to deploy fibreto-the-home would be driven by net present value in a business setting. Market alternatives should abound and should have no central control. Cost efficicncies would depend on private intlovation and strt,gglc for competitive advantage. New market development would drive much of the innovation. A dcrcgt, latory policy would prevail. l+ventually, traditional telephone regulation would bc climinatcd. I)t,ring the deregulation phase, incuml~cnt infrastructure firms wtntld bc limited to their public utility ol~ligations atltl operations. If local telephone cornpanics could not subsidize new technology with revenues from regulated custotncrs, they would then have nt) competitive advantage over rival entrants. Policies encouraging industry cooporation o n st;mdards and intcrconncction would continue. Public policy would stress comp,ntil~ility standards, so that private firms could take advantage of production and consumption economies. Ct)operativcs of priwttc firms might bc allowed to expand the possible syncrgics of R&I) talent, dea v a i l a b l e - cg t a x c r e d i t s o r i n t e r e s t sign and nlanufacturing capabilities to rate subsidies, and loan guarantees to infrastructure firms. For example, the d e v e l o p n e t w o r k p r o t o t y p e s . A Rural Electrification Administration 'Japanese model' would be encourand the Rural Telephone Bank use aged; this would allow firms to equity-based financing, which pro- cooperate, subject to competition vidcs incentives for loan rccipicnts to from other cooperatives. The private invest wisely. Infrastructure politics sector cot, ld receive tax breaks, R&D should stimulate cooperative pul~lic/ incentives, governnlent intcrcst subprivate efforts for infrastructure de- sidics or loan guarantees. These incenfives would bc offered to :,I1 firms on velopment. the same terms. The business sector would regard Private market approach such policies as a cat:,lyst, suggesting For those policy makers preferring a that a "trickle-down" of new tcchnoh+private market approach, information gy will occur to society's benefit. This
Under the infrastructure approach, public interference in markets may admittedly restrict the product and service options offered by an otherwise competitive market. However, this is a small problem compared to the need for the social benefits of infrastructure development. Cost efficiency under the public infrastructure approach arises first through technology push, resulting from mass economies of scale and subsequent demand stimulation brought on by network compatibility. To stimulate private market efficiency under this scenario and to avoid future increases in crosssubsidies, new strategies for incentive regulation may be considered, such as changes in depreciation accounting rules, price-caps and open network architecture. Cost-sharing is one regulatory way of recognizing nct public benefits. which arc prcst,mal~ly grcater than the stttll of private benefits, largely bcCatlSC o f network externalities. The encouragement of industry standards is also important. Regulators sht>uld not set these directly; instep,d, the industry must bc required to adopt some generic network and device COml+atil+ilitystandards for their firms to follow. The standards would not bc exclusive, however, and any noninfrastructure firm would bc frcc to pursue other options. Relaxed operating restrictions may allow ctmtributions f r o m non-rcgul,ttcd lines of business to flow to the regulated infrastructure. Of course, one potential problem is that cross-subsidies will flow the other way. A number of tax and investment incentives arc also
TELECOMMUNICATIONS POLICY December 1990
459
(~UvttttlL'ttt
may be questionable, however, due to past failure of supply-side, trickledown policies. In recent years income and education gaps have grov, n under such policies; the risk is that the informationJ'communication rich will get richer while the poor get poorer.
Corwlusiotz It is important to reach a public con-
460
sen,',us on the proper goals of comm u n i c a t i o n policy: the status quo alternative mav be neither privately nor publicly efficient. In fact it mav further e x a c e r b a t e the technology/ polic,v crisis. Residential broadband networks may never have a chance if the political tug-of-war between free marketeers and infrastructure factions leaves us ~vith no public policy.
T E L E C O M M U N I C A T I O N S POLICY December 1990