Broadband Industry Structure: Policy, Pricing

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Broadband Industry Structure Policy, Pricing
Penetration

• Yale M. Braunstein
• 2002

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My Approach - 1

• Industry structure ? firm conduct (pricing) ?
  broadband penetration
• Policies and regulation can affect outcomes
• Therefore, we need to consider more than just the
  technology solutions if we want widespread
  broadband access
• Underlying economics
• Business models
• Role of government regulators

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My Approach - 2

• Outline
• Current business models
• Quick review
• Data (a few examples)
• Problems issues
• Current challenges
• Context parallels with other media
• Universality
• Digital divide
• Content (vertical control)

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Business Models - DSL
 
Key T Local telco/Baby Bell/ILEC C CLEC
(equipment may be collocated at CO)          I
Non-Bell ISP IXC Backbone provider Notes
(1) ILECs are seeking permission to enter (e)
business                   (2) Billing may be
by either Telco or ISP
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Business Models Cable Modems
 
Local loop, trunk or star
CMTS
Key C Cable system operator M Modem
service provider          I Independent ISP
IXC Backbone provider Notes (3) Who provides
the line between the cable company and _at_Home,
Roadrunner, or whomever?           (4) Who does
the billing? Cable company or ISP?
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Business Models Cellular Mobile
 
Key M Mobile operator A Applications
provider          I Independent ISP IXC
Backbone provider Notes (5) Who provides the
link between the mobile company and the ISP,
even if it is owned by the mobile op.?
                  (6)  (7) Do any of these
exist?
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Business Models Wireless LANs (802.11x)
 
Key P Physical network V Venue (property
owner)          I "Captured" ISP IXC
Backbone provider Notes (8) 2-way revenue
split between P V          (9) 3-way revenue
split among P, V, and operator of virtual network
(e.g., provider of authentication,
billing, marketing roaming)
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Others

• Satellite-based systems
• Latency problems, some uni-directional
• Starband bankruptcy
• Wireless, other than 802.11x
• MMDS (fixed wireless)
• Ricochet (bankruptcy re-organization)
• lt128 kbps
• Nokia rooftop
• About 1 Mbps
• Hybrids miscellaneous others

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Ruby Ranch Internet Cooperative Association

• Local DSL with microwave link to ISP
• Interesting history battle for local loops
• www.rric.net

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Broadband Data are Difficult to Analyze
Predictions Vary
Broadband Booming in Europe
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Price Affects DSL Penetration - 1
U.S. drops from 5th to 10th in one year
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Price Affects DSL Penetration - 2
USA (SBC)
Korea Tel
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Broadband Penetration in Korea
South Korea's broadband Internet market, where
more than 15 out of 100 people have access to
service, still has room to grow if prices fall,
the Organization for Economic Cooperation and
Development (OECD) said. But Takayuki Matsuo, of
the OECD Directorate for Science, Technology and
Industry, said South Korea could not rest on its
laurels as the world's most wired society. "We
are still in the transitional period," he
said. "Trust building is still very weak, not
only in South Korea but also in the world.
Consumers are still afraid of putting their
credit card number in their PCs," said
Matsuo. South Korea ranked first in terms of
penetration rates for Internet access, with twice
the rate of second place Canada, he said. Matsu
said the fast growth in South Korea of broadband
service came thanks to harsh competition amid
huge demand from South Korean users for faster
Internet access and games.
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Factors Contributing to High Broadband
Penetration in Korea

• Key factors include population density, pricing,
  education, availability
• Significant government investment
• 1.5 billion to construct infrastructure
• 1 billion in soft loans
• 700 million for RD
• Subsidies for low-income households
• Free IT training

Source http//www.theregister.co.uk/content/6/275
87.html
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Problems - DSL

• Price going up in U.S.
• Despite economies of scale
• Despite decreasing cost industry
• Economies of scale for suppliers ? decreasing
  cost of inputs
• Cause Increasing concentration (?)

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DSL Concentration Price
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Problems - Cable Modem

• Shared service
• Price going up in U.S.
• Introduction of tiered services
• Lack of universal coverage
• Recent change in business model
• Death of _at_Home

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Problems Cellular Mobile

• Limited bandwidth slow speed
• Batteries can not support always on
• 3G / UMTS will not solve all the problems
• Q Will 3G effectively compete for broadband
  customers? A "Absolutely not. Not enough
  bandwidth.-- CEO Keiji Tachikawa of NTT DoCoMo
  (March 2002)
• Spectrum auctions ? high license fees ? high
  prices for services (?)

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3G Cash Flows Spectrum Fees

• Assumptions
• Incumbent operator in European country with 50
  million population
• Hybrid IP-circuit switched architecture
• 15-year license
• Source Kalba International, Inc., 2000

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Problems Wireless LANs

• For 802.11x systems
• Has anyone seen a viable business model?
• For public venues owners of properties want
  share of the revenue
• Interference
• Lack of roaming
• Despite 802.11x family of standards
• (Not to mention authentication, billing, etc.)
• For others (fixed wireless, etc.)
• Bandwidth, line-of-sight, other technical issues
• Plus all of the above

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Problems - Others

• Current or recent bankruptcies
• _at_Home (cable modem business model)
• Covad (CLEC DSL business model)
• Ricochet/Metricom (wireless)
• Starband (satellite)
• Sprint Broadband Direct (as an example)

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Context

• Discussions of policies to promote access (both
  in North America and in Europe) often seem to
  ignore questions related to which entity provides
  the access.
• In other telecom and media discussions this area
  is known as ownership or concentration or
  industry structure. Example Ben Compaine, Who
  owns the media? competition and concentration
  in the mass media industry (3rd ed., 2000)
• Furthermore, also ignored is the question of
  access to what?
• In other telecom and media discussions this area
  is known as content.
• And, issues related to ownership of the
  Internetboth of carriers and of contentare
  often completely ignored even though they may
  affect access and use.

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Two Major Points

• Discussions of the Digital Divide and other
  access/penetration issues should include
  ownership/industry structure and content
  components as well as access.
• Even if you do not accept (1), it is important to
  realize that industry structure affects
  (broadband) access.
• I look at trends in telecom and broadcasting for
  lessons that may be applicable to the Internet.

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Preview of the Remainder

• Policies to promote access to traditional telecom
  services and electronic media
• Broadband pricing and access recent findings
  hinted at above
• U.S. policies to promote ownership by small
  businesses, minorities, women
• Diversity of ownership
• Ownership of what? (Remember the various blocks
  on the business model slides)
• Discussion of the links between ownership of
  access and content
• Summary comments

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Policies to Promote Access

• Telecom universal service (regulation)
• Broadcasting licensing
• Internet
• initial funding of the backbone and regional
  networks (subsidy)
• transfer from government/military/academic use to
  public/commercial use (regulatory forbearance)

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Are Access Universal Service Related?

• Changing definitions of universal service in
  telecom
• Historical Milton Mueller (1993)
• Old interconnection of local networks
• Later a telephone line for every (90 )
  household
• Now ?
• Role of convergence Schement, Pressman Povich
• Changes in universal service with the death of
  common carriage

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Broadcast Licensing

• Localism as U.S. policy
• Ownership caps Limits on numbers of stations
  owned by one corporate entity
• Recent changes
• Broadcast spectrum and digital TV
• High value for spectrum in cellular auctions but
  free to existing broadcasters
• Broadband and digital TV compete for spectrum
• See Alan Murrays column on Failed HDTV Policy
  (WSJ, June 4, 2002, page A4)

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Does Any of This Apply to An Interactive World?

• It is necessary to ask a few basic questions
• How interactive is web browsing?
• If it is not very interactive, maybe the old
  approaches are sufficient.
• How many of those online create content?
• Is this an important concern or is the ability to
  create content the issue?
• In either case, do we then need to focus on
• Content-creation skills?
• Access to web servers resources?

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Broadband Industry Structure Affects Access
Prices
Regardless of whether interactivity changes the
dimensions of access, there is evidence that
industry structure plays an important role.
(Remember these charts?)
USA
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Policies to Promote Ownership Diversity

• (An inconsistent) Mix of policies in U.S. across
  media types
• Telecomm
• Wireless
• Broadcasting
• Internet

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Ownership Wireless - 1

• Auctions led to high prices, limiting the role of
  small and minority-owned businesses
• Designated entities authorized by the Omnibus
  Budget Reconciliation Act of 1993 47 U.S.C.
  309(j)(3)
• The objective of promoting economic opportunity
  and competition and ensuring that new and
  innovative technologies are readily accessible to
  the American people by avoiding excessive
  concentration of licenses and by disseminating
  licenses among a wide variety of applicants,
  including small businesses, rural telephone
  companies, and businesses owned by members of
  minority groups and women

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Ownership Wireless - 2

• Munsons analysis of the intent
• The House Report explained the second objective
  in further detail. First, the committee intended
  the FCC to use a common sense approach to avoid
  concentration of licenses, not any particular
  test.Finally, the House committee included
  minority groups and women in order to ensure that
  such individuals would not be excluded by the
  competitive bidding system.-- M.W.Munson, A
  Legacy of Lost Opportunity, 7 Mich. Telecomm.
  Tech. L. Rev. 217 (2001)
• which led to the NextWave/Chase Tel/Clear
  Comm/GWI/Kansas PCS debacles (1996 auction)

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Ownership Wireless - 3

• The compromise solution of re-auctioning the
  NextWave spectrum to large carriers and splitting
  the proceeds between NextWave, which is in
  bankruptcy, and the Treasury fails to get
  Congressional approval (2001).
• The debate ignored the parallel situation of
  minority-owned successful bidders.

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Ownership Wireless - 4

• European experience not much better
• Legal challenges to licenses in Ireland
• Selection of Meteor over Orange upheld by Supreme
  Court but results in several year delay
• Post-auction renegotiations in France for 3G
  licenses
• Does this meet transparency requirements?
• Investigation of Italys 3G auction
• Etc.

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Ownership Broadcasting - 1

• Competing trends in U.S. minority ownership
  policy
• Pro
• Nondiscrimination Employment Practices (1968)
• Minority Tax Certificates (1978-1995)
• Distress Sale Policy (1978)
• Declared unconstitutional 1989
• Metro Broadcasting (1990)
• Con
• Financial Qualification Requirements following
  Ultravision (1965)
• Adarand (1995)
• Lutheran Church-Missouri Synod (1998)
• Auctions (raising the price of spectrum)
• Spectrum grants to existing TV broadcasters

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Ownership Broadcasting - 2

• Effects of ownership may be in several areas
• Programming / Content
• Employment
• Ownership of licenses and facilities
• Legal to give preferences to small businesses but
  not minorities or women(?)

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Broadcasting - 3

• Ownership One can quantify the costs to the
  minority community of U.S. policies such as the
  Financial Qualification Requirements and the loss
  of the Minority Tax Certificates
• From increased cost of L-T Debt 0.44 mil
• From (strong) barriers to entry 4.37 mil
• From no minority tax certificates 1.5 mil
• (All are per station, in current dollars, and
  depend on a number of specific assumptions)

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Internet - 1

• A (changing?) mix of ownership models
• Conversion to a hierarchical structure with
  backbones internet exchange points owned by
  very large carriers
• Tier-1 ISPs generally have access to the global
  Internet Routing Table and do not buy network
  capacity from other providers. Examples Cable
  Wireless (CW), Sprint, Qwest, ATT, Worldcom.
• Tier-2 ISPs lease part or all of their network.
  Examples AOL, _at_Home (gone)
• Tier-3 ISPs are regional, with no national
  backbone.

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Internet - 2

• Discussion points
• These definitions are not quite so clear in
  practice.
• See Rob Friedens Revenge of the Bellheads How
  the Netheads Lost Control of the Internet
• ILEC control of DSL and possible entry into Level
  1 may drive out smaller ISPs
• Why might there be a relationship between the
  number of (independent) ISPs and content?
• Tying arrangements bottlenecks (more on next
  slides)
• Diversity in ownership yields diversity in
  content
• Does this apply to the Internet?
• Possible examples on next slides

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The Essential Facilities Doctrine

• The notion of an essential facility is familiar
  to the antitrust bar, but difficult to assess.
  The grandaddy of all essential facilities cases
  involved the Terminal Railway Association, which
  first assembled in the 1890's the sole river
  bridge and related yards and tracks at St. Louis
  and which subsequently purchased a second,
  competing bridge. Although ordinary monopoly
  analysis or modern merger analysis might have
  disposed of the matter, the Supreme Court left us
  the legacy of the essential facility. It has been
  suggested that a 1990's equivalent of owning both
  Mississippi bridges is to own the software used
  on a very large installed base of computers, and
  various other modern day analogies have been
  suggested. I am not sure whether a century of
  practice has perfected our ability to analyze the
  elements of an essential facility case. Some
  aspects of the doctrine are still subject to
  serious debate. For example, how essential is
  essential?-- Commissioner Mary L. Azcuenaga
  (FTC, Jan. 1996)

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Essential Facilities and the Web

• Should DSL or Cable Modem users be able to choose
  their ISP?
• Should cellular users be able to choose their
  home page or portal?
• The next big fight could well break out in the
  world of wireless. So far, the issue has not been
  big in Washington. But in Europe, where wireless
  services are widespread, there have already been
  two skirmishes. On June 21, Britain's BT CellNet
  Ltd. bowed to pressure to allow its wireless
  customers to choose rival Internet portals as the
  home page on their cell phones rather than its
  own default home page. In May, France Telecom was
  forced to take similar action. ''It's valuable
  real estate for the carriers, and they're going
  to have a hard time letting it go,'' says IDC
  wireless analyst Callie Nelson.-- Business
  Week Online, July 31, 2000

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Internet Content - 1
This may be a very different mix of broadband
content from a small ISP than what you might see
from ATTBI or SBC/Prodigy.
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Internet Content - 2
For example, after ATT, Cox, and other cable
modem operators replaced _at_Home as their ISP, they
also took direct control of the content on their
home pages.
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Summary

• Ownership industry structure ? broadband
  prices ? access
• Ownership industry structure may affect content
• Industry structure ? ownership and the
  distribution of wealth across business sizes and
  ownership types