Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 1
I
INTRODUCTION
OCR for page 2
OCR for page 3
Telecommunications in the New Economy
The New Economy refers to a fundamental transformation in the United
States economy as businesses and individuals capitalize on new technologies,
new opportunities, and national investments in computing, information, and com-
munications technologies. Use of this term reflects a growing conviction that
widespread use of these technologies has made possible a sustained rise in the
growth trajectory of the U.S. economy.1
To understand this phenomenon better, the Board on Science, Technology,
and Economic Policy (STEP) of the National Academies has held since 2000 a
series of symposia on Measuring and Sustaining the New Economy. These
symposia have examined key issues related to semiconductors (the base tech-
nology driving the pace of technological development) as well as computers,
software, and telecommunications. Taken together, these meetings have produced
a comprehensive picture of what is known about the drivers of the New Economy.
1In the context of this analysis, the New Economy does not refer to the boom economy of the late
1990s. The term is used in this context to describe the acceleration in U.S. productivity growth that
emerged in the mid-1990s, in part as a result of the acceleration of Moore's Law and the resulting
expansion in the application of loser cost, higher performance information technologies. See Dale W.
Jorgenson, Kevin J. Stiroh, Robert J. Gordon, Daniel E. Sichel, "Raising the Speed Limit: U.S. Eco-
nomic Growth in the Information Age," Brookings Papers on Economic Activity, 2000(1):125235.
3
OCR for page 4
4 THE TELECOMMUNICATIONS CHALLENGE
This knowledge can help develop policies needed to sustain the benefits of the
New Economy.
New telecommunications technologies--the subject of STEP's fifth confer-
ence--have contributed significantly to the New Economy. These contributions
include the advantages of new product capabilities for businesses and consumers
as well as new, more efficient forms of industrial organization made possible by
cheaper and more versatile communications. Thus, while the telecom sector
accounts, by various measures, for about one percent of the U.S. economy, it is
estimated to be responsible for generating about ten percent of the nation's eco-
nomic growth.2 A key policy question, therefore, is how to sustain or improve on
this multiplier of ten, even as new technological innovations are ushering a major
shift from a vertical model to a horizontal model of production and distribution in
the communications and entertainment industries.3 This task of adapting policies
and regulations regarding the communications industry to new realities is made
more challenging given its long legacy--one that goes back past Alexander
Graham Bell to Benjamin Franklin, the first postmaster of the United States.
This introductory essay highlights selected issues discussed in the course of
STEP's conference on Telecommunications and the New Economy.4 The confer-
ence emphasized two transformations in communications: First, it emphasized
the potential and challenges in the diffusion of broadband and Voice over Internet
Protocol (VoIP). Second, it emphasized the transformation from vertical
industrial organization in print, radio, entertainment, and broadcasting to more
horizontal Internet based platforms. Speakers at the conference included industry-
representatives, lawyers, and technologists, as well as some academics. They
presented a variety of views on the challenges, opportunities, and policy prescrip-
tions needed to sustain U.S. leadership in telecommunications.5
In this introductory summary, we first review progress in the measurement
of communications equipment in the national accounts. We then look ahead to
some emerging information and communications technologies and their possible
contribution to sustaining the productivity improvements associated with the New
2See comments by Dale Jorgenson in the Proceedings section of this volume.
3Dale Jorgenson, "Concluding Remarks," in the Proceedings section of this volume.
4The enormous breadth of issues taken up at the conference leads to a tradeoff in the depth to which
the conference or this introduction can cover them. We acknowledge this reality.
5At the same time, the conference was necessarily limited in time and focus. There are of course a
variety of issues concerning the telecomm sector, not all of which can be addressed at any one-day
event. For example, the conference did not cover a discussion of recent commercial history of the
industry such as the dot-com boom and bust, the WorldCom fraud trials, and the legislative and legal
history surrounding the 1996 Telecommunications Act. It also did not fully address all aspects of the
impact of new forms of communications and media on regional economies and selected media
markets. Another limitation was the relative focus on household use of the Internet and new media over
business use of broadband, even though important productivity gains and economic advance often
follow from business use of new information and communication technologies.
OCR for page 5
INTRODUCTION 5
Economy. This then leads us to examine the reasons for the broadband gap in the
United States and some alternative ways of bridging this gap. Finally, we high-
light some of the policy challenges that emerge with "end of stovepiping" as
information technologies and communications networks converge.
MEASURING TELECOM PRICES
How do new information and communications technologies translate into
prices and hence consumer welfare? Mark Doms of the Federal Reserve Bank of
San Francisco provided the participants of the STEP conference an overview
of what the current official numbers say, and the challenges of coming up with
good price indexes for communications equipment and services. He noted that
while investment in communications in the United States had been substantial--
around $100 billion per year, representing a little over 10 percent of total equip-
ment investment in the U.S. economy--it had also been highly volatile. During
the recession of the early 2000's, he noted, IT investment fell about 35 percent
from peak to trough. (See Figure 1.) Doms noted that this recession might well be
remembered as the high-tech recession, adding that "certainly what happened to
communications played a major role in what happened to the high-tech sector."6
Measuring the dollars spent on communications technologies in the United
States every year is difficult because the technology itself is rapidly changing. As
demonstrated earlier in his study, a computer costing a thousand dollars today is
a lot more powerful and versatile than a similarly priced one of 10 years ago--
and this is no less true for communications equipment.7 Twenty-five years ago,
most long distance communications was handled through landline phones, in stark
contrast to the diversity of means of communications in use today. As Doms'
analysis points out, between 1996 and 2001 alone, there were tremendous
advances in the amount of information that could travel down a strand of glass
6The rise of the Internet persuaded many investors in the late 1990s that demand for data-network
backbone capacity was about to explode. Many anticipated Internet traffic to double every 100 days--
a belief reinforced by an April 1998 report, "The Emerging Digital Economy," by the Department of
Commerce, U.S. Department of Commerce, The Emerging Digital Economy, Washington, D.C.: U.S.
Department of Commerce, 1998. Resulting large investments led to a fivefold increase in the amount
of fiber in the ground. At the same time, technological advances increased the transmission capacity
of each strand of fiber 100-fold, so total transmission capacity increased 500-fold. But over the same
period demand for transmission capacity merely quadrupled, a rise that could easily be accommo-
dated by existing networks. When it became clear that the predicted explosion of demand was not
going to happen, operators frantically cut their prices, hoping to fill their empty pipes. Equipment-
makers' sales collapsed and their share prices tumbled--leading to the burst of the telecom bubble.
See The Economist, "Beyond the Bubble," October 9, 2003.
7Jack E. Triplett, "Performance Measures for Computers" in National Research Council,
Deconstructing the Computer: Report of a Workshop, Dale W. Jorgenson and Charles W. Wessner,
eds., Washington, D.C.: The National Academies Press, 2005.
OCR for page 6
6 THE TELECOMMUNICATIONS CHALLENGE
40
Nominal IT investment
Real IT investment
30
20
10
Percent
0
10
20
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
FIGURE 1 Annual percent change in IT investment.
NOTE: Percent changes based on year-end values.
SOURCE: Mark Doms, "The Boom and Bust in Information Technology Investment,"
FRBSF Economic Review, 2004: 1934. Bureau of Economic Analysis.
fiber, adding that the price of gear used to transmit information over fiber fell, on
average, by 14.9 percent a year over this five-year period. The fast speed of tech-
nological change makes the job of tracking prices complex because the capabili-
ties of the equipment change dramatically under the same rubric of "computer" or
"router." Whereas money spent on telecommunications was relatively easier to
track 25 years ago when most purchases were of telephone switches, today's
telecommunications equipment includes a wide array of technologies related to
data, computer networking, and fiber optics.
Current methodologies for making inter-temporal comparisons in price and
quality understate true price declines because they do not fully track these tech-
nological changes. While the Bureau for Economic Analysis has estimated that
prices for communications gear fell an average of 3.2 percent per year between
1994 and 2000--in sharp contrast to the 19.3 percent fall in computer prices--
Dom's analysis, which takes fuller account of technological changes, suggests
OCR for page 7
INTRODUCTION 7
that that communications equipment prices actually fell on the order of 8 to
10 percent over that period.8
While this new estimate is a step in the right direction, more refinement is
necessary in measuring prices. As Doms notes that the job of keeping track of
these developments is growing more difficult for statistical agencies, especially
in light of their limited budgets and the rapid development of technology. "Unless
the statistical agencies get increased funding, in the future, they are not going to
be able to follow new, evolving trends very well," he concluded.
Indeed, as we see below, current trends in information and communications
technology--benefiting from Moore's Law--will continue to disrupt incumbent
businesses and traditional business models.
COMMUNICATIONS TECHNOLOGY: A VISION OF THE FUTURE
Moore's Law, which in its modern interpretation anticipates the doubling of
the number of transistors on a chip every 18 months, has spurred the modern
revolution in digital technologies for over forty years.9 It is likely to continue for
another ten to twenty years, according to experts in the semiconductor industry.10
This pace of ever faster and cheaper semiconductors and semiconductor related
technologies is likely to continue to have significant impacts, not least on com-
munications technologies. As William Raduchel noted at the conference on tele-
communications and the New Economy, the endurance of Moore's Law means
that "the most powerful personal computer that's on your desk today is going to
be in your cell phone in twenty years." Technologies for display, storage, and
transmission of data are also expected to show rapid improvement, he added,
though their rates of improvement are likely to abate sooner than that of semi-
conductors.11
8Mark E. Doms, "Communications Equipment: What has happened to Prices?" FRBSF Working
Paper 2003-15.
9While by no means dictating an actual law, Gordon Moore correctly foresaw in 1965 the rapid
doubling of the feature density of a chip, now interpreted as approximately every 18 months. Observ-
ing that the number of transistors per square inch on integrated circuits had doubled every year since
the integrated circuit was invented, Gordon Moore predicted in 1965 that this trend would continue
for the near future. See Gordon E. Moore, "Cramming More Components onto Integrated Circuits,"
Electronics, 38(8), 1965. The current definition of Moore's Law, which has been acknowledged by
Dr. Moore, holds that the data density of a chip will double approximately every 18 months. Many
experts expect Moore's Law to hold for another 15 years.
10See, for example, Robert Doering, "Physical Limits of Silicon CMOS Semiconductor Roadmap
Predictions" in National Research Council, Productivity and Cyclicality in Semiconductors: Trends,
Implications, and Questions, Dale W. Jorgenson and Charles W. Wessner, eds., Washington, D.C.:
The National Academies Press, 2004.
11For a discussion by representative from these industries of the rate of technological change in
these and other computer related industries, see National Research Council, Deconstructing the
Computer: Report of a Workshop, op. cit.
OCR for page 8
8 THE TELECOMMUNICATIONS CHALLENGE
Raduchel predicted that enhanced digital sampling, skyrocketing storage
capacity, and expanded packet switching technologies will change the way we
will work, communicate, and entertain ourselves in the future.12 Faster computers
mean that digital sampling for recording, playback, looping and editing of music
will improve to the point where it is nearly error free, changing the way music is
heard and distributed. Advances in storage capacity and speed will lead to new
products (as already previewed with today's iPods and TiVos) that will likely
challenge existing business models of how music and video entertainment is pack-
aged and distributed, and ultimately consumed. In addition, advances in packet
switching, where information is commoditized for transmission, will likely mean
that "radio, television, classified information, piracy, maps, . . . anything" can be
moved around a communications infrastructure with no distinction as to what
they are. These developments, in turn, will require greater attention to the issue of
standards that can allow for coherence as well as future growth and innovation.
These advances in capturing and distributing information and entertainment
in commoditized packets build on the concept of the stupid network--where the
intelligence is taken out of the middle of a communications network and put at
the ends--a design principle that has already guided the development of the
Internet.13 According to David Isenberg, such an end-to-end network allows for
diversity in the of means of transmission--including varieties of wired and
wireless technologies--with this diversity creating greater robustness against the
failure of any one element. As we see next, enhancements in packet switching
capabilities are already making such novel technologies as Voice over Internet
Protocols and Grid Computing technically and commercially feasible for wide-
spread use.14
VoIP (Voice over Internet Protocol)
In Internet telephony, voice is broken into digital packets by a computer and
conveyed over the digital network to be reassembled at the other end. The voice
network of the future will run over the Internet Protocol, according to Jeff Jaffe of
Lucent Technologies. Since this technology has a completely different capability
than traditional landlines when it comes to voice quality, cost, and reliability, he
predicted that it will bring about a generational change in voice communications.
Louis Mamakos of Vonage (a company that has introduced VoIP to commer-
cial markets in the United States and elsewhere) cited two sources of opportunity
that arise with VoIP: One is through sharing infrastructure, which comes from
chopping up audio into packets and transmitting it over an existing packet-based
12
See remarks by William Raduchel in the Proceedings section of this volume.
13
David Isenberg, "Rise of the Stupid Network," Computer Telephony, (August):16-26, 1997.
14
The Wall Street Journal, "Vonage plans to file for IPO," August 25, 2005.
OCR for page 9
INTRODUCTION 9
Box A: VoIP--A Disruptive Technology
VoIP has the potential to undermine the business model underpinning
the telecommunications industry. Factors such as the length of the call or
the distance between callers, key determinants of cost today, are
irrelevant with VoIP. In addition, VoIP augers more widespread use of
videoconferencing as well as new applications such as unified messaging
and television over Internet Protocol (IPTV).
Many analysts believe that the question is not whether VoIP will dis-
place traditional telephony, but how quickly. This disruptive potential of
VoIP is a challenge for telephone, mobile, and cable incumbents--with
some attempting to block the new technology and others moving to
embrace it.a
aThe Economist, "How the internet killed the phone business," September 15, 2005.
See also Dale W. Jorgenson, "Information Technology and the World Economy," Leon
Kozminsky Academy Distinguished Lecture, May 14, 2004.
network, which yields significant cost advantages compared with traditional tele-
phony. But equally powerfully, he contended, are opportunities that come from
using software to provide a variety of services for the consumer. For example, by
marrying it with the computer, phones could be programmed to control who can
call through and when.15
Grid Computing
Grid computing, which allows users to share of data, software, and comput-
ing power over fiber optic networks is expected to be another major development
in information and communications technology. Mike Nelson of IBM likens grid
computing to a utility supplying electricity, noting that logging onto the Grid
could provide a user access to far more computing power than is possible from a
single computer system.
15"For the incumbent telecoms operators, though, what is scary about Vonage is not the company
itself but the disruptiveness of its model. Vonage is a telecoms company with the agility of a dotcom.
Everyone in the telecoms industry has heard of it, and has wondered what will happen if the model is
widely adopted." See The Economist, "Between a Rock and a Hard Place," October 9, 2003. We
many not have to wait much longer to see what will happen. See The Financial Times, "The internet's
next big talking point: why VoIP telephony is quickly coming of age," September 9, 2005, which
reports on the entry of Microsoft and Google into the VoIP market.
OCR for page 10
10 THE TELECOMMUNICATIONS CHALLENGE
A widely known (but limited) instance of concept of grid computing is the
current SETI (Search for Extraterrestrial Intelligence) @Home project, in which
PC users worldwide donate unused processor cycles to help the search for signs
of extraterrestrial life by analyzing signals coming from outer space. The project
relies on individual users to volunteer to allow the SETI project to harness the
unused processing power of the user's computer. About 500,000 people have
downloaded this program, generating an amount of computing power that would
have cost $100 million to purchase.
Grid computing is likely to have fewer nodes that are tied together than in the
SETI case, said IBM's Nelson, but because the size of the machines can be
larger--including large servers, storage systems, and even supercomputers--high
levels of computing power can be generated. Further, since the systems involved
in grid computing will be more tightly coupled and more general purpose, they
can be far more versatile. The next step in grid computing, he predicted, is the
"Holy Grid" where everything is connected to everything, running common soft-
ware, able to tackle a wide range of problems. With the advent of such a grid,
both small and large companies would be able to buy the computing power they
need and get the software they need over this grid of network systems as needed
on a pay-as-you-go basis.
In IBM's view, a part of the larger vision of Grid computing includes
autonomic computing, where integrated computer systems are not only self-
protecting, self-optimizing, self-configuring, and self-healing, but also come close
to being self-managing. Another important component of this vision is pervasive
computing, where sensors embedded in a variety of devices and products would
gather data for analysis. These sensors will be located all around the world and
the data they generate will have to be managed through the Grid. As Nelson
predicts, "Soon we will have trillions of sensors, and that is what we really rely
on the `Net for."
The predicted arrival of Grid computing means that firms in the computer
industry have an enormous stake in the future of telecommunications networks.
With the Grid, the future of computing lies in complex network-based technolo-
gies, such as web services, which tie together programs running on different
computers across the Internet, and utility computing to provide computing power
on demand. With telecommunications firms becoming more dependent on infor-
mation technology, and vice versa, the two industries are likely to become ever
more closely intertwined.
Getting to the Future
While these and other emerging technologies offer alluring prospects for a
more vibrant and productive future, a major focus of the STEP conference on
telecommunication technologies concerned the regulations that condition the
speed at which these technologies and others can be adopted as they become
OCR for page 11
INTRODUCTION 11
available. As Dr. Jorgenson pointed out in his introductory remarks, the issue of
regulation is particularly germane to telecom, which is regulated at both the
federal and state levels. Broadband regulation, in particular, was identified by
several conference participants as a bottleneck to realizing the benefits of new
information and communications technologies in the new "wired" and "wireless"
economy.
SUSTAINING THE NEW ECONOMY:
THE BROADBAND CHALLENGE
Broadband, which refers in general to high-speed Internet connectivity, already
supports a wide range of applications ranging from email and instant messaging
to basic Web browsing and small file transfer, according to Mark Wegleitner of
Verizon.16 In the near future, he said, improved broadband networks can lead to
true two-way video-conferencing and gaming as well as VoIP. The future of
broadband, he predicted, includes multimedia Web browsing, distance learning
and telemedicine. Beyond these applications, he noted, lay the possibility of
immersive gaming and other types of information and entertainment delivery that
comes with high band output combined with high-definition receivers.17
Can we indeed arrive at this promising future? Charles Ferguson of the
Brookings Institution noted that while many foresee what a "radiant future"
should look like, there exists an enormous gap for many between this vision for
broadband-based technologies and the lack of adequate high-bandwidth access to
a broadband network.
The Global Broadband Gap
Indeed, as many conference participants pointed out, the United States is
falling behind other nations in access to high-bandwidth broadband.18 Jaffe drew
16Individuals and businesses today variously connect to the nation's fiber-optic network through
telephone lines (via digital subscriber lines or DSL), though television coaxial cables, and by fiber-to-
the home, depending on the availability of these services within different jurisdictions. Wireless con-
nections are also emerging as a viable alternative, as discussed later in the text.
17Many of these applications are already emerging, although the potential of many of these applica-
tions can be more completely realized through networks that are faster, carry more information, and
reach more users.
18Commenting on a discussion of the United States slippage in broadband penetration rates,
Dr. Kenneth Flamm of the University of Texas noted that it is important to carefully define what is
meant by broadband. Broadband, he noted, describes a wide spectrum of bandwidth, with significant
differences between its high and low end. In addition, he noted that while 99 percent of the U.S.
population was connected by telephone or cable, and thus were potentially connected to the Internet,
the issue of bandwidth size determined the types of applications that could be made practical to
households and businesses.
OCR for page 16
16 THE TELECOMMUNICATIONS CHALLENGE
available to competing operators, in particular the "local loops"--the wires that
run from telephone exchanges into homes and offices.20
The 1996 Act sought to promote competition by asking incumbents to share
this part of their networks with rivals--technically known as "local loop unbundling"
(LLU)--given that the expense for competitors to build their own networks would
be very high in the short term. In practice, however, most incumbent operators
saw unbundling as robbery, according to Thompson. This meant (as The Econo-
mist describes it) that "the incumbent must, in effect, give its rivals a hand as they
try to steal its business. Not surprisingly, most incumbents find procedural, legal,
and technical reasons for being slow about it."21 Though intended to promote
competition in the short run, local loop unbundling may have inhibited invest-
ments in alternate infrastructure that competitors might otherwise have made over
the longer term. And because it forced incumbents to share their networks with
rivals, this may have also deterred them from investing in new equipment. An
unintended consequence of the 1996 Telecommunications Act may well have
been to inhibit investment needed to provide high bandwidth broadband access
over the local loop, although the issue of whether mandatory unbundling increases
or decreases the roll out of broadband network access remains an open empirical
question.
Even so, one of the authors of the Telecommunications Act of 1996, Charles
Thompson, conceded that the concept of unbundled network elements, introduced
in that legislation was moribund--that he "would be the first to put flowers on the
grave of unbundled network elements."
Outdated Standards and Regulatory Uncertainty
Outdated standards and a regulatory uncertainty may be retarding progress in
addressing the broadband gap, according to some conference presenters. On the
issue of standards, Peter Tenhula of the Federal Communications Commission
(FCC) acknowledged that wireless technology regulation was still being governed
by a ninety-year-old spectrum management regime rather than one "rooted in
modern-day technologies and markets." Such outdated regulations, he noted, fail
to capitalize on technological advances in digital technologies such as those that
allow for greater throughput of information, interference management, and
spectrum sharing.
20Local loops can be either "legacy" copper loops or newer fiber broadband connections. The 1996
Telecom Act created considerable uncertainty for the unbundling broadband services. See, for
example, the press release of April 8, 2002 by the Telecommunications Industry Association, "TIA
Tells FCC That Unbundling Rules Discourage Broadband Investment," which recommends that the
FCC not apply its network unbundling rules to new facilities used for the provision of broadband and
high-speed Internet access services, and to apply them to legacy systems including copper loops, so as
not to inhibit investment in wire-line broadband networks.
21The Economist, "Untangling the local loop," October 9, 2003.
OCR for page 17
INTRODUCTION 17
Regulatory uncertainty is also holding down the installation of fiber all the
way to the curb, noted Dr. Jaffe. Clear regulation is needed, he stated, to encourage
sufficient near-term investment in fiber infrastructure. This regulatory environ-
ment may have been further clouded in recent years by increasing federal concerns
about infrastructure protection, disaster recovery, and emergency services in the
wake of recent concerns about terrorism. According to Jaffe, vendors such as
Lucent face uncertainties in developing new products at a time when regulatory
imperatives are very slow to come out.
Another important source of regulatory uncertainty is the patchwork of local
regulation issued by individual municipalities. Cable infrastructure is often
governed by city-specific franchise agreements, while telephone companies and
other broadband providers may in some cases prefer statewide or even national
authority as a means towards greater regulatory simplicity and predictability.
In addition, as Verizon's Wegleitner observed, prevailing uncertainties in
updating regulation make it difficult for his company to invest in the develop-
ment of an effective broadband network. Incremental rulemaking in the transition
from the old regulatory regime to a new one often creates ambiguities, with
investments of millions or even tens of millions of dollars hinging on the inter-
pretation of words that, while written only a few years before, were already
technically obsolete. "It is that interpretation that is going to determine the path
forward of the network's evolution." This "unnecessarily complex regulatory
environment," did not make sense in that it discouraged investment.
Thompson objected, however, arguing that large telecom and cable compa-
nies are not passive recipients of federal and state regulation and that, moreover,
the current regulatory environment are greatly affected over the years by the
power of incumbents on all sides. To the extent that incumbents influence regula-
tion, the current uncertainty in regulation may well reflect the uncertainties that
major cable and telecom providers are facing in coming up with a viable business
model that allows profits in an arena that has been transformed by new technolo-
gies. Lisa Hook, recently of AOL-Broadband, noted in this respect that firms in
the broadband industry were struggling at the service layer to find business models
and revenue streams based on new technologies that would justify the investment
needed to make nearly unlimited bandwidth widely available.
SOME ALTERNATIVE SOLUTIONS TO CLOSE
THE BROADBAND GAP
According to IBM's Michael Nelson, the Internet revolution is less than eight
percent complete, with many new applications still to be enabled by future tech-
nologies like the Grid. Realizing this vision of the next-generation Internet will
require both new technologies as well as significant investment, he cautioned, as
it will entail providing whole neighborhoods with gigabits-per-second networks
that are affordable and reliable as they are ubiquitous. "Getting there is going to
OCR for page 18
18 THE TELECOMMUNICATIONS CHALLENGE
require more intelligent, more consistent policies than we have today," he
declared. Participants at the conference considered a variety of means by which
the nation could close the broadband gap, of which some key approaches are
previewed below.
Directed Government Incentives
Ferguson suggested that the nations that were ahead of the United States in
broadband penetration shared two characteristics. The first was that their govern-
ments are "much more heavily involved in providing incentives and/or money
and/or direct construction of networks than is the case in the United States." The
second was that their Internet providers are under government pressure to improve
their price and performance. For example, he said that the Chinese government
had made it clear to the country's principal telecommunications providers that
broadband deployment was a major national priority. The situation was similar in
Japan and Korea, adding that government encouragement in Canada and the
Scandinavian countries had also enabled those countries to surge ahead of
the United States in high-bandwidth broadband penetration.22
For the United States, Ferguson recommended a variety of policy measures
to bridge the broadband gap. Initiatives could include subsidizing the deployment
of municipal networks and offering investment incentives to public and private
providers. Putting more pressure on incumbents to open up their networks so that
there is an open architecture broadband system that is more analogous to the
structure of the Internet is another avenue.
Faith in Efficient Markets
In contrast to this more policy-driven approach, Verizon's Wegleitner noted
that broader technical, financial, and regulatory improvements would reduce
uncertainty and allow markets to function efficiently. While admitting that cur-
rent challenges resisted simple solutions, he put forward what he called a short
answer to the problem: "Let the markets rule." By this, he envisioned the Internet
of the future as an interconnection of commercial networks such as Verizon's
rather than the confederation of commercial providers that it is now. He added
that the future requirements for services offered customers via broadband would
be of such quality and scope that only an interconnection of commercial networks
could provide this service.23 To make this network of the future possible,
22For an assessment of Japanese policies to catch up and surpass the United States in Broadband
connectivity, see Thomas Bleha, "Down to the Wire," Foreign Affairs, 84(3), 2005.
23The current Internet is based on a confederation made up of multiple service providers. Their
ability (or inability) to maintain their interconnection arises from commercial issues, and not from the
current design of the Internet.
OCR for page 19
INTRODUCTION 19
Wegleitner recommended further development of appropriate standards for com-
munication protocols and a new way of levying tolls on customers for use of the
infrastructure that belongs to companies like Verizon, combined with a light
regulatory touch.
Networks in the Hands of Customers
In the discussion that followed the first panel, Jay Hellman, a real estate
developer, observed there exist business opportunities both in laying fiber to the
home and making sure it functions. He likened the duo of fiber and services to a
public roadway where service companies like FedEx and UPS competitively ply
their fleets. It was desirable, he added. that the street be accessible to as many
competitors as possible. He also added that his own frustration with the capacity
offered by existing providers had prompted him to start his own small tele-
communications company. Responding to this comment, David Isenberg noted
that the development of technologies that allow customers to create their own
networks and that create opportunities for individuals to provide service innova-
tions was important to sustain innovation and provided a broader, more generic
solution to the broadband challenge.
Municipally Owned Fiber
Thompson proposed a different approach, recommending the development
of non-profit public-private partnerships at the local level to stimulate the devel-
opment of broadband to the home. These partnerships would serve as a utility,
lighting fiber but not provide any service on that fiber except those municipal
services that the town or community base chose to provide. The network would
be open to any and all service providers with an Internet Protocol basis--be they
telephone companies, cable companies, software companies, or others providing
online entertainment--and it would be used by all under the same terms and
prices. Communities could build this network, just as municipalities build and
maintain roads and sewers, he added. Citing the case of Ireland where, Thompson
said, such partnerships have been successfully developed to provide broadband
access.
While separating the network access component from retail services may
help municipal providers of network infrastructure, more needs to be learned
about the feasibility of this idea in the United States, including whether customers
want to buy their services in this way. The issue of whether the municipal provi-
sion of infrastructure will in fact lead to more competition for broadband access
also remains to be studied.
OCR for page 20
20 THE TELECOMMUNICATIONS CHALLENGE
The Wireless Wildcard--A Silver Bullet?
Wireless broadband access can be a third tier that competes with cable and
DSL, according to David Lippke of HighSpeed America.24 In this way, wireless
broadband can help overcome the limitations associated with traditional wired
broadband access. While wireless broadband has been in limited use so far due to
relatively high subscriber costs and technological limitations such as problems
with obstacle penetration, rapid advances in technology are likely to overcome
such challenges. Moore's Law applies to wireless no less than other forms of
telecommunications, he noted, predicting that wireless data rates would reach all
the points through which traditional telecom had passed.
In particular, scientists and engineers working on the upcoming WiMAX
standard have resolved a number of problems that had bedeviled existing wireless
protocols such as WiFi. The prospect of reaching gigabit speeds was now being
mentioned, and other quality of service issues as well as lower costs of installa-
tion are being addressed. To the extent that these predictions are realized, the
WiMAX protocol may well offer an effective wireless solution to the broadband
gap, especially for smaller towns and communities across the United States.
THE END OF STOVEPIPING
The move from analog to digital information and communication technolo-
gies is ushering a major transformation disrupting how telecom, cable, and music
and video entertainment companies, among others, do business. Because analog
solutions were all that existed until recently (except in some fields of computing),
these industries each matured into separate industries, with separately evolved
business models and regulatory frameworks. In the digital age, however, basic
technologies like digital sampling and packet switching enable the commoditization
of voice, data, and images into digital packets that resemble each other. These
packets can be sent over the Internet with no distinction as to what they are, to be
reassembled at the intelligent ends of the network.
Drawing on these observations, William Raduchel noted at the conference
that the information and communications technology revolution will usher the
end to stovepiping as service and content providers shift from vertical integration
to a greater reliance of horizontal platforms. This change, he noted, will give rise
to a variety of public policy issues as individuals and businesses in the economy
restructure to take advantage of the potential offered by new technologies.25 He
24Also mentioned at the conference was broadband over power lines, which at the time was being
reviewed by the FCC.
25A key example of contemporary relevance is the offshore outsourcing issue. For a discussion of this
issue, see National Research Council, Software, Growth, and the Future of the U.S. Economy: Report of
a Workshop, Dale W. Jorgenson and Charles W. Wessner, eds., Washington, D.C.: The National Acad-
emies Press, 2006. See also Catherine L. Mann, High Technology and the Globalization of America, forth-
coming.
OCR for page 21
INTRODUCTION 21
Box C: Some Factors Affecting the End of Stovepiping
While the digital transformation has the potential to disrupt traditional
vertically-integrated industrial organizations, some factors may inhibit a
transformation to a fully horizontal platform.
· Open Network Architecture: The horizontal organization of commu-
nications requires a relatively open network architecture. However, if
systems or content providers do not have access to physical or logical
pipes, those providers cannot reach their customers.a
· Separation of Carriage from Content: Some customers may prefer
to purchase services in bundles that include access, as noted by Lisa
Hook. Here, vertically-integrated firms may have a competitive advan-
tage over firms that supply pipes or content exclusively.
· Social Policies that Favor Universal Access: Where social policies
set access price below a competitive market price, the supplier of the
access must also be able to cover its total cost from the supply of
some other higher-margin services or receive a subsidy.
· Economies of Scope: There may be economies of scope between
providing communications services and network facilities.
aConsider, for example, the FCC's Video Dialtone initiative in the 1990s, which
attracted substantial investment from incumbent telephone companies until it was determined
that some portion of the bandwidth had to be made available to competing content providers.
For a wider discussion of the limitations of open access cable, see Thomas W. Hazlett and
George Bittlingmayer, "The Political Economy of Cable `Open Access,'" Stanford Technology
Law Review, 4, 2003.
also noted that the speed of change is likely to be such that the economy may not
be able to adjust to it readily. Among the issues to be addressed is the challenge to
intellectual property rights and question of regulation, which is expected to be
very challenging.
The potential and implications of the move from analog to digital information
and communication technologies were discussed by several of the conference's
participants. Key points from these discussions are summarized below. As in any
conference that includes a variety of perspectives, some of these policy recom-
mendations are mutually contradictory, and evidence may be required regarding
their efficacy.
OCR for page 22
22 THE TELECOMMUNICATIONS CHALLENGE
Convergence and Competition
Raduchel sees the Internet as having two complementary aspects--it is both
a physical set of networks as well as a protocol known as TCP/IP. At the present,
the physical network can only support movies and other applications at low bit
volumes and is often not cost effective--although this can be expected to change
as technology improves and the broadband gap is overcome. The significance of
the Internet Protocol, he said, is that it makes all networks look the same and
allows interoperability. It was for this reason that the telecommunications world
could be expected to move to one set of interconnected webs, he said, predicting
that "5 to 10 years from now, we will be online all the time."
This convergence is challenging the traditional business models of firms in
these industries. How would telecom companies, for example, deal with new
technology that makes cell phones work perfectly everywhere or with much
cheaper VoIP service? The next decade, warned Dr. Raduchel, would be marked
by "lots of dislocation" as firms attempt to adjust to new technological and
commercial realities.
According to Mr. LaJoie, the convergence of data, voice, video, wireless,
public networks, and private networks in an end-to-end infrastructure was chang-
ing the terms of competition across industries. Where there was once a big
separation between what the telecom and cable industries did for example, "now
everybody is in everybody else's business." While cable television, Internet,
Cellular, WiFi, and Satellite transmission businesses were once distinct, LaJoie
believes that they are all destined to overlap and offer similar kinds of products,
suggesting with some optimism that the economic rewards that will arise from
this competition would be what drives continued innovation, the advent of new
services, and increased broadband connectivity.
The potential end of stovepiping also poses new challenges for consumers.
Many consumers, faced with a proliferation of Internet services, operating
systems, and devices will want a service that is easy to use and integrated, pre-
dicted Ms. Hook. She noted that companies like AOL Broadband see a market
opportunity as aggregators, packaging a variety of content and communications
services over the Internet and protection against viruses and spy-ware that are
easy to launch and use.
Intellectual Property in the Era of Digital Distribution
In addition to disruption in the business models of firms that deliver a digital
signal is the disruption to business models of firms that provide the content. In-
deed, the music and entertainment industries are among those that are also
undergoing a fundamental shift in the digital age. Andrew Schuon of the Inter-
national Music Feed television network noted that while the public's desire to
consume music has never been greater, with new technologies allowing users
to take an entire music collection with them anywhere they go, the key problem
OCR for page 23
INTRODUCTION 23
for content providers is how to make money selling music in the new medium--
given that technology already available has allowed consumers to share music
and other content with each other for free. At present, he noted, legitimate down-
loads account for only a few percent of all downloads from the Internet.
He noted that technology developed for building legitimate services makes it
now possible to protect intellectual property, to monetize it, and to track licenses
while, at the same time, creating a good experience for the consumer. However,
this technology has to catch up with consumer expectations that have developed
in the absence of such constraints: "If you steal the content, you can do anything
you want with it--put it into any portable device, put it on as many computers as
you have, use the content as you see fit." The challenge for the music industry is
to find a way to get the consumer to pay for its product while at the same time
being more creative than the illegitimate download sites. The music industry,
Mr. Shuon said, has to offer the modern customer the flexibility to use the content
in the way they want to, in addition to offering superior content and a fair price.
Steve Metalitz, of the law firm Smith and Metalitz, agreed that developing a
legitimate market for copyrighted materials over broadband--for entertainment,
services, software, video games, research, and reference works--was indispens-
able for the long-term viability of these industries. Acknowledging that piracy
will continue to be a problem, he added that the challenge for the future of broad-
band is to achieve a relatively low level of piracy and a very high level of
legitimate products. Addressing this challenge requires:
· Developing legitimate markets for copyrighted materials over broadband;
· Providing greater security for delivering content to an end-user including
measures to ensure that the income-generating potential of material going into the
pipe did not vanish forever;
· Creating a usable legal framework to protect the technological measures
used to control access to copyrighted material in the network environment;
· Focusing enforcement of piracy problems on organized criminal groups
as well as dedicated amateurs who play a role in making the system insecure; and
· Improving public education to make consumers aware that certain types
of file sharing is illegal and the need to secure permission to avoid copyright
infringements.
Cooperation, Mr. Metalitz concluded, is needed among providers of network
services along with better communication with policymakers to advance these
objectives.
The Challenge for Regulation
According to Peter Tenhula of the FCC, the challenge for regulation con-
cerns the migration from decades of regulatory stovepipes towards a new vision
OCR for page 24
24 THE TELECOMMUNICATIONS CHALLENGE
Content
video: Application services
Logical
-channel
Private/Commercial radio Multi cable/DBS Audio/video: broadcasting Telephony/Commercial carrier Physical
FIGURE 3 Vertical silos to horizontal layers.
of a variety of applications and services (covering voice, video, and data among
others) that are provided over multiple and competing telecommunications plat-
forms (including cable, satellite, DSL, and power lines). For this idea to work,
content or service providers need a choice of mechanisms by which they can
reach their customers. Rather than preserve the artificial vertical integration that
had existed for decades and had created silos that grew up over the years,
Mr. Tenhula suggested that it made better sense to let the natural layers fall as
they might. (See Figure 3.) Replacing sector-specific communications regulation
with a layered regulatory model, he added, would better complement the net-
worked characteristic of the New Economy.
The FCC's agenda, he said, was to guide and propel the journey from a slow,
conventional analog world to a digital world with significant opportunities for
faster, more reliable, higher quality information and communications, with the
overall goal of providing substantial benefits for American consumers.
CONCLUSION
Concluding the conference, Dale Jorgenson noted that the New Economy
had witnessed a huge shift from a vertical model to a horizontal model in the
computer, semiconductor, and communications industries. In this new model, he
said, most of the interesting innovations were disruptive. The challenge for busi-
nesses in this changing environment was to figure out how to make money, which
was hard given that consumers were both clever and unpredictable. It was "too
bad," he said that the consumer ends up carrying away most of the welfare, which
then cannot be delivered to shareholders. But in another respect, he added, the
fact that "consumers emerge over and over again as the big winners . . . [is] a
great thing about the New Economy."
Jorgenson characterized the policy issues in the telecommunications chal-
lenge as particularly difficult. While many economists are prone to offer private
OCR for page 25
INTRODUCTION 25
property as an answer to policy dilemmas, the presence of common property in
the form of the digital communications infrastructure made matters more com-
plex, he noted, adding that a way had to be found of maintaining common facili-
ties within a market based approach. The transmission of property such as data,
software, and music across this network also raised questions about its protection,
while ensuring privacy for users. Taken together, these issues provide a robust
agenda for further study and consideration about the New Economy--which, he
noted, has been a central aim of the National Academies' Board on Science,
Technology, and Economic Policy.
OCR for page 26
Representative terms from entire chapter:
telecommunications challenge
