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Panel II ------------------------------------------ The Broadband Opportunity: What Needs to Be Done? INTRODUCTION Kenneth Flamm University of Texas at Austin Convening the panel, Dr. Flamm offered introductory remarks focusing on the areas it was to consider. The first of these concerned the definition of broad- band, and, specifically, the speed of transmission to which the term properly applied. Discussion by the previous panel of the United States' slipping behind in penetration rates for "something called, quote, broadband," he said, had failed to acknowledge that what qualified as broadband had been changing as well. Some of the countries that were pulling ahead of the United States in penetration rates were also offering higher quality, faster broadband connections. The FCC used 200 kilobits per second (kbps) as its threshold speed for broadband. He pointed out, however, that according to this definition, the variation between fast broad- band and slow broadband was greater than an order of magnitude--and thus sub- stantially wider than the variation between slow broadband and low speed dialup, since the former was only four times faster than the latter. "Increasingly," he said, "what broadband is, and the quality of broadband service, are going to be an important issue." 77
78 THE TELECOMMUNICATIONS CHALLENGE Broadband Access: A Rapidly Changing Landscape A second area, broadband access, had been an issue for many years in the United States, but data that the FCC had been collecting on broadband availability had shown that the landscape was changing very rapidly and that it might no longer be an issue. At present, high-speed service was available in around 86 per- cent of Zip Codes containing 99 percent of the U.S. population, and approxi- mately 40 percent of U.S. Internet households connected with broadband (see Figure 20). "So the question is," Dr. Flamm said, "if the definition of broadband is one issue, and broadband access is no longer really an issue, what are the issues?" The panel, he anticipated, would focus on pricing and on competition. The latter, as measured by the number of providers per Zip Code, had changed rapidly over the previous four years (see Figure 21). Still, there remained many Zip Codes where the traditional duopoly--made up of the telephone company and the local cable company--were the sole providers of broadband services. He would take advantage of the occasion, Dr. Flamm said, to bring up what he called a "very important data issue" and to make a plea for funding. In 1999 and 2000, the Bureau of Labor Statistics had sponsored a survey sampling U.S. 50 45 40 35 30 Population 25 of 20 15 Percent 10 5 0 20 17 1819 15 16 13 14 June 2000 11 12 10 9 8 7 of Providers 6 December 2003 5 Number 4 13 0 FIGURE 20 99 percent of population now has at least 1 provider in their Zip Code: Population-weighted distribution of Zip Codes by number of broadband providers.
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 79 50 45 40 35 30 25 20 Percent 15 10 5 0 20 19 18 17 16 15 14 June 2000 13 12 11 10 December 2000 9 Providers 8 of 7 6 Number June 2003 5 4 13 December 2003 0 FIGURE 21 Rapid change in U.S. broadband penetration, competition over four years: Distribution of Zip Codes by number of broadband providers. NOTE: FCC numbers have been corrected to reflect undercounting of rural Zip Codes with zero providers; corrections probably somewhat overestimate zip codes with zero providers. households that collected data on broadband prices. The question on broadband prices had been discontinued in 2001, but why? His guess was that broadband was held to be less important then than it had been in 1999 and 2000. "There are some issues of priority in our statistical data-collection efforts," he declared, "that need to be addressed." Dr. Flamm then introduced the panel's first speaker, Charles Ferguson, whom he billed as "interesting and often provocative." Dr. Ferguson had left MIT to become one of the founders of Vermeer Technologies, where he had participated in the creation of a software technology that had subsequently become known as FrontPage. Vermeer, like quite a few successful startups, had been acquired sub- sequently by Microsoft, and FrontPage was being sold as part of the Microsoft Office suite. As a result of the sale of the company, Dr. Ferguson held a fair amount of Microsoft stock; he declared, however, that he had no financial interest in any telecommunications provider.
80 THE TELECOMMUNICATIONS CHALLENGE THE BROADBAND PROBLEM: MARKET FAILURES AND POLICY DILEMMAS Charles H. Ferguson The Brookings Institution Dr. Ferguson said that his talk would address three issues: 1. the size of the problem that the United States was facing in the broadband area, which, as others had stated, was quite substantial; 2. why that problem existed; and 3, what could be done about it. He began with two points of presumed general understanding and agree- ment: that a rapid de-maturing of traditional analog consumer electronics was taking place; and that, technologically at least, the potential existed for de-maturing of the analogue telecommunications industry, which had previously been domi- nated by telephone service. Further, he postulated that a majority in the informa- tion technology industries would substantially agree on what the "radiant future" should look like, remarking that, in a few sectors, this future had already been reached. United States Lagging in Broadband Penetration Dr. Ferguson pointed, however, to an "enormous gap" existing between this vision of the sector's potential and its actual state, particularly in the United States. And perhaps of foremost interest, he said, was the extent of the gap between the United States and other nations. Those who had visited China's large coastal cities in the previous two years understood the U.S. lag; the same was true for those who had been to South Korea, Japan, Taiwan, or other parts of industrial- ized Asia, as this gap was very obvious. To illustrate, he posted graphics highlighting year-old data with the comment (see Figures 22 and 23): "As Mr. Isenberg mentioned a few minutes ago, things have gotten substantially worse since then." These figures showed that, as of late 2003, DSL penetration per 100 telephone lines had reached 27.7 in that category's leading nation, South Korea. The United States, which was not in the world's top ten, had only 4.8 DSL subscribers per 100 phone lines and trailed China, which was at 5.1. Moreover, when it came to the absolute number of DSL lines, both China and Japan had surpassed the United States, which, Dr. Ferguson conjec- tured, had likely fallen in the intervening year from third place to sixth or seventh.
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 81 Global Telephone DSL Subscribers DSL per 100 phone Ranking Country lines 31 December 2003 lines 31 December 2001/02 31 December 2003 2003 (ITU) 1 South Korea 6,435,955 23,257,000 27.7 2 Taiwan 2,800,000 13,099,416 21.4 3 Hong Kong 690,000 3,842,943 18.0 4 Belgium 789,677 5,132,427 15.4 5 Japan 10,272,052 71,149,000 14.4 6 Denmark 473,481 3,739,247 12.7 7 Singapore 242,000 1,927,200 12.6 8 Israel 380,000 3,100,000 12.3 9 Finland 336,600 2,850,000 11.8 10 Canada 2,170,243 19,962,072 10.9 FIGURE 22 DSL penetration by country--I. DSL per DSL Subscribers Global Ranking Country 100 phone lines 31 December 2003 31 December 2003 1 China 10,950,000 5.1 2 Japan 10,272,052 14.4 3 USA 9,119,000 4.8 4 South Korea 6,435,955 27.7 5 Germany 4,500,000 8.4 6 France 3,262,700 9.6 7 Taiwan 2,800,000 21.4 8 Italy 2,280,000 8.3 9 Canada 2,170,243 10.9 10 UK 1,820,230 5.2 FIGURE 23 DSL penetration by country--II.
82 THE TELECOMMUNICATIONS CHALLENGE Slow Growth Holding United States Back Accounting for this drop were growth rates. The total U.S. growth rate for DSL lines, both in absolute number and in penetration per telephone line, was something on the order of 40 percent, with the rural growth rate at about twice that. Dr. Ferguson acknowledged that the cable telephone system still provided the majority of U.S. residential broadband connections; he contended, however, that that did nothing to change the overall picture. In the first place, he explained, when business connections were included, the percentage of total U.S. broadband connections provided by the cable telephone system was relatively low. In the second place, even in the residential market the percentage of connections pro- vided by the cable system had been holding roughly constant, as had the cable system's growth rate in respect not only to connections but also to bandwidth levels. Price/Performance Another U.S. Weakness In fact, although the U.S. cable television system had been improving its bandwidth levels slightly faster than had the U.S. telephone system, the price-to- performance ratio for broadband services abroad was enormously superior to that in this country. Depending on the nation and the service being compared, other nations were outpacing the United States by between 2 and 15 times. And the gap was growing rapidly, because U.S. price/performance in local telecom services-- not only in digital services like DSL and local broadband, but also in voice tele- phony and such related services as voice mail and caller ID--was, "quite aston- ishingly," roughly flat. The total local telephone bill in the United States was flat or even increasing, a surprising fact in that the underlying technology for all such services is computing--which was improving, depending on the technology be- ing measured and the measurement being used, anywhere between 20 percent and 50 percent per year. Alluding to Dr. Doms's discussion of the increase in the capacity of fiber-optic cable deriving from increases of both the number of chan- nels and the capacity of each channel, Dr. Ferguson said the technological im- provement was, in some cases, as high as 100 percent per year. Both DSL and cable-modem service, however, had displayed very low rates of progress. On top of that, the benefit that those broadband services had pro- vided relative to that a simple modem could provide had turned out to be, in Dr. Ferguson's words, "surprisingly modest." Modem technology had improved at a rate of around 40 percent per year until reaching its limits at 5660 kbps; modem service, he pointed out, was "to a first approximation, symmetric." It had then taken several years for consumer DSL services to be introduced, and they had been relatively expensive upon introduction; furthermore, they are asymmetric, something he called "not accidental." The result, combining all those factors, was an annual improvement in the price/performance of bandwidth of some 10
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 83 15 percent yielded by either DSL or cable-modem service. Not only was this rate already far below that which the technology curve should have been providing, but it seemed to be in the process of slowing even more. Bandwidth Costs Dominant Dr. Ferguson commented further that bandwidth rather than computer hard- ware frequently dominated the total cost of adoption of a new network-computing application. Personal computers were powerful and cheap, but deploying a high- performance, high-quality videoconferencing system could nonetheless prove extremely expensive. Purely for purposes of illustration, he posited the use of T-1 service, whose price/performance, he pointed out, had improved very slowly if at all over the previous several years. If two T-1 lines were required for point-to- point connections between two personal computers, over a three- or four-year period the total costs of using that service would be completely dominated by bandwidth costs. Competition in U.S. Markets Flawed What was the reason for this? While allowing that in various respects regula- tory costs imposed on the entire system accounted for some degree of drag, this was "not the principal story" in Dr. Ferguson's opinion. Very simply, he stated, there were two monopoly industries providing broadband service in the United States, both had very severe conflicts of interest, and they avoided competing with each other except in the residential market. And even in the residential market, their competition with one another was "quite restrained, and much less substantial than you might suspect." The conflict of interest of the telephone companies was, Dr. Ferguson asserted, "fairly obvious": They had incumbent businesses that were providing very expensive voice and traditional data services, and very rapid improvements in price/performance of bandwidth would have undercut their dominant busi- nesses in a major way. The same was true of the cable system: It provided video services that could easily be provided over a sufficiently high-performance IP network. Additional conflicts of interest in both industries related not only to Internet telephony but also to intellectual property rights and to proprietary intellectual property control. This was particularly so of the cable television industry, which had many proprietary-entertainment and other content assets. It was very afraid of the effects of piracy, and one consequence was that cable operators wanted to provide downstream-weighted services, because "upstream service is what deter- mines piracy levels when you're using peer-to-peer networks," Dr. Ferguson stated. Cable-modem service, like DSL, is a very asymmetric service and heavily weighted downstream; and the reason that the telephone companies preferred
84 THE TELECOMMUNICATIONS CHALLENGE downstream-weighted is that symmetric service would make it far easier to use Internet telephony. `Local Bandwidth Bottleneck' Hurts Computing Distortions existed in both industries, he said, and not only about service's price/performance but also about its technical characteristics, its quality levels, and the degree to which it was symmetric. He judged the economic stakes involved in this question to be "quite large" for the country. While computing them in a rigorous way would be extraordinarily difficult, it seemed increasingly clear that the "local bandwidth bottleneck" was having a substantial effect on the growth of the computer industry, of various other portions of the information technology hardware sector, and of the American economy. "You can convince yourself reasonably easily," he stated, "that this effect is something on the order of one-half of 1 percent--or even up to 1 percent--per year in lost productivity growth and GNP, which is a lot." This obviously had some effect, although it was not clear how substantial, on American job losses, Dr. Ferguson said, alluding to the prevailing debate over outsourcing. There was no question that broadband infrastructure was having a significant effect on the way industry was growing in China and Southeast Asia. While India had traditionally been far, far behind in telecommunications infra- structure and was still far behind both the rest of Asia and the United States, even it was gaining rapidly: Although from a very, very low base, the number of broad- band connections in India was going up quite rapidly, on the order of 300 percent per year. Broadband Shortcomings Hurt National Security In addition to the direct economic effects, there were quite significant national security effects arising from forgone opportunity and capability in the broadband system under which the United States was laboring, Dr. Ferguson said. First, any major terrorist emergency, such as an attack that used weapons of mass destruc- tion, would undoubtedly result in major quarantines and disruption of transporta- tion systems. It would be imperative for many people to be able to talk to each other and understand each other's concerns at high bandwidth across wide geo- graphical distances and with impaired mobility; the utility of a nationwide broad- band system in such a situation is obvious. Then, in light of recent events in the Persian Gulf, one might also ask about the impact of reduced transportation demand on oil prices, oil security, and so forth. "Once again," he said, "one can convince oneself that the issue here is really quite substantial." To whatever extent the United States faced a problem of "digital divide"-- disparity in broadband, Internet, and computing access as a function of economic ability and economic status--that problem was also coming to be increasingly
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 85 dominated by the bandwidth question. The reason here, again, was that band- width dominated the total cost of adoption of new computing applications. Can Policy Changes Help United States? How, then, might the United States attempt to address this question, which was of such macroeconomic and military significance? The nations that were ahead of the United States, in what they had done in the broadband-policy arena, had evidenced two shared characteristics. The first was that their governments had been "much more heavily involved in providing incentives and/or money and/or direct construction of networks than is the case in the United States," Dr. Ferguson said. The second, also related to governmental policy, was that their systems were much more competitive than that of the United States. There might be many more providers, but even when there was a relatively low number, the providers were under government pressure to improve their price/performance and to compete with each other. This was true even where there was no explicit antitrust policy. Certainly none existed in China, but the Chinese government obviously had made very clear to the country's principal telecommunications providers that broadband deployment was a major national priority and had put them under a great deal of pressure to continue accelerating it. The case was similar in Japan and Korea, and even in non-Asian countries--Canada, for instance, and the Scandinavian coun- tries--that had surged well ahead of the United States. Dr. Ferguson cited as a "somewhat hopeful recent development" the FCC's unanimous vote to preempt regulatory control of voice over IP, "so at least there will not be a patchwork of 50 different state regulations of Internet telephony." He charged, however, that the United States had been "notably absent from pro- ductive efforts in regard to broadband for quite some time." RBOCs' Consolidation `A Major Mistake' This was not specific to the Bush administration, he said, although he gave it lower marks than its predecessor did. What had begun to undermine the potential benefits of the Telecommunications Act of 1996 in a significant way was the series of mergers among Regional Bell Operating Companies that had effectively halved their number to four.3 "That consolidation was unopposed by the FCC and by the Justice Department," Dr. Ferguson observed, commenting: "That, I think in retrospect, was a major mistake." A great deal of litigation had followed, and there had "not been much effort by the federal government and/or the FCC-- 3While consolidation among RBOCs may have eliminated a source of potential competition, the issue of whether it eliminated actual competition and whether potential competition was likely or unlikely to begin with remains to be resolved.
86 THE TELECOMMUNICATIONS CHALLENGE depending on whether you want to differentiate between the two--to ensure that there is a competitive, open-architecture system." Nonetheless, he did not see new legislation--even if it might be helpful in providing what he called "appropriate broadband policy"--as necessary. What was required instead was "some kind of national political will." This could open the door to a range of measures, among which might be: · subsidizing deployment of municipal networks; · offering investment incentives to any and all providers, whether public or private; · constructing a large federal network; and · putting more pressure on incumbents to open up their networks so that there was an open-architecture broadband system in the United States that was more analogous to the structure of the Internet itself. Calling this last point critical to the future of network architecture and services, he called for a "far more open-architecture, computer-industry-like structure and feel" for the U.S. telecommunications system. Commoditization No Enemy of Investment In closing, Dr. Ferguson questioned Mr. Isenberg's suggestion that, since the network logically anticipated for the future would function as a commodity pro- vider of bits, industry would likely be averse to committing to sufficient levels of investment and research. The history of the computer industry did not support that proposition, he claimed, and neither did the behavior of those Asian and European nations with broadband service superior to that available in the United States. On the contrary, most sectors of the computer industry were composed of large companies that produced commodity products in brutal competition. While there were a few notable, very profitable exceptions--he named Intel and Microsoft--more typical as examples were Dell, Hewlett-Packard, most of IBM, most of the semiconductor industry, the entire disk-drive industry, the display industry, and so on. "Disk drives are like disk drives, bits are like bits, DRAMs are like DRAMs," he stated. "And while those industries are volatile, one does not see any hesitancy for entry or investment. Indeed, competition in those sectors is quite healthy." If there were an appropriate government policy, he concluded, it would be reason- able to expect that levels of investment and technological progress in the industry would be sufficient. Dr. Flamm, asking the audience to hold its questions, recessed the panel's proceedings until after lunch. Resuming the session after the lunch break, Dr. Flamm introduced Mark Wegleitner, the chief technology officer of Verizon, as the only one among the
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 87 panel's distinguished speakers about whom the previous presenter, Dr. Ferguson, had had many good things to say in his recently published book. THE BROADBAND CHALLENGE: A TELECOM PERSPECTIVE Mark A. Wegleitner Verizon Mr. Wegleitner expressed his appreciation at having the opportunity to speak about a subject that his company was pursuing with great vigor, spurred by a conviction apparently shared by many at the symposium: that broadband could be an engine for growth. There were two dimensions to broadband's contribution. One was in the capital investment required to build a network and the multiplier effect that could be expected to have on growth, jobs, and innovation. Obviously, however, the investment was not an end in itself; the second dimension, at least as envisioned by Verizon, was the stimulation to the economy, as well as the social good, that would come of having a broadband network available. Although the United States had traditionally been a leader both in communi- cations and in attracting capital, it had not been holding onto that leading position of late. Mr. Wegleitner displayed a chart based on International Telecommunica- tion Network (ITU) data that showed the United States to be thirteenth in the world in broadband deployment. While acknowledging that there were "lots of ways to spin numbers," he stated that the conclusion to be drawn was "that we aren't leading in what we have to perceive as one of the key technologies for any national economic environment going forward." Richer Applications in Broadband's Future But a question underlay this last assumption: What did we think broadband was actually going to do for people? Mr. Wegleitner named applications--email, instant messaging, basic Web browsing, small file transfer--whose requirements could be met by current broadband access technologies. Such familiar applica- tions, although important, could almost be characterized as modest. True two- way videoconferencing and gaming, as well as voice over IP, were the next step up the ladder, but they would not in themselves exercise a huge demand on broad- band. Further along, however, lay multimedia Web browsing, distance learning, and telemedicine. Even beyond those would come immersive gaming and what- ever means of information and entertainment delivery were to come after high- definition television: 5-megabit and 9-megabit pixel TV, 3D TV, and/or holographics. "We know that the bandwidth demands are just going to continue to grow and grow and grow," said Mr. Wegleitner. With the richness of the future appli-
88 THE TELECOMMUNICATIONS CHALLENGE cations he had listed would come a great deal of complexity, and it was complex- ity that, in the world of networking, drove broadband. But while it was certain that more bandwidth would be needed over the coming two to ten years, no one could predict with great accuracy how much. Displaying a graph in which broad- band requirements on the y-axis were plotted against historical time on the x-axis, he said that the middle of the scale--where cable-modem and DSL technology operated in the 3- to 5-megabit per second (Mbps) range--had been reached (see Figure 24). Verizon Expanding Fiber to the Premises In its fiber-to-the-premises (FTTP) deployment Verizon had set 30 Mbps as the top offering for the present but was building for 100 Mbps. "The 100-megabit bogey has been something that we've been kicking around inside Verizon for some time now," Mr. Wegleitner remarked. The company believed that fiber all the way to the home or business was the way to satisfy that, and that the home, as the "true mass-market representative," was really the key. Verizon had announced FTTP deployment in nine states, had begun it in Texas, California, and Florida, and had been building in the East Coast states. The company hoped to be in over 100 central offices by the end of 2004, and its target was to pass 1 million homes. Immersive Gaming 5M100M Hi-Def Video Streaming/Multicasting (FTTP) Network Hosted Software Very Large File Transfer Remotely Managed IT Streaming Audio/Video Audio/Video On-Demand Complexity (bps) 768K5M and Distance Learning Telemedicine (DSL / CM) Video Conferencing Multi-media Web browsing Richness Bandwidth Gaming Voice over IP Small File Transfer Basic Web Browsing 56K E-mail (Dial-Up) Instant Messaging Today 200x FIGURE 24 More bandwidth: Multimedia applications.
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 89 Mr. Wegleitner listed four things that can be done with data: It can be processed, stored, displayed, or moved. There had been great advances in the first three, in accordance with the well-known phenomenon of Moore's Law, as the industry had gone into more and more complex applications. But remaining to be answered was what could be provided in the form of network capability for the last, the moving of data. The objective of Verizon's business was to make sure that it was not the bandwidth bottleneck in the movement of data, which was why it had taken such steps forward as deploying fiber to the premises. The Shape of the Internet to Come Mr. Wegleitner next asked what the Internet would look like in 2008 and beyond. Would it remain a confederation, a descendent of the ARPANet? Or would it be a more rigorously maintained interconnection of commercial net- works? His prediction was that there would always be some holdover of the Internet, but that the latter would be much more in evidence. The requirements for services offered customers would be for such quality and scope that only the interconnection of networks could provide it. Because Verizon customers would need to talk to customers of Time Warner, Comcast, or whomever else might be a provider for individual users of the network, a means of reliable interconnection would have to be available. The ability to provide service with a high level of quality would depend on an infrastructure that would go beyond what the current Internet could provide. "Maybe the Internet in itself will morph into that," he allowed, although in his own view it was more likely to be based on "interconnection agreements between commercial providers with the purpose of satisfying their own customer requirements." Another reason this sort of commercial enterprise would underpin the country's future communications infrastructure was that a way had to be found to collect for services. The hope was that scale would drive the cost of services down dramatically and that applications, despite their increased sophistication, would be reasonably priced owing to the economics of the technology. Still, there had to be a billing system appropriate to what the providers were attempting to accomplish. Verizon, Mr. Wegleitner explained, was building aggregation networks at the metropolitan level. It was building core network--IP backbone--nationwide, and ultimately would build or interconnect internationally as well. Motivating the company was the change taking place in the traditional telephony business; having experienced this first-hand, Verizon had seen that, to be a successful communica- tions company, it would have to change along with the business. The $12 billion Verizon was spending annually in its capital program was, to the company's knowledge, the largest sum spent by any U.S. corporation and, perhaps, the largest in the world. "What we need to do collectively," he stated, "is ensure that Verizon puts that in places that serve not only Verizon's interests but the interests of the U.S. communications infrastructure as a whole."
90 THE TELECOMMUNICATIONS CHALLENGE Technical, Financial, Regulatory Changes Three sorts of changes were needed to make this work. The first was tech- nical: There were standards for particular communications protocols that needed to be taken further. One such standard, multi-protocol label switching (MPLS), had not really been developed to accomplish the commercial interconnection of networks described by Mr. Wegleitner. Equipment adhering to such standards had to become available, and it had to be deployed in the network, and agree- ments had to be struck among the interoperating carriers. The second was financial: A way had to be found to replace the existing "economic ecosystem," which featured access charges, a universal service fund, and other artifacts of "the way we have been operating as a communicating nation over the course of the last 50 or more years," as he put it. To move forward, a new economic system that supported the new technology deployment was needed. The third was regulatory: While there were "any number of things" to be worked on in this arena, Verizon was concerned about "incremental rulemaking," which was the path being followed to move from the old regime to the new, with the unsuccessful result that the rules were insufficiently clear. In some cases, Mr. Wegleitner said, investments of millions or even tens of millions of dollars might hinge on the interpretation of words that, while written only a few years before, were already technically obsolete. "It's that interpretation that is going to determine the path forward of the network's evolution," he commented. Having what he called "an unnecessarily complex regulatory environment" didn't make sense in that it discouraged investment. For an example, he turned to unbundling requirements governing broadband: Although the rules had begun gaining some clarity not long before, they had earlier tamped down investment by companies and, as a consequence, scared off prospective investments. While admitting that such problems resisted simple solutions, he put forward what he called a "short answer": "Let the market rule." It was, he asserted, to a very light regulatory touch that the wireless industry owed its phenomenal growth, great innovation, and very competitive environment. Concluding, Mr. Wegleitner said he imagined he was joining all those present in voicing the belief that broadband was the future. Telcos such as Verizon had a vested interest in broadband, as it was a key part of their future technology strategy. "We have the capability to make things happen quicker with some clarity and a cooperative effort around the technological, financial, and regulatory things that we think have to be settled going forward," he stated, adding: "The right environment here is the key."
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 91 A PARADIGM CHALLENGE: MUNICIPALLY OWNED FIBER H. Brian Thompson iTown Communications Mr. Thompson began by signaling that his views were not in accord with those of the previous speaker and by warning that some of his statements might be "less than subtle." Noting that he had joined MCI in 1981, when competition was just beginning in U.S. telecommunications, he stated that many of the issues current in 2004 had applied in the early 1980s as well. Currently, the situation in the industry was "becoming increasingly untenable," he declared. Providing a brief overview of his talk, Mr. Thompson said that he would: · add his own negative assessment of the U.S. competitive position to those of several previous speakers; · discuss the essential nature of broadband; · take up what he called "the real question," why current services were not good enough, again a topic that had received attention from other presenters; · address the current model of the industry's fundamental structure, a matter he highlighted as "important"; and · discuss what he characterized as the need "to make a complete change in the whole paradigm of how we're approaching the marketplace and serving the customers." Displaying a chart illustrating broadband penetration by country that differed from that of Mr. Wegleitner only in its details, Mr. Thompson observed that the United States was far from the top of the list and sinking rapidly (see Figure 25). Concern over inequality in infrastructure and access had prompted him to partici- pate a decade earlier in forming the Global Information Infrastructure Com- mission, an organization whose relevance had only increased with time, since it was no longer developing nations alone that had such problems. "We have a huge access problem in our own country," he stressed. Broadband Central to Community Development It was beyond question that broadband affected every aspect of a commu- nity: its economic activity, its development, its education, its delivery of health care and government services. Broadband was also the driving force behind the individual and social activity that people were willing to pay for, whether that meant information and entertainment media or "simply talking to someone some- where else." Nations that had recognized this before it had been addressed with any effectiveness in the United States, and that had established more broadly
92 THE TELECOMMUNICATIONS CHALLENGE Broadband Subscribers per 100 inhabitants, 1 January 2004 FIGURE 25 U.S. continues to lose ground on broadband penetration. NOTE: The comparison is limited in that it does not reflect the relative prices of dial-up services in various countries or reflect what percentage of the population has access to broadband at home. SOURCE: ITU Internet Reports, 2004. ranging policies, had taken into account the issues of economic and community development. Broadband Policy: An Irish Example Mr. Thompson, an adviser to the Irish government for the previous decade, recalled putting together two study groups, the latest of which had resolved to embrace a public-private partnership at the local level in the aim of stimulating the development of home broadband access within that country. This, in turn, was expected to generate "huge" rewards in economic development, as well as to promote the entire community's technological and social development. The Irish government had chosen 19 towns of moderate size and provided funds on a
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 93 revolving basis to entities that were willing to take new technologies into those towns and to establish "true" broadband--"not DSL, not simple broadband, but very high level broadband connectivity, both wireless and fiber." The government had committed itself, he said, to moving beyond what it had done ten years before to attract the information infrastructure companies that had become a fundamental part of Ireland's economy. It had recognized that these firms were no longer making and selling shrink-wrapped software but were ship- ping software out over the Net. Besides addressing this change, it had established a national science foundation as a tool for staying up with the state of the art and maintaining the country's economic development. Only three or four weeks pre- viously, Ireland's population had gone over 4 million for the first time since 1857, as people were returning to the country. Mr. Thompson likened Ireland's former condition to that of many states in the United States, which had seen residents leave for centers where they could get access to communications and infrastructure. Why Aren't Current Services `Good Enough'? He then turned to the question, also raised by preceding speakers, of why current services were not "good enough." For more than five years, the national and international backbones had had a capacity of 1 terabit on a single fiber; before leaving GTS in Europe, Mr. Thompson had put such capability in place. In the United States, what had once more commonly been called the Information Superhighway was still capable of handling such capacity easily; and, according to a chart he projected, a desktop or laptop computer could function at between 1 and 3 gigabits per second (see Figure 26). The problem, as the chart illustrated, was that there was not even 1 megabit of connectivity between the two. The DSL connection he himself used on a wireless basis at his home in Rhode Island was capable of only 128 kilobits per second. Expressing skepticism regarding claims that 30 Mbps would be available on DSL, he declared: "The fact of the matter is, that's our choke point." This came about because since 1983, when access became a concept, compa- nies seeking access had never been able to get it in a way that allowed them to compete.4 Mr. Thompson recalled that his former company, LCI International, and Bell Atlantic had agreed in 1996 on the existence of "unbundled network elements." Through the telephone companies' leasing out their local plant at reasonable prices, access would be made available to all, and the telcos' embedded plant would not become stranded investment. But this agreement had "lasted about as long as it took the signatures to dry on the page," and nearly a decade 4Current speeds are determined by the nature of competition as well as by the copper architecture of legacy telecommunications systems.
94 THE TELECOMMUNICATIONS CHALLENGE Current Copper wire based cable modem and DSL "broadband" technologies choke information transfer Info Superhighway Desktop/Laptop ~1-3 Mbps Asymmetrical 1-5 Gbps Cable Modem/ 1-3 Gbps DSL Symmetrical in last mile Symmetrical Internal transfer speed desktop/laptop computer IXC and Metropolitan Fiber with today's hard drive network transmission speed per optical wavelength Access remains the weak link FIGURE 26 Why aren't current services good enough? SOURCE: Paul Green, FTTH Council Consultant. later everyone that was involved in that process had retired from the former Bell System, so that there no longer was anyone who understood what the basis of the agreement had been. But, more important, the agreement itself had been "an encroachment on the prerogatives of the incumbents, and therefore access would not be uniform and it would not be ubiquitous." FCC approval ensuring that that didn't happen had been granted about a month before. But juxtaposed to this had been the FCC's decision of the previous week not to subject voice over IP to regulation by the states, which Mr. Thompson equated to "a decision to open up the Internet." AT&T, meanwhile, had announced that it would no longer be a local service provider but that "oh, by the way, they may be in the voice over IP business in the future." While all this amounted to a very interesting process that would be worth following, access was, he emphasized, "the weak link." Current Capabilities Nowhere Close to Need Mr. Thompson then projected a chart that placed bandwidth requirements for a variety of residential broadband applications, both business and consumer, against the level of access generally available (see Figure 27). Current capabili-
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 95 Professional Consumer Entertainment 10,000 Broadcast video H D 1,000 T Digital N V e-Learning photography T S 100 Tele- Video on C Remote LAN Home medicine demand access shopping Mbps Net 10 surfing Video conferencing Current cable and 1 DSL networks .1 .01 Residential broadband applications FIGURE 27 Another view of restricted uses: Residential applications/speed matrix. SOURCE: Kim Maxwell, Residential Broadband: An Insider's Guide to the Battle for the Last Mile, Hoboken, NJ: John Wiley & Sons, 1998. ties, including DSL networks, did "not come anywhere near" being able to provide the bandwidth necessary for broadcast-quality television, let alone high-definition TV or even HDTV "on some compression basis," taking account a demand level of three to four sets per home. To make a case for "Big Broadband" or "Ultra- High Broadband," he displayed a chart comparing the speeds of dial-up, DSL/ cable-modem, VDSL, 100-megabit, and gigabit services (see Figure 28). The last two, he said, were "what we really need." Another chart schematized the industry model then current (see Figure 29). Telephone companies had networks, while cable companies had head-ends with capacity to connect to both residences and schools. There had been additions to these capabilities: DSL in the case of the former, set-top boxes in the case of the latter. "But what we still have," Mr. Thompson observed, "is the notion that you've got to have your own network to compete." Even though one often heard it acknowledged, including at the day's symposium, that "the customer wants to be able to buy on a reasonable basis what they're looking for," that need was beyond the current industry's ability to fulfill. He called, therefore, for change: "It's time that we recognized, as the Irish have, that we should be in public- private partnerships to provide access networks." For access networks were not a "nice-to-have" but a "required" facility, instrumental to towns, states, and the nation in "creating the kind of environment that they want to have for economic
96 THE TELECOMMUNICATIONS CHALLENGE 1,000 Mbps This is Ultra -High Broadband 100 Mbps 26 Mbps 13 Mbps 56 kbps Dial -up DSL/Cable VDSL 10BaseT Gigabit Modem Modem Ethernet Ethernet FIGURE 28 Beyond the interim solution: What is the solution for "big" broadband? Cable Telephone company company Headend Central Office Businesses Government Schools Institutions Residences FIGURE 29 Current industry model: If you want to compete, bring your own network.
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 97 development to take place." In 1986 he had called in a speech for a "second divestiture," one that would allow the access network component to be separated from the services being provided. "Now we're at the place where, economically, it is viable and, technologically, all the pieces are in place." Fiber Network as Public Utility It was for this reason that around two years before, confident of having pro- vided for his children's future and eager to "give something back," Mr. Thompson had formed iTown. The company was "very rapidly" pursuing a strategy that began with establishing "not a central office serving a small community but a central facility serving as a hub for a community of economic interests." The hub would then provide access to a non-profit public-private partnership that would serve as a utility, lighting the fiber but not providing any service on that fiber except those municipal services that the town or community chose to provide. The network would be open to any and all service providers with an IP basis--be they telephone companies, cable companies, a Microsoft, or somebody wanting to provide films or games. Communities should choose to build networks just as, a century before, they had chosen to build roads, just as they chose to build sewer systems or any other element of essential infrastructure. iTown could play its role of providing the network when there was no one else to do so in towns all over the country that were being either underserved or, in many cases, not served at all. The United States should change, Mr. Thompson argued, such that it would bring existing technology to people rather than forcing them to move in order to have access to it (see Figure 30). The network he For-Profit Competitors Service i Town Service Provider A Retail Provider B Central Office Non-Profit Fiber Utility Businesses Residences Government Schools Institutions FIGURE 30 Open network architecture allows multiple service providers: All service providers use network under same prices and terms.
98 THE TELECOMMUNICATIONS CHALLENGE described would not only be open to all service providers, it would be used by all under the same terms and at the same prices. The community would control the network assets through a non-profit, to which iTown would provide professional management services. Access Charges Approach Service Charges iTown's creation was a response to the fact that "access charges, quote unquote," incurred by customers in some cases far exceeded the service charges themselves. The national average for what was known in the industry as a "triple play"--the purchase of Internet, telephone, and cable-TV services from the same provider--was about $139 per month (see Figure 31). Of that, said Mr. Thompson, $65 per month was billed for "access" to a network "that doesn't cost anywhere near that amount" unless not only past amortization programs but also "all the capital that's been invested in facilities that are no longer valid" are figured into the equation. Displaying figures reflecting current average investment costs asso- ciated with building networks in communities of 62,250 and 27,500 inhabitants that provided a fiber link to every home, he noted that payback for the basic cost was projected within 10 to 13 years (see Figure 32); these projections did not include the use of broadband wireless, which he expected would also enter the mix in the future. He challenged the notion that such a fiber network would be obsolete within 10 years, saying the networks iTown planned to build would have "gigabit and multiple-gigabit capabilities." The model, he said, was economi- cally viable and would offer a small town the ability, acting as a local utility, to provide access with "today's and tomorrow's technology." iTown was making headway in its endeavors, which, however, were not new: 90-odd communities across the country had gone forward with one form or Access and Service Provider Division of Revenue Service Avg. Total Cost ($) Access ($) Service Provider ($) Local w/Features 36.00* 15.00 21.00 Long Distance 12.00** 12.00 Total telephone 48.00 15.00 33.00 Cable 46.50** 25.00 21.50 High Speed Internet 44.22*** 25.00 19.22 "Triple Play" 138.72 65.00 73.72 % of Total 100 47 53 FIGURE 31 Where does the revenue come from? SOURCES: *FCC data; **Estimated from FCC data; ***ARS, Inc.
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 99 Community Size (Population) 62,250 27,500 Required investment $35M $20M Cost per FTTP Passed $997 $1,162 Distribution and NID Served $1,995 $2,325 Dedicated access revenue (10 years) $121M $58.4M Cash Flow (10 years) $54.7M $20M Take rate Breakeven 28-30% ~35% and Financial self-funding 38-40% 38-40% performance redirected income 50+% 50+% Years to debt payback 10-12 11-13 FIGURE 32 FTTP networks in small communities financially viable. another of fiber projects. As an example he offered Utopia, an effort to build networks in a number of Utah communities, among which the city of Provo was beginning to move ahead with an active network. Only the previous week, Mr. Thompson's group had announced Opportunity Iowa, a new undertaking involving some 83 towns in the state that had gotten together to provide municipal networks; iTown was working on similar projects in other states as well. "The whole truth here is that we as a nation have got to move," he stated. "We don't have the time to take the next 20 years to get one-third of the households in the country on broadband capability." The consequence of delay would be the con- tinuing erosion of the country's technological base and its ability to maintain its leadership. THE WIRELESS WILDCARD David Lippke HighSpeed America Offering an overview of his talk, Mr. Lippke said he would identify within the domain of wireless what he called "real wireless broadband" and state what its current status was, what challenges it faced, and where it was going. He might offer some projections for its future as well. Elusive Definition of `Wireless' The term "wireless" was very confusing. Did it refer to a cell phone? to a phone in one's house? to radio frequency identification (RFID)? "What kind of
100 THE TELECOMMUNICATIONS CHALLENGE broadband are we talking about?" was the question--"if we are talking about broadband at all." For the purposes of his presentation, Mr. Lippke specified, "wireless" would refer to broadband wireless access (BWA), fixed wireless access (FWA), wireless ISPs (WISPS) large and small, and metro area networks. Left out of consideration would be satellite access, indoor wireless such as WiFi, cellular, or such technologies as 2G or 3G. The capabilities and speeds of these latter wireless venues could be expected to converge eventually--according to projections he had recently read, perhaps in around 25 years--but, for the moment, he would limit his remarks to the former group of technologies. Broadband, as Mr. Lippke was defining it, was characterized by access speeds of anywhere from 250 kilobits per second to 20 megabits per second, with the average probably running at round 1 Mbps. The 250-kbps rate could generally be attributed to artificial constraints, he said, explaining: "People can turn the band- width limits down and still get the money." Also characteristic was low latency, not of the fiber type but anywhere from single-digit to a few tens of milliseconds. Where such wireless broadband was available (and particularly in rural settings) it supplanted satellite, as people would always convert to it from satellite because its broadband quality was much higher than satellite's. It was being implemented using WiFi; although WiFi was not designed for outdoor use, it was sometimes being applied outdoors, pushed up to 10 miles with directional antennas or pro- prietary protocols. The hubs, commonly pretty small, were often collocated on businesses or even residences; the cell radius would run anywhere from 1 mile to 5 miles with exceptions at both ends. To illustrate, Mr. Lippke showed photo- graphs of the installations that brought access to his own home. A flat-panel, high-gain antenna that was mounted on a post near his house communicated with antennas on a mountain ridge a couple of miles off, providing around 1 megabit of connectivity with more available if it were selected. Wireless Broadband Suppliers in Flux Although admitting it was difficult to ascertain the true numbers, Mr. Lippke placed wireless broadband operators in the United States at 2,000 and called an estimate of between 500,000 and 1 million subscribers "safe." One new operator was reputed to be "popping up" per day nationwide, but "what you don't know is how many are dying each day," he said. Such deployments were not, on average, very large, even if this was starting to change with the arrival of bigger players in the market. While some operators, particularly in the Midwest and other regions with conducive terrain, boasted several thousand subscribers, others were mired at the level of 100300 and having a hard time reaching critical mass. To date, wireless broadband had been successful in the T-1 and fractional DS3 replacement businesses; in both rural and urban areas, it had been able to compete very strongly on both cost and speed of delivery. The general goal for these providers was to have, say, 10-Mbps service turned up within 72 hours of a
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 101 contract's being signed. Since this stood in stark contrast, both in timing and cost, to service "that one might get from the phone company," Mr. Lippke said, "this is a definite sweet spot for wireless." It had often been very successful as well in uncompeted rural markets, and even in competed small-town markets with par- ticularly conducive geography. Spelling out the Challenges Current operators were facing a number of challenges: · Relatively high per-subscriber costs: Deployment, estimated at any- where from $300 to $1,000 once hub costs were considered, was bumped up by the high cost of installation, which generally required sending a truck to the site. · Technology churn. · Proprietary protocols: Many of these were being used, as was WiFi, which was not intended for this application. · Obstacle penetration limitations: The majority of frequencies designated for this space--and particularly for the unlicensed space, which was dominant-- experienced real problems with obstacle penetration. "Trees and buildings are definitely enemies," Mr. Lippke commented. · Accurate coverage forecasting: The latter problems led to difficulty pre- dicting where there would and would not be coverage, which in turn could create inefficiencies. Multiple visits to a site, not only for installation but also for survey purposes, might be necessary; and there could be marketing backlash from customers who had ordered the service only to discover that coverage was inadequate. · Insufficient spectrum: This had been a particular problem at the lower end of the scale, although there had recently been a fair amount of progress in the 900-MHz space, allowing penetration through trees and buildings. "It's one thing when you're talking to satellites and looking 30 degrees above the horizon," Mr. Lippke noted, "but it's another thing entirely when you're sitting on a rooftop and trying to make it to a tower three miles away that is only 100 or 200 feet tall. Then, there are all sorts of obstacles to be considered." · General scale issues: Because of these operators' small size and the con- comitant lack of equipment-buying volume, it was hard if not impossible for them to provide a residential broadband product costing on the order of $25 or $30 per month. While such challenges remained, what had led Mr. Lippke to dub wireless a "wildcard" was the good news that recent progress had been considerable. "And in 2005 and 2006," he predicted, "we're going to see potentially a real flash-over building up." Important to remember was that Moore's Law applied to wireless no less than to other forms of telecommunications. An article in the IEEE
102 THE TELECOMMUNICATIONS CHALLENGE Spectrum of July 2004 had heralded a new law, "Edholm's Law of Bandwidth," holding that wireless data rates were increasing at the same pace as telecom rates in general, although displaced somewhat in time. Wireless data rates would thus reach all the points through which data rates for traditional telecom had passed, it was "just a matter of what applications [were] going to be appropriate at what times." Significant progress had also been shown by: software-defined radios; new antenna technologies, such as MIMO, that had the effect of increasing dis- tances and speeds; and, after many failed mesh attempts, there appeared to be some practical mesh occurring. Moreover, a key need of mesh topologies, density of initial deployment, was being affected by the fact that penetration in residential markets was approaching 50 percent. "When the efforts originally failed," Mr. Lippke recalled, "you didn't have near that density of potential customers." And, as had been mentioned by previous speakers, efforts to increase the amount of spectrum, or to expand the rules for accessing existing spectrum, had also been meeting with success. WiMAX Seen Having Strong Impact But probably the greatest impact in this space would derive from the fact that the WiMAX standard had arrived, and specifically the form for fixed and nomadic use known as 802.16-2004. WiMAX had resolved a number of problems with existing wireless protocols, particularly WiFi. There was initial talk of 75-Mbps speeds going to 250 Mbps, and, just in the previous days, articles that mentioned the prospect of reaching gigabit speeds had begun circulating. Other issues occupying the wireless world in the past had been quality-of-service (QOS); jitter on the latency; and graceful loading characteristics (as the number of subscribers in a confined space increased, the network's performance gracefully degraded). Moreover, WiMAX had support for a variety of new approaches to antennas and signal processing. Even more important, WiMAX itself was a certification mechanism for the standard of 802.16, which would bring down deployment costs tremendously. Since installation would no longer require truck rolls, its cost would approach the norm for indoor installation--dipping ultimately below $200, with self-installation by customers possible--so that deployment over a wide area would become very practical. WiMAX could also help compensate for the fact that "wireless" is an ambiguous term by providing consumer marketers with a brand or label that could act as a point of focus around which understanding could be built. Mr. Lippke remarked that the number of articles on WiMAX had recently shot through the roof; he had seen a tally of 400-plus articles in the second quarter of 2004, a threefold increase from the quarter before. "WiMAX truly is a silver bullet that can lead to sort of surprise attack with wide-area wireless broadband," he said, adding that he rarely gives standards such accolades.
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 103 Wireless-Fiber Hybridization Gaining Presence Speculating on "likely futures," Mr. Lippke said that WiMAX-driven services could come to dominate the space in small towns that was being dealt with either marginally--by small cable operators--or not at all. Service providers would be able to deliver at speeds as good as or better than cable and DSL, he predicted. Observing that hybridization of wireless and fiber to the curb was already under way and that broadband over power line (BPL) was starting to get some traction, he claimed to have seen numerous BPL-based business plans that would involve getting "relatively close to the consumer, then bridging around a number of prob- lems once in close by going wireless from there." Cable and telephone companies would hybridize as well, but this was to be expected in BPL in particular. While contending that there was "a lot more hype than reality" to news of the creation of citywide WiFi networks, which were having to cope with hit-and-miss and scaling problems, he said that WiMAX unlike WiFi was a practical protocol for larger- scale deployment and would make such networks a reality. Although the question of how such antenna and switching technologies would develop was unresolved, Mr. Lippke concluded that, owing to cost changes, wireless might well become a third tier that would compete with cable and DSL in tier-one and tier-two areas. U.S. CABLE: BRINGING THE BITS HOME Mike LaJoie Time Warner Cable Thanking Dr. Raduchel for inviting him to speak at the symposium, and remarking on how different the opinions had been on the complex topic under discussion, Mr. LaJoie said he wished to talk about the implications of conver- gence: what it was doing to the industries represented, what benefits it had for consumers, how separate industries might want to address it, and how it might be considered from a regulatory perspective. `Real' Convergence: Not Devices but Content The "real" convergence, Mr. LaJoie asserted, was not that taking place between the television and the PC or between the cell phone and the televi- sion. It was, rather the convergence of data, voice, video, wireless, public networks, and private networks in an end-to-end infrastructure that was increas- ing competition across all the industries. The economic rewards that arose from this competition would be what drove continued innovation, the advent of new services, and increased broadband connectivity. Consumers would benefit from this competition, but only if economic models continued to drive the investment. A related point that he deemed key as the networks expanded, connectivity
104 THE TELECOMMUNICATIONS CHALLENGE increased, and the availability of broadband became more and more the rule of the day, was digital rights management and the protection of copyright. For it was important to ensure that there was interesting content to disseminate via these networks and that the industries creating it survived as well. To illustrate his notion of convergence, Mr. LaJoie pointed to the way busi- ness had evolved at Time Warner Cable (TWC) over the previous decade. In 1994 the company had offered only one product, multi-channel video. Five years later it was beginning to grow in digital video subscribers and had just started rolling out residential high-speed data service. By 2004 the company's revenue mix had changed through growth in digital video and high-speed data, and it was adding digital phone and commercial high-speed data as well. Formerly Discrete Businesses Overlapping Some would call the convergence of these industries the transformation of old lines of business: Where there was once "a big separation" between what the telecom and cable industries did, with satellite a new entrant into the competition, "now everybody is in everybody else's business." Mr. LaJoie posted the follow- ing list, saying it was "just the beginning" of the businesses that were destined to overlap, offering "similar kinds of products": · Cable TV · Internet · Private IP · Cellular · IXC, CLEC, ILEC · WiFi · Satellite · Consumer Electronics Competition was increasing, something he viewed in a positive light. While recent announcements that Verizon and SBC planned to build fiber to the home and compete with cable in television services might give some people at TWC pause, he said, they represented "a good thing for all of us because it's going to spur initial investment in the economy and drive new uses." Cable Industry's Massive Broadband Investment Focusing on cable, he noted that the U.S. industry had invested about $85 bil- lion in broadband infrastructure since 1996 "incremental to just business-as-usual capital investment." TWC alone had, on that basis, invested $14 billion during the period. This eight-year figure paled, he admitted, in comparison to Verizon's investment, which came close to matching it on an annual basis; but in the latter's
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 105 case it represented the entire capital budget, while for TWC it corresponded to spending on broadband alone. This investment had enabled Time Warner Cable to deploy with unprecedented rapidity a variety of enhanced consumer services, including high-speed data (HSD) and high-definition television (HDTV), launched in 1996; video on demand, launched in 2000; digital video recorders (DVR), launched in 2002; and digital telephone, launched earlier in 2004. As a result, the company had added almost 4 million HSD subscribers by the third quarter of 2004 to pass between 18 million and 20 million homes, thereby eclipsing 20 percent penetration. By that time, it also had 389,000 subscribers to HDTV, 1.4 million to subscription video on demand (SVOD), and 709,000 to DVR. "The investment in this infrastructure pays off for our customers because they get a wider choice of products to enjoy," said Mr. LaJoie, and it "pays off for us, as long as the climate continues to be as effective for us to invest in as it has been." In 2004 alone TWC had launched digital phone service in 30 out of 31 divisions. Displaying a timeline showing deployments of new services in the cable industry (see Figure 33), he pointed out that from 1948 to 1972, when pay-TV came in, all it had to offer was video in the form of community-access television. Its next big technological achievement, addressable set-top boxes, dated to 1990. "Not much happened" for the next six years, but then the industry deployed hybrid fiber/co-ax networks and started offering quite a number of new products, with "many, many more being designed and developed" all the time. Welcoming RBOCs to the TV Market The announced entry of SBC and Verizon into the TV market, he reiterated, was "great" for the communications industry in general and for the multi-channel Multi-Room DVR, HSD VOD, Tiering, SVOD, HD-DVR DVR, HD Pay Addressable Digital Digital Service Phone Video TV Boxes HSD 1948 1972 1990 19961998 200220032004 FIGURE 33 New service deployments.
106 THE TELECOMMUNICATIONS CHALLENGE video industry in particular. "More outlets for the delivery of these products to consumers will bring nothing but more investment and a richer set of services," he explained, because "investment in network infrastructure is the key thing that enables all of this." Contesting the opinion of previous speakers, he said the pressure would be on to open these networks to all comers, but he added: "Performance needs to be maintained." No model for additional revenue was in existence "for those who want[ed] to hitch a ride over existing network infrastructure," he said, alluding to Mr. Thompson's iTown venture. Therefore, while the idea of community- owned networks was "interesting," it would be "very difficult to continue making the investment from that posture." Meanwhile, new regulation would need to take into account both the convergence and the amount of investment taking place in these industries, as well as to "provide for economic incentives that [would] ensure continued innovation." As the current system "seem[ed] to be working pretty well," change should be made only after careful deliberation. Calling the management and control of private networks "critical" to main- taining the quality of service, Mr. LaJoie underlined that it was nonetheless important that private networks and public networks have robust methods for interconnectivity and interoperability. This was being addressed, albeit slowly, in standards bodies, and it might be an area in which regulatory application "could actually help." Integration into an interoperating communications infrastructure would enhance the power of each of these networks. "The more devices con- nected to the network, the more valuable it is," he explained, and "the more inter- connected networks there are, the more international or national value there is in that infrastructure." Over time, bandwidth and connections--the industry's primary drivers--would tend to become increasingly commoditized. As a conse- quence, distributors would have to be able to add content, commerce, and other rich communications elements to their offerings. Consumers' Mobility Steadily Rising Wireless was having an undeniable impact, Mr. LaJoie said, citing the trend, made so obvious by subscribers, toward consuming content, communications, and information on the move. For network owners, this might present the main challenge of the future: While customers were still willing to consume products at home, more and more wanted the ability to consume them on the move as well. "Nomadicity" and mobility would become increasingly important components of communications infrastructure in the future, requiring far more investment than had the hard-line broadband infrastructure of the last decade. Concluding, Mr. LaJoie raised the issue of digital rights management. Even though TWC's business, delivering content, did not involve it in owning copy- right, he expressed his concern for maintaining the integrity and ownership of copyright. An economic model that safeguarded products and protected their producers' rights to financial return was essential to the continued development
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 107 of interesting content. A degradation of the notion of copyright ownership had accompanied the advent of digital distribution, he stated, as making high-quality copies and redistributing them had become exceedingly easy. This was another critical area, and one that was "certainly appropriate for regulatory attention." DISCUSSION Dr. Flamm opened the discussion by noting that the panel had provided "a rare example" of unanimity in agreeing that broadband was important to the country's economy, its society, and, to some extent, its national security. There was likewise unanimous agreement that the United States had fallen behind other countries and was not necessarily catching up. Substantial variation was to be seen, however, in the panel members' prescriptions for dealing with the nation's lag. While characterizing one of the solutions presented as complete deregulation of the local loop, he pointed out that a complete re-regulation of the local loop had also been put on the table, and that there had been some advocacy of "`relax, don't worry, be happy' as one of the potential policy paths as well." Claiming the right to the ask the first question as his "moderator's prerogative," Dr. Flamm began by recalling that more than one panelist had spoken of observ- ing a tendency to dismantle some of the opening up of the local loop--for instance, the unbundled network elements that had been a centerpiece of the 1996 Telecommunications Reform Act. He then solicited all the panelists' expecta- tions for future developments: Was unbundling network elements as the vehicle for opening up the Net "essentially dead--and just put flowers on its grave, and move on to something else--or [was it] something that should be resuscitated?" A second question, inspired by the discussion of municipally owned fiber, was whether an increase in regulation at the state level, including the passage of legislation, would limit such initiatives. Finally, he asked the panelists to reflect on the innovative forms being taken by the regulation seen "popping up" at the state level. Unbundled Network Elements Already Passé Mr. Thompson, speaking as the author of a portion of the 1996 act, said he "would be the first at this point to put flowers on the grave of unbundled network elements." He said the pertinent provisions of the act had been used as a "light- ning rod" to draw a large number of CLECs into the business, based on the notion that "somehow there would be regulatory oversight and a pricing structure." Most of the incumbent operators would call it robbery and argue that it should never have happened, he stated, even as he reminded the audience that these incum- bents were the very ones who had agreed to the process in the beginning as a way of getting the act passed. The unfortunate reality was that the regulatory environ- ment in Washington had been greatly affected over the years by the power of the
108 THE TELECOMMUNICATIONS CHALLENGE incumbents on all sides; it was therefore no surprise that the notion that open access would rest on a basic, agreed pricing structure had been dead on arrival. Open Access from the Incumbent's Standpoint Expressing his disappointment at the turn events had taken, he explained the case from the incumbent's point of view. As the local loop became commoditized, as voice communications increasingly dropped in price, and as such competitive sources as satellite and cable came into the market, it was becoming clear that the incumbent telephone company would be left with plant that was no longer pro- ducing revenue. Stranded plant was a fundamental issue; it had been one of the great fears after the breakup of AT&T. And the issue for the incumbent then became how it could shift to getting at least some revenue from that stranded plant; for that would allow it, under its economic model, to invest in future capacity, whether it was going to sell the output on a wholesale or a retail basis. Admitting to having been "on the opposite side" as chairman of Ireland's tele- phone company, Mr. Thompson said he had wanted to encourage measures ensuring that such facilities "would always be used and we could be the provider at the local level of those facilities." As circumstances evolved, however, regula- tion had to address the incumbent's obligation to become increasingly open. "If you were going to treat it as a local utility," he declared, "then it should be regulated as a local utility." This, in essence, was what he was proposing. Mr. Wegleitner, while cautioning that "throwing a technologist into a debate on unbundling [was] probably a very dangerous thing," permitted himself the following observation: The general objection he had heard on the part of the RBOCs, rather than being to the idea of wholesaling access as part of unbundled network elements (UNEs), was to the setting of prices that were "not compensable for the facility." The crux of the matter, from his point of view, not so much the policy of unbundling access as the amount of revenue that could be obtained from selling it as a wholesale facility. Second, the point of the process, as he understood it, was to encourage facilities-based bypass: The facilities--in the case under discussion, copper loop--had been made available so that CLECs might establish some traction in the market, but the ultimate goal had been to spawn competition at the facilities level. This, he stated, "really did not materialize." While there had been continued effort to work the use of the unbundled element as a business, in the end many such business models had simply failed. `New Wires, New Rules' Mr. Wegleitner then shifted perspective from the past to the future. Some of what had been tried with the copper network had worked, some of it had not. Saying he was speaking frankly as a technologist, he described the copper net- work as already "pretty much obsolete" in any case and said it was "going to go
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 109 away." But what rules should apply to the new facilities that Verizon, along with other players in the business, were putting into the ground? The future would see a move into broadband facilities, among them broadband to the premises. This raised the question of how new construction--"which, quite frankly, anyone could undertake"--would be regulated. His own company's position: "It's new wires, it should be new rules." Disconnect Between Network, Service Layers Mr. LaJoie, suggesting that his listeners draw their own conclusions regard- ing both the effectiveness of unbundling network elements and the associated regulatory impact, identified network owners' main future concern as a "real dis- connect between the services layer and the network layer" rather than unbundling. Companies that provided services to subscribers but owned no network infra- structure other than their server complexes--he named Google, Yahoo!, and MSN as examples--had arrived on the scene, grown, and proved successful. He called their viability "a testament to the fact that there are effective models out there for making sure that new companies, and new communication products and services, can be devised separate from who owns the network." This was "one of the beauties of the public Internet," which promised even richer and higher-bandwidth versions of such companies with further growth and the advent of Internet Protocol Version 6 (IPv6). The issues of unbundling and providing access to the last mile had become a moot point, he said, "because you don't need access to the plant." He recalled meeting Masayoshi Son, the founder of Yahoo! Broadband in Japan, who had driven a huge penetration of new products and services without owning any physical network himself just by leveraging existing infrastructure. One reason Mr. Son had been able to do that was that he had pinpointed a niche in Japan's regulatory arena, whose climate is "completely different" from that of the United States. Mr. LaJoie acknowledged that Mr. Son was "now a billion dollars in debt and losing more every day," but, calling him "an amazing guy," he pre- dicted: "He's going to turn that around." In this country, he reiterated, unbundled access to the physical plant was going to be far less significant than the separation of the network layer and the services layer. Competition or Consolidation? Dr. Ferguson said that those who knew his opinions on the subjects under discussion would experience no surprise at his disagreement with the previous two speakers. Noting that his background in the competitive information- technology sector had shaped his temperament, he said that he shared the overall goal of a deregulated environment. "But that environment can and should be deregulated," he stipulated, "only once it becomes open and competitive, which it currently is not." While it was "very much in the incumbents' interest to portray
110 THE TELECOMMUNICATIONS CHALLENGE themselves and each other as [being] as competitive as possible," he observed, "if you in fact look at the structure of this industry over the last ten years, it has been getting steadily less competitive." He issued a warning: "If you deregulate a monopoly, you get a deregulated monopoly." Detailing the "wide variety of ways" in which he believed the telecommuni- cations industry to have been concentrating, Dr. Ferguson began with Internet access. Under the dial-up regime there were thousands of ISPs, but "when every- body converts to broadband, there are going to be two ISPs." Asserting that the cable industry had been consolidating rapidly, he charged that it had become "an oligopoly of about half a dozen diversified, vertically integrated industrial com- plexes." All of these owned proprietary content assets; alluding to Mr. LaJoie's comment that Time Warner Cable's business was delivering content and that it was thus not involved in owning copyright, Dr. Ferguson declared that TWC's corporate parent was "very definitely concerned with copyright" as owner of Warner Communications, of Warner Bros. Studios, and, through Time Inc., of text-based magazines. Dr. Ferguson traced a similar consolidation among ILECs, saying their number had dropped from somewhere between seven and nine to four. Comment- ing on the UNE regime, he moved to cast doubt on the ILECs' complaint that they were being subjected to unfair pricing, with the prices of unbundled network elements set unfairly low. "If that [were] true," he argued, "then the most logical thing in the world [would have been] for each of them to purchase those incred- ibly cheap unbundled network elements from each other, integrate into each others' geographies, and compete with each other." That none of them ever did that, he stated, meant that "a certain degree of skepticism" was in order when viewing "those claims, and the structure of this industry, and the kind of conduct it has engendered." Concluding, Dr. Ferguson cited several issues--"the precise way in which an open-architecture industry can and should be achieved, exactly which inter- faces should be open, whether there should be divestitures or not"--as meriting debate. Noting the potential to choose among "a wide array of possibilities," he nonetheless emphasized his misgivings regarding the status quo and the direction in which the industry had been moving. Dr. Flamm, responding to Mr. Thompson's request to comment, also asked him if he would discuss whether municipal fiber networks had not already been preempted by state law in a number of places. Regulatory Underpinning to Access Cost Structure Mr. Thompson said he would begin by making a point that, though "criti- cally important," might escape some who were younger than he: In 1983, when the access regimen was put into place and the first policy debates occurred, "there was no such thing as the Internet." The TCP/IP protocol did exist, and there were
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 111 four companies using it; one of these, Western Union, had 750,000 employees who were members of the Communications Workers union. During discussions of the use of the embedded network and of who should pay for it, there was a "very great hue and cry on Capitol Hill" that came back to the FCC, which estab- lished "enhanced services." These services--the use of the TCP/IP protocol and of telex on the backbone, as it was being employed at the time for TWX and other functions--carried no fees for access to the public switched network. And the Internet service providers of ten years later, when the Net was taking shape, still paid nothing for access despite a "huge outpouring of objections from every one of the incumbent telephone companies." In fact, even in 2004 an ISP's access to the public switched network was without cost. "What we have seen as the advance of the Internet in our society," he concluded, had therefore enjoyed a "huge regulatory underpinning." States, Incumbents Ganging up on Non-profits? Turning to Dr. Flamm's question regarding state laws' preempting municipal fiber networks, Mr. Thompson asked: "Is it any great surprise that the incum- bents--which in many states are very close to the regulators and play a fairly major role in political campaigns--have put forward proposed legislation in virtually every state making it illegal for a municipality to compete with them on the grounds that the municipality would come to the business from a non-profit and governmental point of view?" He stressed that his company's was not a competitive offering but a significantly different package, based on the premise that the municipality had a right to provide an access network--as it does in the case of roads, sewers, or water--but would not provide services unnecessarily in competition with incumbent franchises. Each state's laws were different, Mr. Thompson explained, in line with whether the state had been nurtured or neglected by its incumbent providers of services. Those towns participating Opportunity Iowa, whose advisory board included two former governors and numerous university presidents, felt "the time had come to make a point," he said: "They have been overlooked by their incum- bent carriers and their incumbent cable operators to the point where they are losing their brains, the graduates of their schools, to other states." In 2003, a bill had been put before the Iowa legislature by the largest incumbent cable provider and the incumbent telephone service provider that would have made it illegal for any community to own a telecommunications network. The same had been done in other states, including Wisconsin and Kansas; Opportunity Iowa had been crafted as a non-profit, political effort in order to deal with such pressures-- which were being seen all across the country--before the legislature. The follow- ing year or two, he predicted, would see "a very interesting debate" about the role of the community in providing essential facilities for their residents, for, he stressed, network access is an essential facility.
112 THE TELECOMMUNICATIONS CHALLENGE Seeds of a Consumer Rebellion? Dr. Flamm opened the floor to questions, and John Gardinier, who identified himself as retired, commented that he was leaving broadband because of the monopolies. "I know some consumers are leaving cable completely," he said, "and a certain number are leaving their phone providers to go strictly cellular." He asked Dr. Ferguson to state his reaction to Mr. Thompson's endeavor-- speculating that he would see it as a step in the right direction, albeit one with shortcomings--and to reflect on the idea that unless the industry looked to a different model, it might face a consumer rebellion. Dr. Ferguson, characterizing as interesting the question of whether and at what point the broadband problem will become politically salient, identified two possible sources of rebellion: consumers and the technology sector. The last mile already had become a significant drag or drain on the growth rate of much of the technology sector, he said, pointing specifically to personal computers. "In pri- vate, a number of those companies and the people who work in them will tell you they're rather upset about it," he recounted. "But, unfortunately, the telephone companies are frequently their largest customers--sometimes the cable compa- nies are as well--and both are politically powerful, so they have to be careful about how they proceed." He pronounced himself as "not terribly optimistic" that this would become a political issue soon. Addressing the status of municipal networks, Dr. Ferguson said he would concur with Mr. Gardinier's formulation: that they were a good thing but were unlikely under prevailing regulatory, political, and economic conditions to make up for the system's other problems. Tax incentives for the construction of municipal networks could be useful in a reformulation or improvement of broad- band policy. There would, however, be a requirement for continuous technological improvement of those systems over a long period of time, and in general munici- palities were not considered to be the best stewards or managers. He did not, therefore, believe that municipal networks would replace other portions of the system. Prospects for a New Telecommunications Act Mike Nelson of IBM asked the panelists to reflect on a question raised by Mr. Tenhula earlier in the day: whether there would be a new telecommunica- tions act. What might actually drive a rewrite of the 1996 Telecommunications Act? Was it possible that giving this serious consideration would only generate more uncertainty in the marketplace--considering that, as the details were hashed out and after they were finalized, it would take the courts another five years to figure out what those details meant? Mr. Thompson, saying he had spent some 15 years on the 1996 Telecommu- nications Act beginning with what was called the Bell Bill in the late 1970s,
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 113 offered to take off his shirt and display his scars. A telecommunications bill ranked only one step below a trade bill as measured in money spent, both by proponents and by opponents. Any would-be competitors to the incumbents were, at the moment, weak enough financially and sufficiently dispersed that there was no strong need to propose a bill. The exception was that a bill might come from the telephone or the cable companies, but he saw that as unlikely because most FCC decisions on the issues attendant to the 1996 Act had, to date, been in favor of the incumbents. Mr. Wegleitner, while demurring on the question of whether another tele- communications act might be coming, stated that both technology and "the way the industry has shaped up" had outrun the 1996 Act. He said that something needed to be done but expressed uncertainty as to whether another act would be needed to do it. Factors Behind U.S. Broadband Lag Turkan Gardenier of Pragmatica Corp. offered a pair of observations regard- ing the United States' No. 13 ranking in broadband penetration. First, whereas outside the United States the caller paid for a cell phone call, in this country the recipient was responsible for the charges incurred by the caller. Because these charges could add up, she said, she personally did not give her cell phone number out to many people. Second, where a larger percentage of the population lived in apartment houses, such as in the Far East, whole buildings could be wired for broadband, avoiding installation fees and monthly charges for each individual dwelling. Could these factors be contributing to the less-than-optimal use of broadband technology in the United States? Mr. LaJoie disputed the notion that the charts showing the United States in thirteenth place told the full story. For a number of reasons, some related to the issues raised by Ms. Gardinier, the picture was somewhat less stark than the charts made it appear. Important to keep in mind, he said, were differences in regulatory climates, in the history and condition of infrastructures, in how products were used, and in the concentration of homes. The concentration of population in Tokyo and Seoul, for example, was much greater than in all but a few places in the United States, and so broadband penetration would tend to be greater there. A comparison of penetration there with penetration in major U.S. cities would show that there was not such a discrepancy. But the regulatory climate and the age of infrastructure were also significant. Building greenfield was different from putting in facilities when a lot had already been built out. While infrastructure in Asia and Europe was newer than that in the United States, this country was in the process of making investments in both the cable industry and the telecom industry.
114 THE TELECOMMUNICATIONS CHALLENGE No Denying U.S. Broadband Shortcomings Dr. Ferguson said he disagreed for a number of reasons. First, even if it were true that geography, population density, or other considerations made a differ- ence with regard to broadband penetration, they did not explain growth rates. For growth rates had been "enormously different": less than 40 percent per year in DSL residential connections in the United States vs. about 80 percent in the rest of the world. Second, the countries that were ahead of the United States, and that in many cases were growing more rapidly even though they were already ahead, were not always countries with markedly different geographical or population- density profiles. Not only was Scandinavia ahead of the United States, so was Canada--a nation almost as large as the United States with a population of only 40 million. Third, a comparison of price to performance in urban areas would show bandwidth to be somewhere between two and ten times more expensive in the United States than it was in much of Asia. Arguing that such facts under- mined Mr. LaJoie's claim, he insisted that the United States' problems in band- width penetration were real. Connections Between Communications, Transportation Mr. Hellman said he would discuss the relationship between communica- tions and transportation but he wished to preface his comments by saying that he considered outrageous that many accepted DSL or cable-modem as broadband; instead, he asserted, these were "the sales tax on broadband." Then, speaking as a real estate developer, he noted that because the long-term fixed assets he con- structed--buildings--do not move, wireless was of interest to him mainly as a subset of a much bigger picture. Since it could be deployed very quickly, wireless might indeed be a step in the evolution toward a new wired network; but its particular value, mobility, was irrelevant in the case of buildings. The economic significance of the relationship between transportation and communication, Mr. Hellman declared, was greatly underappreciated. Transpor- tation was extremely expensive, and the expense could arise at many different levels: · building roads and bridges was expensive; · building rail was expensive; · oil and gas were expensive, and they had international political implica- tions as well; and · environmental compliance could be expensive, and arduous as well--the Washington, D.C., metropolitan region was currently in violation of the federal Clean Air Act.
THE BROADBAND OPPORTUNITY: WHAT NEEDS TO BE DONE? 115 The way to begin solving such problems was to reduce the amount of time people spent in stop-and-go traffic. But, "if you're going to do that," he said, "you've got to give them an alternative way of getting the job done." He called desktop videoconferencing an absolute necessity in this regard but noted that it required sufficient bandwidth that "you can see a good picture and see what you're talking about at the same time." Bringing together the policy discussions on trans- portation, which entailed massive expenditures by both the federal government and the states, and telecommunications might be a way of starting to come to grips with these issues, he suggested. Extending Great Teachers' Reach Related in Mr. Hellman's mind was another public-interest issue, that of improving education. The decline of urban schools was much discussed, but less talked about was the fact that "the suburbs [were not] going to give up good teachers to the cities." Because truly great teachers were limited in number, "a hybrid of computer and communication networks and broadband and inter- connectivity" would be required if the best teachers were to be made available to everybody. He therefore recommended expanding the policy debate. Mr. Wegleitner stated his agreement with Mr. Hellman on broadband's potential for helping solve the nation's energy problems. While he hesitated to make a detailed statement connecting the construction of a fiber-optic network with the economics and social impact of reducing emissions from gas-powered vehicles, he called "being able to move the business to the house--and, in fact, transparently providing the virtual office--absolutely part of the vision of broad- band as we see it." Upstream was one of the key components; downstream was arguably O.K. at a few megabits, but symmetry was needed and 10 megabits or more would be required in order to do the job correctly. It was for this reason, he said, that Verizon had adopted as its platform for fiber deployment the G.983 passive optical network, which "can take a residence and make it look like an office in a remote sense." Mr. Wegleitner affirmed Mr. Hellman's observations on the importance of distance learning as well. Verizon had built a number of educational networks using the more traditional ATM frame relay technologies. He mentioned Net- work Virginia, on which Verizon had worked in conjunction with other carriers to tie together a multitude of universities; extending its reach to other schools as well was a primary objective. A similar network was online in New Jersey. RBOCs' Consolidation: Legal, Economic Perspectives Mr. Nelson recalled that Dr. Ferguson and Bob Metcalf had a few years before suggested the need for an antitrust suit against the Regional Bell Operating
116 THE TELECOMMUNICATIONS CHALLENGE Companies (RBOCs), since they clearly weren't competing with each other.5 He asked Dr. Ferguson whether these declarations had prompted calls from: · lawyers who wanted to explore the possibilities, since such a settlement would have made them far wealthier even than the tobacco lawyers; · the Justice Department's Antitrust Division; or · economists who wanted to do a study that would show there actually was a case. There had indeed been discussions on these questions with the people who ran the Antitrust Division in the Clinton administration, Dr. Ferguson said. "There was clearly some interest and concern," he recalled, "but also an acknowledgement of the rather significant political barriers." To highlight the size of these barriers, he stated that the industry's incumbents "literally spend more money on lobbying and litigation than they do on R&D." In this, they are behind only the energy industry and, possibly, the cigarette industry. When Mr. LaJoie objected that the cable companies spent far less, Dr. Ferguson acknowledged this and specified that, by "incumbents," he had meant the ILECs. He asserted, however, that spending by the cable industry was "increasing rapidly." Returning to Mr. Nelson's question, he added that he had received calls from private attorneys exploring private antitrust suits and noted that one "semi-serious" attempt had been made but it had, to his knowledge, not gone anywhere. There had been no calls from economists. Dr. Flamm then thanked the panelists for an excellent discussion. 5We may note in this regard that a firm in one geographical market is under no obligation to to compete against firms providing similar services in a different geographical market. To the extent that the Regional Bell Operating Companies operate in separate geographical markets, this issue is not relevant.
