Broadband Industry Structure: Policy, Pricing & Penetration

1. Broadband Industry Structure: Policy, Pricing & Penetration Yale M. Braunstein School of Information Management & Systems,University of California, Berkeley Prepared for the Wireless Internet Conference, sponsored by the Instituto Superiore Mario Boella, Torino, Italy June 20, 2002

2. My Approach - 1 • Industry structure  firm conduct (pricing) broadband penetration • Policies and regulation can affect outcomes • Therefore, we need to consider more than just the technology solutions if we want widespread broadband access • Underlying economics • Business models • Role of government & regulators

3. My Approach - 2 • Outline • Current business models • Quick review • Data (a few examples) • Problems & issues • Current challenges • Context & parallels with other media • Universality • Digital divide • Content (vertical control)

4. Business model a b c d e notes All telco (ILEC) T T T T IXC (1) Telco/CLEC (e.g., Covad) T T/C T? I IXC Telco/Independent ISP T T T I IXC (2) Business Models - DSL Key: T = Local telco/Baby Bell/ILEC C = CLEC (equipment may be collocated at CO)          I = Non-Bell ISP IXC = Backbone provider Notes: (1) ILECs are seeking permission to enter (e) business                   (2) Billing may be by either Telco or ISP

5. Business model a b c d e notes All cable TV operator C C C C IXC Cable operator/Modem provider (@Home) C C/? ? M IXC (3) Cable operator/Independent ISP C C ? I IXC (4) Business Models – Cable Modems Local loop, trunk or star CMTS Key: C = Cable system operator M = Modem service provider          I = Independent ISP IXC = Backbone provider Notes: (3) Who provides the line between the cable company and @Home, Roadrunner, or whomever?           (4) Who does the billing? Cable company or ISP?

6. Business model a b c d e notes All mobile operator M M ? M IXC (5) Separate applications provider M M/A ? ? IXC (6) Mobile operator/Independent ISP M M ? I IXC (7) Business Models – Cellular Mobile Key: M= Mobile operator A = Applications provider          I = Independent ISP IXC = Backbone provider Notes: (5) Who provides the link between the mobile company and the ISP, even if it is owned by the mobile op.?                   (6) & (7) Do any of these exist?

7. Business model b c d e notes Physical network P or V ? I IXC (8) Virtual network P or V ? I IXC (9) Business Models – Wireless LANs (802.11x) Key: P = Physical network V = Venue (property owner)          I = "Captured" ISP IXC = Backbone provider Notes: (8) 2-way revenue split between P & V          (9) 3-way revenue split among P, V, and operator of virtual network (e.g., provider of authentication, billing, marketing & roaming)

8. Others • Satellite-based systems • Latency problems, some uni-directional • Starband bankruptcy • Wireless, other than 802.11x • MMDS (fixed wireless) • Ricochet (bankruptcy re-organization) • <128 kbps • Nokia rooftop • About 1 Mbps • Hybrids & miscellaneous others

9. Ruby Ranch Internet Cooperative Association • Local DSL with microwave link to ISP • Interesting history; battle for local loops • www.rric.net

10. Broadband Data are Difficult to Analyze; Predictions Vary Broadband Booming in Europe

11. Price Affects DSL Penetration - 1 U.S. drops from 5th to 10th in one year

12. Price Affects DSL Penetration - 2 USA (SBC) Korea Tel

13. Broadband Penetration in Korea South Korea's broadband Internet market, where more than 15 out of 100 people have access to service, still has room to grow if prices fall, the Organization for Economic Cooperation and Development (OECD) said. But Takayuki Matsuo, of the OECD Directorate for Science, Technology and Industry, said South Korea could not rest on its laurels as the world's most wired society. "We are still in the transitional period," he said. "Trust building is still very weak, not only in South Korea but also in the world. Consumers are still afraid of putting their credit card number in their PCs," said Matsuo. South Korea ranked first in terms of penetration rates for Internet access, with twice the rate of second place Canada, he said. Matsu said the fast growth in South Korea of broadband service came thanks to harsh competition amid huge demand from South Korean users for faster Internet access and games.

14. Problems - DSL • Price going up in U.S. • Despite economies of scale • Despite “decreasing cost industry” • Economies of scale for suppliers  decreasing cost of inputs • Cause: Increasing concentration (?)

15. DSL Concentration & Price

16. Problems - Cable Modem • Shared service • Price going up in U.S. • Introduction of tiered services • Lack of universal coverage • Recent change in business model • Death of @Home

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

18. 3G Cash Flows & Spectrum Fees • Assumptions: • Incumbent operator in European country with 50 million population • Hybrid IP-circuit switched architecture • 15-year license • Source: Kalba International, Inc., 2000

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

20. Problems - Others • Current or recent bankruptcies • @Home (cable modem business model) • Covad (CLEC DSL business model) • Ricochet/Metricom (wireless) • Starband (satellite) • Sprint Broadband Direct (as an example)

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

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

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

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

25. Are Access & Universal Service Related? • Changing definitions of universal service in telecom • Historical: Milton Mueller (1993) • Old: interconnection of local networks • Later: a telephone line for every (90% +) household • Now: ? • Role of convergence: Schement, Pressman & Povich • Changes in universal service with the “death of common carriage”

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

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

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

29. Policies to Promote Ownership Diversity • (An inconsistent) Mix of policies in U.S. across media types • Telecomm • Wireless • Broadcasting • Internet

30. Ownership: Wireless - 1 • Auctions led to high prices, limiting the role of small and minority-owned businesses • Designated entities authorized by the Omnibus Budget Reconciliation Act of 1993 [47 U.S.C. § 309(j)(3)] • [The objective of] promoting economic opportunity and competition and ensuring that new and innovative technologies are readily accessible to the American people by avoiding excessive concentration of licenses and by disseminating licenses among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women…

31. Ownership: Wireless - 2 • Munson’s analysis of the intent: • “The House Report explained the second objective in further detail. First, the committee intended the FCC to use a common sense approach to avoid concentration of licenses, not any particular test….Finally, the [House] committee included minority groups and women in order to ensure that such individuals would not be excluded by the competitive bidding system.”-- M.W.Munson, “A Legacy of Lost Opportunity…,” 7 Mich. Telecomm. Tech. L. Rev. 217 (2001) • … which led to the NextWave/Chase Tel/Clear Comm/GWI/Kansas PCS debacles (1996 auction)

32. Ownership: Wireless - 3 • The “compromise” solution of re-auctioning the NextWave spectrum to large carriers and splitting the proceeds between NextWave, which is in bankruptcy, and the Treasury fails to get Congressional approval (2001). • The debate ignored the parallel situation of minority-owned “successful” bidders.

33. Ownership: Wireless - 4 • European experience not much better • Legal challenges to licenses in Ireland • Selection of Meteor over Orange upheld by Supreme Court but results in several year delay • Post-auction renegotiations in France for 3G licenses • Does this meet “transparency” requirements? • Investigation of Italy’s 3G auction • Etc.

34. Ownership: Broadcasting - 1 • Competing trends in U.S. minority ownership policy • Pro • Nondiscrimination Employment Practices (1968) • Minority Tax Certificates (1978-1995) • Distress Sale Policy (1978) • Declared unconstitutional 1989 • Metro Broadcasting (1990) • Con • Financial Qualification Requirements following Ultravision (1965) • Adarand (1995) • Lutheran Church-Missouri Synod (1998) • Auctions (raising the price of spectrum) • Spectrum grants to existing TV broadcasters

35. Ownership: Broadcasting - 2 • Effects of ownership may be in several areas • Programming / Content • Employment • Ownership of licenses and facilities • Legal to give preferences to small businesses but not minorities or women(?)

36. Broadcasting - 3 • Ownership: One can quantify the costs to the minority community of U.S. policies such as the Financial Qualification Requirements and the loss of the Minority Tax Certificates • From increased cost of L-T Debt $0.44 mil • From (strong) barriers to entry $4.37 mil • From no minority tax certificates $1.5 mil (All are per station, in current dollars, and depend on a number of specific assumptions)

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

38. Internet - 2 • Discussion points: • These definitions are not quite so clear in practice. • See Rob Frieden’s Revenge of the Bellheads: How the Netheads Lost Control of the Internet • ILEC control of DSL and possible entry into Level 1 may drive out smaller ISPs • Why might there be a relationship between the number of (independent) ISPs and content? • Tying arrangements & bottlenecks (more on next slides) • Diversity in ownership yields diversity in content • Does this apply to the Internet? • Possible examples on next slides

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

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

41. Internet Content - 1 This may be a very different mix of broadband content from a small ISP than what you might see from ATTBI or SBC/Prodigy.

42. Internet Content - 2 For example, after AT&T, Cox, and other cable modem operators replaced @Home as their ISP, they also took direct control of the content on their home pages.

43. Summary • Ownership & industry structure  broadband prices  access • Ownership & industry structure may affect content • Industry structure  ownership and the distribution of wealth across business sizes and ownership types