Economist: FCC action could cripple broadband service, restore monopolies

By Bill Steele

The action the Federal Communications Commission (FCC) took on Feb. 20 is likely to create regional monopolies that could stifle innovation and growth of open broadband telecommunications, making such networks more costly, less flexible and less versatile than the technology encourages and open, competitive offerings would guarantee, according to Alan McAdams, professor of economics in Cornell's Johnson Graduate School of Management.

McAdams

While most news reports focused on the FCC's action to return the regulation of existing "copper plant" wiring to the states, the FCC also ruled that incumbent local exchange carriers (ILECs) will not be required to "unbundle," or share with competitors, fiber-optic lines they build in the future that go all the way to homes and businesses. McAdams said this could give each ILEC a monopoly on broadband service in its region.

While the debate at the FCC was supposedly about who will provide local voice telephone service and Digital Subscriber Line (DSL) Internet access service, the real battle, McAdams said, was about the future of Ethernet networks over optical fiber infrastructures capable of supporting gigabit (billions of bits) speeds. While this includes the technology called gigabit Ethernet, McAdams uses the term "AFN" (for Advanced Fiber Networks), which he said encompasses a wider range of high-bandwidth technologies available over fiber.

McAdams, a senior member of the Institute of Electrical and Electronic Engineers (IEEE), is immediate past chair of the IEEE-USA Committee on Communications and Information Policy and has been a member of the committee for two decades. In June 2002, he led a team that convened a workshop, jointly sponsored by IEEE-USA and Cornell, to lay out a roadmap for more rapid deployment of broadband networks in the United States. IEEE-USA has issued a position statement, "Accelerating Advanced Broadband Deployment in the U.S.," based on the draft report of that workshop, which essentially recommends that AFN be "included in the debate" on accelerating broadband deployment in the United States and lays out its virtues. "That position statement could not be more timely," McAdams said.

Because AFN deployment is proceeding rapidly elsewhere in the world, "Blocking it or undermining it by permitting it to emerge only in monopolized form in the U.S. would come at great cost to U.S. international competitiveness and domestic economic growth," he said.

Optical fiber carries data as pulses of light. A single wavelength of light can carry tens of billions of bits per second, enough to handle not only computer data but also video and voice telephone services. Using multiple wavelengths can offer multiple tens of gigabits; experiments have shown that it is possible to use more than 1,000 different wavelengths over a single fiber.

Phone companies usually run fiber as far as a local neighborhood but currently make the final connection to a home or business over copper wires, limiting DSL to mere megabits (millions of bits). Cable companies offering Internet connectivity may also use fiber partway along their systems but send their signals to end users over coaxial cable, currently promising maximum speeds of tens of megabits per second, with current market offerings at far lower speeds. So far both technologies are offered "asymmetrically," meaning that upload speeds are much slower than download.

Fiber running all the way to the end user can provide not only faster Internet service but also the ability to carry video and voice telephone competitively from multiple content, application and services (CAS) providers. "The technology was built to permit competition," McAdams said.

AFN networks are capable of so much bandwidth that McAdams has used the slogan "Only too much is enough." Once the infrastructure is in place, he explained, the "marginal cost" to use the network -- that is, the cost to add more activity -- is zero.

That's both the good news and the bad news, he said. It makes it attractive for end users to build their own networks and finance them at least in part with the money they no longer pay for services from the incumbents. But it also means that "whoever gets to the end user with fiber first can have a monopoly." If the phone company builds fiber all the way to the home or business, McAdams explained, under the new rules it would acquire an instant monopoly: Since the cost of serving that user is zero, no potential competitor could hope to undercut the incumbent's price and unlock that user.

McAdams believes these networks should be owned and controlled by their end users, rather than by the ILECs. In contrast to the current "vertically integrated" cable and telephone operators, user-owned systems would be open to many competitive content providers. End users would be able to choose from a variety of providers of Internet services, telephone services and video services, and the competition among service providers would bring prices down.

"On the other hand, if the telcos can monopolize the fiber to the home, then they would determine what content, applications and services can and cannot reach you at your home and at what price," McAdams warned.

Despite the FCC ruling, he still sees a future in which major corporations, school systems and municipalities could go against the regional, unregulated monopolies and lead the way to user-owned systems. Once the infrastructure is in place for institutional users, with fiber lines crisscrossing the community, it will be easy and relatively inexpensive for small businesses and eventually private homes to connect, he said. Rural areas not now served by cable and DSL are also places to install user-owned AFN networks, since they are even less likely to be served with fiber by the regional, unregulated monopoly ILECs.

AFN technology is rapidly maturing and can be bought off-the-shelf today, McAdams said. As an example, he cited Quebec province in Canada, where over 1,000 public schools built AFN networks in the year 2001 alone, reporting that the cost of the infrastructure was recovered in fees not paid to commercial providers. American school systems, municipalities, and small and medium businesses also are building AFN systems and using them for many innovative activities. Several Fortune 100 corporations have built their own internal AFN networks and connected various branches of their companies to one another with fiber. The result, McAdams said, is decreased cost and increased profits for those organizations.

User-owned AFNs do have a negative impact on the business models of ILECs, McAdams said, so the incumbents are likely to try to block AFN efforts through anti-competitive or political action. However, he added, the expertise these companies can offer will be essential to the success of the new systems.