The Internet Is Not a Rotary Phone
As the Federal Communications Commission returns to the subject of net neutrality, it is once again under pressure to reclassify broadband under Title II of the Telecommunications Act of 1996.
Title II was designed for POTS, the “plain-old-telephone-system,” when it was a monopoly. It allowed regulators to dictate to network providers the rates and specifications of the service in exchange for assuring them of a guaranteed rate of return.
Those who fantasize that Title II could successfully be extended to broadband ignore the wishes of two key constituencies — consumers and investors. Consumers aren’t buying regulator-designed services, and investors won’t fund what consumers don’t buy.
Consumers are fleeing POTS in droves. In 1996, when they had no other choice, 94 percent of American households relied on POTS as their sole means of telecommunications. Today, fewer than 5 percent do so. That is not surprising. There are things regulators do well, but innovation is not one of them.
What Americans do rely on today are two technologies that are not regulated under Title II: Wireless and broadband. The services whose specs regulators decreed decades ago are still available by fiat, but consumers have abandoned them in favor of ever-new services, applications and devices. To an economy in which last year’s smartphone is already obsolete, Twitter is becoming passe and a gigabit connection is all the rage, regulations that were designed for a rotary phone connected to a 64 kilobit switched-access line would be disastrous.
Unlike POTS, the wireless and broadband industries are thriving because they are free to innovate. On their innovation rides much of the U.S. economy. As the White House pointed out in its 2013 report, “Four Years of Broadband Growth,” the app economy has created more than 500,000 jobs since 2007. The lifeblood of that app economy is massive investment in wired and wireless broadband networks.
Nearly two-thirds of consumer Internet connections in the U.S. today are over mobile devices, up from zero in 2005. Those nifty smartphones and tablets consumers enjoy can download at speeds that average between 14 megabits per second and 19 Mbps, and can peak as high as 57 Mbps, because wireless carriers have moved through six generations of network technology in seven years.
Today, more than 95 percent of Americans have access to LTE, the fastest mobile broadband technology. They have it because the wireless industry invests in perpetual innovation. In 2013, it invested about $34 billion in infrastructure.
The wired side has also raced to enable speed and innovation. The FCC’s rejection of Title II regulation for broadband in 2005, and its move away from unbundling obligations and rate regulation for IP services, encouraged incumbent phone companies to invest increasing amounts in broadband and IP. Annual broadband investment by phone companies has more than doubled since 2006, culminating in roughly $18 billion in broadband investment in 2013 (out of a total of $26 billion). The cable industry, which has never been subject to Title II, spent nearly $14 billion on its networks in 2013.
Total telecommunications infrastructure investment in the U.S. in 2013 was about $73 billion, and roughly 90 percent of it was spent on those segments that undergird the Internet ecosystem — and are exempt from Title II. The newest infrastructure provider — Google — designed its Kansas City gigabit broadband access service to evade Title II by omitting interconnected-voice service altogether.
By contrast, Europe has continued to regulate its telecommunications industry along the lines of Title II, with a heavy emphasis on infrastructure sharing. Europe lags the U.S. in both investment and broadband deployment. A study by Copenhagen Economics shows that U.S. per capita investment in telecommunications infrastructure is 53 percent higher than that of Europe as a whole. The OECD’s 2013 outlook shows that even the four largest European countries — France, Germany, Italy and the United Kingdom — lag the U.S. badly. In 2011, the most recent year the OECD reports, they had per capita investments of $175, $102, $135 and $132, respectively, while the U.S. invested $225 per capita.
As the White House pointed out in its report, wireless investment in the U.S. grew 40 percent between 2009 and 2012, while European investment remained flat, and Asian investment grew 4 percent. Not surprisingly, as the White House states: “North America’s average mobile data connection speed was 2.6 Mbps, the fastest in the world, nearly twice that available in Western Europe and over five times the global average.”
The European lack of investment shows in the poor broadband coverage. As Neelie Kroes, vice president of the European Commission responsible for the Digital Agenda, said in September 2013: “Telecoms networks are the foundation of the wider digital economy. Every sector now depends on connectivity. This means today’s telecoms sector is holding back the rest of the economy. Networks are too slow, unreliable and insecure for most Europeans; telecoms companies often have huge debts, making it hard to invest in improvements. We need to turn the sector around so that it enables more productivity, jobs, and growth.”
However, the goals of the EU’s Digital Agenda lag U.S. achievements. The target for the EU for 2013 was universal coverage at one Mbps, achieved with the help of satellite for three million people who live in rural areas. The target coverage for 100 percent of Europeans by 2020 — that’s right, by 2020 — is 30 Mbps, and for 50 percent is 100 Mbps. Europe is 54 percent of the way to its 30 Mbps goal, and two percent of the way to its 100 Mbps goal. In 2013, one million Europeans used LTE.
By contrast, 95 percent of Americans today have access to LTE offering average speeds of 14-19 Mbps; in 2013, 47 million subscribed to it. In addition, according to NTIA, even as of mid-2012, 75 percent of Americans were covered by at least one technology offering speeds of 50 Mbps or more, and 47 percent had access to 100 Mbps or more. Cable has since doubled its speeds, and today offers 100 Mbps to 85 percent of Americans. FIOS and U-verse cover additional areas, as well as competition where cable serves. By 2020, the U.S. is looking to widely deployed gigabit services.
President Obama is right to be proud of the achievements of the American broadband sector, wired and wireless, and of the app economy it sustains. It would be a pity if his FCC threw the U.S. into the European morass.
Anna-Maria Kovacs is a visiting senior policy scholar at Georgetown University’s Center for Business and Public Policy, where she specializes in industry analysis and the interplay between public policy and investment. Kovacs has covered the communications industry for more than three decades as a financial analyst and consultant. She previously served as the founder and president of Regulatory Source Associates LLC, which provided investment professionals with analysis of the impact of federal and state regulation on investment in the telecommunication and cable industries.