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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

America’s Lackluster Broadband Market



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Tim Lee calls for “new, creative thinking” on Internet regulation, and he offers a list of several developments in the broadband market to help frame the debate:

1. The wireless market has been well served by competition among the four major cell phone carriers, despite fears that wireless network operators would stymie innovation.

2. The residential broadband market, in contrast, has seen comparatively modest gains, as incumbent telephone companies have failed to invest enough to challenge entrenched cable providers. Satellite and DSL services represent an alternative in theory, yet the quality of these services is substantially lower than that of cable broadband. It is at least possible that we see new wireless breakthroughs that will shake cable providers out of their complacency. But until then, the prospects for meaningful improvements in the quality of residential broadband service look grim.

3. Outside of a few niche projects in college towns and select cities, there seems to be no prospect of a larger move towards gigabit fiber networks. 

4. While network neutrality advocates once warned that ISPs would block or degrade access to VoIP services or websites that refused to pony up for privileged access to consumers, the rise of smartphones has made such heavy-handed intervention much less likely. It is true, however, that ISPs might at some point choose to discriminate against streaming services like Netflix, which both rely on cable providers (to access their consumers bia residential broadband) and compete with them (in offering content), and this raises legitimate concerns.

5. And finally, Tim suggests that net neutrality regulations are unlikely to prevent broadband incumbents from using their market power to against competitors, as foreshadowed by Comcast’s successful effort to (indirectly) extract payment from Netflix for the cost of network upgrades.

One intriguing possiblity is that some U.S. cities will take Chattanooga’s lead and build their own gigabit fiber networks, an extremely expensive investment that might nevertheless appeal to some voters. Tim argues that state-level laws that ban local governments from building such networks are foolish, as they prevent experimentation that could yield promising new business models. Assuming that municipal networks don’t take root, it could be that some new technology, like Steve Perlman’s much-heralded Distributed-Input-Distributed-Output (DIDO) wireless technology, which if Perlman isn’t blowing smoke will deliver speeds 100 times faster than current wireless networks, will completely upend the broadband status quo. If Perlman is right, or if some other inventor-entrepreneur comes along who can deliver a breakthrough of similar potential, the local governments and business enterprises that have invested in expensive gigabit fiber networks will find themselves in a disadvantageous position. So in a sense those local governments that are choosing to forlornly accept broadband mediocrity rather than invest in gigabit fiber networks are betting that something better and cheaper will come along in the not-too-distant future.

DIDO strikes me as the kind of “empowering innovation” that Clayton Christensen has identified as the most important driver of job growth in market economies, and one wonders if, as Christensen has argued on numberous occasions, firms are underinvesting in such truly transformative innovations due to an excessive emphasis on the short-term return on net assets or return on capital employed. Perhaps the best way to improve the broadband market is to focus not on broadband regulation as such, but rather on a larger effort to, in Christensen’s words, “create tax rates that transform what I call migratory capital into productive capital,” i.e., from “investments that will maximize the speed with which it can then be withdrawn” to productive capital that “wants to stay on the job and not go truant after 366 days.”

(This could be a case for what the economist John Kay has called “obliquity.”)



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