The Future of Telecommunications,

The Future of Telecommunications Regulation

 

Eli M. Noam

 

Professor of Finance and Economics

Director, Columbia Institute for Tele-Information

Graduate School of Business, Columbia University

Presented at the Conference on Telecommunications

Pennsylvania State University

April 26, 1999

 

In discussing the future of telecommunications regulations one needs to ask first, there is a future? Or is it just the same present and past repeating themselves, like in the movies, just like the Groundhog Day, where Bill Murray was condemned to live the same day again and again?Itís been over three years now since the Telecommunications Act of 1996.And yet, it seems like the old days, everywhere in new variants one looks, one meets dear old friends.Thereís Interconnection, for example, and over there, good old RBOC IXC, looking as depressed as ever. And here is good old state jurisdiction.Among such truly companions, does one dare to speak of the future as anything but a continuation of the past?

 

Well, yes. What better time to speak of the future than when the Millennium is near, and when one might want to soon some truly big-time New Yearís resolutions about telecom policy. Because if we have no idea where we are going, we actually might end up getting there.

 

For some, the official documents are backward looks.The 96 Act has only one single mention of the Internet that has survived Supreme Court scrutiny. And it is administered partly by a regulatory agency, the FCC, that thinks that a A Portal@ is a politically friendly new office building.So lets look ahead, instead, to the telecommunications of ten years ahead, and to the regulatory environment of 2020.

 

We can address the future in cosmic terms, with nano technology, brain modems, and Supreme President of the Galactic Federation Reed Hundt.Or we can be a bit more modest, and assume simply that the technology in 20 years isnít radically different, just cheaper, smaller, faster, and spread through society.Basically every communications device we have today existed 20 years ago, just bigger, clearer, slower and without the network externalities of a large user base.Satellites, fiber, cable, Micro computers, the Internet (Al Gore was just inventional)


But these trends, of cheaper, faster, smaller and widespread exponential at present, add up to a lot of change. For example, if you believe the growth scenarios of e-commerce companies the way Wall Street does, we will have in 2020 half of the population employed as web masters, and the other half driving UPS delivery trucks.The basic building blocks of technology are not many.First, there are semiconductor transistor chips such as microprocessors, memory, and signal processors.Next year, the world will produce about 100 trillion transistors, thousands of them crammed on silicon wafers.If Mooreís so-called law keeps valid, by the year 2020 these chips will have 1,000 times more power than today, or be 1000 times cheaper, or a combination of the two.

 

As processing becomes cheap, it will be anywhere.Computers have started to be given away for free, like the cellphones that use to cost thousands of dollars.And people will be the minor part of information generators.Already, more than half of traffic is data rather than voice, which means that it involves fast machines rather than slow people.As an information processor, humans are hopeless.If I get faster than 200 words per minute, Iíll lose you and confuse you myself.Education and coffee improve things only so much.But machines have much higher limits.And it is here that the microprocessor revolution has its major communication impact.These data machines will be everywhere.Suitcases will complain to airlines.Electronic books will download from publishers.Front doors will check in with police departments.Pacemakers will talk to hospitals.Television sets will connect to video servers.

 

These electronic gremlins will be on-line, all the time, always on.In contrast, in the past, a residential voice line was used only about 25 minutes per day.(That was, of course, before the invention of the teenager.What we now call Internet connectivity will not be an issue.Internet connectivity will be near 100%, like electricity, because the Internet will have been liberated from the terror of the PC as its gateway.The PC must be the most consumer-unfriendly consumer product ever built since the unicycle.Often these devices will be connected by wireless.We will be able to use more extreme frequencies of the electro-magnetic spectrum, and to cram much more information into what we have.The wireless revolution will lead to a revolution of telecommunications ubiquity in time and space.Whereas in the past we were reachable only when we huddled near nodes called homes and offices, we can now cover the other 98% of the map.Anytime, anywhere.We will walk down the street, mumbling into our lapel, reading our heads-up displays in our eyeglasses.IBM is releasing a postage-size transparent display screen that looks like a sunglass lens.Web surfing on the run.And for those that do not want to read while they drive, Motorola is releasing a voice web makeup language that makes it possible to have information and messages read to you from web pages.Being connected will be a near-continuous experience.

 

With all these information streams growing, the question arises whether the transmission capacity will be able to keep up, or whether it will remain the bottleneck, as it is now.Will the World Wide Web becomes the World Wide Stall?

 

Here, too, the technological trends are favorable.Thank God, or else weíd have a revolution of the digitally compressed.Opto-electronics will be the silicon electronics of the next decade.Erbium doping accelerates amplification.Fiber gratings and tunable lasers increase the bandwidth.Dense Wave Division Multiplexing reaches now 100 windows.Integrated optical chips are likely, with a similar impact of the integrated electronic chip in the 1970s.Fiber optic transmission capability will grow, for the foreseeable future, at a rate probably double that of processing, since it is further behind. There are vast increases in long-distance backbone capacity fuelled by the combination of technical progress, abundant financing, and regulatory liberalization.New carriers are entering and adopting these technologies, such as Qwest, Level 3, Williams, IXC.Incumbent carriers are upgrading.And RBOCs are dreaming that by the year 202 they will have finally passed the checklist.Experimentally, NEC in Japan has reached a 3.5 terabits transmission rate over a single fiber strand.If that becomes the off-the-shelf transmission rate 20 years form now, which seems pretty conservative and if we accept the build out plans of the carriers at face value. Weíll have a national backbone capacity of 40 Megabits per household.Thatís more than dozen-compressed video channels per household, simultaneously with any other household, all-watching different programs at the same time!

 

Of course, this is long distance capacity, but the local capacity will grow with it.Demand creates supply.Supply creates demand.The alphabet soup of contestants includes DSL, FTTC, DCM, HFC, LMDS, WLL, HALO blimps, whatever.

 

To summarize the technical trends: The decade of the 90s was dominated by the revolution in processing power, based on fundamental VLSI technology advances of the 80s.For a while, transmission couldnít keep up with processing, because it was much more expensive to widen the channels than to add the driver instead of the brake.

And what will be the impact of these trends?

 

The most obvious one is that prices drop.Transmission becomes commodity.MCI Worldcomís winning bid for the Federal Governmentís FTS 2001 has a per minute price, in a few years, of less than 1 cent per minute.Similarly, for international transmission, new projects will raise capacity was 5.1 Gbps in í94, 65 Gbps in í99, and 865 Gbps in 2003 almost a quadrupling every two years.And thatís without the adoption of the next round of innovations in fiber optics.As that happens, international calls become priced at flat rate, near zero.On an architectural level, networks become engineered for data, not voice, because data, which is now about 50% of traffic, will be 98% in a few uears.Bandwidth becomes a substitute for switches.And with flat pricing, monthly phone bills that itemize calls will probably become unnecessary.

 

And this is, as far the conventional providers of hype will take you.To a world with abundant information, in which all of mankind are linked up and well informed, in which information conquers illness, ignorance, and poverty, and in which democracy thrives.How wonderful.And, how naÔve.

 

Itís a bit like techies rhapsodizing a hundred years ago over the automobile.There will be no smelly horse anymore!Everything will be shining and clean.And everyone will take a leisurely fun drive to work in the morning and be happy!And the sky will be blue!

 

In such an environment of telecom plenty, what will be the nature of telecom regulation?The problem is that the future is always a bit of an inkblot test, into which everyone projects their fantasies, desires, and nightmares.When it comes to the Internet, some see education and democracy.Others see pornography and chaos.(Itís similar when it comes to)?And since so many have had some negative experience with government, one fantasizes of its demise.The knee jerk response is: NO.Thank you, Mr. Regulator, itís been a nice long century together.But now, weíve got the Internet!

 

Part of this is wishful thinking.Itís a preference for return to the Garden of Eden before the apple and the Mackintosh, a hope for autonomy and self-reliance.

 

In the past, this notion of the withering away of the state has been held by Marxists and utopian socialists.Today itís become the worldview of Silicon Valley billionaires (to be redundant who skipped history classes in high school).

 

Of course, some of the traditional regulatory agenda becomes unnecessary.Price regulation is not needed under a wide-open and widely competitive system.Neither is profit regulation, or quality regulation.Even interconnection and unbundling are important only where there is market power and bottleneck control.

Since many of these rules are set or administered by the 50 states, it might suggest a disappearance of state regulation.

I doubt that.And this isnít because of some bureaucrats who canít let go.Regulation exists in response to interest groups.Whether they are incumbents, entrants, consumers, rural residents, or large users.These interest groups will never disappear.And new ones will emerge.

If anything, the easy communication of the Internet will make it easier for interest groups to organize themselves.Just remember when the issues of Internet access charges came up.The FCC, Congress, and the White House were inundated by a campaign of millions of e-mail messages, and they beat a hasty retreat.So what is it that all of these stakeholder groups will want?†† At least 10 things.Iíll give you some of them now.

 

1. Redistribution. In a democratic system, a majority always wants something from the minority.Many people believe that somehow the efficiency of competition will shrink the subsidy slice of the pie to zero.But that assumes that the definition of the pie does not grow. With telecommunications becoming ever more important, not having the right connectivity becomes a major disadvantage.Thatís why we hear about the info poor, the digital divide, the fourth world, the schools and hospitals, and thatís why we will expand our definition of what is covered.For example, Subcommittee Chairman Seen Burns announced that his legislative priority for this session is to accelerate advanced services and fiber to rural areas.This legislature does not seem to be exactly very deregulatory.And all this will be extended, in time, to DSL, cable modems, video server access, and mobile telephony.

 

Part of the problem is that the old sources for subsidies are being competed away, while demands for new subsidies grow.In consequence, new ways to raise money and to cross-subsidize will inevitably be pushed.

This will be a major battlefield of the future.

 

2. E- commerce and consumer protection.In the past, the Internet confronted little resistance in the political sphere.It faced public fascination, and rightfully so.Eyebrows were raised over porn and privacy, both politically very correct targets of complaints. But, this will inevitably change. As the Internet moves from a nerd preserve to shopping mall and mass medium, it is unrealistic to expect that it will be treated differently than the rest of societyís transactions. Which means that it is unrealistic to expect it to be left alone.

 

Inevitably, there will be problems of fraud, misrepresentation, and theft.And therefore there will be pressures for consumer protective regulation.Now a lot of people say that one cannot regulate the Internet, even if one wanted to. After all, donít high school kids run electronic circles around flat-footed government rules? Sure. But that only proves that it is difficult to go after the electronic part of a transaction.But thatís not the end of the story.If you canít reach the bits, you can go after the physical parts.If you canít block mobile elements, you can try to reach the static ones. Such as Networks, they canít hide or people.Assets.Land.Customers.This might not be elegant, but neither is the tax code.There are plenty of ways to do so.And many of them involve the carriers and service providers, which puts them into the laps of telecom regulation.And here, states have traditionally played the major role in consumer protection.So, as consumer protection problems emerge, there will be public deviance for telecom regulators to ďdo something.ĒCarriers and ISPs will become responsible for the use of their networks.

 

3. The problem of e-commerce trade wars.This is more of a federal issue, but inevitably the states will also be drawn into it.Zero cost global transmission leads to a realignment of commercial transactions. And here, US firms will dominate globally. They are technologically at the leading edge, with risk capital at their disposal, with the advantage of early entrant, and a large home market.Once they establish a successful model for the US market, and once transmission price is near zero, there is no reason to stop at the border.

 

But this success will lead to backlash.Big losers are usually good in at least one thing, organizing themselves.Inevitably, they will use the domestic and international regulatory apparatus to slow things down.One can see it already: in the transatlantic fights over privacy; in the Anational culture quotas, in the fights over domain name registration, in the fights over electronic signatures and authentication. Right now, the Clinton administration is going around the world, preaching the Internet free trade zone.

 

But who are we to complain?Imagine how the tune will be different when we face a serious influx of Mexican tele-doctors.Monaco tele-gambling.Bahamian tax dodges. Thai child tele-pornography.Nigerian securities deals.There is no way weíd let this happen without protective regulation.And here, too, telecom providers and ISPs will be force to patrol their systems.And the states will do much of the regulating.

 

4. Monopoly power.

Many people believe that issues of market power do not apply to the Internet, because it is so wide open that any dog can start itís own business. We are told that the bit economy plays by different economic rules than the atom economy, that silicon-based transactions are different from this based on carbon, and similar nonsense.

 

Itís unclear why packet switching would make Adam Smith obsolete. We might indeed observe that computer communication and market power have been kissing cousins for a long time: AT&T;IBM; Microsoft; Intel.†† Each of them deserves a chapter in any textbook on antitrust. And why should it stop here? Yahoo? AOL? Amazon.com?Are they the next chapters?Why not? Presumably, these companies are trading at such high levels because of investor expectations of abnormally high profits, not because of a competitive return. The economic logic is relatively simple. Development costs are high, marginal costs are low. So there are large economies of scale. Brands are important. First entrants have advantages. There are network externalities.The Internet may still have the image of small is beautiful, but the reality is changing fast.

 

Now some might object and point out how easy it is to set up a web page. True, but thatís for a narrowband world, and even there less and less so. In a broadband Internet world, Webster will be multimedia, video, with lots of bells and whistles. User expectations will grow. Development cost will zoom, and entry barriers will become much higher, just as they are in movies, newspapers, and major software. And when that happens, some Internet submarkets will become heavily concentrated. And inevitably, calls for Antitrust, breakups, fully separated subsidiaries will emerge. Just ask poor Bill Gates -- well, maybe this is an oxymoron.Heís become the undivested AT &T of the 90's and beyond.

Other issues that will emerge on your agenda, only as a list for now:

 

5. Privacy Protection.

 

6. Intellectual Property Right Protection.A big issue for information producers, which gets them to call for an updated version of gunboat diplomacy.

 

7.Education and training.

Thus has been traditionally a major responsibility for the states.

 

8.Taxation.

Sales taxes an transactions on the Internet are inevitable unless all state sales taxes are scrapped, which seems highly improbable.This will thrust the states into Internet-based activities for better or worse.The alternative is to keep a tax-free island, which is unlikely.

 

9. Content Standards.

10.Legacy rules.We do not start from scratch.In the process of implementing the >96 Act and its own policies, the FCC and the states have added in recent years a great number of rules, usually in the name of competition.We regulate to deregulate. And the clarification and harmonization of these rules, and their upgrade to new circumstances will still add much more.

These are ten areas where government intervention will emerge or persist, in Washington and in the states.†† There are probably ten more.

 

The implication, in terms of action, isthat to reduce legacy regulation, the old and the recent stuff, one cannot expect that technology and abundance will do it for you.That abundance will lead to a withering of traditional regulation.One has to go and change the equilibrium. But one should not be unrealistic on what can be achieved.A libertarian paradise will not happen, because while it is easy to embrace it in the abstract, everyone has a little exception in mind, a little help that they need.(Watch, for example, how the Internet ISP industry has started to seek now the regulation of the cable TV industry.

 

One way is to simply abolish the FCC. Which is what for example the Heritage Foundation proposes.But that would leave the field to the state commissions, which Heritage presumably likes even less.Also, even if the US does away with its regulatory agencies, other countries will not.So we may end up substituting regulation from Washington and Sacramento for regulation from Brussels.And in any event: This solution of flash cut is not likely to solve the problem. The interest groups in question will find some forum that will take up their case.Remember Judge Greene?Was it any better, as a process, to have an elderly judge with two law clerks slowly and non-expertly running the American telecom industry structure?The alternative is to focus on substantive policy, not on institutional structure.

If one wants to deal with legacy regulation, one should do so proactively.And this would mean that a commission and a legislature would look ahead and set goals for getting out of certain regulations, with a clear time plan.It means formulating an endgame scenario.The goal should be how, within 5 years, one could remove much of legacy regulation.

The problem here is the potential for dilatory action of incumbents in the meantime. But that could be dealt with by some schedule, with steps and dates along the way, and penalties (including a second divestiture) and rewards along the way.

 

This is actually an ambitious agenda.But if due does not set sights high, one will be the slow ship in the convoy to the Information Age.And it does not mean the disappearance of state or federal regulation in the communications sector. It means that oneís institutions need to reinvent themselves, and become expert in new, or different areas. Privacy Regulatory.Consumer protection in the cyber field.Broadband and mass media.Dealing with new types of market power.To do so the regulatory bodies need to transform themselves from early 20th century utility-style commissions to early 221st century communications protection agencies. Look forward.Change the culture. Change the expert mix.Acceleration the decision cycle.Explore.Experiment.This incidentally is the strongest argument for state commissions.

 

What then is the conclusion?Like it or not, regulatory bodies for communications will continue to exist, as vessels for society establishing some control mechanisms on electronic communication in a revolutionary environment.To expert otherwise feels good, but is not realistic.†† .

 

Most problems in these areas will be vastly over shadowed by the opportunities, and resolved by market forces.And to do so the regulatory bodies need to transform themselves from early 20th century utility-style commissions to early 21st century communications protection agencies.Look forward.Change the culture.Change the expert mix. Accelerate the decision cycle.

 

To survive, we need to innovate.It is also helping us.Because if we do not, we become irrelevant.

 


What then is the conclusion?Like it or not, regulatory bodies for communications will continue to exist, as vessels for society establishing some control mechanisms on electronic environment in a revolutionary environment.To expect otherwise feels good, but good feelings isnít what Washington is about.Just ask poor Bill Clinton.