RULE OF LAW

Broadbandits

By THOMAS W. HAZLETT
August 12, 2006; Page A9

We should be celebrating an anniversary this month: One year ago, in August, the Federal Communications Commission voted to deregulate residential broadband services. Never heard of it? Well, I'm not proposing a parade; but this victory for freer markets undermines the current proposal to re-regulate the Internet via "net neutrality."

First, the broadband situation. Under the "open access" mandate, the federal government used to be the ultimate arbiter of what telephone companies could charge independent broadband providers to use their own physical infrastructure, such as wires and cables and other network components. But reformers argued that depriving the telcos of the power to set prices and cut customized business deals meant they could not attract the investment they needed for critical but very costly improvements to these networks.

The deregulation debate was acrimonious: Critics complained that, left to market forces, households would be handcuffed and gouged by telcos pushing their own broadband services, excluding competitors and restricting access to Web content. After the vote was taken, FCC Commissioner Michael Copps challenged his colleagues: "I hope next year the commission will put its money where its mouth is to see if the assumptions yield the results. And if it doesn't, I hope it will admit that and take appropriate action. I'll be keeping tabs."

The results are in: DSL packages are cheaper, performance speeds are faster, and the number of subscribers is growing more quickly than under open access rules. According to Leichtman Research, for the nine months following deregulation (fourth-quarter results aren't posted), the number of households with DSL increased by 4.6 million -- some 31% above the previous period's growth. Meanwhile, the DSL competitors -- cable modem services -- have added 3.8 million subscribers.

The DSL experience provides a vital piece of evidence for resolving today's equally acrimonious debate over "network neutrality" (aka net neutrality). Though somewhat hazy in theory, net neutrality would likely involve the government prohibiting DSL or other broadband companies from charging content providers such as Google or Yahoo for reaching individual Internet users. It might also prohibit them from providing better service for its own bundled applications -- say, voice over Internet telephone service.

Net neutrality is another flavor of open access. Proponents understand this. The New Republic editorializes that net neutrality is needed precisely because "last August, George W. Bush's Federal Communications Commission (FCC) exempted telcos that provide Internet connections from [open-access] restrictions, dealing a blow to both entrepreneurship and political discourse." The argument is logical, but omits empirical evidence of regulatory effectiveness.

Here is the background. From the earliest days of broadband service, controversy raged over whether the physical networks used to transport data should be allowed to control content. Thus open access rules, which forced telcos to allow broadband company rivals to use their networks at regulated rates. Cable TV systems, meanwhile, also provided Internet connections via cable modems, but without any obligation to share their facilities. If an independent Internet Service Provider (ISP) like Covad or Earthlink wanted to connect customers via Comcast's lines, they could negotiate a deal but had no legal club -- as they did under open access.

There was a vigorous campaign to mandate open access on cable similar to DSL; regulators under both Presidents Clinton and Bush refused. The inevitable litigation ensued; but the Supreme Court set the matter to rest in FCC v. Brand X (2005). Its 6-3 decision upheld the FCC's classification of cable broadband as an "information service," placing it beyond the scope of common carrier regulation.

For a number of years, therefore, DSL service was subject to open access while cable was not. Unsurprisingly, DSL providers were blown away early in the race for market share. By the end of 2002, cable-modem subscribers numbered 11 million and DSL just 6.1 million, according to Leichtman Research.

Then DSL began its deregulatory trek. The first critical reform was a surprise FCC decision in February 2003 to end "line sharing" rules. This dramatically raised the prices which ISPs would have to pay to use phone company facilities to provide retail DSL service, dealing a severe blow to companies like Covad. Echoing conventional wisdom, the New York Times news story forecast a consumer defeat: "High-Speed Service May Cost More."

It hasn't. Average DSL rates, according to Kagan Research, dropped from $39.51 per month in 2002 to $34.72 in 2003. Telcos also expanded the scope, capacity and quality of advanced networks, even improving its endemic customer relations problems.

Consumers responded. DSL, holding just 35% market share in 2002, pulled even with cable among new subscribers in 2004. Leichtman Research reports that "DSL providers have added more broadband subscribers than cable providers in each of the last six quarters," and that overall, "the first quarter of 2006 was the best ever for both DSL and cable broadband providers." Unleashed from open access, DSL is attracting customers like never before -- and the overall growth of broadband subscribers (DSL and cable) is notably higher.

In September 2004 the FCC also eliminated network-sharing obligations for phone companies' fiber optic facilities, and deregulation appears to have triggered more investment. In the first quarter of 2006, about 100,000 of Verizon's 541,000 new "DSL" households actually received lightning fast fiber data connections. The bottom line: Since DSL began to shed its access obligations, users have flocked to the service. By the first quarter of 2006, DSL's subscribership has increased some 60% above its pre-2003 growth trend under access mandates.

Commissioner Copps was spot on in recommending a market test for deregulation of Internet access. If policy makers heed the results, they will reject the U-turn to Internet regulation via net neutrality.