Tuesday, April 18, 2006 - The Progress & Freedom Foundation Blog

So You Still Believe in Infrastructure Socialism?

There's a crowd of people who still run around lamenting the death of the old UNE-P regulatory regime. They persist in their misguided belief that infrastructure sharing somehow offers us the path to broadband nirvana.

It's all quite silly, of course. Forced sharing doesn't lead to true infrastructure innovation or competition. Indeed, it leads to the exact opposite: technological stasis and plain vanilla networks. If you want real competition and innovation, you have to give carriers the incentive to invest in (and upgrade) their own networks with the promise that they will be able to reap the rewards of positive growth should it occur.

Still, the critcs persist, we'll never have any real competition without some degree of infrastructure sharing. Nonsense! Let me cite a little statistical and anecdotal evidence to explain just how wrong the infrastructure socialists are.

Some Hard Facts (for the Bells, that is)

Wall Street broadband guru Craig Moffett of Bernstein Research released an eye-opening report today entitled "Quarterly VoIP Monitor VoIP Growth Still Accelerating." (subscription-only report) In it, Moffett notes that, "If 2004 was the year that VoIP came on to the scene, then 2005 was when it truly became a viable consumer technology. In the span of just one year, VoIP went from having 1.15M to 4.17M subscribers, over a 260 percent increase." (Importantly, Moffett's projections do not include free computer-based VoIP services such as Skype, so there's even more VoIP competition out there than his number suggest!)

With cable operators rapidly expanding their VoIP offerings to match what independent providers like Vonage and Packet8 offer, this puts the telcos in a real bind. (Moffett feels that AT&T and Bell South are in particular trouble in their regions). In fact, Moffett notes that, "Telecom carriers suffered high access line losses at the hands of VoIP growth in 2005, with the rate of line loss accelerating to 5.9% for the full year. VoIP's increasing availability and mass-market acceptance have more than offset any win back the telcos have enjoyed from wholesale/UNE-P line cancellations, consistent with our investment thesis from 2004 and 2005. It is likely that many of these former UNE-P customers are choosing to switch to VoIP instead of returning to circuit-switched service due to their predisposition towards lower-prices and demonstrated preference against the Bells."

But wait, it gets even worse for the Bells. Most major cable operators have continued to expand their "triple play" (voice, video & data) packages to offer consumers all their communications, entertainment and networking needs in one bundle. (And some cable operators are partnering with cellular providers to expand the bundle to be a "quadruple play" that includes a wireless component too).

Which leads to my anecdotal story about how much things have changed in this industry...

My Coming Adventure with Head-to-Head Broadband Comeptition

If you really want to know how paranoid the Bells are about these ominous threats, you need to visit my neighborhood.

I'm lucky enough to live in an area where broadband competition is rapidly intensifying - - Fairfax County in Northern Virginia (McLean, VA to be exact). In recent years, incumbent cable operator Cox Communications has beefed-up its network to offer phone service and high-speed broadband in addition to its growing video programming lineup (which how includes plenty of HDTV and VOD offerings). I've been a Cox cable subscriber for many years now and have been very happy with them. In fact, after 7 years with DirecTV prior to that, I've never thought about going back to satellite after switching to cable. (Of course, the high-speed broadband option Cox offered had something to do with that!)

Meanwhile, regional telephone giant Verizon Communications has been aggressively deploying new fiber optic lines throughout Northern Virginia neighborhoods and the entire Washington, D.C. metro area in the hope of competing against Cox and Comcast in the race to deliver the complete "triple play" package (voice, video, data) to consumers. Last year, Verizon sent a team of contractors out to my neighborhood to dig up my front yard and lay the new lines. And then, for reasons I still can't quite understand, another team came back and dug up my yard again to install more stuff! My wife wasn't real happy about the mess this created (and all the grass that died as a result), but I just kept telling her that one day it would all be worth it.

And that day has arrived.

Starting late last year, Verizon began dispatching door-to-door salespeople through my neighborhood in an attempt to sign up new subscribers. I felt sorry for the people who knocked on my door because they had no idea I was going to shower them with a litany of technical questions based on my knowledge of communications markets. But the salespeople were always very informative and helpful. And they REALLY wanted my business. Unfortunately, however, they had no control over the pesky city and county regulators who were holding up deployment of Verizon's new "FIOS" service in the area. In particular, Verzion had to fight for their right to offer consumers video programming services in competition with cable.

Well, they finally got permission, at least in Fairfax County. (Of course, Verizon and other telcos are still fighting for permission to offer video services in countless other communities across America. And federal legislation is pending that would expedite that process). So, after I received confirmation that Verizon would at least be able to offer me everything I already had in my Cox bundle, I finally decided to pull the trigger and sign up for a one-month trial of Verizon's FIOS service in my home.

I made sure to get a guarantee that the installation would be free and that I could back out of the deal without hassles after a month if I wasn't fully satisfied. Absolutely, they said. After all, even if I didn't subscribe, it's worth it for Verizon to make this deal so that they know my home will be "wired for the future" in case someone else is living there in 5 years and wants FIOS service.

And so begins "Adam's Excellent Adventure With Competing Broadband Services!" I look forward to giving you a full account of how this side-by-side shootout plays out over the coming month. But for now, the important thing to realize is just how wrong the infrastructure socialists were. None of this would be happening if their dream of infrastructure sharing survived for the Bells or if it was applied to cable. These companies are only making these significant investments because they hope to get a decent return at the end of the day. Of course, there is no guarantee that they will. Indeed, the entire FIOS experiment is extraordinarily risky for Verizon and Wall Street and shareholders are watching closely.

It will be fun to see how this all turns out. I'm just thankful that infrastructure property rights prevailed over infrastructure socialism so all this could happen.

posted by Adam Thierer @ 10:55 AM | Broadband , Communications , Innovation , Mass Media , Wireline