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Tuesday, April 25, 2006

The OECD Broadband Rankings
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What, if anything, should be inferred from the United States' 12th place ranking in the new OECD broadband statistics released earlier this month? There are some who suggest that our failure to move up in the rankings indicates that the U.S. needs some sort of industrial policy to stimulate broadband deployment.

For example, Rob Atkinson of the new Information Technology & Innovation Foundation writes in a recent piece: " We should start by realizing that relying on market forces alone is likely to mean that the U.S. will continue to lag behind many other nations....Ensuring that the United States is among the five most broadband-intensive nations in the world will require concerted private and public action." (emphasis in original) He writes approvingly of a plan by the city of Vienna (Austria) to roll out a 1 gigabit network to every household and business in the city.

In my view, this is exactly the wrong way to go. The experience of U.S. cities that have entered the broadband business is not a happy one. More generally, the evidence that industrial policies produce good results is sparse to nonexistent.

Our goal should be to have a vibrant, competitive broadband market, providing the "optimal" amount of broadband consistent with costs and consumer preferences. The OECD rankings provide virtually no guidance concerning whether we are achieving this goal. If, for example, every country had perfectly functioning broadband markets, some country would still be in 12th place, but there would be no reason for concern. Alternatively, if we lived in a world in which no country had a well-functioning, competitive broadband market, even the 1st-place country would likely be able to benefit from a policy change.

In terms of broadband competition, we are ahead of most other countries. We have at least two major competitors in most markets, with the possibility of more (e.g., wireless and BPL) on the way. That by itself differentiates us from a lot of countries. Through court and FCC actions, we have significantly reformed the regulatory regime that subjected broadband providers to facilities-sharing requirements - a regime that had a significant adverse effect on investment incentives.

Despite these pro-competitive policy changes, there is clearly more to be done. It is important to remove barriers to video entry, e.g., by adopting nationwide video franchising as is being considered in the Congress right now. This will be pro-competitive generally and will increase incentives to invest in broadband infrastructure.

A major challenge is to avoid anti-competitive policies that will slow broadband deployment. In particular, we should resist pressures to adopt a "net neutrality" requirement as well as pressures to allocate significant portions of the electromagnetic spectrum to unlicensed uses. A net neutrality requirement will have a significant adverse effect on incentives to build out all forms of broadband. Unlicensed spectrum (contrary to claims of its proponents) is likely to diminish the chances of a viable wireless broadband pipe. Increasing the supply of flexibly licensed spectrum with secure quasi-property rights is the only way to induce the types of investments that might make a wireless third pipe a reality.

We need to remember that the broadband market is still very young. Rates of adoption are rapid and we are not yet close to any equilibrium penetration level. Providers are still experimenting with business models that they hope will generate the revenues needed to cover the extremely large costs associated with building out and upgrading networks. This is not a market that the government should try to micromanage.

posted by Tom Lenard @ 2:34 PM | Broadband , Municipal Ownership , Net Neutrality , Spectrum

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