|The Constraints that held back results|
|Tuesday, 02 March 2010 18:50|
The first constraint: No money
By August, Blair was saying publicly that they needed to look at existing resources. I remember December 2008, the economy was in free fall. The best economists in the world told us they weren't sure it would stop. So they created the stimulus, using essentially all the discretionary money they had for Obama's four years. So there wasn't going to be any way to get much funding in the budget. This meant that anything large, such as fibering America, wasn't on the table. The September slides mentioned a $350B fiber project that the press picked up, but the real possibilities were in the $20-$35B range, and it wasn't clear if even that was possible.
The second constraint: Weak political backing
“The FCC Chairman just does what [AT&T uber-lobbyist] Jim Cicconi tells him to,” one of the most senior D.C. officials told me in a different context. That's exaggerated, of course, but it requires political courage and strong support to challenge the power of the carriers. That hasn't changed since Obama won the election. Century-Embarq and the Time Warner spinoff with a $billion tax break breezed through, and Verizon-Frontier (with another huge tax break) is on target.
Julius has adopted a policy of relying on voluntary cooperation of the carriers to get things done rather than using the authority he has. Except for net neutrality – promised repeatedly in the campaign – he hasn't been willing to make a decision they would strongly oppose. Mike Powell and Kevin Martin made the same mistake for their first three years as Chairman. Both left office bitter because of how little they achieved. High speed Internet in the U.S. is telco and cable both watching each other closely for how high they can raise prices. Verizon and AT&T have raised basic DSL rates 30% recently despite their own costs going down.
A chill went through the FCC building when Cicconi trotted out 70 Democratic Congressman to question net neutrality. AT&T has a robust network and net neutrality is a minor issue for them; if they can persuade 70 Dems (and all Republicans) to go against the public interest on that, imagine what they might do if the plan required something more significant, like lower broadband prices for more than a token.
The third constraint: Thou shalt not
Julius doesn't know networks but he's a smart guy. He caught on early that duopoly and weak competition meant he couldn't rely on the market to get results, except possibly in wireless. Where the market doesn't work, you need to use government power to get results. That could be direct regulation or indirect influence. Companies this size are constantly coming to government for favors, from tax breaks to merger approvals. Refuse those occasionally and they have to make a deal. Almost every government except the U.S. sees the regulator as a negotiator for a better deal for consumers.
Companies are in business to make money and squeeze maximum profit where they have market power. So Julius' “voluntary cooperation” is not enough. He knows this intellectually but hasn't translated this into action. Blair Levin explains how it works in most countries http://bit.ly/ayHJFu “when a regulator says to do something, what happens is that within a very reasonable, short timeframe, those things are done.”
Genachowski made it almost impossible for the plan to accomplish very much when he pulled strong government action off the table. His WSJ comment “No one is spending time working on the broadband plan saying ‘how can we re-regulate?’” points to the problem. If he won't regulate, what are the other levers he has? The policy actually goes much further, dismissing other choices (“Use it or lose it” wireless license renewals, tough merger conditions, refusing government favors, tough audits of subsidy programs yielding fair pricing) as “really just another form of regulation.” By January, it was obvious strong action would be needed for results. I was horrified by the NTIA/DOJ statement that rejected taking any firm action or bringing antitrust into play. I said Larry Strickling should have resigned rather than signing because it meant the plan would not achieve the main goals of more and better broadband. Antitrust needs to be on the table as long as there is obvious evidence of market failure. High-speed Internet in the U.S. costs twice what it does in France and Britain, pretty good evidence to an economist our competition is too weak.
By eliminating anything that even smelled like regulation or antitrust, Julius left himself without the stick he needs for results.
In private, Genachowski worries whether even duopoly will continue. Like most of us, he fears wireline telcos except Verizon FiOS don't have the capacity to compete with cable DOCSIS and the companies will fade away. In the last year, it's become clear AT&T and Verizon will maintain wireline because they need the capacity for wireless backhaul. Their 70% of the country is not threatened. Wireline only companies with large debt are generally expected to need to go through bankruptcy. Fairpoint is on the way out of bankruptcy and is only a few months behind on their broadband buildout. The opex of a network once built is low and operating profits likely for decades most places. I've looked at debt maturities, and the problems are mostly 4-7 years away. For the consumer, however, early reorganization is probably best.