Down to the Wire

Thomas Bleha

From Foreign Affairs, May/June 2005

Summary:  Once a leader in Internet innovation, the United States has fallen far behind Japan and other Asian states in deploying broadband and the latest mobile-phone technology. This lag will cost it dearly. By outdoing the United States, Japan and its neighbors are positioning themselves to be the first states to reap the benefits of the broadband era: economic growth, increased productivity, and a better quality of life.

Thomas Bleha, the recipient of an Abe Fellowship, is completing a book on the race for Internet leadership. Previously, he was a Foreign Service officer in Japan for eight years.

So far, no one in the Bush administration has offered a vision nearly as compelling as Japan's. Although Michael Powell, the former chairman of the FCC, spoke eloquently about the benefits of the coming "digital broadband migration," he suggested no date for arrival in the promised land. Moreover, he measured U.S. broadband progress by the exceptionally slow 200-kilobit-per-second standard -- about one-hundredth of the speed of typical broadband in Japan today. According to that minimal standard, the United States has made some progress: by mid-2004, more than 30 million American homes and offices had signed up for basic broadband. But the service is expensive, very slow, and rather unreliable. And despite these limitations, the Bush administration has made little effort to encourage cheaper and more robust high-speed broadband or to promote what many agree should be the model for the future: a vast network of ultrafast fiber connecting homes, offices, and neighborhoods.

Without vision or leadership, U.S. broadband policy drifted during the Bush administration's first two years. The FCC tended to other matters. The Department of Commerce insisted that the market, not the government, should drive the rollout of broadband. Meanwhile, regional telephone companies relentlessly tried to reverse some of the promising measures that had been taken under President Clinton. Continuing efforts they had launched after the 1996 Telecommunications Act was passed, they lobbied legislators and sought court decisions to overturn regulations that had forced them to open their residential telephone lines to competitors.

Powell seemed not to mind this challenge; he preferred a somewhat different approach anyway. He backed promising new technologies and appeared less interested in the idea of promoting DSL competition for residential telephone lines, even though the strategy had quickly boosted access speeds and lowered prices in Japan and elsewhere. Instead, he favored pitting the cable television industry against the regional telephone industry.

Although in theory the strategy was viable -- telephone and cable lines run in front of more than 75 percent of U.S. homes, and with some technical upgrading, both can provide basic or high-speed broadband -- many opposed it. Among the critics of the multiplatform approach were Powell's predecessors at the FCC, who had done their utmost to open residential telephone lines; many economists, who were distrustful of duopoly competition; and consumer groups. Firms that were already competing or that wanted to compete with regional telephone companies in providing DSL service disagreed, too, as did those that coveted access to cable television lines. Some even claimed that this approach violated the 1996 Telecommunications Act, which, they argued, required the sharing of residential telephone wires.

Still, when the FCC got around to reviewing broadband policy in February 2003, it made convoluted decisions that left only the multiplatform approach. Firms that were competing with regional telephone companies to offer high-speed DSL service over telephone lines would have only three more years of access. More significant for the long run, the regional telephone companies would not have to share with outside competitors the ultra-high-speed fiber lines they laid. The following year, moreover, at the urging of regional telephone companies, a court reaffirmed an earlier ruling that these companies need not share their residential lines with DSL competitors. Although many expected an appeal, higher levels of the administration chose not to challenge the decision. Thus, broadband competition over residential telephone lines was effectively killed. A proven strategy had been lost.

Unfortunately, vigorous multiplatform competition is unlikely to emerge soon. True, there are signs of competition between the cable-modem broadband offered by cable television companies and the DSL service offered by telephone companies. Comcast plans to provide reliable Internet-based telephone service by doubling the speed of its broadband offerings from 1.5 megabits to 3 megabits per second over the next three years. Verizon and SBC Communications have dropped the cost of their broadband service to about $30 a month. And to compete directly with cable, some phone companies have begun to talk of developing their own Internet telephone service and providing higher broadband speeds to deliver video.

But these new services will probably appear only slowly, and competition between the telephone and cable companies will remain limited. The reasons are simple: cheap, high-speed broadband would lead to widespread use of Internet telephones and thus threaten the phone companies' lucrative voice-telephone business, and more inexpensive broadband would multiply outside video and movie offerings and endanger the cable companies' profitability. So, although both the telephone and cable companies could provide cheap, high-speed broadband if they chose to, they are not rushing to develop it.

The lack of strong incentives to encourage competition has, in other words, doomed broadband in the United States to remain much slower and more expensive than in Japan. Over the next five years, service is likely to get only marginally faster and cheaper. Meanwhile, at current transmission speeds, the next "killer" application -- Internet telephone service -- will remain shaky and unreliable.

The development of ultra-high-speed fiber broadband service, which is just beginning to appear in the United States, will also lag. Barely more than 600,000 U.S. offices and homes had fiber connections at the end of 2003. Verizon plans to bring fiber to 3 million of the United States' 115 million households by the end of this year, with speeds ranging from 5 to 30 megabits per second. SBC Communications, which dominates the Midwest and Southwest markets, and BellSouth, the leader in the Southeast, are also laying fiber, although at a much slower rate. But they plan to stop the work after spending about $10 billion (the estimated cost of bringing fiber close to about 10 million U.S. homes and offices) and then examine whether further investment is justified. As a result, the pace of rollout will be slow. And the emergence of the substantial market needed to inspire innovative new products and services for those with fiber Internet access remains years away.