Besa Innovation

A recently published ebook characterizes the history of Verizon, SBC, Qwest, and BellSouth’s (the Bell companies), their fiber optic broadband promises and the consequences that have harmed US economic growth because these companies never delivered and kept most of the money, about $200 billion!!!! In the early 1990’s, the Clinton-Gore Administration pushed the “Information Superhighway”, for which every Bell company - SBC, Verizon, BellSouth and Qwest - made commitments. The idea was that fiber optic wires would replace traditional copper wiring. The idea was that “by 2006, 86 million households should have had a service capable of 45 Mbps in both directions, (to and from the customer) could handle over 500 channels of high quality video and be deployed in rural, urban and suburban areas equally.” And in addition these networks were open to competition. In order to pay for this, the different states in the US removed constraints on the Bells’ profits as well as gave other financial perks. As the result these companies were literally able to “print money” collected in the form of higher phone rates and tax breaks…..

For details about the book, chapters, highlights, etc.
http://www.newnetworks.com/broadbandscandals.htm

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What if, KPN designs its new all IP network in a way that new VoIP providers have problems entering the market? Nothing will happen. Why not? Because there is no regulatory concept that would prevent it. Actually there is nothing wrong with KPN’ strategy to have more switches that allow the SS7 signalling system instead of softswitches. Such network would provide first mover advantages in the new markets for VoIP. If new entrants get worried they should adress this issue now. Even if something like “technological” foreclosure does not exist in the regulatory literature yet……

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A recent report by CPB concludes that there are no market distortions in broadband markets in the Netherlands. This report comes at a time when the discussion about municipalities investing in broadband has never been as political as currently. There is no consensus in the European Commission about this issue with DG Competition (Nelly Kroes) “extensively studying this issue” as it apparently conflicts with Article 87 of EC Treaty and with DG Information Society (Vivian Reding) granting exceptions to less favored regions in the European Union In the Netherlands, a number of stakeholders like cable operators have made quite clear that they are not interested in additional competitors on their turf (statement R. van Esch, VECAI). Despite of these calls, investment in broadband infrastructure (FTTH networks) by alternative providers sometimes in conjunction with support from municipalities is still growing. As there are no guidelines provided by Dutch ministries and the parliament this issue remains unresolved: That means there is legal and regulatory uncertainty, one of the worst cases for private investment.

Why is the CPB report in this situation so tragic? Very simple because it uses a static approach. Despite of all the fuss about externalities, increasing returns, lock in, etc. A dynamic approach in conjunction with the analysis of experience elsewhere would have done much better. The dynamic issue here are: First, “path-dependency” (a concept used in the anti-trust cases against Microsoft), simply explained means not only that “history matters” (in this case the behavior of incumbents like cable and telecom operators) but that their (demand as well as supply) externalities are very important. Therefore the marketing (customer) base, the billing capabilities, the technological (e.g. installation of new technologies) capabilities of incumbents can make life for a new entrant not only difficult but impossible. There is evidence of path dependent behavior of KPN in the market for broadband access. That brings me to the second issue “joint dominance” a new concept developed in the anti-trust literature in the United Kingdom to characterize the (joint) behavior of two companies (e.g. cable and telecom companies) to coordinate their behavior. What kind of consequences has this kind of behavior for apparently broadband markets that are “well-functioning”? But the third point ignored by CBP is much more severe. Broadband does not equal broadband and the technical definition of broadband is not (CBP) “instantaneously” changing over time. In contrast there is a qualitative difference between traditional (DSL, Cable) broadband and Fiber-to-the-Home (FTTH) as FTTH can offer more than 1 Gbit/s and supports all three services (i.e. voice, data and video). There are even commonly agreed definitions on FTTH by the ITU. This qualitative difference is vital for the analysis as we talk about FTTH as the cornerstone of next generation networks (NGN) something traditional broadband networks can currently not offer, but might even trying to prevent…. The fourth point omitted by CPB is important for municipalities intending to invest in FTTH networks. As first experiences in the US show these new networks are not in the same markets as traditional (cable and telecom) operators but they serve different market segments.

If we take all these criticisms into account what remains of the initial report? Probably not the conclusions, even if the 130 page document looks like a solid theoretical piece of analysis. Furthermore I am personally interested in an empirical analysis of the network effects of broadband networks, a part of the report which is currently considered as confidential (why?). Another issue which is interesting to look at is the role of geographical markets in the analysis. Why is the relevant geographical market always the Netherlands, maybe we find evidence of (joint) dominance in areas which are much narrower defined? A test based on postcodes (as CBP uses in its report) can give some indication about dominance issues but I am sure if we disentangle the provision of broadband access and internet access and a look at linkages between the companies providing broadband access and internet access a totally different picture might emerge.

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