Sunday, January 20, 2008

The Economist on Broadband - Open up those highways

[From the prestigious Economist. I couldn't agree more. Thanks to Dave Macneil for this pointer -- BSA]

Open up those highways

Jan 17th 2008 | TOKYO
>From The Economist print edition

Rapid internet services are a boon. But not all regulators understand them

IN ERAS past, economic success depended on creating networks that could shift people, merchandise and electric power as efficiently and as widely as possible. Today's equivalent is broadband: the high-speed internet service that has become as vital a tool for producers and distributors of goods as it is for people plugging into all the social and cultural opportunities offered by the web.

Easy access to cheap, fast internet services has become a facilitator of economic growth and a measure of economic performance. No wonder, then, that statistics show a surge in broadband use, especially in places that are already prosperous. The OECD, a rich-country club, says the number of subscribers in its 30 members was 221m last June-a 24% leap over a year earlier. But it is not always the most powerful economies that are most wired. In Denmark, the Netherlands and Switzerland, over 30% of inhabitants have broadband. In America, by contrast, the proportion is 22%, only slightly above the OECD average of just under 20%.

In terms of speed, Japan leads the world. Its average advertised download speed is 95 megabits per second. France and Korea are ranked second and third, but are less than half as fast, and the median among OECD countries is not much more than a tenth. America's average speed is supposed to be a bit above the median, but most users find that it isn't, or that the faster speeds are vastly more expensive. A New Yorker who wants the same quality of broadband as a Parisian has to pay around $150 more per month.

What accounts for the differences among rich countries? Two or three years ago demography was often cited: small, densely populated countries were easier to wire up than big, sparsely inhabited ones. But the leaders in broadband usage include Canada, where a tiny population is spread over a vast area. The best explanation, in fact, is that broadband thrives on a mix of competition and active regulation, to ensure an open contest.

A lack of competition-boosting oversight is one reason for the poor record of the United States (and indeed for New Zealand, another unexpected laggard). Most Americans have a choice of only two broadband providers, either a telecoms or a cable operator. This virtual duopoly suits both sorts of provider, and neither has raced to offer its customers faster access. In some American states, prices have risen; in most other countries they have dropped.

In theory, America's 1996 Telecoms Act obliged operators to rent out their lines to rivals; in practice, a regulatory decision and then a court ruling (in 2003 and 2004 respectively) have made it easy for operators to keep competitors out. The supposed aim of these decisions was to force new firms to build their own infrastructure, instead of piggybacking on facilities set up by older outfits. But new entrants have found it hard to join the fray.

In any event, those American rulings may have been based on a faulty idea of how competition works in this area. As Taylor Reynolds, an OECD analyst, puts it, innovation usually comes in steps: newcomers first rent space on an existing network, to build up customers and income. Then they create new and better infrastructure, as and when they need it.

In France, for example, the regulator forced France Télécom to rent out its lines. One small start-up firm benefited from this opportunity and then installed technology that was much faster than any of its rivals'. It won so many customers that other operators had to follow suit. In Canada, too, the regulator mandated line- sharing, and provinces subsidised trunk lines from which smaller operators could lease capacity to provide service.

In South Korea, where half the population lives in flats, each block owns its own internal cabling and allows rival operators to put their equipment in the basement; each tenant then chooses which to use. In Japan, politicians put pressure on the dominant operator, NTT, to connect people's homes by high-speed fibre lines. And this week the communications ministry indicated that it will make NTT open those fibre connections to rivals.

As broadband grows more popular, the political mood may change in many countries. At present, consumers are often misled by the speeds that operators promise to deliver. Soon regulators can expect to face pressure to ensure truth in advertising, as well as to promote easier access.

Pressure will also come to correct another problem: most operators cap the amount of traffic users may send and receive each month, and nearly all provide far less speed for sending than for receiving. In other words, broadband doesn't really offer a two- way street. This will matter more as users turn into creators of content, from videos to blogs, and ask to be treated with due respect.