INTRODUCTION AND SUMMARY
Today, there are four main technologies used to provide broadband services to mass-market consumers: cable modem, digital subscriber line (DSL), satellite, and fixed terrestrial wireless. Each of these technologies is backed by significant industry players. Cable modem service is being deployed widely by each of the nation’s largest cable operators, which serve nearly 70 percent of U.S. homes. DSL is being deployed by each of the incumbent LECs, plus numerous CLECs including AT&T, WorldCom, and Covad. The nation’s two largest DBS providers – Hughes and EchoStar – have both deployed two-way broadband satellite services. WorldCom and Sprint are two of the largest owners of fixed wireless spectrum.
Both consumers and providers view each of the various broadband services as interchangeable. Indeed, each of these services offers the same functionality, and is used primarily for high-speed Internet access. Moreover, these services – with the possible exception of satellite – are generally priced at the same levels. Satellite is newer than the other broadband services, however, and the price for two-way broadband service has already begun to decline.
Two or more of the main broadband technologies are frequently available in the same geographic areas. For example, analysts estimate that approximately three-quarters of all homes with access to DSL also have access to cable modem service, and that approximately one-third of all U.S. households currently have access to both cable modem and DSL service. Broadband satellite service is available to almost all U.S. homes.
For all these reasons, the provision of broadband services has all the makings of a fully competitive market. Nonetheless, cable is the clear leader in the broadband market today, by a wide and growing margin. As of September 2001, there were 6.2 million cable modem subscribers in the U.S., compared to 2.8 million residential DSL subscribers, and approximately 100,000 broadband satellite and fixed wireless subscribers. And cable not only has a large lead already, but also continues to add new subscribers at a faster rate than competing broadband technologies. See Figure A.
Although DSL is an attractive technology with which telephone companies can enter the broadband business, ILECs will need to make significant additional investments in their networks in order to provide ubiquitous broadband over the long term. This will likely involve replacing a great deal of the copper distribution plant with fiber optics. The current regulatory environment greatly reduces the incentive to make these upgrades, however. Although ILECs are minority players in the broadband market, both ILEC retail and wholesale broadband services are heavily regulated, while the ILECs’ main broadband competitors (including cable) operate without any such restrictions.
While there still are significant regulatory obstacles to broadband deployment, recent trends indicate that the need to spur such deployment is more urgent than ever. It has been nearly five years since the first commercial deployment of mass-market broadband service. Since that time, there has been limited penetration of broadband. Today, there are only 9 million residential broadband subscribers, which represents about 9 percent of all U.S. homes. And in the first half of this year, the growth of new broadband subscribers began to decline for the first time. See Figure B.
It is not unusual for a new technology to grow this slowly; many new technologies evolve in a so-called “S-curve”: a long period of slow growth, followed by a relatively short period of steep growth, followed by additional slow growth as the market approaches saturation. It is widely accepted that broadband will, eventually, achieve steep growth. And it also is widely believed that this growth will create enormous consumer benefits, and will greatly stimulate the U.S. economy. It is much less settled when this growth and concomitant benefits will actually arrive.
The artificial regulatory deterrents to investment affect the deployment of broadband services not only to residential customers, but to business customers as well. As with residential broadband, business broadband has all the makings of a competitive market. Frame Relay and ATM are the two main business broadband services, and AT&T, WorldCom, and Sprint control more than two thirds of the revenues for these services. Despite such competition, there are widespread concerns that the existing infrastructure is not sufficient to support the rapidly growing demands for bandwidth and that enormous new investment will be required. According to one analyst, $50 billion dollars in new investment will be needed over the next five years in order to prevent U.S. Internet traffic from grinding to a halt.
It is clear from past experience that reducing regulatory obstacles to the deployment of new facilities, and granting equal regulatory treatment to all competing providers of comparable services, greatly increases output. This is exactly what has happened in the wireless industry. As is the case with broadband today, the early years of the wireless industry were characterized by a limited number of competitors, many of which faced extensive regulation that created an uneven competitive playing field. As that industry was deregulated, however, wireless investment, subscribers, and output exploded. And the same thing happened in information services markets. These precedents provide strong evidence that deregulating the nascent, competitive broadband market will boost investment, increase output, and benefit consumers.
I.
RESIDENTIAL
BROADBAND.
A.
Overview of Residential Broadband Alternatives.
There are four main technologies currently being used to provide high-speed Internet access and other broadband services to residential consumers: cable modem, digital subscriber line (DSL), satellite, and fixed terrestrial wireless.
Cable Modem. Cable modem service is provided over cable networks with two-way capabilities.[1] Cable networks pass more than 90 percent of the 105 million households in the U.S.,[2] and approximately three-quarters of all households passed by cable are passed by networks that now have two-way capabilities.[3] Most two-way cable networks are being used to provide cable modem service.[4] According to analysts, cable modem service is actually being offered today to between 50 and 66 percent of all U.S. homes.[5] The nation’s seven largest cable operators – AT&T Broadband, Time Warner, Comcast, Charter, Cox, Adelphia, and Cablevision, – serve more than 80 percent of all cable subscribers, and approximately 95 percent of all cable modem subscribers.[6]
DSL. DSL is
provided over the existing local telephone network by connecting digital modems
over copper loops to the central office, and then ensuring that those loops are
free from various electronics (e.g., load coils) that are needed for
voice service but that inhibit the provision of data services.[7] DSL service can be provided at high speeds
only on loops that are 18,000 feet or shorter,[8]
which means that “only about two-thirds of U.S. homes are easily addressable
for xDSL.”[9] At present, DSL is actually available to only
about 40 percent of U.S. homes.[10] Each of the major incumbent LECs provides
DSL service, as do several CLECs.[11] Approximately
80 percent of the DSL subscribers served by the ILECs (and 74 percent of all
DSL subscribers) are residences, whereas 40 percent of the DSL subscribers
served by CLECs are residences.[12]
Satellite. Broadband satellite services are provided using the same constellation of Direct Broadcast Satellites (DBS) that currently provide video services to more than 17 million subscribers.[13] These geostationary satellites operate in the Ku-band and have broad geographic footprints that enable them to provide service to virtually all U.S. homes.[14] Until recently, the only high-speed satellite services available used a narrowband telephone line as the upstream return path.[15] In late 2000, two satellite providers – StarBand[16] and Hughes – began providing two-way broadband services.[17] WorldCom will begin offering satellite-delivered, two-way broadband services to business customers in January 2002 by rebranding Hughes’s DirecWay service.[18] In the next few years, several additional two-way broadband satellite services using the Ka-band are expected to become available.[19]
Fixed Terrestrial Wireless. Fixed wireless uses high-frequency spectrum to transmit data (and voice) signals to a stationary transceiver up to several miles away.[20] The main fixed wireless services provided to residential customers use Microwave Multipoint Distribution System (“MMDS”), which uses spectrum in the 2 GHz band.[21] WorldCom and Sprint “own most MMDS spectrum in the United States,” and “have commercially deployed MMDS in a handful of markets.”[22] Several companies also plan to offer residential broadband services using unlicensed spectrum bands, including the 2.45 GHz Industrial-Scientific-Medical (ISM) band and the 5.8 GHz Unlicensed National Information Infrastructure (UNII) band.[23]
B.
There is Head-to-Head Competition Between the
Residential Broadband Alternatives.
In determining whether two or more services compete, both the FCC and the Department of Justice focus exclusively on whether those services are substitutes from a demand-side (i.e., consumer) perspective.[24] In analyzing whether two or more services are demand substitutes, courts and the FCC have considered various factors, including whether the services are functionally similar;[25] whether they are viewed as substitutes by consumers and providers;[26] and whether they are priced similarly.[27] Applying those criteria here, it is clear that cable modem, DSL, fixed wireless, and satellite service all compete directly with one another where those services are available in the same geographic area.
First, each of these four services is functionally similar.[28] Each is used primarily for Internet access; each can be used with an ordinary personal computer, with a modest hardware addition; each provides an always-on connection, at comparable speeds; and unlike traditional dial-up connections, each enables consumers to use their ordinary telephone line for voice or fax while simultaneously accessing the Internet.[29]
|
Table 1.
Functional Similarity of Residential Broadband Services |
||||||||
|
|
“Always
On” |
Downstream
Speed |
Upstream Speed |
Required Hardware (in addition to PC and Ethernet Card) |
||||
|
|
|
Min. |
Max. |
Typical |
Min. |
Max. |
Typical |
|