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What the Government's Broadband Plan Means for the Economy


Eliminating market competition will deteriorate that industry.

This week FCC Chairman Julius Genachowski is expected to roll out his broadband plan for Congress. For me, it's just another example of that age-old warning, "I'm from the government and I'm here to help you."

Granted we don't know the details yet, but Genachowski has leaked a number of planks in his platform during a variety of interviews. His objectives include 100 million households with 100 Mbps speeds by 2020.

As is always the case with government overreach, this one is couched in performing "good works" for various allegedly disadvantaged groups. According to Genachowski's metrics we've fallen behind the likes of Korea and Finland in broadband, as if that's the next Olympic sport or something. Rural and underserved markets are at a disadvantage when it comes to job searches, education, health care, etc. due to lack of broadband today. The list goes on and on but it's always the same story. Unfortunately, rather than solve problems, government intervention frequently creates disasters.

Think I'm wrong? Go back to 1992 and look at the changes made to the charters of Fannie Mae (FNM) and Freddie Mac (FRE) as part of the Federal Housing Enterprises Financial Safety and Soundness Act. Congress created an affordable housing mandate to address "underserved [there's that word again] markets and communities." It created annual quotas for conforming mortgages to be purchased by the two government-sponsored enterprises. This may be the one example where government actions created private sector jobs. With the stroke of a pen, thousands of mortgage brokers were needed to market sub-prime loans. And the rest, as they say, is history. But I digress.

As the Wall Street Journal noted in an editorial, more than 90% of our current population has access to broadband today. So apparently what the FCC plans to do is address the 5% to 10% that don't. Strange, during the industrialization of the US in the late 19th and early 20th centuries millions migrated from rural areas to our cities in search of a better job and a better life. Now, you don't have to do anything; the government will bring the benefits to you.

Genachowski doesn't seem to realize or care that for AT&T (T), Verizon (VZ), Comcast (CMCSA), Time Warner (TWX), Clearwire (CLWR), et al, providing service to their customers is a business that needs to make a profit. It is from that profit that future investments are made and those decisions are driven by the economics.

In a recent interview with the Associated Press, Genachowski said, "To me, broadband is an infrastructure challenge that's very akin to what we've faced in the past with telephones and electricity." The important point to note here is that these were highly regulated industries compared to others for reasons that were appropriate at the time.

Does the FCC plan to extend its current regulatory power to encompass "information services" and thereby cast its net over the current service providers? What we'll wind up with is not what Genachowski envisions.

Until its breakup, AT&T (the old one) was a bureaucratic nightmare. On its shelves sat microwave transmission technology as well as cellular technology. Both had been developed at the then-renowned Bell Laboratories. However, because the regulated AT&T was rewarded based upon its capital investments, anything reducing capital intensity (i.e. microwave, cellular) was avoided. That's just the way regulated industries work.

The reason we have the broadband infrastructure we have today is not from government regulation but in spite of it. Back in the early '90s cable companies risked their own capital to create their current data networks. It was a completely new market for cable but the telephone companies tried to fight them through the regulators.

Keep in mind that the telcos had digital subscriber line (DSL) as a broadband alternative and could easily have thrown down the competitive gauntlet. However, those same telcos were in fear that their golden goose, the T-1 business, would be threatened. Hey, when you were charging some firm as much as $10,000 per month for a coast-to-coast T-1 line it can be embarrassing to introduce the poor man's alternative (DSL) that was two to three times faster for 0.5% of the price. Competitive markets sort out these discontinuities, regulators don't.

Allowing Washington to determine the direction of our broadband networks over the next five to 10 years is a huge risk. It's the functional equivalent of walking into a casino prepared for a night's entertainment and dropping your entire wad on one hand of blackjack. You'd be foolish to do such and this is the same principle.

Give me the law of large number with thousands of decisions being made by thousands of individual consumers and we'll get to the correct answer of what works and what doesn't.

Once government regulators get control of some segment of our economy, their sole objective going forward is the perpetuation and expansion of that control. That's why they're rarely the solution and frequently the problem.
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