Chart 1 - Broadband vs. Narrowband

The essence of the case for competition is the impossibility of predicting most of its consequences. The superiority of the competitive market is the positive stimuli it provides for constantly improving efficiency, innovating, and offering consumers diversity of choice.1

During the past decade, the explosive growth in the Internet has transformed the lives of millions of individuals at home and work and has dramatically altered the business landscape in ways that were unimaginable just 20 or even 10 years ago. The proliferation of e-mail addresses, personalized web pages, and online transactions are only a few of the many exciting changes that have become part of our "cyber-culture" as we approach the new millennium.

The market for Internet access is competitive today and is likely to remain so in the future. Government intervention in the form of forced access is a counterproductive policy that will only harm consumers in the end.

The Internet has unquestionably created many benefits for its users; however, there is growing concern among some that the marketplace will be unable to sustain competitive, affordable access to the Internet in many communities around the United States, including Michigan. Some form of government intervention, they argue, will be necessary to guarantee that everyone is "wired" in the future.

 

Broadband Internet Access Is Revolutionizing Telecommunications

Concerns about the market's ability to maintain competitive Internet access are fueled in large part by the emergence of new "broadband" technology, which is being widely deployed across the United States by large cable television service providers. Proponents of government intervention argue that cable companies' head start in the emerging broadband market constitutes a threat to competition in the Internet access market as a whole.

What is this new broadband technology? There are several ways to characterize broadband, but two features are important for understanding why broadband will likely have a significant impact on how the Internet evolves over the next decade. The first feature, according to policy analyst David B. Kopel, is that a single medium can carry multiple channels in a broadband transmission but only one channel in a "narrowband" transmission.2 For example, a cable line (broadband) can carry multiple video programming channels while an ordinary telephone line (narrowband, or dial-up, technology which many consumers use to connect to the Internet) can carry only one voice channel. The second important feature of broadband is the tremendously faster access speed it offers. In a recent report that evaluates the impact of broadband technology on the market for Internet access, the Federal Communications Commission (FCC) describes broadband as a "technology that will allow users to access the Internet and Internet-related services at speeds significantly higher than traditional narrowband modems allow." 3

Table 1 - Rapid Increase

If one compares broadband's two features of enhanced bandwidth capacity and speed to those same features associated with the more common narrowband technology, it is clear that broadband is a superior technology and is likely to have a significant impact in the marketplace. Cable Datacom News, for example, estimates that more than one million customers have already subscribed to cable broadband service here in the United States and Canada.4 Indeed, the number of Internet users using cable broadband technology is projected to grow from under 10 percent of the market in 1999 to almost 40 percent by 2005 (see Chart 1, next page). By contrast, the number of Internet users using the traditional narrowband technology is projected to fall from close to 100 percent in 1999 to 50 percent by 2005.5 If these projections actually materialize, the potential shift in market share could result in a substantial loss in profitability for many independent Internet Service Providers (ISPs), who provide their customers access service using the dial-up narrowband technology. It should be no surprise, then, that it is the independent ISPs who are most concerned with the potential growth in broadband technology.

 

Broadband Technology Threatens the Telephone Monopoly

A possible source of the concern over competition in the telecommunications marketplace is the local telephone companies' fear that cable's new broadband technology will allow cable firms to compete in traditional local telephone service markets. In addition to bandwidth capacity and access speed, the other feature associated with cable's broadband technology is that it will accommodate two-way transmission of voice signals. This means that cable firms can offer telephone service along with other services like video programming and Internet access service to their customers and can seriously challenge the telephone companies' monopoly position in the residential segment of many local telephone markets across the United States.6

Recognizing the potential for real competition from cable firms, local telephone companies have begun to roll out their own broadband technology as well. Table 1, next page, shows that the Regional Bell Operating Companies (RBOCs) and GTE already doubled their number of lines with broadband capability between 1998 and 1999.

 

The OpenNet Coalition Argues for Government Intervention in the Internet Access Market

Recently, major Internet service companies America OnLine (AOL) and MindSpring Enterprises joined with a number of independent ISPs, telecommunications firms, and "consumer advocacy" groups to form a new lobbying organization called the "OpenNet" coalition. OpenNet wishes to persuade federal, state, and local regulators to force cable companies to provide "open" access to their broadband technology (commonly referred to as the broadband pipe), so that independent (dial-up) ISPs can also offer broadband services to their customers.

The OpenNet coalition's formal position has not yet been fully disclosed for evaluation, but its argument for "open"—or more properly, forced—access would allow independent ISPs to offer broadband Internet access to any residential and business customers within a cable firm's service area.7 OpenNet's position relies on two claims. First, OpenNet argues that if all ISPs are not permitted access to the cable system's broadband pipe, cable ISPs will monopolize consumer access to the Internet. Second, the coalition maintains that the cable firms' potential control over broadband technology threatens the open nature of the Internet and may even allow cable firms to control the content provided to Internet users.

Local cable franchise authorities in Portland, Oregon; Broward County, Florida; and Fairfax, Virginia, have responded to OpenNet's arguments by requiring cable firms in their respective jurisdictions to provide nondiscriminatory broadband access to all independent ISPs.8 AT&T, Time Warner, and several other cable firms have contested these requirements on legal grounds and the U. S. Supreme Court is likely to rule on this important legal battle by the end of this year.

In Michigan, the forced-access issue has surfaced with legislation in the state Senate that would require any cable or other firm that offers wireline, broadband Internet access service to "provide any other requesting Internet service provider access to its broadband Internet access transport services, unbundled from the provision of content, on rates, terms, and conditions that are at least as favorable as those on which it provides the access to itself, to its affiliate, or to any other person."9

The sections to follow in this report examine OpenNet's claims and show that the market for Internet access is competitive today and is likely to remain so in the future and that government intervention in the form of forced access is a counterproductive policy that will only harm consumers in the end.