Executive Summary

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 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.

Specifically, the concern of the intervention advocates focuses around the emergence of new "broadband" technology that allows high-speed access to the Internet—access which can currently be supplied in the form of cable modems by many major cable companies. Traditional telephone-and-modem dial-up Internet Service Providers (ISPs) including America OnLine have joined with other groups to form a coalition that claims cable companies' head start in the emerging broadband market constitutes a threat to competition in the Internet access market as a whole. The coalition is seeking to persuade legislators to adopt an "open access" policy with regard to the new cable broadband technology. This policy would force cable companies to make their high-speed broadband lines available for use by all traditional ISPs on equally favorable terms, hence the policy is best referred to as "forced access."

This report analyzes current market trends and argues that the likely economic consequences of government mandating forced access to the cable companies' broadband technology is higher costs for consumers and no significant increase in the number of Internet access options.

The report is divided into four sections. The first section provides background material on broadband, narrowband, and other technologies available to consumers who wish to access the Internet.

The second section provides a supply and demand analysis to show that the market for Internet access service is competitive, driving producers of broadband and other technologies to make access available at affordable prices to as many customers as possible. The analysis also shows that no specific type of broadband technology offers advantages that would likely make it the dominant technology in the marketplace. Indeed, the diversity of advantages and disadvantages associated with broadband and narrowband technologies—and with the service providers using these technologies—means that consumers will continue to enjoy many options for accessing the Internet.

In the third section, the report argues that implementing a forced-access policy will likely have both short-term and long-term harmful consequences for consumers in Michigan and in other states as well. The short-term harmful consequences of forced access will likely be similar to the "interconnection" problems currently plaguing local telephone markets as a result of Congress's 1996 Telecommunications Act. Despite that act's mandate to make established telephone companies' network facilities available to potential competitors, those established companies still earned 96 percent of all local service revenues in 1998. This kind of scenario is likely to unfold in the Internet access market under a forced-access policy. The long-term harmful consequence is that cable firms are likely to reduce their commitment to developing and deploying broadband technology if they must share the benefits with firms that do not share the costs and risks in making these investments. The effect will be a decrease in the supply of Internet access and, most likely, a higher price that consumers will then have to pay. Consumers will be penalized because there will be fewer alternatives to choose from in the marketplace.

The final section presents two policy recommendations that follow from the economic analysis presented in the previous sections. These recommendations are as follows: First, policy makers should refrain from imposing a forced-access policy on the Internet access market. Forced access removes the benefits of property rights each cable company enjoys when it makes an investment decision to upgrade its facilities to provide broadband Internet access. Furthermore, this transformation of a private property to a common property resource reduces the incentive to make these types of investments in the future. The preferable policy is to let the free market work. Such a policy will promote the best interests of all Michigan citizens by encouraging competition instead of protecting competitors. Dynamic, competitive markets will best serve consumers, with all ISPs having the opportunity to compete in an unregulated environment.

The second recommendation is that Michigan policy makers lead the way in advocating that it is no longer necessary for cable firms to negotiate franchise agreements with local governments. Local governments have been selling cable firms exclusive franchises within specified geographic areas since the early 1960s. Today nearly all cable firms have exclusive franchises in their respective service areas. Nationwide, only 3 percent of 67 million cable subscribers can select from competing cable companies, and they pay higher prices for the cable monopoly. Policy makers should prohibit municipal franchise authorities from using their legal power to require forced access as a quid pro quo for granting franchise agreements, renewals, or transfers to particular firms. Furthermore, eliminating municipal franchise agreements would also remove what many believe is a significant barrier to entry in local cable markets. Eliminating this entry barrier is likely to create additional competition, which would benefit consumers who purchase video programming and Internet access services.