Making Broadband Bloom

George Gilder
Business 2.0
September 1, 2003
Print ArticleContent, some say, is king. Well, I am discontent.

At the moment, struggling with RealPlayer and RealOne, I conclude that streaming video does not work. What passes for broadband in the United States -- 200 to 800 kilobits per second -- simply cannot handle video.

The paucity of video education and entertainment on the Net thwarts the "life after television" running on "worldwide webs of glass and light" that I celebrated 13 years ago. All the riches of education, culture, sports, and religion promised for decades depend on robust, reliable, jitter-free broadband. When true broadband is deployed to homes and businesses, network traffic will lurch up again by a factor of thousands, and the technology depression will end in a new boom.

But before we'll see a new boom, the United States must overhaul its tax and regulatory policies. For years Washington has pummeled telecommunications with the heaviest taxes of any sector save tobacco and alcohol. MIT economist Jerry Hausman estimates that U.S. taxes on wireless telecom services alone average about 18 percent, which so distorts the markets that service providers lose $3 in revenue for every $1 collected by the government.

This industry assault dates to the micromanaged spectrum auctions of the mid-1990s, which not only extracted some $30 billion from telecom but also required a ridiculous seven competitive carriers in every region. Capping it off was the botched telecom "deregulations" act of 1996, which preserved the obsolete distinction between local and long-distance service, placed byzantine price controls on the communications system, and has been subject to near-constant revision by the courts and the Federal Communications Commission ever since. In other words, at the worst possible time, just as a new global Internet infrastructure was being built and financed, the United States reregulated the communications industry. As a result, whether you're AT&T (T), SBC Communications (SBC), or Verizon (VZ), today you have regulators in all 50 states subjecting you to different rules and taxes. If you are deploying facilities to compete with these giants, you find your investment devalued by the price-controlled lines that the telecoms are required to provide.

While Washington punished telecom, capital and technology moved to Asia, where they found a more hospitable environment. Without crushing regulatory restrictions or taxes to hold back development, South Korea has become the world-class broadband center that the United States should have been. It has a thriving tech stock market, a profitable telecom sector, and at least 20 times more per capita bandwidth than the United States. Americans pay about $40 a month for well less than 1 megabit per second. Koreans pay $25 a month for 6 to 8 megabits per second. In addition, for only slightly higher prices, Koreans already have 1 million very high-speed digital subscriber lines running at 13 to 20 megabits per second, and deployment of some 2 million new links of 50 megabits per second is planned for the next 12 months.

While the United States has supplied a meager form of broadband to some 20 million households (around 20 percent of the U.S. total), Korea has connected real multimegabit pipes to nearly 11 million households (73 percent of the Korean total). Koreans now run a third of their economy through the Net. They perform 70 percent of their stock trades and close to half of all banking transactions online, and they place and fill retail orders for everything from groceries to furniture. With broadband to the majority of homes and cell phones, the dotcom dream has triumphed in Korea.

The Koreans accomplished this in just three years. Yes, their population is concentrated in four cities, and half of all Koreans live in dwellings accessible to fiber optics. But the Korean government has created a favorable environment for communications companies by assigning a single regulatory body and low tax rates.

The Korean example proves that broadband can be robust, popular, and profitable. It also shows that when new broadband connections are deployed, Internet usage in the United States will undergo a surge of traffic comparable to the 100-fold rocket of 1995 and 1996. This explosion ignited a 9,000-fold rise by 2002 and propelled the growth of communications gear in the late '90s.

With communications technology doubling its cost-effectiveness annually and Internet traffic increasing by a factor of thousands every few years, the only feasible strategy for Congress, the FCC, and the courts is to get out of the way. By deregulating broadband as the prime avenue of interstate commerce, untouchable by state regulators, Congress can ignite a new boom even more far-reaching than the first Internet boom. But by continuing current policy, the United States will see its economic leadership, and then its military dominance, pass inexorably to Asia. It's our choice.

George Gilder is a senior fellow at Seattle's Discovery Institute.