Stop the Broadbandits

George Gilder
The Wall Street Journal
March 4, 2004
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Rare it is in politics and life to get a second chance at a huge opportunity. But by reversing a catastrophic decision of the Federal Communications Commission that has paralyzed America's telecom industry, a U.S. court has given the Bush administration a new chance to escape the blame for killing broadband in the U.S.

Granting the FCC only 60 days to act, the U.S. Court of Appeals for the District of Columbia on Tuesday chastised the "Commission's failure, after eight years, to develop lawful [connection] rules and its apparent unwillingness to adhere to prior judicial rulings." This severe attack on the Bush Administration by a liberal court might seem par for the course. But by throwing out the FCC's rump majority votes a year ago to continue micro-mismanagement of Internet connections and to delegate telecom control to 50 different state public-utilities commissions, the Court has performed a vital service.

The Bush Administration now has a chance to release U.S. technology companies and communications markets from a multi-state schlerosis that is driving Internet leadership, wealth and jobs massively to Asia. New broadband networks cannot spring up across America's local loops overnight. But a bold White House policy to free the Internet from last century's rules -- designed for long-gone monopolies -- would spur the entire telecom and technology sectors to gear up for a new era of optical and wireless networks.

At the root of the dot-com, stock market, IPO, and job debacles was a disastrous Clinton-Gore telecom policy that was ripe for reversal.
In essence, the FCC under Reed Hundt interpreted the supposedly deregulatory Telecom Act of 1996 to re-regulate the last-mile links that give customers access to the networks. Treating the local loop as a sleepytime utility rather than as an arena of constant and tempestuous technological change, Mr. Hundt's FCC controlled every local telecom price and connection. Then it used these powers to force incumbent telcos to share their lines with rivals at capped prices. Privatizing the risks of last-mile investment and socializing the returns, the FCC capped and devalued all investment in new infrastructure and brought deployment of new local-loop facilities to a halt.

The result? The entire U.S. network equipment industry crashed, losing more than 95% of its previous market capitalization. American equipment companies plunged into a desperate struggle for survival through overseas sales, to be achieved largely by outsourcing jobs and investment.

Unfortunately, instead of exploiting the failed policy of its political rivals by changing course, the Bush administration embraced the Clinton-Gore policy and made the telecom crash its own. Compounding the Clinton Administration's errors, President Bush's FCC balkanized local-loop policy among 50 different state public-utilities commissions. The 10,000 members of the communications bar, most of them around K Street in Washington, can give you 10,000 reasons why the local loop should continue as a carnival of litigation and lobbying across the country. But last-mile technological progress has stopped as a result, replaced by pettifoggery and politics. By this time next year, Verizon's 38 million wireless customers will have faster Internet access on their mobile phones than Verizon's wireline customers have to their desktop PCs. Only the most severe regulatory disincentives to invest could have resulted in such an outcome, which defies the laws of physics.

Now within reach for Americans are new telecom applications such as voice-over-the-Internet (VoIP), video conferencing, and rich entertainment and education that have already proven both feasible and popular in Asia. But this democratic diffusion of entrepreneurial power across the Internet cannot happen without broadband connections to homes and businesses. Although by conventional measures the U.S. now ranks 11th among nations in broadband penetration, by Asian standards the U.S. has no household broadband connections at all. South Koreans and Japanese enjoy links some 10-to-50 times faster than our fastest connections to homes, and the Koreans now have 40-times more last-mile bandwidth per capita than the U.S.

Though the Internet is potentially a fountain of innovation and key driver of productivity and employment growth, the current administration has no coherent policy on telecom or technology. President Bush appointed the astute and forward-looking Michael Powell to chair the Federal Communications Commission. But the White House then appointed Kevin Martin to join him as a commissioner, and sat idly by while Mr. Martin sandbagged his own chairman and voted with the Democrats on the decision now thrown out by the Court of Appeals.

Mr. Powell continues to make headway on the edges of telecom policy: The FCC last month took a hands-off approach to voice-over-IP and is making more wireless spectrum available for private use. But on the obvious and key issues affecting the transformation of the nation's copper telephone network into a broadband fiber optic one, the commission has bogged down in politics and corporate subterfuge.

Flawlessly executing one of history's consummate campaigns of political lobby-gagging of rivals, AT&T has blocked Internet advance in the U.S., where both the Internet and fiber optics were invented, largely at Bell Labs. A moribund company long propped up by regulatory contraptions, AT&T has surrounded the White House with highly paid friends-of-George, good Republicans who are sound on most issues, like taxes, but out of their element on telecom and technology. Even the smart and swashbuckling tax-cutter Grover Norquist has lately succumbed to AT&T's mantra of price controls and micro-regulation, urging the White House to oppose a national deregulation of telecom.

While Mr. Hundt now urges an "industrial policy in favor of broadband," the U.S. does not need an industrial policy. It needs to end its anti-industrial policies that punish telecom with higher taxation than on any industry except tobacco and alcohol. Propelled by President Bush's supply-side tax cuts, the economy is improving fast. But in a world where the U.S. is no longer shielded from competition by the socialist failures of its global rivals, our leading industry cannot survive as a political casino.

For the fourth time, the courts have ruled that the FCC has improperly interpreted the telecom law. With the courts once again asking the FCC to liberalize the rules, the White House should make its pro-broadband, anti-price control position loud and clear, and commissioner Kevin Martin should either listen or depart rather than fight on with his Democratic allies as he currently plans to do.

The key to a new regime is a ruling that broadband-real multimegabit links to homes and offices -- not the dribbleware widely available in the U.S. -- is not a telecommunications service to be regulated but a new domain of innovation to be liberated. Although the FCC made a feeble gesture in this direction in its previous ruling, the emancipation of broadband must cover all broadband, not just "green field" projects or "new fiber" or wireless in the high microwave bands. Dissolved must be the entire artificial and litigious distinction between local and long distance communications that assigns the local loop to local regulators and long distance to lobbyists and litigators.

The future will see a fibersphere of all optical networks reaching around the globe and linked to customers by a variety of mostly wireless devices. In this radically simpler and more powerful network architecture, the only locality will be the distance reachable at the velocity of light, not at the speed of politics.


Mr. Gilder, a senior fellow at Seattle's Discovery Institute, is editor of the Gilder Technology Report.