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Don’t Ruin the Internet Revival

With deflation under control and President Bush’s supply-side tax cuts taking hold, the case for a U.S. economic comeback gets stronger every day. But the conventional wisdom is that two of our most important and hardest hit sectors, technology and telecom, have so much capacity and so little confidence that it will be many years before they return to health. With telecom investment down 75% since 2000, economy-wide fixed investment down nine of the last ten quarters, more than 1,000 telecom bankruptcies, a nine-year low in venture capital investments, and a 28-year low in initial public offerings, it will take time to climb out of the deep technology hole.

There is new evidence, however, that we are climbing faster than most people think.

Despite the Federal Communications Commission’s best efforts, the cable TV and Bell telephone companies signed up 1.9 million new residential broadband users in the first quarter of the year, bringing the total to 19 million. Then in May three of the Bell telephone companies announced an agreement on new standards for extending high capacity optical fiber closer to homes and businesses. By now we should be passing Peter Huber’s “tipping point” of 20 million broadband connections—a rough projection of critical mass that will spark the next flurry of innovation on the Net.

Just last week, Microsoft and Apple each introduced new products that add voice and video capabilities to their popular “instant messaging” applications. The offerings are somewhat crude today, but they promise to turn computers into fully capable video-phones. Already, companies like Avistar offer advanced PC-based video-conferencing with TV-quality sound and video. Microsoft has spent an estimated $500 million building out its online gaming infrastructure. Its Xbox Live network, which now boasts 550,000 subscribers after seven months of operation, and Sony’s Playstation network let teenagers and teenagers-at-heart play basketball, race cars, and hunt for three-dimensional terrorists with virtual rivals across town or across the globe. Madden 2004 football, hitting the Net this fall, is the most highly anticipated collaborative game yet.

Soon inexpensive but high-resolution “webcams,” built with cheap digital video chips from Foveon, will proliferate to every PC, laptop, Xbox, PlayStation, plasma screen, mobile phone, PDA, kiosk, ATM, conference room, operating room, building entrance, security check-point, baby nursery, auto dash and auto bumper. Ubiquitous digital cameras will cover most angles of most amateur athletic, educational, theatrical, and family events. Previously unworthy of being professionally filmed by cameramen using conventional video systems, these events will now be cheaply captured, wirelessly forwarded, and then narrowcast, broadcast, and archived. Full-motion Macromedia “Flash” animations increasingly will replace static web pages. The phenomenon of informal, real-time journalism known as “blogging” will morph into video-blogging.

Making use of new analog chip technologies, sensory networks will monitor sensitive facilities like oil pipelines and report all manner of data from remote scientific experiments. You can already visually check the surfing conditions at most of your favorite beaches thousands of miles away. Sensing the new visual orientation of the Net, Google increasingly focuses on the difficult task of finding and sorting images.

Growing broadband penetration, along with new rich media applications, will mean not 500 channels of programmed TV but billions of channels of personalized video, crisscrossing the Net in real-time and lag-time, offering each of us a time- and space-defying sixth sense that might be termed true “tele-vision.”

High quality video, however, needs at least a thousand times more bandwidth than voice or text, requiring robust broadband links, like those in South Korea, where connections to 70% of homes are, on average, some ten times faster than those in the U.S. In Korea, high-definition movies and educational videos over the Net are a reality, while exchanging mere still-photos in the U.S. often results in frustrating waits and return-to-sender messages. When instant messaging, e-mail, and simple websites graduate to video-mail and full-motion news and entertainment, the result will be a new surge of Internet traffic that the current network cannot accommodate.

A new analysis by my colleagues George Gilder and Charlie Burger shows how such an Internet traffic spike would benefit America’s technology industries. In 1995 and 1996, the introduction of the Netscape web browser and the popularization of e-mail caused Internet traffic to leap a hundredfold over two years, spawning the late-90s boom in everything from chips, optics, servers, and network software to e-commerce and the multitude of dot-coms. This data traffic spike occurred before either wired or wireless broadband emerged. Over the next seven years Internet traffic growth slowed to “just” 100% per year. But now, the tipping point of broadband use and new inexpensive camera technologies are making investments in rich-media applications and services a reasonable bet.

In just the last two years, moreover, some 20 million “Wi-Fi” wireless network hubs have been sold, extending the reach and usefulness of broadband landlines in homes, businesses, and public spaces. Real 3G wireless phone networks from Verizon and Sprint are now operational as well.

In June 2003, traffic on the major U.S. Internet backbones was about 175 petabytes (10 to the 15th) per month. Another discontinuity like that of the mid-90s—but this time unleashed by far more bandwidth-hungry devices and applications—would jolt the Internet by requiring enough capacity to handle 25 exabytes (25,000 petabytes) per month by December 2005. Literally hundreds of new optical networks would have to be built across the major U.S. routes alone. With the nation’s “metro networks” carrying some four times the traffic of the backbone networks, millions of new “edge” routers and tens of millions of new computers and data storage devices would be needed to transmit and store some 100 exabytes per month. Companies like Corvis, Essex, EZchip, Avanex, Synaptics, and National Semiconductor, as well as the dominant networking and storage players, would benefit.

Not even FCC Commissioner Kevin Martin can stop this second coming of the Internet. But he can slow it down. Next week the FCC will issue a split decision on telecom deregulation. After seven long years following the passage of the 1996 Telecom Act, it will finally overturn some of the key legal obstacles that blocked deployment of broadband Internet connections and helped cause the three-year technology depression. Newly constructed broadband links will now be free from the pernicious poaching of rivals who never took the technical or financial risk of investing in their own infrastructure.

Unfortunately, the political price for this first step toward deregulation of broadband data networks is the massive re-re-regulation of the nation’s voice networks. Only Washington lawyers are so adept at snatching defeat from the jaws of victory. The decision likely will confer broad new powers on the zealous New Deal lawyers of the 51 state utility commissions. But federal appeals courts have already overturned similar FCC attempts at re-re-regulation—not once but twice. With the telecom realm already an attorney’s godsend, continued legal wrangling could delay for several years the hundreds of billions of dollars of new telecom investment that will be needed to consummate the new video-friendly Net.

At a time when the once-distinct voice and data networks are merging, when it costs no more to call across country than across the street, and when mobile phones and “Internet phones” are replacing numerous landlines, thus eating into incumbent telephone company market share, the re-re-regulation of voice is an inexplicable black mark on what should be an Internet revival.

A quick legal reversal of the new Martin regime would assure telecom companies and investors that it will never become law and that lawyers at the 51 state commissions will not be given further charge over the telecosm. Then the FCC can get on with the more important business of completing the deregulation of broadband and devising a new “smart-radio” paradigm for wireless spectrum.

Bret Swanson is executive editor of the Gilder Technology Report and a senior fellow at Seattle’s Discovery Institute. He is writing a book with George Gilder on technology and the world economy. An adapted version of this article originally appeared in the Wall Street Journal.

Bret Swanson

Bret Swanson is a Senior Fellow at Seattle's Discovery Institute, where he researches technology and economics and contributes to the Disco-Tech blog. He is currently writing a book on the abundance of the world economy, focusing on the Chinese boom and developing a new concept linking economics and information theory. Swanson writes frequently for the editorial page of The Wall Street Journal on topics ranging from broadband communications to monetary policy.