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Facilities-Based Competition is Working

Readers of this blog are aware that the telephone network is a relic of the past that will someday join the telegraph terminal and the buggy whip in the dustbin of history; the only question is when. For telephone network operators, sooner is better than later because the costs of supporting an archaic network with a dwindling number of users are an unsustainable drag on investment in the up-to-date broadband networks, both mobile and fixed, that have taken its place.

The Investment

AT&T shows what’s at stake in a blog post on two very closely related initiatives, one on the investment side and the other in the regulatory sphere, Building a Network for the 21st Century | AT&T Public Policy Blog.

…we are committing $14 Billion in capital to bring Internet broadband infrastructure – wireline and wireless – to more places over the next three years.  As part of that commitment, we plan to expand our 4G LTE network by an additional 50 million consumers (based on population covered).  And we plan to provide an additional 8.5 million customer locations with our award winning U-verse product that will directly compete with the cable incumbent’s voice, video and broadband offerings.

This $14B investment brings the total annual investment in AT&T’s networks to a very serious level:

We plan to invest on average about $22 billion in capital per year over the next three years. To build that additional infrastructure means that we will be buying 21st century broadband equipment, including laying new fiber and providing faster Internet services to a significant part of our service area.

You can buy a lot of iPhones for that kind of money.

The Policy Experiment

In the same post, AT&T discusses an FCC filing that seeks to establish an “experimental” set of policies for the phase-out, “Petition to Launch a Proceeding Concerning the TDM-to-IP Transition.” The petition discusses a number of the current service rules for the telephone networks (AKA “TDM”) that don’t make as much sense in the mobile/broadband era as they did when initially devised.

For example, Section 214 of the Communications Act (on discontinuation of TDM service) affects the transition to IP, as do Commission rules such as the “Notice of Network  Change Rules” and various aspects of the Universal Service Program that are still TDM-oriented. The filing rounds out a list of obsolete rules with “dialing parity,” “equal access,” and “legacy copper loop” rules that made sense during the immediate breakup of the old AT&T but don’t any more. Generally, they require the maintenance of the old network side-by-side with the new one.

It clearly doesn’t make sense for companies like AT&T to invest to the hilt on mobile/broadband IP networks when they’re unsure what their obligations are to the plain old telephone service (POTS) network, so the regulatory move and the investment move complement each other. It shouldn’t be this way, of course; we’d like for investment and regulatory modernization to proceed independently, but that’s not realistic when they’re so much work to do on the regulatory side to free up capital for the new networks.

No Good Deed Goes Unpunished

The adult elements of the policy world have already praised AT&T for boosting their investment in IP networks: FCC Chairman Julius Genachowski took as a sign that the climate for investment is strong:

“AT&T’s announcement of billions of dollars in new investment in wired and wireless broadband networks is proof positive that the climate for investment and innovation in the U.S. communications sector is healthy. Today’s announcement adds to nearly $200 billion of investment in wireless and wireline broadband networks since 2009, and powerful growth in the Internet economy.”

He also promised to review the petition for regulatory relief, acknowledging the ongoing process at the FCC to modernize regulations:

“AT&T has also filed a petition with the FCC today suggesting issues to consider in our ongoing work to modernize our rules for the evolving communications market. As we review AT&T’s filing, we will focus on the principles that have guided our actions since I became Chairman: driving the virtuous cycle of private investment and innovation in the broadband ecosystem, promoting competition, and protecting consumers.”

That’s not a wildly enthusiastic response, but the FCC’s not a wildly emotional agency, so I’d take that as praise.

On the other side, the coterie of professional Bell network critics were super-critical of both the investment and the request for a policy experiment. According to semi-tech blog Ars Technica, many critics are downright miserable:

“For 100 years we’ve had the idea that everyone has a phone line,” said Susan Crawford, a visiting professor at the Harvard Kennedy School and a telecom law expert. It’s the principle known as “common carriage,” she told Ars.

“Today the general purpose network is a fiber-to-the-home (FTTH). That’s what’s going on in Europe and Asia, but we seem to be abandoning that concept. Instead, we’re allowing private carriers to choose who has to rely on wireless and who gets a wire and who gets what type of wire. The whole system has been turned upside down.”

Crawford, it should be noted, has written a book declaring AT&T and Verizon dead and buried by the cable companies, so the prospect of AT&T improving its service offerings to match cable Internet services in many respects has to upset her. It upends the premise of her book, that we’re in the midst of a cable monopoly for home Internet service from which we can’t escape until government takes over the network construction business (or that’s what I think the book will say, it’s what she’s been arguing in DC for the past three years.)

[Note: The definition of “common carriage” above is incorrect, by the way. The term has broad meaning in transportation as well as in communication, and she seems to be talking about “universal service.” Crawford knows this, so the Ars Tecnica writer has probably misquoted her.]

Ars got a much more amusing quote from the guy who’s pretty much the king of the wild-eyed telco bashers:

Bruce Kushnick, a telecom analyst at NewNetworks, likened AT&T’s move to “extortion.” He argued the $14 billion investment was a quid pro quo to sweeten the move to further deregulation—and he anticipates further lobbying from AT&T to Congress in 2013.

“The letter that they filed says they want to get rid of regulation, and there will be an attack by AT&T and Verizon to get rid of all regulation in Congress probably at the beginning of next year,” he told Ars. “Their goal is to take the letter and to extend it through Congress. What we need is a wireless and wireline to have an open utility, and let customers choose whatever provider and whatever services they want. If we don’t do that, we will fall behind.”

Kushnick maintains that the phone companies have failed to deliver a fiber-to-the-home network they allegedly promised twenty years ago in return for some regulatory relief, which he calls a $300 billion scandal (it used to be $200 billion, but it’s been adjusted for inflation, I think.) Somehow this swindle hasn’t impaired the development of the IP network, if it was promised at all. In any event, I don’t see AT&T arguing for an end to all IP network regulation, and there isn’t that much today in any case.

They certainly are arguing that it’s not productive to import all POTS regulation to the IP world, a position that most people would agree with. It’s simply a fact that a great deal of the regulatory apparatus for POTS doesn’t apply in the IP world because of differences in technology and the existence of meaningful competition in IP-based services.

Crawford’s arguments that the cable companies have secured a permanent victory over the telcos falls on the same assumption. She knows better, because her ideal world is Ethernet over Fiber to the Home, something that doesn’t really exist in the real world today, not even in East Asia or Scandinavia, the areas that come closest to her ideal by offering Passive Optical Networking (PON) over fiber to the basement of many apartment buildings. AT&T promises to build comparable fiber facilities to half the high-density apartments in their service area too. This will put them on parity with the leading nations and with the cable companies in some respects.

Our friends at Public Knowledge, never known for moderate views on Internet regulation, found something to like in the announcement:

“AT&T is to be applauded for investing in its network and breathing new life into DSL and rural wireless. This investment will not only create new jobs and bring broadband to the heartland, it has the potential to revive competition with cable broadband at a time when many had concluded we were doomed to a cable monopoly.

And they naturally turned this around to the subjects of politics and anti-monopoly regulation:

“Last night’s election validated the Obama Administration’s commitment to reviving antitrust and pro-competitive regulation politically. Today’s actions by AT&T validates those policies on Wall St. As we move into a new Administration, we hope that those who genuinely want to grow the economy will finally take this lesson to heart. Protecting competition is not only good for consumers, it’s good business.”

By the relevant standard, that’s high praise.

A Step Closer to Nirvana

All in all, AT&T’s commitment to higher investment in its middle mile, residential, and wireless networks should come as no surprise. From a purely technical standpoint, the residential investment flows from advances in DSL technology that bring per-connection data rates close to 100 Mbps, the so-called “vectoring” option that’s beginning to be rolled out in Europe. When homes are equipped with vectored DSL, they’ll need optical backhaul closer to the home than they needed it with legacy DSL, so investment in optical is essential.

As AT&T upgrades its mobile network from 4G HSPA+ to full-blown LTE and LTE Advanced, copper backhaul has to be replaced with fiber as well, so they may as well kill both birds with one stone. As AT&T isn’t folding its tent anytime soon, the investment in fiber is inevitable, and while it may not have happened when critics such as Crawford and Kushnick may have wanted, it’s happening at the pace with which consumers value high-speed networks, which is actually the correct pace for most purposes.

The best thing about AT&T raising the bar on their services is the response it will surely draw from the cable companies in the residential space and the other mobile service providers in the wireless space. The carriers are at par with handsets now that Apple sells the iPhone through Verizon, Sprint, and several others, so the focus goes back to the network.

Ordinarily, there would be reason for skepticism about the effects that AT&T’s investment would have on the weaker, foreign-owned competitors, Sprint and T-Mobile, but Sprint’s new Japanese owner, Softbank, appears poised to invest in its new toy (pending regulatory approval:)

SoftBank, a Japanese telecommunications and Internet corporation, has confirmed via a press release and a live event in Tokyo the $20.1bn investment that would give SoftBank a 70% ownership of Sprint. The news hit the rumor mill 3 days ago and was pretty much confirmed by CNBC yesterday. The transaction is expected to close in mid-2013 pending regulatory approval.

Roughly $12.1bn will be paid to the shareholders at $7.30 a share and $8bn will be used to “strengthen Sprint’s balance sheet,” grow the network, and perform “strategic investments.”

German-owned T-Mobile is showing signs of life as well, committing to a $4B investment in network modernization:

T-Mobile will invest a total of $4 billion over time into network modernization and LTE deployment. Over the next two years, this represents approximately $1.4 billion in incremental network investment. T-Mobile expects to reach broad deployment of LTE, with service in the vast majority of the top 50 markets and 20 MHz service in 75 percent of the top 25 markets.

This is an exciting time for those of us who love our high-speed IP networks, and a vindication of the American strategy, dating from the Clinton era, of relying on facilities-based competition to spur the development of  such networks.

If this isn’t the kind of activity we want to see, massive investment of private capital to upgrade networks at no expense to taxpayers, I don’t know what IP nirvana would look like. Facilities-based competition made the United States the world leader in LTE, and it’s showing no signs of letting up.

Now what can we do to get some more spectrum freed up?

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