Wall Street Journal 02.19.03

Broadband's Narrow Minds

By George Gilder

At the Federal Communications Commission these days, Commissioner Michael Powell and his one-time protege Kevin Martin have introduced a new slogan: "What, me worry?" While the communications sector suffers though a crisis of stifling overregulation, the commission seems ready to accept an outbreak of litigious new rules at the state and local levels.

As the FCC prepares to meet again later this week, the telecom industry's woes are jeopardizing the future of the U.S. economy. Since the March 2000 peak, telecom has seen a $1 trillion loss in market cap among 17 companies, not to mention another thousand related bankruptcies. But worse is how the complacence will play out internationally. If we continue along our current path we will surrender U.S. leadership in communications technology to beleaguered South Korea and to China, supposedly still a developing country.

In the global technology arena where economic and military power is determined, leadership can change in a matter of months. Just three years ago, the U.S. was overwhelmingly dominant in communications technology and deployment. All the leading-edge optical companies were based in the U.S. or Canada and the Internet was overwhelmingly an American phenomenon. Today, the U.S. is falling precipitously behind. Although damage to the U.S. economy is measured in trillions of dollars, the competitive losses are far more portentous. While politicians still talk of a telecom bubble, Chinese, Japanese, and Korean companies are fulfilling the business plans of U.S. firms that were driven out of business by the regulators.

Washington sages who prattle that there is little market for broadband should contemplate South Korea. Not only does it lead the world in wireless technology and deployment, but it boasts broadband penetration of some 70% of households. Amid many alibis and excuses, some in the U.S. industry claim that broadband penetration of 20% of households -- "the fastest for any new electronic product" -- is impressive. But real broadband of the sort South Korea deploys for $33 per month runs at a pace of eight megabits per second. This is about ten times as fast as our DSL and cable modems.

Average South Korean service is fast enough to stream a high resolution HDTV image two ways onto a computer screen. Even South Korean mobile wireless connections outperform most U.S. DSL. By Asian standards, the U.S. has virtually no residential broadband at all.

China now has as many wireless subscribers as the U.S. and is moving ahead to advanced technologies far faster. It has reduced Cisco Systems, the leading U.S. vendor of communications gear, to calling in the lawyers in an effort to defend obsolescent intellectual property rather than competing through continued innovation on the frontiers of optics. Taiwan has meanwhile become the world's leading independent manufacturer of microchips and is now investing nearly a billion dollars in facilities on the mainland. Japan and Singapore are nipping at South Korea's heels.

Much of the problem on Washington's end is the lawyers and lobbyists called forth by the Clinton administration's million-word re-regulation of telecom in 1996. But the Bush administration can stop it, if they can get past the notion that telecom disputes are special-interest pettifoggery between long-distance and local rather than the expression of huge changes in the industry that make all such categories irrelevant.

Cable, satellite, and telco rivals have made the local loop one of the most "competitive" arenas in the entire economy. But the regulation of every price and connection assures that no one can win or make any money. Investment has halted in its tracks, devastating the advanced optics and network equipment suppliers.

In an era when it costs no more to call across the continent than to call across the street, a states-rights pricing system is an egregious absurdity. Improving potential cost effectiveness at a rate of some six-fold every year, telecom can no longer prosper in a political tug-of-law among fractious state commissions plus scores of fee-chasing mayors, and a menagerie of anti-trust beadles and regulatory vandals in the Federal government.

It's not a stretch to suggest that the technology crisis now jeopardizes national security. If Mr. Bush were to advocate a new law deregulating all broadband services, the decisive change toward deregulation could ignite the stock market and revive the kind of Internet revolution that makes sense. America's largest recent contribution to the global economy, the Web can still spearhead a more robust, secure and profitable communications infrastructure.

Telecom was never really a bubble since it was in the process of improving its cost effectiveness by a factor of 11,000 in six years to accommodate a 4,000-fold rise in Internet traffic during that period.

But all this bandwidth is useless if it is not connected to homes and offices. Deployed through the world economy and extended to final users, optical wavelength technology can still unleash the boom in broadband video teleconferencing, education, and entertainment anticipated by the stock market during the late 1990s. But to fulfill this promise, Washington can no longer treat the industry as a political cash cow or plaything. The industry's customers and shareholders, and the nation's economy, deserve better. So does the president who appointed Kevin Martin.