Who has a Better Plan?

By Randolph J. May
Special to The National Law Journal
Monday, October 11, 2004

The vitality of the communications industry is important to the well-being of the overall economy. But with this year's presidential campaign dominated by debates on war and national security, it is not surprising that communications policy is rarely mentioned.

To the extent that the candidates address communications policy at all, both trumpet universal broadband availability as their key objective. Though they have said little, it is possible to discern a meaningful difference in regulatory perspective.

Senator John Kerry emphasizes tax incentives, advocating a 10% tax credit for companies that invest in today's technology in rural and inner-city areas. And he proposes a 20% tax credit for investments anywhere for what he calls next-generation broadband that will make available much faster speeds than those delivered presently by telephone-company-provided DSL and cable-company-provided modem services. Kerry estimates the cost of the tax credits over five years at $2 billion.

President Bush does not mention broadband tax credits, choosing instead, on the tax front, to highlight his opposition to allowing states and localities to tax broadband services. Most significantly, he underscores the relationship between regulation and investment in new networks. For example, in April, Bush stated: "Broadband is going to spread because it's going to make sense for private sector companies to spread it so long as the regulatory burden is reduced-in other words, so long as policy at the government level encourages people to invest, not discourages investment." The Republican platform states that high-speed Internet access should not be governed by regulations established long ago for the telephone.

President Bush's approach represents sounder policy. Tax credits are government subsidies that, like most, are very difficult to terminate once established. Subsidy recipients marshal their political clout to entrench the write-offs. There is no reason to believe-assuming unnecessary regulatory impediments are not placed in the way-that free market policies won't deliver to all Americans the broadband services they demand. Markets direct resources in a way responsive to consumer desires more efficiently than government subsidies can.

The Bush administration fairly may be faulted for not articulating a coherent deregulatory communications policy for its first three years. But at least now the president is urging that outdated public utility-style rules, promulgated in an earlier monopolistic voice-telephony era, be jettisoned. These regulations, which require that the dominant providers share their networks with competitors at below-market rates, inhibit incentives to invest. While these rules currently apply mostly to telephone-company networks, many argue that cable operators should be subject to the same mandates. To its credit, in recent months the Bush administration has sought review of a 9th U.S. Circuit Court of Appeals decision, Brand X Internet Servs. v. FCC, potentially subjecting cable companies' broadband services to rate and sharing regulations. And it rightly refused to seek review of a D.C. Circuit decision, United States Telecom Ass'n v. FCC, which reduced telephone-company regulatory burdens.

Kerry's on the wrong track

While tax credits sometimes might make sense as part of an "infant industry" incubator strategy, the evidence indicates that the credits are not needed for broadband at this time. There are already 30 million broadband connections, with the number growing rapidly.

Federal Communications Commission data indicate there are at least two providers in almost 80% of the nation's Zip codes. Government data also show that more than 80% of the nation's Zip codes with the lowest household income have at least one high-speed provider offering service. And more than 70% of the nation's most sparsely populated Zip codes have broadband subscribers. So even in the poorest and most rural markets, there does not appear to be a market failure that would justify a public-investment approach.

Of course, if the broadband marketplace resembled the monopolistic narrowband one that gave rise to regulation, then Bush's call for eliminating regulatory burdens might not make sense. But it does not. Cable and telephone companies currently compete in many areas, and rapid technological advances should allow wireless and satellite companies to become more significant competitive forces. Other potential entrants, such as power companies, exert competitive pressure from the sidelines by developing newer technologies.

Hopefully, the candidates' very different regulatory philosophies-one relying on less regulation and the other more on government financial support-will usher in a broader debate about the need to update our communications laws with a meaningful set of regulatory reforms appropriate for the digital age.

Randolph J. May is senior fellow and director of communications policy at The Progress & Freedom Foundation in Washington. The views expressed here are his own.

© 2004 The National Law Journal. All rights reserved. This article is reprinted with permission from The National Law Journal.