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Testimony on Regulating Cable Broadband Services

Before the
Federal Communications Commission
May 25, 1999

Comments of Charles Eldering
Adjunct Fellow, The Progress & Freedom Foundation

On behalf of the Progress & Freedom Foundation and its members I would like to thank you for having me here today. In my comments I would like to look at the question of further regulation in the cable Internet services by examining the status of cable modem rollouts vs. the deployment of digital subscriber line (DSL) modems, and how we think high-speed Internet services can be best brought to all Americans in a timely manner. From the Commission’s own studies it is very clear that cable modems are the best bet for the consumer today in terms of obtaining advanced telecommunications services, and in particular high speed Internet access which can support a wide variety of entertainment, informational, educational, and e-commerce applications. With 350,000 cable modems deployed, as opposed to approximately 25,000 ADSL modems (a ratio of 15 to 1) it is clear that "something good" is happening for consumers, and that that "something good" is cable modems.

Simply stated, government regulation is at a minimum with respect to cable Internet services, thus enabling the cable industry to lay pipes that will continue to fuel the robust economic growth that we enjoy today. That growth has come about largely as a result of the penetration of personal computers in both businesses and residences – and can continue only to the extent that those computers have broadband pipes to be connected to. We believe that the key to success is to continue to abstain from regulation in the area of cable Internet services, and to extend the Internet driven "regulation free zone" to include advanced services and equipment deployed by Incumbent Local Exchange Carriers while simultaneously insuring that entrants have access to twisted wire pairs, and that adequate spectrum is also available. Only by creating a competitive environment between cable operators, ILECs, CLECs, and wireless operators, can Americans be assured that they will have access to high-speed Internet based services in a reasonable and timely manner.

To make my point I would like to look briefly at the economic and technical aspects of both cable modems and digital subscriber line systems.

To deploy cable modems a cable operator must have a two-way cable plant: able to both send data from the subscriber to a head-end as well as from the head-end to the subscriber. Two-way cable systems have been in existence for some time, but making two-way services robust is challenging because the cable plant is shared on the upstream and acts as a noise funnel, with unwanted signals from all homes accumulating on the way to the receiving point. In addition, the bandwidth in the upstream is fairly limited. In the downstream the plant is shared, so as additional subscribers for Internet services are added, additional multiplexers are required.

My point here is quite simple: cable can be a challenging technical environment, but the challenges can be met by investment. In the case of cable modems, when the penetration rate gets high enough, the operator will necessarily reduce the number of subscribers on a return path segment by reducing the "node size" as we refer to it, and adding additional multiplexers at the head end. It is also clear that cable operators are making sufficient investment to handle the relatively low penetration rates for Internet services today. Will they continue to have the incentive to deploy equipment and extend cable modems beyond the relatively affluent and highly educated early adopters? If and only if their businesses remain unregulated.

How do we know that regulation will have detrimental effects – just look at the DSL industry. DSL technology is extremely advanced, and equipment is available that can deliver data rates exceeding 1.5 Mb/s over 12,000 ft, and data at 25 Mb/s over 3,000 ft of conventional twisted wire pairs. Incumbent Local Exchange Carriers can add DSL to existing twisted wire pairs, and although conditioning of lines is required, the investments to achieve modest penetrations of service are reasonable – or perhaps they would be reasonable if the business plans provided a clear path for the recovery of the investment. Unfortunately, ILECs are faced with regulatory barriers and regulatory uncertainty with respect to how their broadband services will operate. I think the disparity between deployed cable modems and deployed DSL modems is related to the regulatory disparity between the cable and telco worlds. To force cable Internet services into a telco type regulatory structure – one which we speak of abolishing – will only serve to throw water on the embers of residential broadband Internet service.

At high penetration rates, DSL systems will require extensive fiber build-outs in order to reduce the distance that data is transmitted over twisted wire pairs. Just as in cable, these hurdles can be overcome with investment. Unlike cable however, it is not clear that we have recognized the impediments that regulation poses to the investments which will be required to bring advanced telecommunication services to all Americans. Fiber build-outs and deployment of DSL technologies at significant penetrations will require significant investments on the part of the Incumbent Local Exchange Carriers.

I believe that the risk of government inaction in creating an Internet based regulation free zone as applied to ILECs is that we will not only forestall investment by ILECs in DSL ready infrastructure, but that we will create a situation in which cable rolls out services at a rate which is suitable for them, but not necessarily commensurate with the demand. Clearly, with the momentum which is gathering behind cable consumers would benefit from other sources of broadband services. Opening cable systems will not provide such an incentive, but will simply create a complex, and unworkable regulatory system which is only capable of decreasing the incentives on the part of the owners of cable plants to invest in their infrastructure.

Clearly, leaving cable to execute an Internet based strategy on closed systems entails risk to the consumer, particularly if competition between cable operators, ILECs, CLECs, and wireless companies does not develop. Nevertheless, in our opinion, the risks of unbundling cable and creating an investment-deterring regulatory system for cable which parallels the telco situation far outweighs the risks which go along with leaving data over cable unregulated. Additionally, antitrust laws are in place and can be utilized to protect the consumer – when and if necessary. Prophylactic regulation is not a solution.

In conclusion, I would ask the Commission to consider, as we move forward, not as to whether we should regulate Internet based services such as Internet over cable, but whether we can effectively regulate these services without strangling Internet based economic growth. I think the answer is no.



The Progress & Freedom Foundation