TABLE OF CONTENTS

Executive Summary
Introduction
What is Forced Access?
The Economic and Regulatory Effects of Forced Access
Implementing Forced Access – Federal, State, and Local Dimensions
Recommendation and Conclusion

EXECUTIVE SUMMARY

• If allowed to develop unfettered by government restrictions, the deployment of high-speed Internet technology -- known as broadband -- will bring the World Wide Web to consumers at faster speeds, provide better quality, and allow for new applications that will fundamentally alter the way we work, communicate, and recreate.

• A number of providers, including telephone companies, cable companies, satellite providers, wireless providers, and utilities are forming partnerships across industries and exploring ways to bring broadband to the market. This surge of competition will continue as long as governments do not reduce incentives by forcing businesses to share their property with competitors.

• The Federal Communications Commission (FCC) has decided not to regulate the growth of broadband at this time. However, a number of states and localities has considered legislation that would force cable providers to open their platform to Internet Service Providers (ISPs) at non-discriminatory terms and rates. To date, six states and four major cities have rejected such legislation.

• Portland (OR), Broward County (FL), and Fairfax (VA) have passed forced-access provisions. All three cities are currently in litigation with cable providers over the issue.

• The policy of forced access has not been proven on technical grounds; more troubling are the economic and regulatory effects that would result if policymakers decided to mandate a forced-access provision.

• A policy of forced access would:

1. Stifle innovation by removing economic incentives of tech firms to invest in research and development; cause a deterioration of current high-speed access through cable lines because of the lack of incentives.
2. Promote false competition between middlemen, quashing real competition.
3. Increase prices for consumers by saddling the broadband industry with new and expensive regulations.
4. Foster a digital divide by pricing low-income Americans out of the market and halting innovations that could better bring Internet access to rural areas.

• Access for ISPs should be achieved through competition in the free market, not the political arena. America Online (AOL), formerly a proponent of government-mandated access, realized that the market is the best place to compete, and has merged with cable giant Time Warner.

• AT&T has agreed to open its system to MindSpring, the nation's second largest ISP. AOL informed Congress that it agrees in principle to opening up its lines. We argue that these companies should only do so if the agreements are profitable for them. The market, not politics, should decide the issue of line sharing.

INTRODUCTION

On February 14, 2000, officials at America Online (AOL), the nation's largest Internet Service Provider (ISP), stated that they were ending their lobbying efforts aimed at convincing state and local policymakers to mandate a policy of forced access. Instead of government mandating rules that would force cable operators to open their infrastructure to unaffiliated ISPs, AOL favored an approach based on voluntary solutions.

Two months earlier, AT&T, the nation’s largest cable provider, announced that it had reached an agreement with MindSpring Inc. that would allow the ISP access to the vast cable holdings AT&T gained in its acquisition of TCI. The agreement would begin in 2002, when AT&T's exclusive contract with @home, its affiliated ISP, expires.

It is instructive to note that the above events occurred at the end of a nearly year-long debate that pitted AOL and other ISPs against AT&T and other cable companies over access to the cable infrastructure that will be one of the on-ramps to the Information Superhighway. These solutions were not only voluntary but were privately transacted agreements that will undoubtedly benefit the companies and their customers in the near future.

This paper details the battle over forced access, an intense debate centered at the federal, state, and local levels that will determine the economic expansion of Internet applications such as video-conferencing, telemedicine, online business growth, and numerous other options that have yet to be discovered.

We argue that forced access is a wrong-headed policy choice, and policymakers are well advised to avoid it. Thus far, only three municipalities have decided to enact a forced-access provision. These three stand alone as numerous states, municipalities, and the FCC have decried forced access and have avoided enacting legislation to enforce it.

We begin with a definition and explanation of forced access. This is followed by a discussion of the ramifications of forced access, and brief sketches of the courses charted in the states and municipalities that have dealt with the issue. Last, we provide an analysis of why an avoidance of forced access is important to the future of broadband.

WHAT IS FORCED ACCESS?

Forced access, promoted by its proponents as "open access," is a policy that involves a government mandate for one party to grant access to its facilities to another party. Forced access could be a government requirement for a storeowner to lease part of his or her space to a competitor. Or forced access could involve a homeowner being required to rent an upstairs bedroom to a tenant. In both of these examples, the competitor and the tenant use government involvement rather than private negotiations to access the space or the room.

In the context of the Internet debate, forced access is a policy that would require cable providers to provide non-discriminatory access to ISPs not affiliated with the cable company on their cable line. As cable companies entered the Internet business, many of them brought an affiliated or "preferred" ISP with them.

The objective of forced access is to mimic the telephone arrangement currently in place. Most Internet consumers utilize traditional analog telephone lines (twisted copper wire) to access the Internet at slow speeds. Regulators believe that since telephone companies have to open up, unbundle their equipment, and provide access to every provider, cable should do the same. This is an inappropriate analogy that fails to hold up for several reasons.

First, unlike incumbent telephone companies, cable was never assigned specific territory by government. In addition, federal law prohibits municipalities from granting an exclusive franchise to one cable provider. Therefore, cable is inherently not a common carrier and, therefore, not subject to open and non-discriminatory access.

Second, cable is a shared service and telephone is a dedicated-line service. This means that as more Internet users get onto a cable system, the speed eventually slows down. Remedies such as congestion pricing can be used, but cable providers need time to develop strategies to retain Internet quality.

Third, cable is but one option for high-speed Internet access. Digital Subscriber Lines (DSL), wireless, satellite, and other options are coming to the market. Intervention that requires cable companies to open their system will deter other innovations and options in new technologies. Such an action would also deter other competitors from entering the broadband market.

In short, cable cannot be equated with telephone lines for various reasons. To do so denies credence to other options and could deter them from entering the market.

THE ECONOMIC AND REGULATORY EFFECTS OF FORCED ACCESS

At first blush, the idea of creating competition by forcing cable companies to share their high-speed lines with competitors might sound appealing. Sober reflection, however, reveals glaring fallacies underlying the arguments that groups such as the OpenNet coalition and their supporters advocate.

Composed of Internet service providers (ISPs), telecom firms, and "consumer advocacy groups", the OpenNet coalition supports government mandated "competition among Internet service providers over last mile broadband networks." Although couched in terms of "competition" and "consumers’ rights", the coalition’s favored policy of forced access is misleading and wrong-headed.

Government does not create competition, a process that happens only in the marketplace. A policy of forced access would usher in a host of economic distortions that would harm consumers and benefit, unsurprisingly, the companies behind the OpenNet group.

 

Tragedy of the Commons

Consider the likely consequences if governments decided to force cable companies to open their cable lines to competitors. The resulting problem is often referred to as "the tragedy of the commons." If, for example, a company like AT&T were forced to allow rival ISPs "open" access to its lines, what incentives would that leave for AT&T to upgrade its lines in the future? Any upgrade or expansion that the company initiated would benefit everyone, but all the costs would be borne by AT&T. No company likes that kind of arrangement, and it would effectively ensure that the lines would not be upgraded or expanded to any great extent, thereby arresting the growth of broadband technology.

When rival firms get a free ride on their competitors' infrastructure, neither party has an incentive to upgrade and expand. A homeowner forced to share his or her house with a number of government-chosen roommates, for example, could not be expected to be eager about adding new carpets and other amenities. That’s the "tragedy of the commons", and one of the most powerful arguments against a policy of forced access.

 

Decline in Innovation

If it’s possible to rank the negative consequences of a government policy, a decline in innovation is one of the worst. And under a forced access regime, that is exactly what would happen.

Cable is obviously not the only high-speed method that consumers can choose to reach the Internet. By 2008, Goldman Sachs estimates that 73 million households will use one of the potential broadband services. But which will it be? There are already a number of competing options including Digital Subscriber Lines (DSL), cable modems, and wireless technologies (see box above). If competing firms believe they can simply use someone else’s technology, the incentives to come up with better, competing technologies will wither on the vine.

 

 

 

 

So far, observers of the high-speed Internet access debate are predicting that cable and DSL will be the two leading methods consumers will choose for their high-speed service. And if the government steps in, they might be right. But that would be unfortunate for consumers who can already see glimpses of the high-speed future to come. Under free-market competition, all sorts of alternatives that the government can’t hope to imagine will evolve.

For an example of how the market, left largely alone by government agencies, is fostering innovation, one can look to the intense race to be the first to provide consumers with access through electrical lines.

Working under the assumption that they will be able to reap the benefits of their creativity and enormous capital investments, German company Veba and U.S. company Enikia are feverishly trying to make possible high-speed Internet access through electrical lines. And according to CNET news, they’re not the only ones. A Texas firm, Media Fusion, has also joined in the electrical-line race. It is a potential "gold mine," according to Phil Hunt, a powerline communications expert at Cisco Systems.

However, if these companies thought they would have to share the benefits of their research and investments with, for example, AT&T, because AT&T made an error in going after the cable market instead of electrical wires, they would probably be less likely to make those important investments. Sharing property with one’s competitors means a decline in rewards and profits, making the high risk of the venture often not worth the effort. In this way forced access stifles innovation. If firms are going after the smaller profits that line sharing would bring, they might as well invest in something of minimal risk – a government bond, perhaps?

Incentives matter, and when the government inadvertently distorts those incentives, consumers wind up worse off, with less innovation and choice.

Pseudo-competition

Urban neighborhoods usually have several movie theaters to choose from, but they all charge the same price for the latest new picture. That’s because they all get the same movie from the same vendor at the same cost and, as a result, don’t have much leverage to compete through pricing. They are middlemen. The same condition prevails under forced access.

Proponents of forced access tout the idea that they want to increase competition. But the "competition" they describe is misleading. What they argue for is not increased competition, but increased numbers of re-sellers. The problem is that there is only one cable line. And no matter how many companies are selling it, it will still be the same line.

Unlike true competition where firms compete with one another by cutting costs, increasing bandwidth, investing in infrastructure, and looking for new and better ways to deliver the service, forced access creates a situation where the only competition is in re-packaging the same good. Instead of being competition between providers, it is competition between middlemen.

Regulatory Costs

If governments were to step in at the federal, state, or local levels to regulate high-speed Internet access, the regulatory costs could be enormous. Without going into details of how the industry might be regulated, one can imagine that new Internet access regulations could include the creation of new and expensive regulatory agencies and result in many requirements, forcing companies to pass on the cost of compliance to consumers. Prices would rise, and some consumers would be priced out of the new economy.

Under the pretense of "fostering competition," those who are promoting government involvement in the high-speed Internet access market are seeking one thing only – protection from true competition in the marketplace. A policy of forced access would result in less innovation and competition, leading to higher prices and less choice for consumers.

Forced Access Promotes "Digital Divide"

A sharp halt in the deployment of broadband technology would hurt all consumers, but a forced-access regime would hit low-income Americans the hardest.

Because of a lack of competition and a higher regulatory burden, prices for broadband access would be high enough to deny service to a substantial portion of the population. Ironically, the government action of forced access would be responsible for the "digital divide," another issue the government is being asked to solve. But if competition is allowed to flourish, prices will decrease and more Americans will be able to afford to get on line.

Consider how even limited competition has already produced cost savings for consumers in San Francisco. The emergence of cable lines as a viable system to provide high-speed Internet access forced local phone monopolies in the San Francisco area to slash prices for their own high-speed service by 50 percent or more. It was only after @home introduced high-speed access at a price of $39.95 that Pacific Bell slashed the cost of their DSL service from $89.95 to $39.95. If left alone, these market trends will continue.

Rural Americans will also find themselves underserved if forced access is implemented. As noted earlier, forced access would halt expansion of cable lines (most of which are located in urban areas) and would lead to a decline in incentives for companies to create and improve other forms of high-speed Internet access such as wireless technologies. Once again, this policy would ironically lead to voices clamoring for the government to solve the very access problem that it helped to create.

Despite the continued calls for forced-access policies, there is reason to feel optimistic. Up to this point, many states and localities have rejected the forced-access ploy.

 

IMPLEMENTING FORCED ACCESS

The federal government, along with a patchwork quilt of state and local governments, has considered whether or not to implement forced access. Six months ago, state and local governments argued that the FCC, given its decision not to regulate the broadband market, was "doing nothing". Therefore, it was up to these levels of government to deal with the issue.

This section provides a closer examination of the position of the FCC, states, and municipalities that have raised the issue. It is fairly clear that the FCC’s position has indirectly influenced state and local policymakers to consider the costs and benefits of a forced-access platform. The flurry of legislation that was introduced to enforce such a platform dissipated upon closer examination of the issue.

 

FCC: Let the Market Sort it Out

From the outset of the debate on forced access, the FCC committed itself to a "hands off" policy on broadband. Through numerous policy pronouncements, research papers, and public speeches, the FCC held fast to a belief that the market is the best barometer by which to measure the deployment and success of broadband technologies.

Take, for example, the comments of FCC Chairman William Kennard during a speech to the National Association of Telecommunications Officers and Advisors:

You need regulation when market-based incentives are not aligned with the needs of consumers. But I believe that there are market incentives that will drive openness in the broadband world. One is the prospect of alternative pipes. …The second is the culture of the Internet that has grown up in this country.

Along with this commitment to market-driven solutions, the FCC also established a clear argument that if forced access were to become a policy choice, the federal, not state or local governments, would make the determination. In a speech to the National Cable Television Association, the chairman noted:

The information superhighway will not work if there are 30,000 different technical standards or 30,000 different regulatory structures for broadband. …[However] we do not have a monopoly in broadband, we have a no-opoly because the fact is, most Americans don't even have broadband.

 

 

The most important event solidifying the FCC's position was the release of a study by the Cable Services Bureau titled "Broadband Today". That report analyzed the roots of the debate going back to the Telecommunications Act of 1996 and its definition of broadband, and the pace of deployment of broadband by cable operators, telephone companies, satellite providers, and wireless technologies. The report outlined several factors that demonstrate there is no need for regulation of the broadband industry:

 

• The broadband industry is nascent.
• Cable modem deployment spurs alternative broadband technologies.
• Regulation or the threat of regulation ultimately slows deployment of broadband.
• Market forces will compel cable companies to negotiate access agreements with unaffiliated ISPs, preventing cable companies from keeping systems closed and proprietary.
• If market forces fail and cable becomes the dominant means of Internet access, regulation might then be necessary to promote competition.
• There is no consensus on how to implement open access from a regulatory perspective.
• There is no consensus on how to implement open access from a technical perspective.
• Rapid nationwide broadband deployment depends on a national policy.

Clearly, the FCC argued that the costs of implementing forced access outweighed the benefits, and the timing was not right. The percentage of broadband users in North America represents three percent of all Internet users. Cable has a definite competitive effect on other technologies, which would not dare test the waters if regulations were imposed on cable providers. Last, there was no clear roadmap of how to implement forced access, either legally or technically. For these reasons, the FCC committed itself to a "hands-off" broadband approach.

 

The State Perspective: "Protecting our Consumers"

The state-centered debate on forced access focused primarily upon opening cable systems in the name of "competition". State legislatures, not state public utility commissions, were the focus of forced-access activity. Legislators introduced bills that had titles such as "Internet Access Enhancement Act" and "Internet Consumer Bill of Rights", thus implying that not only was cable the only method of broadband transport, but that its closed character was harming competition and consumers would be helped, not harmed, by forced access.

 

Pending State Legislation on Forced Access

 

To date, 11 states have introduced forced-access legislation. Though all of the bills are relatively short in length, their objective is similar: to get cable providers to open their infrastructure to ISPs on a non-discriminatory basis. However, there are several differences as well.

Two states, Vermont and Delaware, apply their measure to wireless providers as well as cable. The object of the legislation, broadband technology, is defined differently as well. Nearly half of the states define broadband as Internet capacity in excess of 200 kilobits per second, and the others define it as 144 kilobits per second.

Five states – Pennsylvania, Idaho, Virginia, Utah, and New Hampshire – have voted down forced-access provisions. All five bills were defeated in committee. But the issue that is most pertinent in the debate at the state level is not video or Internet, but local telephone competition.

States have very little say on either issue, with video being a federal-local issue, and Internet remaining entirely federal. With cable providers deploying bundled packages that include local phone service, the first real possibility of facilities-based competition has come to the market. Local phone companies, eager to protect their hold on this part of the market, enlisted the help of state legislators in the battle.

With AOL changing its stance, the FCC holding to its stance, and the broadband market expanding and changing constantly, the states are proceeding much more slowly than the marketplace. For instance, in the six months from the time the Pennsylvania House Committee on Consumer Affairs began public hearings on the issue, the AT&T announcement and the AOL reversal occurred. In the same six months, the committee produced 521 pages of testimony. In short, the market is maintaining a pace that regulations are incapable of matching.

Municipalities: Breaking the "Cable Monopoly"

At the municipal level, the debate over forced access took on a new aspect: the dilemma of cable competition and rates. After all, officials at the local level are probably most familiar with the "nuts and bolts" of cable service. Since forced access dealt with cable providers entering the Internet business, local officials believed that their familiarity with the politics of cable rightly positioned them to dictate the terms and conditions of the broadband system.

Municipalities that have voted against mandating a forced-access provision are greater in number than those who have voted for such a provision. This section provides a brief synopsis of each of the major cities' decision on forced access.

 

Portland, OR

In late November and early December of 1999, Portland and its surrounding county of Multnomah became the first government entities in the country to mandate a forced-access provision on their new cable provider, AT&T. Based upon the recommendations of the advisory board, the Mt. Hood Cable Regulatory Commission, the city and the county approved an open access condition that required AT&T to provide "open access as a condition of the approval" of the franchise.

As a result of this decision, AT&T filed suit against the city and county in U.S. District Court. The court upheld the decision of the city and the county, and the case is now held up in the Ninth Circuit Court of Appeals. The ruling on the appeal will have a definite effect on the national scope of broadband deployment.

Broward County, FL

The Florida county's Ordinance Number 1999-41 is straightforward about its objectives:

It is the public policy of Broward County and the Board of County Commissioners that as a matter of public health, safety, and general welfare, in connection with the privilege of using the public rights-of-way and in order to promote the widespread availability of cable service to Broward County residents, and to protect consumers and promote competition, cable system franchisees that offer high speed access to the Internet shall not discriminate in favor of themselves or their affiliates.

Similar to the situation in Portland, AT&T took the matter to court, where it still resides. After this incident, one observer noted:

The Florida and Oregon actions raise the possibility of a crazy-quilt of regulations across the U.S. . . . Hundreds of cities will soon be deciding whether to approve AT&T's [franchise] and might try to attach other open access conditions.

The ordinance in Broward County, which passed by a 4-3 vote, would affect only the unincorporated areas of the county, or less than eight percent of consumers. Since there is no home rule charter, each part of the county had to address the issue individually.

Fairfax, VA

Forced access in Fairfax, Virginia, divided along city and county lines and is, therefore, perhaps the most indicative case study of how forced access can drive high-speed Internet investments to other jurisdictions. The city council of Fairfax voted to impose a forced-access provision in transferring the cable franchise of Media General to Cox Communications. Cox gained ownership of the cable system following a $1.4 million purchase of the Media General system.

The outlying communities in Fairfax County, which contain 25,000 cable subscribers, voted against forced access. Thus, while the city enters into negotiations and perhaps litigation, the residents of the county will begin to enjoy the benefits of broadband cable and the competitive investments it will attract.

Pittsburgh, PA

The city of Pittsburgh opened negotiations with AT&T in October of 1999 as the franchise formerly held by TCI was about to expire. AT&T had plans to replace the old coaxial cable system with a new hybrid fiber-coaxial system that would allow for high-speed Internet, enhanced video, and local telephone service.

The city council was lobbied by a group called the Pittsburgh Open Access Coalition, a consortium of ISPs that wanted an open-access provision included in the transfer of the franchise to AT&T. The Coalition members all had agreements with local telephone companies to provide high-speed Internet service over DSL lines, but wanted the council to intervene and open the cable grid as well.

After a period of debate and public hearings, the city council approved the transfer without a forced-access provision that entails:

 

• A $40 million investment in the city of Pittsburgh, and $300 million in the Western Pennsylvania area.
• Links to private and public schools, museums, libraries, and community organizations.
• An Intranet network that will link city government buildings.
• A most favored nation status in which any technological advancement must be undertaken in the city if it is done anywhere else.

San Francisco, CA

The Department of Telecommunications and Information Services (DTIS) commissioned a study that served as the basis of information for policymakers in the city. The study found several important aspects of forced access were simply not feasible for the city to undertake at the present time. Although DTIS argued that open access on cable was "technically feasible", there were other problems associated with implementing such a platform:

While open access is clearly technically feasible, there are aspects of open access that will take time and investment to implement. Experience shows that the business arrangements necessary to implement open access are perhaps more time consuming than the technical arrangements. …A clear approach to implementing open, non-discriminatory access to Internet content and broadband transport has not emerged.

In late July 1999, the Board of Supervisors voted 9-2 to reject forced access of the cable system.

Los Angeles, CA

In perhaps the most extensive local-based study of forced access to date, the city's Information Technology Agency commissioned a research paper from Claremont McKenna College that outlined the direct consequences of forced access on the city's economy and government. Among the findings:

 

• A $1,000,000 to $6,500,000 increase in administrative costs.
• $2,280,000 to $8,640,000 in lost franchise fees.
• $72,000,000 or more in lost savings to consumers from competitive local telephone services.
• Delayed deployment of broadband.
• Lost jobs and taxes, and delayed network upgrades and service deployments.

 

Given the large number of cable TV customers in the city (602,000), forced access was a battle of high political stakes. To date, the city has voted against forced-access requirements for cable providers.

Miami, FL

The second municipality in Florida to consider open access, Miami, voted very differently than Broward County, rejecting the measure by a margin of 10-2. The mayor of Miami, Alex Paneles, stated:

Access to the Internet is an essential tool. …We should refrain from using the power of local government to saddle [high-speed Internet providers] with new regulations that are restrictive and burdensome. This would clearly harm consumers.

That perspective sets a standard for policymakers nationwide.

 

RECOMMENDATION AND CONCLUSION

The underlying goal of policymakers involved in the broadband debate at the federal, state, and local levels should be to foster true competition that benefits consumers. Increased competition will invariably benefit consumers by lowering prices, expanding available products and services, and bringing innovations to the market.

However, if policymakers at various levels employ an open-access agenda, both competition and innovation will suffer. Even the FCC has seen through the "open-access" façade. Arguing that consumers are best served by governments that maintain a "hands off" attitude when it comes to assessing the deployment of high-speed Internet technologies, the FCC has, for the time being, embraced a free-market policy governing Internet access.

Several state and local governments, on the other hand, have erroneously decided that competition will be achieved and maintained by extending legacy regulations to the broadband world. But as demonstrated in this paper, if state and local governments go down the road of forced-access, the final destination will be an Internet world with pseudo-competition between suppliers, fewer innovations, and a digital divide of Grand Canyon dimensions.

ISPs who manage to leverage government intervention, in lieu of voluntary agreements to access infrastructure, will see individual gains in the short term, but they will also force everyone to lose in the long term.

Our recommendation, therefore, is that governments at all levels strongly reject policies of forced access. By rejecting forced access and embracing the free market, governments will provide incentives for new innovations that will expand Internet access for all.