Joost Blog

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.
- Adam Smith, The Wealth of Nations

Consumers want ample and unfettered access to the Internet. They want lots of megabits at low prices without caps and thresholds and blocks. Adam Smith wasn’t big on Facebook, but he has the right idea to get consumers what they want today.

For a brief period after the Telecommunications Act of 1996, the U.S. was flush with shiny new ISPs laying fiber and offering attractive Internet services to consumers. During the Internet bubble, capital was easily accessible and billions of dollars were invested in the creation of broadband infrastructure.

That all stopped in 2001 when the telco bubble went the way of the Internet bubble and investors went off to buy subprime mortgages (not to mention the fact that enforcing the Telecommunications Act became an afterthought).

Since then, the ISP market has steadily been consolidating to a smaller number of more powerful carriers. In most markets, US consumers have the choice of only two ISPs. In some markets, there’s only one choice (which is not much of a choice at all). Advocates of Net Neutrality legislation have witnessed a steady path back to Ma Bell. Concentration of power in the hands of a few business behemoths makes us all nervous, so the Net Neutrality crew has proposed that we regulate ISPs so that traffic cannot be blocked or “managed.”

Now, our company provides video services on the Internet, so we should be the first to cry wolf and want regulation against the big bad guys. Not to mention that as a dyed-in-the-wool Silicon Valley guy, I should be going along with Vint Cerf and crew. But it turns out that’s the wrong answer, because it’s treating the symptom and not the cause of the problem.

Most economists will tell you that two players in one market makes for pretty bad competition. That’s the real problem. If there is sufficient competition in the market for broadband services, companies would win over consumers by offering them ample broadband at low prices. Just look at the bandwidth pricing that corporations get at data centers. It’s been dropping like a rock for years. Why? Because unlike the consumer market, there is plenty of competition in the data center bandwidth market.

The challenge with creating competition in the broadband market is that building a national network (with any technology – wired or wireless) requires a lot of capital – capital that is not so available in these economically challenged times. The two existing broadband networks – built with telephone wires or coaxial cables – both received governmental help in their creation – one through taxpayer dollars (Ma Bell) and the other through franchise rights that were granted to cable operators.

If the Federal Communications Commission and other regulatory bodies are to create a competitive playing field, the answer is to figure out how to encourage the investment dollars and reduce the capital requirements for building the third and fourth major broadband networks. There are lots of ways to do this. Set aside good wireless spectrum that the dominant carriers can’t have access to, or give tax breaks to newcomers that are building consumer broadband infrastructures for a few years. Basically, signal to the people who have the capital, “Hey, put your money at risk and we’ll make it worth your while, because we think it’s good for America.”*

As for the technology of choice – wireless, like WiMax or LTE, or wireline, like fiber – it doesn’t matter that much. Smart engineers and entrepreneurs will figure out how to make the best use of the asset that is available them. If we can put 25Mbps on a 100-year old copper plant … we can figure out how to do anything.

So there you have it. Regulation has a heck of time keeping up with the world of fast-moving technology businesses. Just set the groundwork for a competitive environment, and let Adam Smith rip.

* If you want to see an example of where regulatory policy jump started competition and the build out of residential broadband, you can look to France or Japan (and if you live in one of those countries, consider yourself lucky, because you probably have a faster broadband connection for less money than the average American pays for his slower connection).