- The Washington Times - Monday, March 11, 2002

The old chicken vs. egg paradox has a perfect parallel in the age of the Internet: Which will come first, the demand for broadband services, or the supply? It's a silly question, but earlier this week the administration tried to answer it. In speeches to a tech advisory group, Commerce Secretary Don Evans and lead economic adviser Glenn Hubbard proposed a broadband strategy that promises to lay a demand-side egg while ignoring the supply-side chicken. Their answer may be good politics, but it will make for bad policy.
Getting the broadband market off the ground is an important key to economic recovery. Technology leaders like Microsoft's Bill Gates and Intel's Andy Grove blame the tech sector's continuing problems on the lack of affordable broadband, and recent studies have suggested widespread adoption could create $500 billion in economic benefits and 1.2 million new jobs.
By the numbers, the broadband market seems to be growing rapidly.
Broadband services are supplied by the phone and/or cable companies in 78 percent of U.S. zip codes, and satellite service is available to everyone with a southern exposure. As for demand, 20 percent of home Internet users now access the web through a broadband connection, twice as many as a year ago.
Still, many observers believe the market is not growing "fast enough." But how are we to know? Is the pace desired by companies like Intel and Microsoft who would benefit from the increased demand for computers and software broadband would generate necessarily the right pace for the economy? Should we listen to the cable and phone companies, who want to sell the stuff? Is there any pace that would be "fast enough" for these folks?
The only valid way of judging whether broadband deployment is moving "fast enough" is by comparing what is actually happening to what would happen in an efficiently functioning marketplace. That means looking to see whether there are market imperfections or regulatory distortions that are slowing things down. As it happens, you don't have to look far.
Broadband supply is unquestionably being limited by a morass of antiquated taxes and regulations. Telecom companies, including cable TV providers, are subject to some of the most complex rules and highest tax rates in the economy, and the telephone companies face especially steep hurdles, since any investments they make in new broadband facilities have to be resold to their competitors at cost. On the demand side, the absence of an effective copyright regime for on-line music and movies highlighted by the Napster episode means there is not all that much content available for broadband subscribers. No one knows how fast the broadband market would grow if these distortions were removed, but just knowing that they are there tells us the market is, indeed, not growing "fast enough."
The appropriate policy response lies not in setting national goals or creating new government subsidies both of which the administration has rightly opposed but rather in removing the regulatory impediments that reduce supply and creating a legal framework to protect on-line content. In other words, an effective policy has to focus on both supply and demand, not one or the other.
Unfortunately, the Bush administration seems on the verge of adopting a broadband policy that ignores the supply side. That's the way most observers read a speech this week by Commerce Secretary Don Evans. Speaking to a group of tech advisers, Mr. Evans said nothing about broadband supply, but argued, "There is a real demand-side issue we need to think about."
Such a one-sided policy will only lead to more frustration. When it comes to broadband, supply and demand are inextricably linked content providers won't invest in distributing digital content until consumers are able to download that content on fast, reliable, affordable connections from competing providers. And that won't happen until the regulatory problems facing communications companies are addressed.
Politically, it must be admitted, communications deregulation is tough business. As last week's Tauzin-Dingell debate proved, the interest groups who stand to win or lose are prepared to play hardball, and for politically influential long distance companies like AT&T; and MCI, anything that loosens regulations on incumbent local phone companies is simply unacceptable.
Showing leadership in the "telecom wars" takes political courage. A good example was recently provided by TechNet, a Silicon Valley trade group whose members sell equipment to all sides, and for whom taking a position is hardly a risk-free proposition. Yet in January the group issued a policy statement calling on the administration to "use its authority to remove regulation where it creates significant disincentives to investment in new, last-mile broadband deployment." That's code for deregulating the Bell companies, as Tauzin-Dingell would do.
The overwhelming approval of Tauzin-Dingell by the House led many to believe the administration would follow TechNet's lead and show some political courage on telecom deregulation. By continuing to focus solely on the demand side, it risks slowing the economic recovery, and being seen by many as having chickened out on the politics of broadband.

Jeffrey A. Eisenach is president of the Progress & Freedom Foundation.


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