The Consumer Rules

Thomas J. Tauke
The Progress and Freedom Foundation
September 21, 2005

In 1900, Ladies' Home Journal went out on a limb and predicted that in the year 2000, direct-dial long distance would be a common occurrence ... and that strawberries would be as large as apples.

Fifty years later Popular Mechanics predicted that by now we'd be living in homes with plastic floors and furniture that could be cleaned with a garden hose. They also predicted that most of us would be wearing rayon underwear that chemical factories could convert into candy.

Forecasting the future is risky, and rarely turns out as anticipated. This has never been truer than in today's broadband age. As we often say: "The world has changed." And, indeed, that's one of the few things we can predict: changes in technology and the market will continue.

Ten years ago, policymakers noted that change, and asked how they could maximize competition, investment and innovation in telecommunications. It was the right question. But the answer wasn't what many policymakers anticipated.

The 1996 Telecom Act recognized that the world was changing, and based policy on the premise that competition would be intra-modal - say, a new wireline phone company competing with the existing wireline phone company. Instead, innovation and investment in broadband and wireless technologies enabled inter-platform competition among telecom, wireless and cable companies for voice and data customers.

Five years ago, at another PFF forum, I discussed this changed world, and outlined on behalf of Verizon a policy direction, which became know as: "Old Wires, old rules. New wires, new rules." While any shorthand description will miss some key nuances, this general policy is now a reality in the world of telecom. Broadband networks are no longer subject to unbundling, and broadband services are not regulated as telecommunications services.

Now technology and customers are transforming the market place once again. This time, though, it's not just about communications services. It's about a whole universe of digital content: voice, data and video. Today, technology permits us to seamlessly deliver an array of voice, video, and data services - fixed and mobile - over different networks, using different technologies. Consumers are demanding faster broadband speeds and a greater ability to manage their communications services. And, as in 1996, policymakers are again asking how to maximize competition, investment and innovation.

Those questions about innovation, investment and competition are still the right questions, but this time it's not just about new rules. It's about how the rules of the game are set - and who sets them. And that's what I'd like to discuss with you this morning.

So what do we need from a policy perspective to give consumers what they need in this evolving broadband world?

The short answer is that we need lots of investment and innovation. The combination of investment and innovation worked to create competition and choice in the Internet. It worked to create competition and choice in wireless. It is creating competition and choice in broadband, and that competition and choice have shaped the market and delivered tremendous benefits to consumers.

In spite of what we have experienced, however, some policymakers take comfort in using the power of government to shape the market. They want to imagine all of the things that might go wrong, and then write rules to prevent them from happening. We call this "anticipatory regulation." And it does not work in today's broadband market place. You simply can't anticipate what choices consumers will make, or what services will develop to suit their needs, and to try to do so only hampers innovation and the deployment of new services.

What we need instead of "anticipatory regulation" is a market-driven approach. This does not mean that there is no role for government. It's simply an updated role. Instead of attempting to anticipate how the market will develop and then write the rules governing that market, government empowers consumers to shape the market and thereby set the rules of the game. Government is not on the field calling the plays, nor is it writing the rules. Instead it fills a referee-like role, observing the field of play, responding to complaints from any of the players, and addressing cases of market failure.

Also vital to empowering consumers and the marketplace is a very good set of principles - "Connectivity Principles." These were first laid out two years ago by the High Tech Broadband Coalition to ensure consumer freedom, while also supporting a marketplace that encourages investment and innovation in broadband.

Verizon, as well as many other companies providing broadband networks, software, and equipment, endorsed and support these principles. We are observing them as we provide broadband service over DSL and, more recently, Verizon's new fiber-to-the-premises service, called FiOS.

Essentially, the principles state that consumers using the public Internet should be able to 1) use their broadband connections to run applications of their choice; 2) access their choice of legal content on the Internet; 3) run any devices they wish on their broadband connection, and 4) receive meaningful information about the functionality and capabilities of their data and broadband connections.

These principles are based on the philosophy that innovation will flourish in this vibrant Internet space. We agree with that philosophy. Indeed, competition is driving the development of new and innovative services across this new marketplace.

For example, Verizon offers different kinds of broadband Internet connections to serve different needs. We have made DSL widely available, and have priced it aggressively. To attract customers who are still on dial-up, we have introduced a basic DSL service for only $14.95 a month. To meet the needs of those who want higher speeds, we are offering a 3-megabit service.

To fill in the gaps of our wireline service, we have launched successful experiments with Wi-Fi in small rural towns, such as Grundy, Virginia. We are also deploying EVDO high-speed mobile wireless access across the country. And of course we are leading the world in fiber deployment with our FiOS product, which brings consumers unprecedented broadband speed and capacity.

At the same time, we believe that we can offer consumers additional value by participating at all levels of the broadband value chain. Frankly, in order to earn a return on the huge investments and innovations we are making in advanced networks - and from which many other companies have gained, by the way - we must be able to offer our consumers the innovative services and integrated solutions that provide greater convenience, control, and security.

This means stand-alone offerings of VOIP services (our VoiceWing service) and video. Tomorrow in Keller, Texas, Verizon will formally flip the switch on our FiOS TV service, delivered over our fiber-to-the premises network. We believe it will provide consumers with the richest video experience available.

Our set-top box - and the advanced network behind it - will feature a best-in-market navigation device that is extremely powerful, flexible, consumer-friendly, and which will enable a full range of all-digital programming options. And shortly, our FiOS TV product will permit the integration of video and data services into one viewing experience.

Because FiOS TV is a customized platform, it will ensure our customers' privacy is protected, and that our video partners' content is securely delivered. It will also be secure from viruses and worms that plague many computer systems. Doing all of these things reliably is critical to giving both our customers and video partners what they expect.

At the same time, over the same network, customers can get the fastest Internet access available through our FiOS data service. They can go anyplace, using any service and any end-user device they please - all consistent with the connectivity principles. In the end, it is the consumer who decides.

This is why commercial or proprietary offerings are as important as access to the public Internet. Commercial offerings allow companies to innovate and differentiate their products in a variety of ways - from the services they offer over their networks, to the devices that link to those networks, to the networks themselves.

Ultimately consumers will decide what combinations of products and services to buy, and from whom. Everyone in the marketplace from Verizon to Google, from Microsoft to eBay, is working to put together the packages they think consumers will want. Government can't hope to predict how all of this will work out, and from past experience we know it shouldn't try.

We know from past experience that government regulations impose significant costs on businesses and consumers. We know from past experience - the 1996 Telecom Act, for example - that government rules have unintended consequences. Some of these consequences may not emerge for years after the regulations take effect, and may very well hamper deployment of the very technologies we should be encouraging.

The past, as well as the promise of broadband's future, should impose a high threshold for imposing new regulations on the marketplace. Why risk harming consumers, and slowing innovation, when the market is working and working well?

Up on Capitol Hill, Congress is beginning work on updating our telecommunications laws. We are encouraged by the stated commitment of many Members of both the House and Senate to promote investment in broadband networks and innovation in service development. It's good to hear lawmakers say that we should rely on market forces rather than government fiat to shape this new world of communications.

Yet the temptation to anticipate and regulate is strong, as evidenced in the current staff draft circulating among the members of the House Energy and Commerce Committee.

While there are many good concepts in this legislation, and while we understand that this is a document intended to trigger discussion, the draft clearly shows that the "government knows best" forces are still among us. And what they are proposing really does threaten to deny consumers many of the benefits that today's technology and marketplace can deliver. Let me mention a couple of notions in the draft that cause concern.

First, the draft contains provisions which attempt to remove the huge barrier to video choice by lifting the requirement that a company like Verizon must secure a second franchise - we already have the authority to deploy our network - in order to offer video services to our customers. That's good.

However, in order to qualify for this "national franchise," Verizon would essentially have to design its service to track the desires of policymakers rather than customers, and in particular, fashion a set-top box that doubles as a personal computer so that customers could use their television to surf the Internet.

This notion raises red flags. Why, we wonder, is Congress trying to design the service we offer or dictate the capabilities of the customer premises equipment, specifically our set-top box? To take the latter example, if customers want to use their television as a computer monitor, they can go to Circuit City, buy the appropriate device and surf away. But by requiring Verizon to offer a PC-equivalent in the set-top box, Congress is: 1) raising the cost of the set-top box; 2) potentially opening up the set-top box to various viruses, thus affecting the viewing experience; and, 3) making it much more difficult for us to give content owners the guarantees they demand that their copyrights will be protected.

We're the third video provider in the market ... after cable and satellite. Why would government try to tell us how we approach the customer and how we offer services?

Second, the draft includes a section entitled "build out" with a note that this section is, quote, "to be determined." The good news is that nothing is there. The bad news is that somebody apparently believes that there should be something there, specifically, a "build out" requirement.

Let me point out the obvious: we are the new player in the video market. We start tomorrow. In 24 hours I trust we will have paying customer #1 signed up, but we are clearly entering this market as the third player. Yes, we're confident. But there's no guarantee in an open, competitive market. Yet, before we've entered the horse race, some on Capitol Hill are already adding weight and lengthening the track. Instead of encouraging competition in this market, they are making it harder for new entrants to get out of the starting gate.

I'm confident that these concerns in the draft do not reflect the thinking of most lawmakers. Nevertheless, we have to keep making the case that this is a new world. So let me offer a suggestion that the drafters of legislation might consider as they develop a policy for this new world:

First, start with the premise that the market is working, and that it does discipline all of the players. Then, update the role of government, adapting it to this new world of rapidly evolving technology and vibrant, competitive markets.

Specifically:

• Make it clear in the statute that this wired and wireless broadband space is an inter-state market - a national market - subject to the jurisdiction of the FCC.

• To support this market, transform the role of the FCC by adopting a new model for the commission. Under this new model for this new broadband space, the FCC would not write rules. Instead, it would act in response to complaints and act only in cases of market failure.

• Finally, encourage all participants in the value chain that makes up the public Internet to adopt a common guide to govern the market. That guide should be the connectivity principles ... principles protect consumers, encourage investment and innovation, and promote competition. And we challenge all providers, including application providers, equipment manufacturers, and other wireline network providers, to embrace those principles as Verizon has.

In one sense, this kind of change in the role of the FCC is not a big deal. It's simply adapting government's role to the new world. But from another perspective, this is a huge change in the way government deals with the telecommunications industry.

Just as big change is usually hard for us as individuals, it's also difficult for the body politic. Yet, we know the world has changed. And we know that the old game where "government rules" and consumers are passive beneficiaries won't work in the real world. Now, we have a new game where consumers, not regulators, rule. And the proper role of government is to referee.

If Congress adopts a "Consumers rule; government referees" policy, the public interest will be achieved and the market place will be served. This policy will promote competition among providers of services, while driving investment and innovation, and creating value and choices for customers. This policy will help fulfill the promises of the broadband age, achieving the larger goal of constructing a truly connected broadband society that creates both financial and social value for us and future generations.