North American Network Operators Group

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RE: What do we mean when we say "competition?" (was: Re: [Latest draft of Internet regulation bill])

  • From: David Schwartz
  • Date: Wed Nov 16 08:09:26 2005

> > 	Right, and this is appropriate. Large investments in infrastructure
> > should *not* be made if there's already adequate service. Better to
> > invest in places where there isn't.

> Is that still true if the "adequate" service is being provided at a price
> which is two to three times what it should be costing and the provider
> is enjoying the ability to do this because nobody else is in the market
> space?

	It depends how much they invested. In some areas that are very expensive to
serve, that may be precisely what happens. In areas that are easy to serve
and customer dense, you won't get away with this for very long.

	You need prices to be high where it really is expensive to provide access
because that's what provides the incentive to develop cheaper ways to
provide access. Perhaps we don't all fly personal planes today because the
government chose to build roads.

> > 	The government can't do a good job of picking winners and
> > losers, so stop
> > letting it.

> Agreed.  So, let the government do what it does well... Manage the things
> that tend to be natural monopolies and keep it out of everything else
> as much as possible.  Are you arguing that there should be competition
> for the provision of highways, for example?


> How would you see that
> working?  Do we stack six copies of I-80 on top of each other, or, do
> we allocate multiple semi-parallel routes for freeways and let different
> companies build different routes and charge what they want for each of
> them?  How do you see that working on a neighborhood level?  Even
> if you think it works at the highway level, we're really talking about
> the neighborhood streets here.

	Now you are asking me to pick the winners and losers and claiming that if
I'm not smart enough to pick the winners and losers, a free market won't
work. I am the one saying nobody is smart enough to figure out how to do it.
You are the one saying governments will be smart enough to build the right
infrastructure and now slow innovation. (As they always have in the past
despite every effort to provide 'equal access'.)

> The last-mile infrastructure for terrestrial services looks a lot more
> like a local roadways inside a neighborhood than any other analogy
> I can think of.  I have yet to see any environment where this has
> been accomplished on anything other than a monopoly basis.

	The monopoly is not the problem. The lack of competition is the problem.
Perhaps you don't see the difference. If a monopoly is the most efficient
result, then competition will lead to an efficient monopoly. It's when you
choose a monopoly and shut out other efficient results that you have a
problem. That's the situation we have now and that's the situation you
propose to maintain.

	If it's expensive or impractical to run eight company's fiber in a city,
then make the companies pay that expense to run fiber or don't let them.
That way, we'll have eight fibers if that really is the right solution and
we won't if it isn't. If someone wants to run carrier-neutral fiber, they
can do so. But if that's not the best model or best solution, don't shut out
the others.

> >> The list goes on, but, believe me when I tell you that there are
> >> plenty of consumers in California that do not feel that SBC
> >> is meeting their needs, but, they don't have access to a real
> >> CLEC.
> >
> > 	Oh, I know that story, believe me.

> So, do you really think that if SBC had the same terms for access to
> the MDF<->MPOE leg that any competitor had this would not actually
> change or would get worse?  I don't.  I think it would actually
> solve many of the current problems and encourage many of the CLECs
> to re-enter the market.

	I think if SBC had to open their circuits, they wouldn't build as many of
them unless they were forced to. Living in an area with no local high-speed
access options, I want them to have every incentive to build new
infrastructure. If you force them to build new infrastructure, or subsidize
it publically, then you are again picking winners and losers. The big losers
will be the new technologies, because they'll never have a chance

	If a free market naturally creates a problem, then it creates an incentive
for a clever solution. No person or group could engineer a solution as
clever as the one the market will evolve. But your proposal requires such a
group. It essentially extends exactly what we have now.

> > And what about a carrier that needs different
> > infrastructure to provide
> > the type of service it wants to provide?

> They can build it, and, if they get a competitor that wants equal access
> to it, they get reimbursed for the build.

	You realize that that is absolutely crazy. That's like saying "you can buy
a lottery ticket, and if you win, give me the ticket and I'll reimburse you
its cost.

> > 	And repeating the same problem 50 years from now when
> > innovative services
> > can't compete with the maintained subsidized infrastructure.

> I don't see that.  First, the current bill doesn't do some of the things
> I'm saying need to be done here.  It, instead, requires what you want in
> terms of everyone lays their own copy of infrastructure into the
> public rights of way duplicating and multiplying the cost of the
> last-mile infrastructure by the number of competitors.  Yes, that's
> a level playing field, but, it's _NOT_ an efficient one.  I suppose
> we have to decide which "mistake" is the better one to make.

	You assume it's inefficient because you assume people will make inefficient
use of it. Suppose someone proposed requiring small grocery stores operated
by different companies to cooperate to have their food shipped in the same
trucks. That might seem efficient, because fewer trucks would be needed. But
the flexibility advantage of having your own trucks might actually outweigh
the advantage of fewer trucks. Grocers stores now are free to coordinate
their trucking and they largely choose not to.

	I am not proposing prohibiting sharing of infrastructure.

> > 	That's not enough. The last mile infrastructure is as
> > important as every
> > other part. It may even be more so.

> Agreed, but, it's also an area that tends to be a natural
> monopoly.  Leaving
> that natural monopoly in the hands of a single provider that is also
> providing services on top of that infrastructure creates an advantage for
> that provider.

	Right, so stop subsidizing them. Make them pay for that advantage.

> Requiring a separation between LMI operator and service provider (or at
> least the ability to create such a separation when it is in the public
> interest), OTOH, might just be an improvement.

	What a great way to create a problem that the government can then jump in
and solve. Reduce the revenue possibilities from building infrastructure.
Suddenly, private industry doesn't want to build infrastructure. No problem,
the government will come to their rescue and build the infrastructure. And,
of course, when the government builds the infrastructure, it chooses the
technologies and business models. But, hey, it's public money so why
shouldn't they choose?

	It is expensive to build infrastructure. Anything that reduces the value of
that infrastructure to the company that built it means that less
infrastructure will be built and new, risky, expensive infrastructure
*won't* be built.

> > The present system was made by subisidizing infrastructure
> > that was felt
> > to be good enough at the time it was designed. This is what created all
> > the flaws in it that bother you.

> Not true.  Most of the flaws that bother me in the current system
> have to do with the fact that, for example, SBC is both LMI infrastructure
> operator _AND_ service provider.  This makes it very difficult for
> anyone outside of SBC to have a truly competitive offering because they
> are dependent on SBC for their LMI whether they like it or not.

	If SBC couldn't reap the profits it did, it wouldn't have built as much
infrastructure as it did. The more money you can make from the
infrastructure, the more of it you are likely to make. You want to know why
we don't have more and better infrastructure? It's likely because it's not
profitable to make and improve it.

> OTOH, if the shared LMI was operated by a neutral third party
> and leased to SBC and any other competitor at the same price for
> the same component, that would resolve most of what is
> bothering me about the current system.  It would allow me
> to buy phone service without giving money to SBC.  Today,
> I can't do that unless I go to VOIP over WISP which has its
> own set of tradeoffs.

	Will that neutral third party make as much as a non-neutral one would? If
so, then why wouldn't neutral third parties arise out of natural
competition? If not, then either there will be worse infrastructure, less
infrastructure, or subsidized infrastructure. Subsidized infrastructure
strangles innovation and repeats the very problems you seek to solve.

> Partially, but, do you really think that the market is there
> to support duplicate copies of last mile infrastructure?

	Perhaps in some places, perhaps not. It depends how much better the
duplicate infrastructure would be than the existing.

> If we have 10 providers, then, each theoretically needs to make
> $500/yr/household.  I don't think there's even $250/yr/household
> on the table for deployment if you really think it through.

	Some companies would go after only the most profitable areas. You're
assuming it's all or nothing.

> That's why I believe last mile deployment of terrestrial resources
> creates a natural monopoly.  Whoever deploys first gets a commanding
> lead in controlling the infrastructure and there is strong disincentive
> to invest in competing infrastructure absent some certainty of
> gaining a substantial portion (more than 50%) of the existing
> competitors customers.  Sure, if the existing competitor CAN'T
> serve their customers better, better service and/or lower price
> might make that possible.  However, if the existing competitor
> can do so, they have a serious advantage being after customer
> retention instead of trying to gain new customers.

	And this is what they should get for making the very expensive initial
investment. Reduce that, and the investments simply won't happen.

> No, the proposed bill doesn't, and, neither does my proposal.
> The proposed bill does exactly what you claim you want.
> My proposal says that anyone who does has to be willing to sell
> the LMI portion to the city if the city feels it is in the public
> interest for the price quoted for buildout prior to the start
> of the buildout.

	This is "if you win the lottery, I get a share for the price of the
ticket". This forces the innovator to bear the full risk and allows the
copycats to get the full benefit with no risk. The determination of "public
interest" is nothing but a test of who is how-well connected. Risk
investments in infrastructure just wouldn't be made in such a scheme.

> IOW, you can build whatever you want/need, but, if a competitor wants
> equal access to it and you aren't providing that, you have the risk
> of the city coming to you and making that possible for your
> competitor whether you like it or not.  You haven't lost anything
> because the city has reimbursed you the cost of building said
> infrastructure.  You still have the same access to that
> infrastructure as your competitors, and, your customers don't
> see any disruption in service, but, your competitors gain
> access to the LMI without having to do a parallel build.

	"You haven't lost anything"!?!? What! I'm sorry, I can't understand how
anyone could think like that. You take all the risk, and if you're right, we
give you back what you paid and take what you made.

> Try to stop looking at what I'm proposing through whatever filter you've
> applied and look at the whole proposal:

> 1.	ANY provider may build infrastructure in public right of way.

> 2.	ANY provider doing so must provide a price quote for said
> 	buildout to the local governing body.  The governing body
> 	and provider must come to agreement in good faith as to the
> 	quote being reasonable and just (e.g. provider isn't quoting
> 	10x cost and city isn't trying to claim 0.1x cost).
> 3.	Provider retains title to infrastructure until such time
> 	as the local governing body makes a finding of fact that
> 	public ownership of said infrastructure is in the public
> 	interest and buys it from provider at above quoted price.
> 4.	City retains, in perpetuity, right to purchase said
> 	infrastructure at quoted price.
> 5.	For any such infrastructure owned by the city, city shall
> 	operate or contract for the operation and maintenance of
> 	said infrastructure in a non-discriminatory fashion
> 	open to all service providers on an equal cost basis
> 	and to the benefit of the public.  Such costs shall
> 	reflect the actual cost of operations and maintenance
> 	for the previous year, appropriate contingency and
> 	liability funds, overhead, etc.
> I think this is win-win for everyone except a monopoly-oriented
> service provider.

	It's lose-lose for an innovator! Suppose I have to spend $1,000,000 for a
buildout. And suppose I calculate that there's a 5% chance that it will make
a profit. But if it does, the profits should be huge. Am I going to spend
the $1,000,000 if there's a 95% chance that I'll lose the million and in the
5% where I win, I just get back my $1,000,00 and my competitors get to split
the profits I earned them?

> Consumers get easy access to competition for any form of service that
> can be delivered by existing or future infrastructure.

	No, there will be no future infrastructure. Nobody will build
infrastructure if they aren't assured of keeping it.

> Providers have no disincentive from building new infrastructure as
> long as they do so in a model that assumes they will have
> competition and cannot count on LMI monopoly as an advantage.

	Well that's the problem. LMI monopoly as advantage allows a huge number of
projects that may not be possible any other way. It would cost a lot to
provide broadband to me where I am. It may be that LMI monopoly is the only
way to finance that cost. Under your scheme, I don't get it. Under my
scheme, I get it, and a market is created for other companies to go after.

> Providers which sell wholesale at fair and reasonable prices with
> comparable service levels to their wholesale customers are unlikely
> to lose control of their infrastructure (it is unlikely
> to be in the public interest to buy it in that case).

	Your scheme is nothing but "you take the losses, we take the profits". Any
infrastructure that results in much larger revenues than the cost to produce
the infrastructure will be subject to takeover.

> > 	The problem is, the early-deployment monopoly may be what
> > justifies the
> > cost of the rollout. Take that away, and you just don't get the new
> > technology. So long as there is equal access to do a roll out,
> > there is no
> > problem. Yet your plan *reduces* such access.

> Nope.  It doesn't.  It just prevents the early-deployment monopoly from
> becoming a long term competitive advantage.  Re-read my detailed 5 point
> explanation above.

	I don't see how it only affects long-term competitive advantage.

> >> > 	You can't "correct" the damage. It's not possible. All you
> >> > can do is pick
> >> > winners and losers *again*. The previous chosen winners and losers
> >> > don't really exist anymore in their previous form -- all you
> >> > can do is
> >> > more damage.

> Perhaps correct the damage is the wrong term.  I want to avoid creating
> the damage all over again.

	But that's exactly what you'd do. You'd either have to subsidize
infrastructure or have less of it, because your plan reduces the
profitability of developing infrastructure. Innovation won't happen, because
you only get to keep the losses.