Nyquist Capital

The OECD released updated broadband statistics yesterday. The US is ranked 12th. Included is some historical trend data that I think sheds some light on why a broadband ‘gap’ exists between the US and the rest of the world.

I don’t believe the broadband gap is a problem that needs to be solved. I think many folks are happy with dial-up in the US, and don’t subscribe to broadband because no incentive exists for them to switch.

In Europe, few people were happy with dial up. Unlike the USA, where local phone calls to the AOL modem pool were free, Europeans were charged per-minute fees. There was no such thing as a free local call. Europeans who spent hours on the phone with their ISP hated dial up not just for poor speeds but also high cost. This leads to a large proliferation of Internet cafes and initially, low internet use.

Let’s look at growth trends in Asia, North America, and the EU over the last few years.

Note - The EU-15 are comprised of Belgium, France, Germany, Italy, Luxembourg, The Netherlands, Denmark, Ireland, United Kingdom, Greece, Portugal, Spain, Austria, Finland, Sweden.

I think there is a pretty simple explanation at work here. Once broadband technology became available, Europeans rapidly ditched their dial up lines not just because of speed, but because of cost. European broadband exploded with a spectacular 73% CAGR while the USA grew at a slightly less rate of 39%. I don’t think the lack of government intervention in the broadband markets provides an explanation for the difference in growth rate. The government can’t make things grow that fast and there is only one thing that can - economic substitution. There was a huge economic incentive to move to the fixed rate connections offered by DSL.

In Korea and Japan, the government creates financial incentives in other ways to move people to broadband whether they want high speeds or not.

Now that $19.99 DSL is becoming widely available in the US, and AOL has increased prices for dial-up so that they are higher than their bundled DSL offering, I expect you will see the same movement here in the US, the broadband gap with Belgium, Canada, Iceland, and Japan will be closed, and global catastrophe averted.

Richard Notebaert, CEO of Qwest (Q ) has a short op-ed in today’s WSJ discussing how the Net Neutrality has been twisted to serve the interests of the digital elite.

From the editorial:

According to the FCC, Net neutrality means that providers of Internet services must allow unfettered consumer access to the Internet. No one should deny or impede access to lawful sites on the Web. Everyone supports that position.

But some very big corporations are trying to redefine Net neutrality away from a focus on access, and toward something far more nebulous and self-serving. Case in point — assume an online movie provider negotiates a commercial agreement with a company like Qwest to guarantee download speeds of, say, five megabits per second, for all its customers. That’s a pretty good idea in a world where every company is trying to differentiate itself from its competitors.

“Not so fast,” cry the naysayers. They claim that the idea of a premium level of service violates Net neutrality because that online movie company’s competitors may not want to offer their customers the same benefits. Essentially, they argue that doing this would give some content providers an advantage over those that choose not to provide this service.

Well, yes it would. As an industry, we’ve always sold bigger pipes and faster service to those who wish to buy them. And yes, I suspect much of that enhanced capacity has been bought to give the purchaser an edge. That’s how a competitive marketplace works.

Once fiber and high bit rate DSL gets deployed to the curb the bottleneck will no longer be the ‘last-mile” but will be the infrastructure between the user and the supplier of media and content. Taking away the ability of carriers to use variable pricing to distribute costs according to use and demand will result in a stagnation of investment as well as higher prices for people who fund the heavy usage of others.

Notably, Notebaert isn’t a complete Telco shill, he recently indicated that the hype over peer to peer usage isn’t warranted, and isn’t impacting his network. Maybe that’s because Qwest customers have the worst DSL and broadband penetration and technology. P2P may not be as popular on Qwest’s network as it may be with others that support much higer bit rates and can deliver even-more-instant gratification.

The WSJ on Saturday covered efforts by Deutsche Telekom (DT) to seek deregulation of policies similar to UNE-P regulations here in the US.

Europe’s largest telecommunications company is investing €3 billion ($3.6 billion) to connect residential customers to the Internet at speeds up to 50 megabits per second — more than eight times as fast as its quickest offering so far and faster than any other connection available in German homes. The move is crucial for Deutsche Telekom’s ambitions of offering a “triple play” of services spanning telephone, Internet and television at a time when its traditional business of phone calls is being shaken by major technological upheavals.

It looks like they managed to get a copy of Verizon’s (VZ) and AT&T’s (T ) playbook…

The German incumbent is lobbying to be spared such interference, arguing that it is creating a new service and already faces mounting competition from cable, Internet and other telecom companies. It has threatened to scrap the spending plan and lay off more workers if regulators impose too many restrictions.

The German government supports the removal of UNE-P like rules and has increasingly distanced itself from regulating the telco sector. Why? Concern over a broadband gap! According to the OECD, France, Great Britain, and Germany all lag Japan, Korea, and the USA in broadband penetration, particularly in next gen technology deployments.

Another quote from the WSJ article:

The government argues that there are three steps in fostering competition: privatization, regulation and deregulation. “The third step is the one that needs the most courage,” says Joachim Wuermeling, Germany’s secretary of state for the economy. That stance, however, puts Berlin on a collision course with European Union regulators in Brussels who are responsible for setting the terms of industry competition across the Continent.

As it turns out Telefonica and France Telecom want the same deregulation, and the EU is concerned that allowing germany to deregulate would be a precedent for the entire continent. All of these carriers are making deployment of next gen broadband networks contingent on a release of obligations to lease the new infrastructure to competitive carriers.

I do not understand the mechanics behind the EU and how it represents the interests of corporations and individuals in member states, but it seems ridiculous that a sovereign country no longer has control of how a company can operate within its own borders. Who are the EU regulators looking out for? Themselves?

Companies only invest risk capital when the potential returns warrant it, regardless of the wishes and magical wand waving of pundits and politicos in Brussels or Washington DC. Telcos will simply refuse to make new investments in technology if the upside rate of return is regulated by a government entity and the downside risk is left unlimited.

I am frustrated the hypocrisy of those who lament broadband availability and technology, but at the same time refuse to allow those who make the risk capital investment to reap the benefits- instead they advocate confiscatory policies like Net Neutrality, and UNE-P.

The good news is that these debates are taking place, as we may be lucky enough to see the same destructive UNE-P legislation that was removed in the USA eradicated from three of the largest states within Continental Europe.

Thanks to Om Malik for some good data (.pdf link, in German) on German broadband policy.

From the WSJ today($$$ link)….

Verizon (VZ), making clear its view on some implications of a confusing move by the Federal Communications Commission earlier this week, said regulators’ decision to deregulate broadband data services it provides to large business customers won’t free it from conditions imposed when it acquired MCI Inc. Verizon also said the decision won’t eliminate its obligation to continue payments to a fund that subsidizes phone services for low-income and rural customers.

It looks like access lines that were originally owned by MCI are still subject to price controls, but ones owned by Verizon are not? What about lines that were originally leased by MCI from Verizon? Anyone know a good source on the net to get good hard data on exactly what this ruling means?

What really strikes me about these recent developments is that the mainstream media could care less. When the Brand X decision was handed down, the digital elite prophesized doom at the hands of the cable and telco monopolies. The same thing happens with business broadband leased lines, you could hear crickets chirping, and good details are not readily available.

So far the only outrage is coming from Washington DC and the carriers that were previously free-riding on Verizon’s infrastructure. Here’s a quote from the best article I have found on the subject.

The latest move by the FCC is likely to face challenges from competitive carriers, say experts. But some analysts say these protests are just sour grapes, since the deregulation of business broadband is a necessary step in developing a mature, market-oriented broadband market.

“The standalone CLEC business is fading,” said Jeff Kagan, an independent telecommunications analyst based in Atlanta. “This isn’t the same industry that it was in the 1990s and the 1980s. There is much more competition. The CLECs complaining are likely the ones that haven’t evolved to change with the maturing market.”

Considering the fundamental value of these connections to businesses, two very different things could be happening:

1. Businesses are aloof, and unaware of the massive monopoly that has now seized control of their key digital infrastructure
2. Businesses see this as a positive development, that will give their broadband suppliers an incentive to build new, better infrastructire for them to use.

Got Facts? I’d like to get a debate started but they are in short supply.