What are the real economics of broadband infrastructure? It’s not so simple as market opportunity, investment, and subscribers; Verizon and Comcast have different regulatory histories and see the world differently apotheke-zag.de. Google, as a potential new entrant, has completely different motivations.
Let’s take a look at the regulatory background, and then get a sense of what’s really motivating Verizon, Comcast, and Google.
Regulatory Background
We have gradually come to think of Verizon and Comcast as equals: big, for-profit telecom companies — competitors for TV, Internet, and telephone service. But they got to their current positions through very different routes. Here’s a brief (and rather incomplete) history.
In 1984, the former AT&T was busted up into seven Baby Bells: Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West. Terminator-like, these companies have been spending the last 26 years reconstituting themselves, merging into very large firms. Bell Atlantic changed its name to Verizon in 2000 after acquiring GTE.
Telecommunications regulation in the United States has a long history and reflects theory originally applied to railroads and other public utilities. The idea was that communications was a public good and because the network had to be large and interoperable to be effective, it was best served by a natural monopoly. So, assets like public rights-of-way were made available for the monopoly to use, in exchange for an agreement to provide Universal Service, covering the entire population.
To keep the monopoly from charging unreasonable prices, regulators mandated that their services should be marketed at cost, plus a reasonable and sustaining profit margin. This means that there is no incentive for them to keep costs down; in fact, the higher their costs, the more raw dollars they make.
Verizon today operates under this kind of regulatory background, which was outlined initially in the Communications Act of 1934, and then amended by the Telecommunications Act of 1996 — which has subsequently been eroded and modified by case law and other FCC actions.
The FCC, under Bush-appointed Chairmen Michael Powell and Kevin Martin, tended towards the opinion that the best way to foster competition and innovation would be to empower a small number of well-capitalized firms and let them compete together in the marketplace.
Comcast, for its part, came together very differently. Cable TV franchises were primarily granted by local municipalities, starting in the 1950’s. Comcast acquired dozens of these small firms, each with their own regulatory agreements with cities and counties. By 2000 or so, this aggregation started to resemble the sort of “large firm” that the FCC thought could be an effective competitor to the telephone companies.
So that’s how we got here. Verizon is heir to the top-down, cost-based monopoly regulation subsidized by the Universal Service Fund, which requires that it provide telephone service even in rural areas. Comcast is the product of the roll-up of dozens (if not hundreds) of small cable TV firms. Now let’s take a look at their interests in the current landscape.
Verizon
Verizon, in many ways, is just the current-day incarnation of a big chunk of the original AT&T. It’s still the primary telephone infrastructure provider and the bulk of its physical wiring plant is copper. It operates the same switching facilities that AT&T did back in 1984. In many important ways, nothing has changed.
What about FIOS? Isn’t Verizon innovating there? Aren’t they making this investment to “make money?” It’s complicated.
Verizon made the decision to install FIOS primarily to block competition. The Telecom Act of 1996 required that telcos make copper wireline infrastructure for competitors to run alternative services. This is where alternative telcos like Cavalier, Covad, Adelphia, and many others came into the market. You’ll notice that almost all of those companies are now defunct or severely hamstrung.
This is in part because Verizon (and its peers) set out on a strategy to make a competitive business model all but impossible. FIOS was part of that strategy.
When Verizon installs FIOS, they almost always remove the copper wires that could otherwise have been used by competitors; and this has effectively shut them out.
Verizon has spent over $20 Billion to build out FIOS in its service area. Ostensibly this might look like “investment in innovation” to observers. But in fact, this spending was mostly done to block competitors and to destroy the pro-competition provisions of the Telecom Act of ’96.
It should thus come as no surprise that Verizon has recently announced that they are unlikely to expand their FIOS network further. This isn’t because they can’t get more new subscribers in new areas (like downtown Boston, which is still not served); rather, it’s because they have calculated that the costs of future expansion exceed the downside risk of lost profits caused by competitors in the areas that remain.
They have put FIOS in all the places where it was either easy to do so or where the competition was too strong to ignore. Now that the competitors are mostly defunct or severely weakened, the threat is just not there to justify expansion.
Like feudal warlords, they invested just enough in FIOS to block out competitors, rejigger the regulations, and maintain a status quo of mediocrity. And we’re supposed to think this is innovation?
Comcast
Comcast has different problems. Because all of their regulatory agreements are negotiated with individual municipalities, it’s more difficult for them to make investments across their entire footprint. This is why Comcast often rolls out new products and services in trial communities, and then rolls them out to new areas one at a time.
Comcast does have a very large television service footprint, and their acquisition of NBC and other content providers over the years, like HTS, is an attempt to establish themselves as a vertically integrated entertainment provider. They control the entire stack, from the physical cable, to the viewer, to the content itself. This means that they are protected from threats from content providers who might try to command high rates for popular content. Disney (who controls ESPN and ABC) often finds itself in battles about rates with cable providers. Acquiring NBC/Universal means one less potential threat of rate hikes for Comcast, and higher overall profits.
But Comcast’s physical plant is dominated by aging coaxial cable infrastructure. While local head-ends are fed by fiberoptic backbones, local distribution to the home is through co-axial cable, which can degrade in performance when it rains, is subject to lightning damage, and can only go so fast. Fiber-to-the-home is vastly superior, but it would cost Comcast billions to upgrade its plant. In the absence of competitive pressure (such as that which was faced by Verizon), they have no incentive to do so. Instead they are happy to push their existing plant as hard as it can go, using standards such as DOCSIS 3, and invest in fiber-to-the-home infrastructure only as necessary or convenient.
Google
Google has recently announced that they would like to spawn innovation, and potentially build out gigabit fiberoptic infrastructure in one or more communities in the United States. I helped organize Baltimore’s municipal response to Google’s Request For Information for this project.
Google’s proposing something very different from what Verizon and Comcast offer: an open-access network, over which new entrants could provide Internet or other services. This is exactly the paradigm that Verizon has fought to destroy with FIOS.
Comcast has also fought open access repeatedly; before Verizon settled on FIOS as its primary anti-competitive strategy, Verizon tried to force cable companies to become subject to the same kind of infrastructure-sharing to which it was subject under the Telecom Act of 1996.
And Comcast fought this effort mightily; in 2002, I testified before the Maryland House of Delegates in support of a bill that would force Comcast to open its network, and Comcast’s lobbyists managed to defeat it.
Also in 2002, working alongside Verizon-supplied lobbyists, I testified before the FCC with TCP/IP co-inventor Vint Cerf (now a VP at Google) arguing that cable companies should be forced to provide “open access” to their networks because it would promote competition and entrepreneurship. At that hearing, FCC Commissioner Robert Pepper made it clear that the FCC believed that Verizon and Comcast could provide all the competition we would ever need. We see how that’s turned out.
To date, there has not been any significant open access network deployment in the United States. And with the decline of competitive telco-based services, telecom innovation has now stalled entirely. It’s time for something new.
Net Neutrality
Google has a different potential problem on its radar. In the US, Comcast and Verizon control access to a large percentage of its customers. Currently, the Internet operates under a doctrine of “Net Neutrality,” which is to say that customers and Google all just pay for access to the network, and each can communicate freely with anyone else on the network.
Various telecom executives (most notably former AT&T CEO Ed Whitacre, now CEO of GM) have argued that companies like Google should no longer get free access to their customers. Folks like Whitacre believe that the natural role of a company like Verizon or Comcast is to act as a toll-gate, charging both content providers (Google) as well as customers for access to each other.
As you might imagine, Google heartily opposes this idea: it could dramatically increase their costs and would destroy the “level playing field” which has dominated the Internet from the beginning. Startups could be stifled because they might need to negotiate an agreement with broadband providers to get access to customers. This is a war that Verizon and Comcast appear ready to start, and people like News Corp’s Rupert Murdoch are fanning the flames.
Google’s Fiber Plan
Google’s announcement that it intends to build ultra-fast open access fiber networks is its declaration of war against the threatened end of net-neutrality. Further, this is a productive use of Google’s vast stockpile of cash; it’s something tangible it can do to ensure its market position.
And it’s a move that’s ideologically compatible with its mission. Google genuinely believes that the expansion of a fast, net-neutral Internet has positive effects on society, and it’s also good for its bottom-line. More people online means more ad-views which means more advertising, and more dollars for Google. There’s no downside for them; it’s an expensive proposition to be sure, but it’s less expensive than paying for access to customers in a world without net-neutrality.
By promoting itself as a good citizen, wrapped in the banner of open-access, innovation, and net-neutrality, ideologically-sympathetic regulators such as the FCC’s new Obama-appointed Chairman Julius Genachowski are likely to view Google’s approach favorably. This would allow Google to establish a vertically-integrated, long-term market position which would be hard for Verizon or Comcast to disrupt.
And the kicker? The open-access network Google’s proposing really would promote innovation and entrepreneurship. The United States is ranked 15th in broadband penetration worldwide today. This is a chance to change that.
Don’t believe that Verizon or Comcast will make these investments unless forced to do so. And while Google may also feel it has no choice but to build its own network, Google at least has a vision that goes far beyond just sustaining a mediocre status-quo; they truly believe in the level playing field that has given birth to so much innovation.
It’s time for America’s bandwidth to finally match our ambitions and our talent. Let’s go Google!
Over the last few weeks I’ve been working with Baltimore Mayor Stephanie Rawlings-Blake, a diverse group of volunteers, my friend Tom Loveland (the Google Czar), and other city officials to organize a response to Google’s Request for Information regarding a potential investment of high-speed 1Gbps fiber-to-the-home Internet infrastructure.
Along the way, something remarkable happened.
We laid out a case for Baltimore, and it’s compelling. While other cities have been pulling stunts to try to get Google’s attention, we’ve been assembling a data and fact-driven case for why Baltimore in 2010 is uniquely suited to innovate with the addition of high-speed fiber infrastructure. Google’s corporate culture is famously and relentlessly data-driven. We’ve answered the questions completely, and have highlighted Baltimore’s unique strategic qualifications. We didn’t just stress “how badly we want this,” we built a concise, logical, and detailed case for why Google should want us.
While it’s probably been obvious that we have been working hard and generating press, the public is not aware of our overall strategy, and that’s partly because we have not been able to talk about all of it. Here are some of the reasons why Baltimore can and very likely will win this trial.
Baltimore is unique in that it owns and operates its own expansive conduit system; most cities do not, and this means that Baltimore can deploy a new network faster and less expensively than other cities can.
Baltimore is home to the only philanthropic field office of Open Society Institute, and founder George Soros (the world-famous financier) has pledged to support a Google investment in Baltimore with programs to help alleviate the digital divide. He has urged Google to select Baltimore as the site of this trial, citing the same reasons that Soros selected Baltimore for his philanthropic efforts.
We’re also working with Bob Kahn, co-inventor of TCP/IP to talk about new ways to archive and share municipal data. Mr. Kahn’s counterpart is the other “father of the Internet,” Vint Cerf, who is now a senior executive at Google. And we believe that Cerf will be helping to review these submissions.
We worked with the Economic Alliance of Greater Baltimore, the entity responsible for marketing Baltimore to the business world at large, to shape our messaging and ensure that we had factual economic data. The Greater Baltimore Committee collaborated to align its business members with the effort, securing letters and videos of endorsement from dozens of key large employers.
Last week, the FCC released its National Broadband Plan and one of its authors is a Baltimore City resident. We sought his counsel and advice.
We aligned support of our corporate community, including Under Armour, T. Rowe Price, and dozens of other companies. We received the enthusiastic support of Johns Hopkins University, The University of Maryland System, Loyola University, and a long list of other schools. Gilman School suggested that it could share its K-12 curriculum with the world with the addition of gigabit broadband.
The Space Telescope Institute produced a stunning, compelling video with astronaut John Grunsfeld.
We’re highlighting our burgeoning music and film scenes. In 2008 Baltimore was voted Best Music Scene by Rolling Stone, and the MICA-produced documentary “Music for Prudence” was just awarded an Oscar.
Urban development author James Howard Kunstleraddressed the Downtown Partnership just yesterday, making the case that Baltimore is poised for a population explosion as we enter into an era of urban “redensification.” I share that vision and believe that high speed infrastructure is one of the most important urban design investments we can make today.
In this process, we have articulated a powerful vision for the future of Baltimore, and that vision isn’t going away. We’ve identified our key strategic strengths, and they are the foundations for our shared future. We can’t control whether Google will choose to make an investment here. But that’s not what is most important: we’ve built a case for why we should be investing in ourselves. And that’s a message that resonates with everyone from carriers and broadband providers to prospective residents and businesses.
We have several “aces in the hole,” and our prospects are beyond strong: we’re feeling lucky, as they like to say at Google. But frankly, if Google chooses not to invest here at this time, we should seriously consider making this investment ourselves — the returns would be immense.
Google CEO Eric Schmidt recently outlined a case arguing that America needs to address its ongoing “innovation deficit” and spur entrepreneurship and creativity in meaningful new ways.
How did we get here? Why is it that America has an innovation deficit? It’s simple: we have lulled ourselves into complacency. America is bored because we have made ourselves boring.
Unleashing Self-Actualization
What do we mean when we talk about innovation and creativity? Really what we’re talking about is what psychologists call self-actualization. Put simply, it’s nothing more than realizing all of your unique capacities and putting them to good use. Self-actualization occurs best when it’s in the company of others who are doing the same. Companies that achieve remarkable results are typically loaded with people who are either self-actualizing or on a pathway towards it.
Abraham Maslow described this pathway as the “hierarchy of needs” to highlight the fact that people cannot become fully self-actualized if they are concerned with other more basic needs like food and security.
Like the USDA food pyramid, Maslow’s hierarchy identifies some important elements, but the idea that there is a strictly linear progression towards self-actualization, or that it is inclined to occur naturally, is probably wrong. Looking at the world around us, it’s easy to see examples of people whose lives who have petered out somewhere in the middle of his pyramid, even though their baser needs have been met.
I believe this is because we have designed 21st century America in such a way that we short-circuit the process of self-actualization in a number of important ways.
Problem 1: Suburbs
Self-actualization occurs best when people are able to connect face-to-face to discuss real-world ideas, try things out, and play. This means intellectual conversation with a diverse range of people, including a broad range of views. It means exposure to the arts, to music, and a shared desire to solve meaningful problems.
Suburbs short-circuit these important pathways for self-actualization in these important ways:
Slowing movement: people are dispersed – gathering requires use of cars
Lack of diversity: suburbs tend towards less diversity of views, not more
Diverts self-actualizing motivation into materialistic and trivial pursuits
The first two points are obvious enough, but let’s spend a moment on the last one.
Suburbs divert self-actualization into pursuits like neighborhood-hopping and home improvement. It’s not surprising that we just suffered the effects of a housing bubble. With millions of peoples’ self-actualizing efforts poured into drywall and granite countertops, there was simply a limit to how much housing and home-flipping we can endure. It doesn’t do anything. Working on housing is first-order toiling, not long-term advancement.
Is it surprising that the icons of the housing bubble years were “Home Improvement,” “Home Depot,” and the SUV? The SUV was literally a vehicle for improperly diverted self-actualization: if I have a vehicle that lets me improve my basement and my backyard, I can become the person I want to be.
Problem 2: Artificial Scarcity of Opportunity
Suburbs have had other unfortunate side-effects: we have allowed corporations to define the concept of work. By dispersing into our insulated suburban bubbles, we have largely shut down the innovative engines of entrepreneurship that used to define America. Where we might fifty years ago have been a nation of small businesses and independent enterprises, we are more and more becoming reliant on corporations to tell us what a “job” is and what it is not.
To the extent that we are not spending time together coming up with new important ideas, we are shutting down opportunities for ourselves. And corporations are happy to reinforce and capitalize on this trend. Opportunity is unlimited for people who are legitimately on a pathway towards self-actualization. We choose not to see it because we think of “jobs” as something that can only be provided by “companies,” and not created from scratch by collaboration.
Problem 3: Reality Television
Reality television is an ersatz reality to replace our own. It steps in where we’ve failed at self-actualization. It is both a symptom and a cause of our failure. As a symptom, it shows that we have so much time on our hands that we can spend it worrying about somebody else’s ridiculous “reality.” As a cause, this obsession can only be serviced at the expense of our own shared reality.
Problem 4: Car Culture
As a society, we spend way too much time in cars. Some of this is due to the issues I already raised about suburban design. But besides that, we spend a ridiculous amount of time stuck in traffic, waiting at red lights, and trekking around our metropolises.
Cars are fundamentally isolating. Time spent in a car is time you can’t spend doing something else. Sure, they can be useful, and I’m not anti-car, I’m just anti-stupid. If we as a society are burning many millions of hours each week in our cars stuck in traffic and covering unnecessary miles, it’s hard to see how that’s helping us become self-actualized (unless it’s in the backseat) and become more innovative. It’s a tax on our time.
Some have also suggested that one reason we have so many prohibitions on what we can do while driving is because we really just don’t like driving that much. Maybe the problem with “texting while driving” is that we are driving, not that we are texting. Maybe communication is more important societally than piloting an autonomous 3,000 pound chunk of metal and plastic?
A Solution: Well-Designed Cities
We’ve had the solution under our noses all along, but we’ve chosen to let our cities languish. Historical facts about America have led our cities to evolve in particular ways that differentiate them from some of our peers in Europe in Asia. But there is hope, and we must recognize the assets at hand in our cities.
Cities offer higher density populations which lead in turn to innovation and a flourishing of the arts. They lead to efficiency of movement and face-to-face communication, which is absolutely essential for intellectual self-actualization and entrepreneurship. Well designed public places let people interact and share, and also provide a platform for festivals, celebrations, and entrepreneurship. There are simply too many positive assets to ignore.
Arguments that American cities are unlivable today are tautological and self-reinforcing. The very problems that are most often cited (crime and education) are the same problems that would most benefit from entrepreneurship and real long-term economic development activity.
The root cause for the abandonment of our cities is race. In the case of Baltimore, WASPs left when Jews became concentrated in particular areas. Jews left when blacks became concentrated in particular areas. And “blockbusters” capitalized on the fear by benefiting on both ends of these transactions. In 50 years, Baltimore (and many American cities) changed dramatically.
Young adults today simply do not remember the waves of fear that sparked this initial migration. It may be a stretch to say that we are entering into a “color blind age,” but we do live in an era where we elected the first black president. I believe we are at the very least entering an age where people are willing to consider the American city with fresh eyes.
We are at a turning point, on the cusp of a moment when people will start looking at our cities entrepreneurially, for the assets they possess rather than the history that has defeated them. We are at a point where we can forget the divisive memories of the mid-twentieth century and forge a future in our cities that is based on shared values of self-reliance, innovation, and entrepreneurship.
Designing Our Future
The design constraints we have proposed for the last 50 years — abandoning our cities, relying on cars, building suburbs and big box stores — have led to the America we see today. And I ask simply, “Do you like what you see?”
We’ve let the culture wars frame these difficult design problems for too long, and it’s time now to put them behind us and start to ask questions in fresh terms. It’s clear now the answer likely doesn’t involve old-school silver-bullets like “Public Transportation,” because simply overlaying transport onto a broken suburban design doesn’t fix anything. Building workable cities and investing in long term transportation initiatives that help reinforce a strong urban design is much more sensible.
And make no mistake: self-actualization is an intellectual pursuit, and the kinds of cities that promote real self-actualization, innovation, and entrepreneurship must become hotbeds of intellectual dialog. Truth and acceptance of facts is an underlying requirement for self-actualization, and we can no longer delude ourselves into thinking that a society built on suburban corporate car-culture makes economic sense.
To continue to do so is to prolong and widen America’s innovation deficit.
Several months ago, this article from the Pew Research Center categorized several states as sticky, magnet, or both; sticky means that people who live there tend to stay there, while magnet means that it attracts people. Some states (Arizona, Florida, Maryland) are High Magnet/High Sticky, while others are one or the other, and one sad batch is neither (Iowa, New York, West Virginia).
What this study doesn’t tell us is very much about what those places are actually like, only the “raw numbers” about mobility and retention. For example, my home state of Maryland is described as “magnet/sticky” (woot) but so are Arizona and Florida, and as far as I can tell, these three states share little in common. Certainly the recent real estate bust was felt worse in those places than here.
I believe that in Maryland’s case, we are both the wrong kind of magnetic and and the wrong kind of sticky, and so to describe Maryland in this way is counterproductive because it assigns a positive spin to some inherently negative patterns of movement.
For example: suppose Maryland is “high magnet” because it attracts people who want to work for federal government contractors. This increases the per-capita income but puts pressure on roads, exacerbates suburban sprawl, and adds people to the voting base who often don’t understand local issues or have personal experience with the landscape around them. I’d call this effect neutral, if not negative.
Suppose Maryland is “high sticky” because we retain 99.5% of our college graduates (a number I’ve heard tossed around). But suppose we export .5% of our very best and brightest and our natural born “effectuators?” And suppose that the smart people we do retain get sucked into government? Again, not necessarily a bad thing, but it doesn’t necessarily lead to the most creative entrepreneurial landscape sometimes.
Maryland has a great deal going for it, but articles like this are meaningless and enhance a simplistic, 19th century view of how we want to build our society. Who are we building our society and economic structures for?
If we are building them for ourselves we need to start thinking about how they serve our everyday experience as people. I have more thoughts on this. If we want to build our society for corporations and a 19th-century conception of what education, production, and economic value is then idiotic oversimplifications like “high magnet, high sticky” might be useful.
I believe we can and must move past such Orwellian, disingenuous oversimplifications.
I am CEO and co-founder at 410Labs, and creator of Mailstrom. I'm a serial entrepreneur, software developer, and community builder in Baltimore, Maryland, USA.
