FCC'S MATTEY IDENTIFIES LOW BROADBAND DEMAND AMONG MAJOR POLICY CHALLENGES

Low demand for broadband services has emerged as one of the “major challenges” for U.S. policy, FCC Wireline Bureau Deputy Chief Carol Mattey told a panel sponsored by the Center for Strategic & International Studies (CSIS) Thurs. in Washington. She said while 80% of the U.S. population had access to broadband, only 20% of households subscribed: “A key question for the U.S. policy is why so many people that have access to broadband in the United States have chosen not yet to subscribe.” The panel focused on policy and regulatory developments in Japan and the U.S. as they affect broadband deployment

Mattey said among reasons for low demand could be price, lack of content, availability of substitutes or ability to use broadband at work. “More than half in my office don’t subscribe to broadband,” she said: “My understanding is in some other nations, the content and types of applications that people have become accustomed to using are different… I think some of it is cultural, some of it is the fact that people have access in other places, to some extent it’s price.” Verizon Assistant Vp-Internet & Technology Policy Lincoln Hoewing said from the audience that price initially was a factor, but not so much any more: “The biggest challenge is not so much on today’s broadband, it’s going to be more and more in how we get higher speeds as they have in Japan.” Legg Mason broadband analyst Timm Bechter said in an interview “the biggest reason” for low demand was that “most applications people use today, like e-mail, don’t require broadband.” He said introduction of new applications, such as video, music and teleconferencing would spur the demand: “Things take time. Demand will keep increasing.”

Mattey said “stimulating demand is not part of the FCC’s regulatory mission. Our philosophy is deregulate, let companies deploy the infrastructure and let the marketplace work. And so if consumers want to subscribe, great; if they don’t, that’s not our job to promote content.” She said she was “interested in finding out about [the demand], but that’s not something we are seeking to affect directly.” She suggested that “demand side issues would more likely be considered in places like the Department of Commerce.” Bechter said one action to promote demand would be govt. subsidies in rural areas.

One reason for successful broadband deployment in Japan is the govt. “focusing on how to increase the demand for content and application of broadband services,” said Yasuhico Taniwaki from the Japanese Embassy. Cora Dickson of the Commerce Dept. said from the audience one of the biggest structural differences between the U.S. and Japan was that the FCC concentrated only on broadband deployment, rather than its demand, while Japanese regulator did promotion as well as regulation. Taniwaki said several agencies in Japan focus on content demand, and there is “quite a lot of duplication. An important thing is to ensure interagency communication.”

Another difference is that in the U.S. cable continues to dominate. Mattey said at the end of 2003, cable modem services represented over 16 million high speed lines, followed by DSL with 9.5 million lines. There were about 600,000 FTTP lines. Taniwaki said unlike the U.S., Japan has more DSL subscribers (11.5 million) than cable modem (2.6 million). He said the speed of DSL service in Japan was 24 Mbps, and more than 40 Mbps in some metropolitan areas. He said several Japanese common carriers have also launched fiber optic service with 100 Mbps for more than one million subscribers in metropolitan areas such as Tokio and Osaka. He said the number of fiber optic subscribers in Japan is expected to hit 3 million by March, 2005.

Taniwaki said the reasons for the rapid growth of DSL in Japan were: (1) The price structure. He said introducing DSL for a flat fee attracted many dial-up Internet users who were charged for time-sensitive local calling. (2) Establishment of interconnection rules, such as collocation and unbundling rules for DSL service providers using access networks of the dominant carriers. He said in Japan, NTT regional companies have 98% of local access lines and that has increased the number of DSL subscribers compared to cable modem. He said despite a common opinion that the Japanese govt. heavily subsidizes private sector to promote broadband, “in reality, government assistance has been limited mainly to a loan system and tax deduction measures. Rather… competition policy has worked well so far.”

Japan’s govt. is focused on accelerating the speed of broadband deployment. Taniwaki said the govt. expected to reach nationwide deployment of fiber to the curb (FTTC) by March 2006. He said FTTC installation reached 72% by the end of March 2003, “in line with the plan.” “The installation of fiber networks is evidently the role of the private sector,” he said: “The role of the government is only limited to ease the financial burden of the common carriers.” Specifically, he said the govt. offered carriers: (1) Loans with interest rates lower than the market rate, available to any carrier with a fiber network installation plan. (2) Tax deductions for carrier investments in digitalization. “These policies are broadly recognized in Japan to have worked well especially during the ’take-off’ period since the year 1996 or so.”

Noting that “Japanese policy implications may not be applicable to U.S.,” Taniwaki said the “remarkably fast” transition from PSTN to IP networks “is forcing the regulatory authority to change the competition from the legacy model based on PSTN to the new model based on IP networks.” He said VoIP shouldn’t be recognized as the replacement for PSTN-based telephone, but “it should be considered that the existing demarcation among services be completely dismissed.” He also stressed international policy coordination should be “further explored in international fora such as ITU or OCED… keeping in mind that IP-based services easily span international borders.”

Answering a question on intercarrier compensation, Mattey said: “I certainly don’t think it’s fair to say that access charges will be eliminated in the near future in the United States… this is an area where a lot remains to be seen where the United States will go.” She said the Commission hadn’t received any submissions from the group looking at these issues. “The Commission is actively working on its own proposals in this area, but the first step would be a further notice of proposed rulemaking,” she said. Mattey also noted that in addressing intercarrier compensation issues, “we also have to think about the difference between retail prices and money that’s exchanged between carriers. Obviously, retail prices for telephone service in the U.S. are controlled by the state regulators. The intercarrier compensation issues have both state implications and federal implications. So it’s a very complicated issue.” Taniwaki said in Japan, access charges were calculated using the TELRIC model under which the access charged is calculated by dividing the cost owed by the incumbent to maintain the local networks by fixed call volumes. He said because the fixed telephone traffic volume has declined since 2000, “the access charge is forced to increase even if the cost remains the same… Maybe we have to rethink this model.”