For residential customers, switching broadband access method from Cable to DSL or the reverse is much more costly and cumbersome than either switching from one DSL provider to another or switching among narrowband ISPs. There are no physical switching costs in these latter two cases. Moreover, the ILEC must provide access and collocation for any DSL or narrowband ISP competitor that requests it, while the Cable companies have no such obligations. Thus once the US broadband Internet infrastructure is built out, if access to cable lines remain closed, broadband cable Internet providers like AT&T will realize that they have several hundred dollars’ worth of room to maneuver.

The logical architecture of the network also creates important switching costs. Information access and transmission systems become embedded with one’s current provider. This is in contrast to narrowband Internet service provision or DSL service where the prohibition on bundling access and service allows customers to switch easily between ISPs and to have equally convenient access to various kinds of content. Let us consider these several costs of switching from one broadband system to another.

First, many everyday communication activities are tightly entangled with one's Internet provider, so that shifting providers may range from the inconvenient to the truly burdensome. With narrowband Internet access, the inconvenience is typically limited to getting a new e-mail address and modifying a few dial-up settings. However, because broadband Internet supports a wide range of new communication activities, switching among broadband access providers would be much more cumbersome. For example, for customers who elect to use their "always-on" broadband connection to run web servers from their home, the switch would require a modification of the DNS tables to link their domain name to the new IP address they would receive.35 Additional inconvenience would include the loss of adaptive setups that provide ease of access or access to special services.

Second, if arguments about bundling are correct, competition is all the more stifled. Some market analysts estimate that merely the prospect of bundled services creates approximately $150 in new value per subscriber for a Cable system, irrespective of value created by the anticipated revenue from each individual service offering.36 There may be competitive advantages in the package of services created, advantages in pricing those services, and advantages in a single bill. Indeed, the consumer’s preference for one bill is believed to be strong enough to reduce switching, even without price reduction for the services in a bundle.37 Consider only the geographic monopolies noted above. In those areas, Cable's competitors cannot create equivalent packages. The ability to include television offerings in its bundles, whatever the rules on control of program content there may be, certainly makes it easier for AT&T to create distinctive packages. AT&T could, and apparently intends to offer integrated bundles of phones service (both local and long distance), Cable TV, mobile services, and ISP. Can competitors create equivalent alternative bundles? If not, what will be the market consequences? This of course further increases resistance to switching one component of the bundle --broadband access-- to an alternate supplier.

Finally, and more fundamentally, consumers may never find out what they are missing and thus may never be in position to decide whether switching broadband provider is worth the cost. With traditional products, we tend to think of switching costs as part of a rational decision between two well-known alternatives. For example, customers switching from one brand of cereal to another have all the information they need to make a rational choice: they know the prices, they see the packaging, they can easily compare objective nutritional value and subjective taste. Not so when picking between two alternative broadband access services. As we just described, prices are not always what they seem, with countless hidden costs ranging from re-wiring to domain name re-setting, and packaging is less than transparent when broadband services come as part of complicated and hard-to-compare bundles.

More insidious is the difficulty to assess real-life performance (the service's objective "nutritional value") or to really understand the difference between "open-access" and "closed-access" communication experiences (the service's subjective "taste"). Just like cereals, customers can't know what they are missing until they buy the competitor's product and try it out. But unlike cereals, where it is easy to buy two different boxes and give them a taste-trial over breakfast, few customers will subscribe to both Cable service and DSL and benchmark them against one-another before deciding which one they like best. The good news is that whichever they chose, it is likely to be much better than the analog modem it replaces. The bad news is that they will probably never know how much better it could have been, had they picked the other one. Until two years ago, when France Telecom finally decided to take a real stab at offering mass-market Internet access, French citizens thought that second-generation Minitel was very cool. As they marveled at their new Minitel terminals displaying alpha-mosaic images faster than ever before, they never suspected that across the Atlantic (and across the Channel), the web had vastly overtaken their once-pioneering télématique.

In such cases, when first-hand information is hard to obtain, we typically rely on others to help us chose. We follow the lead of neighbors, or read Consumer Reports. Operationally, for broadband consumers, comparative shopping will generally mean comparing notes with friends and neighbors who have an alternative. There is clear evidence for this behavior from the PC world. PC users, Austan Goolsbee and Peter Klenow have shown, are strongly influenced by their local social network.38 But neighbors will not be much help if what broadband access service is available to them depends on which Cable providers control the local monopoly. French customers certainly could not count on their French neighbors to tell them about the Internet. Even trade magazine benchmarking reports may be of limited use because in the short term, until full-fledged third-generation services emerge, the differences between various flavors of broadband Internet access will seem subtle to the residential consumer. Indeed, the average household doesn't directly experience "open broadband Internet-access" or "dynamic caching" but rather the services delivered over broadband access infrastructure --web pages loading faster or smoother streaming video. But even when delivered over a third generation infrastructure, these still remain second generation applications.

As in an earlier stage of the Net’s evolution, the real differences --new communication patterns, new applications and interfaces, significantly different security and privacy implications -- will only emerge over time, through sustained use. They will unfold as competing "network performance features" offered by broadband access providers play themselves out through the evolutionary unfolding of the third-generation Internet. These in turn will facilitate different forms of end services and other features that are important to users, like privacy and security. Unless we preserve open access today, we will never find out because we may not even begin to explore alternative evolutionary paths. Customers will never be in a position to compare significantly different broadband experiences, and they will never know what they are missing. But perhaps America doesn't really have to lead in this round. It might want to hope that France will be able to repay the favor, and come rescue it from the closed-Cable evolutionary trap a few years down the road.

The resulting market structure will be complex: the precise market structure, or set of different local market structures, will only unfold over time. But however the structure of a local market unfolds, it is likely to be less than fully competitive.

In some set of markets -- likely to be a significant set given the limitations on DSL -- Cable will be the only broadband option. Either DSL service will be technically impossible, or Cable's initial lead in deployment will result in an unwillingness of the local RBOC or competitors to spend resources deploying DSL in that area. In this case consumers are likely to be harmed: they will pay the fees for access that an unregulated monopolist can charge, and they will suffer from limitations on the kinds of services offered and the degree of experimentation offered imposed by the single access provider.

In some markets the typical residence will possess two active wires capable of carrying broadband video services subsidizing high speed data services. Consumers seeking broadband service will have a choice between the Cable-blessed access provider allowed to operate over the cable line, and the set of ISPs and Local Exchange Carriers buying access over the telephone line from the local incumbent phone company. Is there reason to think that consumers with the potential for dual access would then be worse-off than if ISPs could themselves offer access over either wire?

First--as discussed above--Cable's early lead in deployment, coupled with substantial physical and logical switching costs are likely to give AT&T/@Home substantial power even in potential dual access local markets. Second, the closing-off of ISP access to the cable wire changes the dynamics of the market in which ISPs and CLECs face the RBOC. ISPs and CLECs purchase broadband access and collocate equipment at a regulated price, but regulators cannot fully specify the quality and reliability of service, or the incumbent's responsiveness to ISP requests for assistance and accommodation. A credible threat on the part of ISPs to vote-with-their-feet and desert telephone wire for cable wire would provide significant discipline on the RBOC, and get its incentives to provide high-quality and flexible service right.

This point should not be overstated: pride in the system and the satisfaction of doing a high-quality job are important motivating factors. But it is the case that in a regulated monopoly quality of service is one factor that can slip. And as long as the cable wire is closed, competitive DSL access providers will face a monopolist in their RBOC. Better to have real market competition --in this case, competition from the cable wire for the business of each broadband Internet access provider--as a source of discipline as well.

In some markets there will be an effective network duopoly, Cable on one hand and DSL on the other. What will then be the competitive dynamic of a duopoly in which one is closed and the other is open? Wouldn't the cable company then simply have to open its system in order to attract customers? Before assuming that the Cable company would not gain much by closing its system, one must consider how the presence of closed-access cable would affect negotiations between the open-access ILEC and the competing ISPs. Indeed, by keeping access closed, the cable owner might strengthen the ILECs bargaining position vis-à-vis ISPs, thereby decreasing competitive pressure on its own integrated ISP. If both network providers are open, then the ISPs could negotiate with the owners of both wires to the home and give their business to the one with the best terms and conditions. Perhaps both network owners would prefer not to cooperate with the ISPs, but if both were open that would be a much harder implicit bargain to strike. Closed-access cable and open-access ILEC would in effect have a common interest in keeping cable closed-access, thus creating the basis for implicit collusion that would strengthen their respective positions over non-affiliated ISPs. So even where cable and DSL are in a position to effectively compete with one another, one can imagine scenarios under which this would not necessarily result in forcing Cable to open access to its infrastructure.

The consequences for the innovative dynamic of the Internet will be quite different in these three cases: effective monopoly, asymmetric duopoly with one side closed and the other open, and real competition between network owners and amongst ISPs. In all three cases however, we have strong suspicions that competition alone would fail to guarantee open access to the emerging broadband infrastructure.

The investment incentives resulting from a closed Cable network are not so essential that the FCC should avoid a thorough policy investigation on open access today. The FCC’s policy choice about broadband cable necessarily addresses two markets simultaneously. They are the broadband access market, the focus here, which includes high speed data and the other services it supports such as interactive video teleconferencing and the phone/fax access network market. An upgraded cable television network not only hastens the provision of broadband access to households, it also permits a second line to the home for phone/fax service competition and therefore accelerates the emergence of competition in the local loop. Some contend that the creation of a viable cable broadband network has the added pro-competitive effect of forcing faster rollout of DSL by the RBOCs, the local telephone companies.

Those who advocate closed access to broadband cable claim it is essential to justify the investment needed to upgrade the cable network. They argue that reducing the total return on investment in broadband by ending the exclusive use of Excite@Home or introducing significant regulatory uncertainties over the rules for broadband access (thus forcing a discount on total return) can only slow build-out of cable broadband (and thus slow deployment of DSL).39 Whether there would be an influence on the investment and hence the pace of the build-out of cable broadband is debatable. In any case, we have substantial doubts about the size of the effect being so great as to preclude a significant policy initiative on broadband access. In fact the Cable industry often builds out their upgraded network to support digital video and higher quality analog video in a monopoly franchise, providing a low cost platform for the addition of high speed data services.

To begin, the ILECS are investing in DSL, not simply to compete with broadband cable, but also as a means to cope with exploding Internet modem calls without deploying more expensive central office equipment, and also to move toward a data network regardless of what Cable is doing.40  The more fundamental question is about the effect on cable broadband build-out.

The Cable networks are franchise monopolies in most markets and built, capitalized and largely upgraded under a monopoly market operation. AT&T did not buy companies in competitive markets, but rather bought a set of video distribution monopolies. These monopolies had, arguably, largely made the decision to upgrade their networks to digital video in order to compete with direct broadcast and, perhaps most importantly, to offer cable-based phone service. AT&T paid substantial amounts to do this, some estimates run as high as fifteen billion dollars in access and interconnection fees in 1998, about a third of its domestic wireline revenues.41 Cut those charges in half and AT&T's net income doubles. Little surprise that some estimates suggest that AT&T plans to have extensive and exclusive cable/phone penetration in four to five years. In that case, gains from video services, let alone Internet access, are just gravy. Seen that way, AT&T got the basic advantage of Internet access for a small marginal cost. Moreover, the modifications required to add Internet capacity to an existing digital Cable system are much lower than the estimates of the costs required for upgrade of the digital network itself.42 Given the imperatives and advantages just described, it would hardly seem that Internet access needs to be closed in order to justify the upgrade of capacity.

Cable control of broadband access to the Internet will have two sets of damaging consequences. First, and our primary concern, the innovation and experimentation that has been central to the Internet explosion will be stifled, if not precluded. Second, Cable owners will have the capacity to control network services; voice, data, and video distribution and a material part of the video content as well as much of the services and Internet content delivered through the cables. The risks and harms outlined here would occur whenever there is a monopoly provider of tied access and ISP service.43 The case at hand is that of AT&T/@Home, so it again is the focus of our discussion there.

Any network owner, left unconstrained, will logically attempt to shape network uses along patterns that best serve its own interests. In the present case, @Home's service is understandably configured so as to force usage to fit the specific patterns that generate the most profits for @Home. These practices may represent sound business strategies: many constitute @Home’s own practical responses to network management challenges, and others look a lot like what other network providers do. However, they become worrisome if, as we believe the case to be, the closed network reduces the ability of rivals to deliver services efficiently and if consumers cannot access alternate ISPs. Where there is a geographic monopoly this is certainly the case. As a result, @Home’s concept of what can and should be done over the Internet precludes a range of innovation and experimentation by other service providers and by its own customers. The practices involve a number of elements.44

a) Limits on the overall amount of downstream video from outside sources, currently to about 10 minutes per day. Obviously, this increases the importance for content providers to be positioned as a favored partner of Excite@Home and escape such restrictions.

b)  Limits on up-stream traffic, that curtail consumers' ability to experiment with their own uses of the network including internet telephony and interactive video teleconferencing.45

c)  Prohibitions on setting up any kind of server, including web, ftp or pop servers

d)  Technical biasing against and limits on the performance for non-partner content that will structure the cyber marketplace, limiting experimentation and innovation.

e)  Prohibitions on using Excite@Home for work-related activities, for which customers are expected to purchase the more expensive "@Work" service. That means it will be difficult to hook up to corporate LANs from home, which will limit the present diffusion of innovative forms of work at home.

f)  In order to enforce these rules, @Home must constantly monitor its customers' data traffic, raising serious privacy concerns.46

While it will still be possible to receive Internet service from other ISPs, though still paying for @Home ISP service, alternative service providers will be denied access to key network performance features of the @Home infrastructure, such as dynamic caching and collocation on the @Home network. They are thus forced to compete with their hands tied behind their backs.

Closure and usage limits preclude experimentation with a wide range of alternative patterns of use. Provider domination of the processes of experimentation, learning, and innovation that preceded deregulation and the Internet will have been re-established. @Home would then become the monopsony buyer, or at least dominate a major segment of the market, for network software tools and hardware equipment. By contrast, open access to Cable would then allow the dynamic of network innovation in the broadband era to unfold with the force, pace, and innovative imagination of the narrowband era. The development logic that has characterized the Internet to date would be likely to continue. ISPs other than @Home would experiment with different patterns of service, different packages of service offerings. Each ISP would itself become a client for innovative software and hardware companies. The virtuous cycle of user-driven innovation would be sustained.

At this formative stage in broadband evolution, we need to encourage the widest possible experimentation with available alternatives and the widest possible experimentation by competing providers and innovative users. Only such openness can generate alternate, unforeseen patterns of use for the Internet; alternate kinds of content and means of delivering content; alternate ways of structuring the E-commerce market place.

Whoever owns the network, absent competitive or regulatory constraints, will also logically try to extend its infrastructure ownership into control of the services and content it carries. In the present case, AT&T/@Home appears intent on leveraging its Cable access monopoly into markets that ride on top of Cable access. This goes well beyond the bundling of Internet service provision with other AT&T services. It has significance far beyond the simple bundling of gateway services such as e-mail or web hosting with the basic service provision.

There is clearly a range of strategies available for the provider of a large cable modem network to "bias" Internet access to the advantage of some content over others. Though some may be intelligent ways to speed up the Internet experience for customers (dynamic caching is a good example), these practices could easily become abuses of dominant position if applied differentially to different service and content providers. Indeed if a single ISP, in this case AT&T/@Home, has sole access to these strategies, it can then at its discretion, and at its discretion alone, systematically shape what content and services gets to the end-users under optimal conditions. Worse, it could shape the very terms of innovation on the Internet, deciding who gets to experiment and who can capture the resulting benefits. Open access would assure that other ISPs could use the Cable infrastructure to pursue similar approaches, where appropriate, and would foster healthy competition of network applications, programming and architecture.

The @Home annual report is very clear on these strategic practices and includes details of how @Home offers speedier service to Internet content providers who agree to become "content partners" and share their revenue stream.47 Under the sole control of a broadband access monopoly, the potential for serious abuse is evident. Consider in particular :

"The @Media group offers a series of technologies to assist advertisers and content providers in delivering compelling multimedia advertising and premium services, including replication and co-location. Replication enables our content partners to place copies of their content and applications locally on the @Home broadband network, thereby reducing the possibility of Internet bottlenecks at the interconnect points. Co-location allows content providers to co-locate their content servers directly on the @Home broadband network. Content providers can then serve their content to @Home subscribers without traversing the congested Internet."48

Further, the report notes that:

"we have established relationships with certain of our interactive shopping and gaming partners whereby we participate in the revenues or profits for certain transactions on the @Home portal. We also allow certain of our content partners to sponsor certain content channels for a fee."49

These quotes describe two behaviors that could bias the cyber-marketplace. The first is "collocation", the second is "replication". Both function to allow @Home to privilege partners and exclude competitors – they differ only slightly in their implementation. @Home has developed partnerships with non-competing firms in each of several content areas (interactive shopping, gaming, digital audio, digital photography, and search services) and it is presently collecting "fees relating to content partnering arrangement".50 In keeping with its Cable origins, @Home sees these practices as "programming" and it sees itself as "programming the Internet."51

@Home is promoting itself as offering collocation service to bring better performance to @Home customers (merchants as well as end-users), but the term "collocation" is not meant in the nondiscriminatory sense that those familiar with telecommunications are wont to use. Rather, each partnership appears to be exclusive to a particular area of content. A collocated partner has faster access to @Home consumers because of a presence on the same network. @Home had, as of 1998, already collocated at least one partner (SegaSoft) and was planning to collocate others.

Replication is manipulation of the caching system to favor partners. It essentially speeds requests for certain content by pre-loading it at sites that are close and well-connected to subscribers. As of 1998, @Home replicated news feeds from CNN and Bloomberg. @Home then promotes replicated and collocated partners on its portal and with its "wizards", making competitors harder to get to. The result is the creation of a cyber-marketplace which systematically favors the providers of content, services or transactions who have a privileged financial relationship with the monopoly owner of the infrastructure that supports that cyber-marketplace. If customers had a real choice of broadband access infrastructure, this would matter less, but within the current situation, when they become customers of @Home's access infrastructure, they automatically and unknowingly receive access to a cyber-marketplace biased to favor @Home's financial partners.

In addition, it certainly is possible to manipulate the caching architecture in many other ways to favor partners. @Home has the incentive, given its relationship with content providers, to further utilize the caching system to actually slow requests to competitors' "programming", rather than merely speeding up access to its own brands.52  In addition, @Home's annual report also notes that "local caching servers can compile far more comprehensive usage data than is normally attainable on the Internet".53 If this data were shared with partners, this would create a further barrier to competition from non-partner content providers. Not only could an @Home partner know detailed information about @Home subscribers using their service, it would also be possible to know the same detailed information about who was using a competitors' service or to restrict access to a competitors’ service while substituting their own.

In summary, @Home proposes in its own materials to structure a cyber-marketplace that steers @Home customers, unknowingly, toward merchants who partner with @Home. @Home can structure the cyber-marketplace both through the advantageous positioning and access of partners and through @Home’s devices such as "How-Do I" wizards.54 @Home’s own reports explains how they will provide superior quality performance to partnering merchants on their network. If you are a merchant, either you are on @Home’s service network or the majority of broadband customers (those that use AT&T@Home cable service) will not be able to access your site, as you intended.

These capacities to structure the cyber-marketplace are of startling significance, especially when customers are unaware of the marketplace's structured biases. They are particularly important if a single ISP has a local monopoly and of broad significance if a single ISP holds stakes in enough local monopolies or dominant positions locally to influence the very structure of the cyber-marketplace. And, we should note, even allowing the choice of another ISP for no additional fee (for example if customers could choose to substitute AOL for @Home as the default ISP over their broadband cable access) would not correct the competitive problems created by broadband access architecture that rewarded @Home with performance advantages over all rivals. There are at least two reasons.

First, electronic commerce is certainly one of, if it is not the killer application of the broadband era. The unfolding of E-commerce will drive innovation throughout all segments and elements of a competitive network. Yet suddenly the competition across segments and elements that has driven the evolution will be squeezed into and captured by a vertical structure with a single buyer, the ISP provider: @Home.

Second, business to business E-commerce has dominated until now. Broadband will facilitate the full-fledged emergence of retail E-commerce. Closed access would, as a matter of policy, permit @Home to structure the cyber marketplace for a significant portion of the American consumer population. With control of the broadband service provision, @Home would become a truly dominant influence in American retail. Even if @Home’s control of the broadband market were more limited, it would nonetheless structure the cyber marketplace used by a substantial number of American consumers. The biases will not be immediately obvious and they will not necessarily be brought to the attention of the consumer. The competitive possibilities of E-commerce, ease of entry and experimentation producing new business strategies and new business organization, would be wiped away. Broad gains to the American economy would be lost.

Joint dominance in broadband access, even monopoly power over broadband access in many cases, raises serious threats to the public interest. In the absence of a policy to assure open access, the resulting vertical integration and closed access defeats the fundamental innovation dynamics that have made the Internet successful: open standards, open access, a clear set of competitive principles and prohibitions against leveraging access control into control of service architecture, cyber-marketplace, communication patterns and content. Vertical disintegration has traditionally led to real competition and innovation in each segment, as well as competition and innovation in alternative ways to package combinations of services.

The policy problem arises at the moment at which the cable television "broadcast" system, built up with local monopolies and successfully built out because of the appeal of cable TV offerings, is being transformed into a broadband digital system and integrated into the national communications network. The current debate stems from the collision of the policy legacy of Cable's monopoly and restricted access origins, with the evolving Open Access thrust of telecommunication policy that has enabled the successful explosion of competition throughout the telecom network segments, ushering in user-driven innovation and the Internet revolution. Reversing the set of policy innovations that have led to broad American communications leadership would be unwise, at best.

But what can be done? We think that the most important point is to recognize that the situation is ripe for an explicit set of policy decisions, not wait and see. The question as to the right prescription is not one that we wish to resolve here. But we would offer some observations about how to proceed.

To begin, some believe the main policy issue is that consumers should not have to pay twice for use of an ISP other than @Home. This emphasis on nondiscriminatory access to the broadband Cable network for all ISPs, they suggest, requires only a light regulatory touch. However, it should be noted that a nondiscrimination rule in itself would not solve the underlying problems that we have described. For example, suppose that the rule simply said that AOL will pay the same as @Home for access to the Cable broadband network. This would not prevent AT&T from taking its rents on the network access charge and simply bundling in @Home for no fee. This would be like Microsoft making its money off Windows while charging nothing for its browser.55 Is this satisfactory, or not? After all, AOL could change its business model to the one used by Yahoo (or AOL in its UK operations for some customers) where there is no monthly charge for email and access. Revenues derive from ads and sales commissions.

Arguably, the "don’t pay twice" rule, while straightforward, only addresses one of the least important issues discussed in this paper. The real issue is the ability to achieve an open architecture for broadband services. Policy makers should be aiming to stimulate innovative designs and uses of the network. But the vertical arrangement between the AT&T/TCI broadband network and an ISP may defeat this because the network will be optimized to give superior performance to the preferred ISP and superior service to the ISP's favored partners.

As we have stressed throughout this paper, the problem is not just the adverse effect on competition in the markets for Internet service provision. The closed architecture of the underlying broadband network will also restrict access to the "network performance features" that are so vital to innovation. In its decision on the AT&T purchase of TCI the FCC rightly expressed concerns about some matters of the network architecture, but settled for rather toothless promises by AT&T in its filings to the Commission.56

The right question is whether policy options exist that are lighter handed than the regulatory regime for DSL imposed on the ILECs and yet responsive to the issues posed by broadband cable networks. It is precisely in regard to the intersection of market power, even jointly shared with other providers, and network architecture that the British telecom regulator, OFTEL has proposed a powerful policy agenda for the UK. This initiative is particularly interesting because OFTEL, while being a credible advocate competition, has generally been less disposed than the FCC to "unbundle" network elements for local access. Yet OFTEL now argues that the regulator should use its power to force disclosure of the underlying network architecture, and a form of mandatory mediation among all stakeholders about how to make the architecture sufficiently nondiscriminatory in order to blunt the worst abuses of market power. The OFTEL approach is one way to think about an intermediary policy solution. It is not proposing anything like unbundling of network elements or LRIC pricing. But it is looking for a measured policy response to the challenge explored in this paper.

As such, OFTEL’s approach serves as an important referent in the current policy debate. It recognizes the problem and creates the condition for an informed and open public debate to address it, rather than simply wish that it will all go away if regulators let the Cable companies proceed.57 Differences in OFTEL's premises, as well as the specifics of the British policy discussion, mean that OFTEL's answer may not be right for America.58  We would also note, that the recently announced Canadian policy on Internet access is much more intrusive. But surely OFTEL's questions are the right ones.

In closing, we would note that it would be highly desirable in itself if the United States again established itself as the international leader for broadband Internet policy. Silence in policy in the United States takes away America’s significant advantage globally in shaping the policy for the next generation of global Internet services. Problems about how to assure competitive network infrastructure for broadband access exist everywhere in the world. The FCC’s silence leaves a leadership vacuum in the global policy arena that others will surely fill, perhaps with results that the United States may not like.

APPENDIX ONE : THE OFTEL APPROACH:

"As service providers provide an increasing diversity of services across undifferentiated digital network, relying on intelligence in consumers equipment,59 it will become even more important to ensure that the entry barriers are not used abusively. Regulators will need to retain backstop regulatory powers to intervene in the market to ensure interoperability. There should be a common framework for intervention. This does not mean that regulators should set standards. OFTEL believes that increasingly interoperability will be based on voluntary agreements within the industry. The regulators role should be to facilitate industry cooperation and to police anti-competitive behaviour. Only if the benefits from intervention clearly outweigh the potential adverse effects should standards be imposed on the market. For example, one of the main obstacles to the voluntary approach is that a consensus can be undermined by standards imposed by a dominant operator which become the de facto standard for a given service or application. This outcome can be either benign or malign - or various shades in between. Regulatory intervention may be justified to prevent those with market power from imposing their own proprietary standards on the wider industry where this raises others60 cost, prevents or impedes market entry or otherwise distorts fair competition."
"OFTEL believes that the concept of interface control may be the basis of a common approach to interoperability. This has three key aspects:
- mandatory publication of standards for all;
- mandatory consensus - seeking process for operators with market influence backed by discretionary powers for the regulator to intervene if this fails."
- within this type of rule there will need to be careful consideration given to the role of intellectual property rights ('IPR')."

Source: OFTEL’s response to the UK Green Paper—Regulating communications: approaching convergence in the information age," January 1999. http:// www.oftel.gov.uk/broadcast/gpia0199.htm

**  Francois Bar is Assistant Professor of Communication, Stanford University; Director, Network Research, Stanford Computer Industry Project (SCIP). Stephen Cohen is Professor of City and Regional Planning, UC Berkeley; Co-Director of the Berkeley Roundtable on the International Economy (BRIE). Peter Cowhey is Professor, Graduate School of International Relations and Pacific Studies, UC San Diego; Director, University of California Institute of Global Conflict and Cooperation; former Chief, International Bureau, Federal Communications Commission.  Brad DeLong is Professor of Economics, UC Berkeley; formerly Deputy Assistant Secretary for Economic Policy, United States Department of Treasury.  Michael Kleeman, formerly Vice President of Boston Consulting Group.  John Zysman is Professor of Political Science, UC Berkeley; Co-Director of the Berkeley Roundtable on the International Economy (BRIE). They received research assistance from Christian Sandvig, PhD Candidate, Department of Communication, Stanford University.

8  "The Unregulation of the Internet: Laying a Competitive Course for the Future" Remarks by Chairman Kennard Before the Federal Communications Bar, Northern California Chapter, San Francisco. 7/20/99

13  Policies and proceedings like the Specialized Common Carrier, Carterfone, Execunet and Open Skies decisions, and the First and Second Computer Inquiries, permitted new entry into equipment, network and service provision.

14  "… established carriers with exchange facilities should, upon request, permit interconnection or leased channel arrangements on reasonable terms and conditions to be negotiated with the new carriers, and also afford their customers the option of obtaining local distribution service under reasonable terms set forth in the tariff schedules of the local carrier." Moreover, as there stated, "where a carrier has monopoly control over essential facilities we will not condone any policy or practice whereby such carrier would discriminate in favor of an affiliated carrier or show favoritism among competitors." See Federal Communications Commission, 29 F.C.C.2d 870; 1971, para 157. See, also, In the Matter of Use Of The Carterfone Device In Message Toll Telephone Service; Docket No. 16942; 13 F.C.C.2d 420; June 26, 1968; MCI v. FCC (Execunet I), 561 F.2d 365 (D.D.C. 1977), cert. denied, 434 U.S. 1041 (1978); MCI v. FCC (Execunet II), 580 F.2d 590 (D.D.C.), cert. denied 439 U.S. 980 (1978); Computer I, 28 F.C.C.2d 267 (1971); Computer II, 77 F.C.C.2d 384 (1980); Computer III Notice of Proposed Rulemaking, F.C.C. 85-397 (Aug. 16, 1985)

26  For example, the FCC cites AT&T estimates that only "60-80% of RBOC access lines are ADSL qualified". Federal Communications Commission. "Deployment of advanced telecommunications capability to all Americans in a reasonable and timely fashion, and possible steps to accelerate such deployment pursuant to section 706 of the Telecommunications Act of 1996." (Report) CC Docket No. 98-146. February 2, 1999, fn 147.

27  These limitations only apply to the copper portion of the loop. Where DLC is used at the serving area interface (where distribution and feeder cable meet), the only constraint will be on the length of the copper distribution cable. Over time, more DLC is being installed, so the percentage of lines with copper greater than 18K ft will decline. Although DSL is not now being provided over DLC, there are many products now (on soon to be) on the market that will make this possible. So I think the answer is that it the percentage of lines where DSL cannot be provided will fall significantly over time. DLC Trends presentation by Bellcore at GR-303 Integrated Access Symposium, San Diego, CA, July 29-30, 1998 - www.bellcore.com/gr/GR303.html#forum. Ultimately 50%, or more of all suburban/urban customers and 80% of rural customers will be served by DLC (assumes 9 kft. beyond CO to trigger for DLC deployment). Nationally, the average annual increase in DLC served lines is ~ 20% compared to an annual growth in working lines of 2%.

58  OFTEL begins with some premises that the FCC might reject. For example, OFTEL is especially concerned about settop boxes. And its analysis of market power is influenced by the fact the underlying network offering DSL in the UK has not been subject to unbundling in the same manner as in the United States.

59  OFTEL further asserts: 4.25 Such ex ante rules are required for those who act as "gatekeepers" but escape the legal/economic definition of dominance (though they have the clear potential to become dominant). Control of access gateways can distort downstream markets. If such distortion occurs it would be extremely difficult to redress after the event. In order to prevent such distortions ex ante rules should apply where the consumer, or other end-user of services, faces significant switching costs in moving to another supplier or service. The rules should be subject to a carefully defined "trigger" to avoid catching any operator unnecessarily. They must also be applied in a way which is technology-neutral (i.e. so that it is the market, not the regulator, who determines the relative success of any competing technologies). They should be the minimum necessary to allow the downstream markets to function normally, without unnecessary restriction or distortion of competition. OFTEL, "Beyond the Telephone, the Television and the PC—III," OFTEL’s second submission, March 1998, found at http://www.oftel.gov.uk/broadcast/dcms398/htm.