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What's a Polite Word For 'Shakedown'?

October 1, 2005
By David C. McCourt


In a special opinion essay to the Wall Street Journal written by media and telecom investor, David C. McCourt offers a view on how regulatory change is important to ensure “net neutrality” and the consumer’s right to choice for competing network, content and service providers.

Who lost broadband?

That depressing question reverberates among everyone contemplating the future of telecommunications in the United States, where the level of broadband penetration has now dropped to 13th place in the world.

As someone who has spent the past 25 years building and bundling cable, data and phone systems, the barriers to broadband are frustrating. Critics sometimes suggest that our broadband problems are a result of a lack of imagination or innovation in the industry. But to anyone who has actually tried to build a competitive system, it is painfully obvious that local regulators have become the bottleneck in the system.

These regulators have emerged as neighborhood tyrants, protecting existing local and regional monopolies and effectively holding competitive broadband hostage. By creating unreasonable demands on any new entrant to the market, local regulators have slowed the advancement of broadband at the very moment when the telecom industry might finally be ready to enter the next age of innovation.

Give-and-take between communication builders and local regulators is nothing new. It grew out of the well-established practice of ”linkage“ in the real estate industry.

Whenever urban developers planned a new building, city officials would often demand some municipal benefits—a park, a public plaza—in exchange for building permits. It didn’t take long for the practice to spread from real estate to telecom.

Twenty years ago in Boston I started Corporate Communications Network, which built the country’s first competitive telecommunications system. We got permits and started digging up the roads to lay cable until some low-level public works officials shut down our construction while they debated what price to extract.

The impasse was broken by the legendary public works commissioner Joe Casazza, who reminded officials that the purpose of public works was simply to ensure that the roads were returned to their original condition after construction was completed.

One result of his bureaucratic restraint was that Boston had competitive phone service before any other city in the country. As the telecom boom grew in the late 1990s, however, other local officials across the country couldn’t resist asking for more. In exchange for permits, telecom builders were told they had to pay new fees, face higher taxes, create local TV channels, and offer all sorts of “community benefits.”

In the real estate industry those negotiations kept the insensitive developer in check. The telecom industry, by contrast, has been advancing so quickly that whatever benefits a community might be able to squeeze out of a telecom provider are far outweighed by the disadvantages of not having broadband competition.

Yet the concept of linkage prevailed and before long, building a new telecom system meant navigating through a maze of hundreds of local councils, each with its own list of demands. Little wonder that today the vast majority of American homes do not have an alternative broadband provider.

We have a second chance to get broadband right. The former Bell companies like Verizon and SBC, admittedly late to the game, are now eager to invest billions of dollars to create high-speed networks that deliver bundled voice, data, and video service. Even the FCC has agreed that customers should enjoy what they call “net neutrality”—the right to choose among competing network, content, and service providers. But the only logical way new competitors will enter these markets is if local authorities are restricted to focusing on the condition of their streets, not negotiating contracts with service providers.

This month Texas passed a law allowing broadband competitors to by-pass local regulators when introducing new service to local markets. This event has become a catalyst for renewed federal involvement. A bill has already been introduced in Congress by Sen. John Ensign that would free broadband providers from having to win special permission from local authorities.

Local regulators will undoubtedly fight it. But it is time residential customers were told that “linkage” doesn’t bring better telecom service.

Indeed, according to GAO statistics, the absence of cable competition in U.S. markets has raised monthly rates, which average more than $40 a month, by 15%-41%. Even using the low end of the GAO estimate, a community with 500,000 households would stand to save its residents $36 million a year—far more valuable than the concessions the municipalities demand in the name of the public interest.

There is much more at stake here than cable rates. Today the Internet is still very much like electricity a decade after Edison invented the light bulb. The huge tide of applications has not even begun to appear. But as Asia and parts of northern Europe have started to discover, there is much more to broadband than sending email, sharing digital photos, and downloading music.

The next generation of Internet entrepreneurs will discover how broadband will play a pivotal role in health care, education, energy, and personal security. Ideally, consumers should exploit all these opportunities through a national policy of “net neutrality,“ giving them whatever applications and information they want from the Internet without the interference of regulators or industry bandwidth gatekeepers.

This is a rich opportunity for consumers and business visionaries. But as long as the United States is still battling municipalities about how to permit a broadband competitor from entering the local market, those opportunities will be pursued elsewhere.

Mr. McCourt has started or led 10 telecommunications and media companies. He is chairman and CEO of Granahan McCourt Capital, LLC.

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