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Abstract

Few phrases in public policy have become so overused so quickly as the information highway. Although it is unclear to many what that superhighway is or will be, this uncertainty has not prevented proposals to regulate the superhighway from being made. In this Article, we examine the economic principles that should govern competition and regulatory policies concerning the development and operation of the information superhighway.

In Part II of this Article, we discuss the evolution of technology for interactive broadband networks. While Part II analyzes the production (or supply) side of interactive broadband networks, Part III examines the demand side and asks: What is the likely market for interactive broadband services? In Part IV, we explain the economic principles for open entry and efficient, subsidy-free pricing that are now widely accepted for regulating network industries.

In Part V, we analyze regulatory policies intended to prevent incumbent, regulated firms (such as local exchange carriers) from cross-subsidizing their deployment and operation of interactive broadband services to the detriment of equally efficient rivals - and, eventually, consumers. In Part VI, we examine whether new interactive broadband services should be regulated.

In Part VII, our discussion turns to the Canadian telecommunications market because of our familiarity with certain policies raised there recently in a major regulatory proceeding. In Part VIII, we examine whether the Canadian cable television industry should be protected from competition while it upgrades its network to provide interactive broadband services, including services that would compete with the voice and data services of local exchange carriers.

1. INTRODUCTION

Few phrases in public policy have become so overused so quickly as the "information superhighway." Although it is unclear to many what that superhighway is or will be, this uncertainty has not prevented proposals to regulate the superhighway from being made. In this Article, we examine the economic principles that should govern competition and regulatory policies concerning the development and operation of the information superhighway.

In Part II of this Article, we discuss the evolution of technology for interactive broadband networks. We explain the economic implications of technological advances in electronics, fiber optics, digital signal compression, and software. These developments will allow some networks to deliver not only narrowband services, but also oneway and switched broadband services; The development of new uses for the network will encourage entry by a number of potential competitors for voice telephony, data transmission, distributive video (currently regarded as broadcasting or cable television), interactive video, and other electronic services such as banking, shopping, and advertising. We next analyze the alternative delivery systems for such networks, including completely fiber-optic networks, fiber/coaxial-cable networks, fiber-coax-wireless networks, direct-to-the-home satellite networks, and "wireless cable" systems (including wireless cellular systems). For each delivery system we provide a rough estimate of the prospective cost of network construction and operation as found in recent studies.

A major conclusion of this analysis is that no one currently knows which system or systems will be technologically and financially viable in the foreseeable future. Although it is regularly reported in the business press that a "convergence" of telecommunications technologies is occurring, It may actually be the case that a divergence of such technologies is taking place in the sense that a number of alternative architectures may simultaneously evolve for the delivery of various combinations of narrowband and interactive broadband services. A corollary of this analysis is that one should not assume that a system that is viable in 1995 will not be superseded by a superior technology introduced only a few years later. Consequently, government policy in this arena must proceed cautiously, lest it impede the process by which superior production technologies displace inferior ones. In particular, policymakers should not overlook the potential competitive significance of wireless networks.

While Part II analyzes the production (or supply) side of interactive broadband networks, Part III examines the demand side and asks: What is the likely market for interactive broadband services? . The potential services that we evaluate are pay-per-view movies and sporting events, home shopping, video games, interactive information services, video conferencing, distance learning, and telemedicine. We conclude, as in the case of production technologies, that the demand for interactive broadband services is highly uncertain. Again, this uncertainty should counsel government policymakers to recognize that current predictions of what consumers will or will not want delivered over the network may prove to be erroneous.

In Parts IV through VIII, we address the economic principles that should inform policies concerning interactive broadband' networks. We assume for purposes of our analysis that the paramount objective of such policies is the maximization of economic welfare.

In Part IV, we explain the economic principles for open entry and efficient, subsidy-free pricing that are now widely accepted for regulating network industries. We argue that reliance on these general principles is appropriate for interactive broadband networks. In the current environment of uncertainty on both the supply side and demand side, vigorous competition rather than government planning will best identify not only which delivery technologies for interactive broadband services are superior, but also which services consumers actually demand. In particular, we recommend that the government not attempt to fund universal service goals (or other social policies) by restricting entry into the market for interactive broadband services or by regulating the price of such services such that one consumer pays an inflated price to subsidize other consumers. If subsidies are deemed necessary, we recommend that the government employ more direct financing methods that subsidize service to targeted constituencies while minimizing the harm to consumers as a whole. However, we caution that the case for any subsidies is likely to be quite weak.

In Part V, we analyze regulatory policies intended to prevent incumbent, regulated firms (such as local exchange carriers) from crosssubsidizing their deployment and operation of interactive broadband services to the detriment of equally efficient rivals-and, eventually, consumers. In particular, we describe the salutary effects of price-cap regulation and of an efficiency-based rule for the pricing of inputs sold to competitors of a vertically integrated monopolist.

In Part VI, we examine whether new interactive broadband services should be regulated. We conclude that it would be counterproductive to do so and that such services are not likely to be necessities of life of the sort that government has traditionally regulated. We next examine whether there should be mandatory interconnection to competing providers of interactive broadband services. We conclude that such mandatory interconnection is unlikely to be necessary and that, if ordered by statute or regulation, it would present exceedingly difficult questions of what the prices, terms, and conditions of such interconnection should be.

In Part VII, our discussion turns to the Canadian telecommunications market because of our familiarity with certain policies raised there recently in a major regulatory proceeding. Nonetheless, our analysis is directly applicable to developments in the United States, which, so far as the deployment of interactive broadband technology is concerned, closely resemble those in Canada. We examine how policies toward foreign investment in the Canadian telecommunications industry are likely to affect the extent of competition fu the delivery of interactive broadband services. We conclude that removal of even the recently relaxed limits on foreign ownership would benefit Canadian consumers by enlarging the number of competitors having the technical expertise and financial resources to build interactive broadband networks in Canada.

In Part VIII, we examine whether the Canadian cable television industry should be protected from competition while it upgrades its network to provide interactive broadband services, including services that would compete with the voice and data services of local exchange carriers. We conclude that a prohibition or moratorium on telephone company entry into video would be unlikely to benefit consumers. We further conclude that consumers probably would not benefit from a policy of temporary subsidies to cable television operatbrs in the price that they must pay to interconnect their voice and data services to the network of the local exchange carrier. However, we do note that this issue is more ambiguous in its consumer welfare effects than is a prohibition or moratorium on telephone company entry into video. In any event, we recommend that Canada's policies toward interactive broadband networks not emulate the approach of the Modification of Final Judgment-the consent decree in the United States that has created its own layer of judicially administered regulation over the Regional Bell Operating Companies since the divestiture of the American Telephone & Telegraph Company. In devising its policies for regulating interactive broadband networks, Canada should avoid adopting expansive line-of-business restrictions on certain kinds of telecommunications firms, the deleterious effects of which for consumers will supposedly be mitigated through a litigious case-by-case waiver process.

II. THE EVOLUTION OF INTERACTIVE BROADBAND TECHNOLOGY

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J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.

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