'Voice is king' hinders FTTH development

Nov. 1, 2001

On a per-bit basis, the biggest moneymaker in telecom is voice service because its 'vital, personal quality' is an easy sell, meaning broadband networks must offer vital, personal qualities to attract consumers.


Twice in June at industry conferences in Atlanta and London, the president of Verizon Wireless, Dennis F. Strigl, told his audience, "Voice is king, not data...it really is still voice after all these years...it will remain the top earner in the foreseeable future." Recent history suggests Strigl is right. Since the late 1980s, the wireless industry has grown much faster than the cable industry, and the two industries now have nearly the same level of annual revenues, even though the cable industry is several years older. Voice service is successful because it has a "vital, personal quality," amply demonstrated in September during the World Trade Center disaster, when heroic passengers using cell phones on the airplane hijacked from Newark airport learned of the WTC's destruction and thwarted the hijackers' goal. With voice service having such a high emotional-psychological profile, the cable industry's data-intensive entertainment packages will never be attractive enough for consumers to become a "critical mass" demanding fiber-to-the-home (FTTH), especially if FTTH is constrained to be a one-way path for delivery of video and data. But a "critical mass" would develop if FTTH embodied an emotional-psychological quality like its narrowband ancestor. How?

One answer is suggested by Andrew Odlyzko in The History of Communications and Its Implications for the Internet. Odlyzko, formerly with AT&T and now with the University of Minnesota, believes "people are willing to pay far more for point-to-point communication than" content and that this preference determines "what kinds of networks are built." He makes his case by studying the history of telephone and postal services in the United States and Britain, noting that the services were meant as a means of commerce but often priced irrationally, not allowing for personal and noncommercial uses. He concludes, "Historically, there has been a pronounced tendency to underestimate the potential of communications services to facilitate social interactions."

Voice service is social interaction with immediate give-and-take between the speakers-a vital contrast with content services, a passive activity often devoid of human contact. Odlyzko sees social discourse and "personalized" content as strong incentives for FTTH: "[I]f the consumer places much higher value on personal communication than on content, the case for symmetrical connections becomes stronger...fiber-to-the-home may be justified sooner than expected." But since "content on the Internet...[is]...subordinate to...business and personal communication," Odlyzko predicts that voice-service providers "for the next decade...will...emphasize regular voice transmission, supplemented by e-mail and various low-bandwidth data transfers," all of which are consistent with Strigl's assertion that "voice is king." But if it is "king," will service providers ever retire their copper plant in favor of FTTH?

On the rare occasion when FTTH issues are presented to Congress, the fiber-optics industry is represented by Tim Regan of Corning. Last spring, he testified to the House Committee on Energy and Commerce: "From the perspective of the fiber-optics industry, broadband is not being deployed to residential customers in America...business customers are getting it, but residences are not." He added, "[T]he term 'broadband' is so imprecise, it is probably useless at this point...the better way of engaging the public debate is to identify bit transfer rates Americans will need to gain access to audio, video, and data applications...a capability in excess of 22 million bits per second downstream and 10 million bits per second upstream is ideal."

Regan believes high-bit-rate networks will not be built, despite the well-established "cost parity between fiber optic[s] and copper," because the FCC's policy of allowing competitors to "share" the loops of the incumbent phone companies gives incumbents a return too low "to justify investment in new technology." He recommends that Congress "eliminate [sharing]...entirely, or only with respect to residential new builds and total rehab situations."

Regan's points were reiterated in a Wall Street Journal story, "Tumbling into the Telecosm," published in June and written by George Gilder, who asserts, "No enterpreneurs will invest in...new infrastructure when they must share it with rivals." But Gilder has to be wrong because incumbents are widely deploying DSL technology, even though a DSL line must be shared with competitors. Regarding the rate-of-return issue, he says, "[the FCC has forced incumbents to accept total element long run incremental cost-TELRIC-which is] summed up...as a price cap on what telephone companies can charge for links to home and business...taking the profits out of...deploying new broadband pipes."

But this assertion equates price caps (which are set by state commissions for the retail prices that incumbents charge their subscribers for voice service) with the FCC's suggested limits on what the incumbents can charge competitors who "share" the incumbent's loop. Price-cap regulation sets prices that incumbents charge subscribers but does not limit the profits made from subscribers. Also, in every state practicing price-cap regulation, services created after the cap began are exempt from price limits. It is a mistake to say an incumbent cannot charge whatever it wants for so-called "broadband" service, or to say an incumbent's profit level is too low to support new technology.

In September, Sen. Ernest Hollings (D-SC) introduced Senate Bill S. 1346, Telecommunications Competition Enforcement Act Of 2001, and read into the Senate record remarks confirming that incumbents' DSL investments are undeterred by the FCC's policy on loop-sharing: "The four Bell companies invested $3.3 billion in DSL deployment and are expected to spend $10.3 billion through 2003...earnings from their DSL investments are expected to be positive by late 2002...the FCC [has] concluded that high-speed [DSL] lines connecting homes and small businesses to the Internet increased by 57% during the first half of 2000."

But Hollings disagrees with the fiber industry's recommendation to eliminate the FCC's loop-sharing: "Bells seek to block their competitors from entering their markets...there is no justification for further deregulation of the Bells...until competition in the local markets is achieved."

The conflicting views of Hollings and the industry suggest wide disagreement on public policy, which might be reconciled if voice service earnings are taken into account: Copper infrastructure profit levels are high enough to make an optical infrastructure look like a paltry profit center, even if there were no rivals demanding to share the optical loop. Therefore, we are all paying too much for copper-based services, and until the profits fall, we cannot expect the incumbents to build optical loops. Someone else has to do it. When they are built, they have to embody "vital, personal quality" that makes wireless so attractive as well as that "social interaction" aspect Odlyzko has identified as a major, underestimated force that propels the demand for communications.

Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at [email protected] or by telephone: 615-399-1239.

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