IIA PRESS TELECONFERENCE: “The Role of Government in the Broadband Economy: Making Regulations Work”

Operator: Good day and welcome to “The Role of Government in the Broadband Economy: Making Regulations Work” conference call. Today’s call is being recorded.

At this time, I would like to turn the conference over to Bruce Mehlman with the Internet Innovation Alliance. Please go ahead.

Bruce Mehlman: Thanks very much and thanks to both our participants and listeners for joining us. This is the latest in a series that goes back to 2004 for the Internet Innovation Alliance, trying to bring focus, attention and thinking around the emerging issues in telecom.

The organization was created in 2004 based on the belief that the desire to see a broadband wired America is bipartisan and essential to our economic future.

And over the last seven years or eight years now, we’ve tried to focus and highlight those areas in which government can play a positive role, either by leading or getting out of the way.

Our organization’s membership includes both for profit and not for profit organizations. And we have continued to do lots of events with the media around the country and on the Hill.

Today we’re very lucky to have two leading experts on questions of broadband telecom regulations, small business and how broadband Internet can be a catalyst for economic growth given the right policy environment.

Specifically, we have Joseph Fuhr. Joe’s a Senior Fellow with the American Consumer Institute and a Professor of Economics at Widener University.

He received his PhD and MA from Temple and his BA from LaSalle University.

Mike Mandel is Chief Economist Strategist at the Progressive Policy Institute and founder of Visible Economy LLC, which is a New York based news and education company.

And he’s also President of South Mountain Economics, a consulting company. And he’s last a Senior Fellow at UPenn’s Wharton School, formerly Chief Economist and a guy I never went a week without reading on Business Week.

You know, as we took a look at today’s conference, the Internet Innovation Alliance wanted to take a look at how best to make government work.

There’s a lot of conversation. But clearly in 2013 there’s going to be a lot of effort to try to make sure we have the right policy to make sure all Americans have broadband access and that broadband can lead and power our economy.

One would note that the operating design here legislatively is 16 years old, the 1996 Telecom Act where the Internet was barely mentioned.

The Mosaic browser had just been introduced. Universal Service exclusively tried to cross-subsidized plain old voice service. You take a look at the smart PDAs back then, what was the hot PDA In 1996 when the Telecom Act came out is today a free app.

Telecoms weren’t in video. Cables weren’t in voice. Wireless was barely in the game as compared to where it is today.

We’re going to turn first to Joe who’s done recently some work, some analysis and some studies on the impact of broadband on small business and how to do – how to see more.

And we’ll turn from Joe to Mike who has done recent work, research and analysis on the telecom legislative and policy infrastructure and with a lot of his usual creative ideas on how we can have a far more supportive environment to enable 21st-Century leadership by the United States and economic growth led by broadband.

With that, Joe, we’ll turn to you first.

Joe Fuhr: Well thank you. And ACI, the American Consumer Institute did a collection of essays on IT’s impact on small business both from a supplier and consumer point of view.

And if we look at information technologies, they’re leveraging the economies of scale, permitting some small businesses to operate more cost efficiently and enabling them to compete head to head with their larger urban based counterparts.

Since Internet services and related Web applications provide access to borderless markets, some businesses no longer need to be physically located near their customers and in fact can operate from anywhere, even from private residence.

And we’ve seen today a tremendous amount of firms, small businesses, being led just by people working at home.

We also find that the information technologies are enabling small businesses to flourish and avoid commercial office space, which saves cost and increases productivity.

Small businesses are an important component of the US economy. The SBA reports that as much as 65% of new jobs created during recovery are in small businesses.

This new technology reduces information costs and allows consumers and producers to find one another worldwide.

Also this information technology has tremendous price benefits. If we look at the price of computers over the last ten years compared with their quality and their power, the price in real terms has gone down tremendously. And this is true of most IT goods and services.

Also, now small businesses get accessibility to a lot of IT without having to have experts on IT.

For example if we look at cloud computing, firms can rent computing power, high value software and dramatically changing their bandwidth as much and when they need it.

This decreases a firm’s fixed cost, make an entry easier for small and medium-sized firms and thus increasing competition.

If we look at mobile apps, mobile apps have permitted small businesses to operate more efficiently and generate more time for sales promotion and entrepreneur activities.

Small businesses already make substantial use of smartphones.

Also it’s been estimated, using mobile apps, on average the small business owner reduces his time by 5.6 hours per week and that employee time goes down by about another 11 hours.

Noteworthy also is that this has saved about $17.6 billion annually to small businesses.

Also 10% of small business firms reported adding at least one employee. And given the difficult economy, such employment generation is impressive.

Some of the mobile apps that are used include onsite acceptance of credit cards, routing trucks more efficiently and reducing the necessity for onsite supervision, thus saving on driving time and other costs.

Another thing is that of the 500 of the best-selling apps, 88% are small businesses.

So IT has created a tremendous impact on the economy. What we need to look at in terms of public policy is to encourage investment innovation into IT, which has created economic growth and jobs.

And one of the things we have to be very careful about today is the issue of the spectrum shortage with wireless getting demand more and more – a lot of these apps, if people don’t have access to them because they don’t have wireless, it’s going to tremendously hurt small businesses and consumers as a whole.

So I thank you.

Bruce Mehlman: Great. Mike, let’s just roll right over to you.

Mike Mandel: Terrific. Thanks very much Bruce. I’m going to say a few words about the investment drought. And I want to put telecom here in the broader perspective.

You know, the US went through a – has gone through a very tough period since 2007. And people have sort of talked about a rollback in consumer spending.

But in fact where the real rollback has been is not consumer spending but in investment. Consumer spending is in real terms is actually above where it was when the recession has started. But investment is still way, way below.

And without investment we can’t get jobs. And without investment we can’t get growth. And so you look around the country and you say, you know, who is actually investing in the US at this point?

And, you know, the one – the clearest answer you get is well it’s really, you know, the telecom companies and more broadly it’s the company that’s sort of involved providing Internet and mobile services, you know, both from the providers and out to the edge.

And the question is what’s the appropriate government policy here if we want growth? And I think you can make a very strong argument that we’re still recovering from the downturn. We’re still facing very big threats from (season).

The main thing that the government needs to do at this point is encourage investment.

So from my perspective the government policy should be aligned to encouraging investment in telecom in every aspect of the Internet of the app economy.

And what that means really is what I call counter-cyclical regulatory policy which is not getting rid of regulations but actually saying it makes sense from an economic point of view to go easy, to encourage investment, not to put in regulations in tough times that could discourage investment but to save from the government and policy point of view that this is in fact an over-arching goal that will help everyone.

I think that would go a long way to rationalizing government policy because otherwise you get confused. You get confused about well should you be trying to be – help individuals? Should you be trying to help the entire country? What’s your ((inaudible)) of policy?

The (inaudible) policy right now because of the macro situation, because of the US really needs investment is for government policy to be oriented towards increasing investment and not decreasing it.

The analogy is very much to other types of countercyclical policy as well like countercyclical monetary policy and countercyclical fiscal policy.

What you want to do is you want to choose something that’s going to help you get out of the downturn in this case investment, encouraging investment is the way to go and putting on more regulations just doesn’t make any sense at all.

Bruce Mehlman: You know, we’re going to open up to questions in a moment though. I’d like just to pile on there.

It would seem to me a lot of the analysis that I’ve read and I find most credible suggests it’s not nearly the need counter cyclically to ensure we’re encouraging innovation but also the fact that it is a different broadband marketplace than the one – than the telecom world that was envisioned and in existence when the ’96 act was written.

We now have competition between formally siloed and very distinct large players. And that type of competition has meant that it’s a very much about spectrum aggregation, it’s very much about innovation and that we have a marketplace in no risk of capture, in fact far more productive in terms of high intensity competition and rapid innovation.

And we’re seeing that from social media to the devices we can buy to the services that are being offered.

Mike Mandel: I think what you’re describing Bruce is actually the flipside of investment. You get a lot of competition when a lot of companies are willing to invest.

You get less competition when people are discouraged from investment. And so what you’re describing here is the possibility of a very perverse result that attempts to sort of regulate which discourage investment could actually end up with less competition rather than more.

You know, I’m looking forward to the next few years and I say what is best –  you know, how are we most likely to get more broadband out to people? How are we most likely to push economic growth forward?

And, I’ve got a rule of thumb here. And the rule of thumb is the more investment the better. The more investment the more competition. The more investment the more growth.

And what happens is if you have countries with less investment then you end up with less competition. You end up with less growth.

And so I’m taking your analysis one step further and saying: the reason why we have these – this competition now—is because a lot of companies were willing to invest. And reducing that incentive could potentially have a very perverse effect.

Joe Fuhr: Also tied into that: if we look at telecommunications and IT, they have been historically very highly taxed. And there have been studies that show it’s a lot more taxed than the 6% sales tax that we see in the states and things of that nature.

And you don’t want to tax what you want to encourage. What we need to do is look at this tax policy and try to make it easier and not add these regulatory costs.

There are issues of co-location when we’re trying to build towers and how difficult it is in allowing other companies to use the same towers to decrease the cost.

And a lot of this gets tied up in all kinds of regulatory issues.

Bruce Mehlman: Well very good. I have only about 600 questions. But having invited folks and having told folks that we would welcome opportunities to ask questions, if I can ask for the help from our moderator to first see if those who have dialed in have questions they’d like to ask.

I’ll let them go first and if everybody is more eager to hear what questions I have, then A) what’s wrong with you people, and B) I’m happy to ask.

Operator: Thank you; if you would like to ask a question, please signal by pressing the star key followed by the digit 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 if you would like to ask a question. And we’ll pause for just a moment to assemble the queue. A question just came through.

We’ll take our first question from Karla Ballard.

Karla Ballard: Hi, yes, this is Karla. I was – first of all thank you for having the call, very informative. I’m curious – what are some of the promising practices that you’re seeing that are encouraging the non-adopters to come online? And how much are you engaged in that conversation?

Mike Mandel: The non-adopters to come online – well from my perspective, the more attractive participating is to people – the more things that they can do, the more that they can see other people doing things that they want to be doing – that right now I think is the biggest thing that’s going to drive the non-adopters online.

That is to say: if the utility increases and it becomes a necessity then it becomes much harder for people to sustain the ability not to do it. What I’m thinking about at this point is my parents for a long time resisted.

And then when they saw what they could do online they were willing to ante up the money. So my vote is for faster broadband, better applications to get better integrated with school and with work that make it really clear that not being online is not an option.

Joe Fuhr: I mean the other issue also is the more innovation we have, the more people will want these new things – there may be things they’re not interested in.

The other thing is to inform people – one of the things is – if you go to bank or send by mail, how much can you save just on postage each month or each year?

And try to inform people about the tremendous benefits of a lot of these applications that they can use, and it just makes it so much easier on them in terms of things like healthcare and things of that nature.

Bruce Mehlman: You know that’s a great point, and on the Internet Innovation Alliance website we have ten ways being online can save you money where we got a personal financial analyst/expert to try to help understand the cost saving potentials.

There’s no doubt when you ask why folks who haven’t been online aren’t online, one of the main reasons that you hear is cost, and as we talk about, you can net save money if you use it intelligently.

But also the providers need flexibility. There isn’t one plan that’s right for everybody and there will be some incredibly heavy users who want higher speed, who want to pay for higher speed or at least are willing to pay for higher speed and who use far more bandwidth.

Making sure that providers have the ability to provide a very high intensity plan for those who want to use a lot of bandwidth, but at the same time a much lower cost, lower bandwidth plan will make sure that everybody can get on and that cost is a minimal barrier.

Ease of use, utility of apps, digital literacy, awareness of what’s out there is all very important. These days though it seems at least to the Internet Innovation Alliance leaders that we’re seeing a great proliferation of apps.

We’re seeing incredible competition. We need to make sure that government doesn’t limit the opportunity for providers to have flexible differentiated cost plans.

And we want to make sure we do all we can to have a pro investment environment that Mike was describing that ensures that spectrum can be aggregated so that those with a lot of customers but insufficient spectrum can have robust enough networks that people don’t find frustration when they use the internet.

I’ll ask one of both of our folks, taking a look at the policy environment we have right now, what do you both see as the biggest current risk in which policy may limit the investment in and proliferation of broadband, and what do you see is the biggest opportunity by which the FCC or Congress can meaningfully encourage greater investment and broadband deployment?

Joe, why don’t you go first.

Joe Fuhr: Okay, I mean my feeling is the whole issue is spectrum demand. Consumers want it. We have a tremendous amount of consumer demand. As you said, more and more apps are coming on and more people are using it.

The FCC has to get allocation of spectrum moving and make it available for people, because if it’s not available and you start trying to use your app and it doesn’t work – especially if you get into something like healthcare: you have a doctor who is monitoring somebody’s heart and it doesn’t work and somebody dies over it – you can’t have the spectrum crunch.

You have to get and make the spectrum available and allocate it better so that consumers can benefit and firms can benefit and society can benefit.

Mike Mandel: My sense is that the biggest problem [that will limit the investment in and proliferation of broadband] is the death by a thousand cuts. The more that the FCC tries to exercise regulatory control over broadband, and wireless and apps, what happens is they run the risk of squeezing out the innovation.

Because people respond to incentives, if people are being regulated they’ll start trying to be – to run business according to the regulations and really one of the things that has made broadband great these days is the sense that there’s a lot of freedom.

So you know right now I think there is far too much reliance on regulation as a tool. I call this the pebble theory. If a regulation is a pebble, you throw one pebble in the stream and nothing happens to the stream.

You throw two pebbles in, nothing happens, you throw 100 pebbles, in all the sudden you’ve dammed up the stream.

So the FCC, Congress and so forth have to exercise some discipline and if they’ve got to regulate in select cases, that’s okay –  but where they can, keep their hands off.

Joe Fuhr: And another issue with that in terms of regulation is people say, “Well, we may have a problem. Well, we don’t regulate when we may have a problem; that’s where anti-trust comes in. We get a lot of people saying this thing may occur – it may not occur.

Well, let’s see if it occurs or not, and if you look at it, there’s been very few really problems with the Internet. There’s only been a few cases where we’ve had to have antitrust come in and to just regulate because somebody thinks there may be a problem.

Makes no sense.

Mike Mandel: I think that’s absolutely right. The idea of proactive regulation is actually really, really troubling in an innovative environment because what happens then is that you end up seeing the problems but not the possible upside and you may never see the upside because you’ve regulated it out of existence.

Bruce Mehlman: I think that’s a great point from both of you and just taking a look as I see the market, we have more apps, more games, more devices, more plans, more options over the last decade. We saw a variety of wireless mergers that enabled competing providers to have sufficient scale to provide these smartphone enabled competitors these days.

But over that decade of wireless combination and spectrum aggregation, we saw the price per message, the price per minute and the price per megabit all fall substantially.

Mike Mandel: You know there’s also another point Bruce, which is that, as you know, I’ve done a study on the jobs created by the app economy. And that there was more than almost half a million jobs created just on the app side and you know we’ve got a new study coming out shortly that will look at the geographic distribution of the app economy and point out from that, the point of view of economic development, this is very important.

Bruce Mehlman: I will turn to Joe and Mike just to ask is there anything additional you guys would like to add or contribute before we thank those who dialed in and end this call?

Joe Fuhr: When we talk about efficiency and economics there’s the allocated efficiency where people are saying price has to equal marginal cost but we also have the whole issue of dynamic efficiency where we talk about innovation.

And if we look at consumer welfare studies, the dynamic efficiency is the one that’s a lot more important than the allocated efficiency, and I think we need to move more and more towards a framework of looking at innovation and the tremendous benefits of innovation.

But firms need a return on that investment, so they’re not going to invest if they don’t think they can get a return and a lot of times you can’t price a marginal cost and get that return.

So you’re spending billions of dollars in investment.

Mike Mandel: So let me just add one thing. Right now the US economy is stagnating, but the broadband economy and the app economy are not.

That’s actually the most vibrant part of the economy right now and regulators should acknowledge that and build on that to help keep us out of recession.

Bruce Mehlman: Well very good. On behalf of the Internet Innovation, I want to thank both of you. Joe you are a frequent participant in a lot of our events and efforts, and we read both of your analyses reports with eagerness.

We appreciate your time, we appreciate those who dialed in and thanks with the help from the folks who moderated this call. We’re online, we’re always trying to generate new thoughts, new ideas.

We have an open mic for those that have suggestions. Please keep the information flowing two ways, and thanks to all.

Operator: This does conclude today’s conference; we thank you for your participation.