Virtual sirens have gone off around the country, and the digital ramparts are swarming with thousands of new recruits protesting plans by the telephone industry to levy new fees on Internet sites. The industry wants to charge extra for preferential treatment, so that sites that stream audio and video have more chance of giving their users a pleasing experience. The debate has excited public fury way more than any issue I’ve seen during the fifteen years I’ve been following the telecom industry.

Telephone companies are trying to hold off government regulation by invoking the perennial American worship of innovation. But if there’s anything the industry hates more than government regulation, it’s government investment. Surely–say the CEOs, along with a battery of academic economists wielding standard financial models–government moves too slow and has too many vested interests to pick the right technologies. In a fast-moving culture of technology, innovation would be crushed.

And the industry pulls out the same mantra in attacking municipalities who invest in copper, fiber, and wireless networks. Government investment? Must be inimical to innovation.

But my analysis suggests just the opposite. Government investment in networks will promote innovation. It’s time to smash the idols. This article explains why.

The importance of comparisons to successful countries

By any account, a handful of countries–Japan, South Korea, and Hong Kong–have been spectacularly successful where the U.S. and most other countries must hang their heads in shame. Thomas Bleha made a big splash with an article about the broadband gap a year ago (”Down to the Wire,” Foreign Affairs, May/June 2005), and the cries of alarm have increased around the country since then.

Bleha laid the blame squarely on the government for lacking “an explicit national policy for promoting broadband.” His proposals are heavy on providing a vision and organization to the task, along with modest investments along the lines of current government spending (subsidies for rural development and for universities). I think that the history impels us to be even bolder, and that the shibboleth of “innovation” must stop being invoked to hold us back.

A few statistics are enough to convey the disparity in achievement:

• According to Bleha, “Today, nearly all Japanese have access to ‘high-speed’ broadband, with an average connection speed 16 times faster than in the United States–for only about $22 a month.”

• A 2003 report (PDF) from the International Telecommunication Union says that in Korea, the incumbent operator plans to offer VDSL services up to 26 megabits per second (p. 7) and that “Korea has among the lowest broadband Internet prices in the world” (p. 13).

• A BusinessWeek article from 2004 writes, “For a little more than $50 a month, consumers in Korea can purchase a 20-megabit-per-second Internet connection. That’s 10 to 40 times faster than a typical U.S. connection.” It adds that 73% of South Korean households bought broadband connections, as compared to 18% in the U.S.

• Residential users in Japan have access to 100 Megabit speed networks–one thousand times the speed of typical U.S. home connections that are called “broadband”!

How was this done? Despite the obvious differences between countries, there must be some basic lessons one can derive from the East Asian successes. I have read a number of analyses, including several reports like the ITU one I cited earlier. (The ITU is little-known among the general public, but is the central organization in international telephony, setting standards and coordinating international development since 1865.)

What stood out to me was the importance of government investment. Not a smothering layer of megaprojects that bulldoze the economic landscape, but thoughtfully chosen and carefully targeted stimuli in key places–just the sorts of things the U.S. government did to bring the Internet into being:

• Modest tax breaks that can bring new entrants into sclerotic markets plagued by outdated thinking (i.e., the local loop markets).

• Carefully directed purchases of government systems that can bootstrap small providers, similar to how governments can support minority-owned businesses.

• Funding for strategic sectors that everybody uses and approves of (schools and universities, health care providers, and so on).

At the end of this article I’ll cite some of the research on what governments have done, but first it’s time to take the “government crushes innovation” argument head on.

Government investment in networks will stimulate innovation

The hoary economic argument against government investment is that government can’t respond nimbly enough to new developments. The telephone companies lather on this argument heavily. Now that the examples of Japan, South Korea, and Hong Kong have provided counter-evidence, we have to look at what’s wrong with the argument in the case of broadband.

The fact is that broadband networking is not going through a groundswell of innovation. The basics of fiber optics have been in place since the 1980s. In fact, telephone companies were talking in the 1980s of stringing fiber to the home, just as they’re talking now! See the $200 Billion Broadband Scandal website (buy the book and make a donation while you’re at it).

We shouldn’t be talking of innovation in fiber networking. We should be talking about catching up after twenty years of dawdling.

If another technology were on the horizon that surpassed optical fiber, the way optical fiber surpasses copper cables, we could ask governments to stay out of the field. (Nanotubes are nowhere near being deployable.) But the way things stand, government investment cannot restrict innovation.

Is there innovation on the Internet? Of course! There are people developing new operating-system like platforms that straddle different systems; virtual worlds that jazz up interpersonal interaction; new ways to share data and ratings and search results. The Internet is poised to become the most innovative platform the world has ever seen.

But that all takes place at the layer above the physical network. What the telephone companies have cleverly done is conflate their mundane, time-tested technologies with the totally different technologies where innovation is taking place.

Funny, turns out the FCC got it right in 1966–before the Internet was even developed!–in their historic “Computer I” ruling, where they drew a distinction between physical communication elements and the information services that run over the elements. It’s this distinction–not some vision of network neutrality–this distinction, reaffirmed in ruling after ruling over the decades and still in force today, that permitted the fount of innovation we associate with the Internet.

Now, what about network neutrality? Well, recent rumors suggest it’s dead on arrival. In their typical behind-the-scenes maneuvers, Congress seems ready to shut out the public and please their big donors, which they can easily do by doing nothing. (In the current legal environment, the telephone companies can change their pricing to suit their whim, restrained only by the highly unlikely chance of a successful antitrust suit.)

But if all the analyses I cite are right, network neutrality by phone companies is not that important. What’s important is competition and new offerings–and the government has a big role to play.

New networks will make it possible to run new applications. That’s how government investment promotes Internet innovation.

A bit about factors that led to broadband

Just to fill out some of the assertions I made earlier, I’ll talk here about the possible sources of broadband development, and cite some of the documents I mentioned earlier.

Some of the factors that boost the probability of success are pretty familiar, and lie outside the scope of telecom policy. A dense population makes it less costly to string fiber or provide wireless access; in this regard Japan and South Korea have an advantage over the United States (although compared to many Asian nations, South Korea is not densely populated). A high educational level and a censorship-free political culture are also important.

Another factor unrelated to telecom policy (at least, to my knowledge, no government has made it a part of its telecom policy) is having a large group of people fiercely attracted to networked, interactive video gaming.

The famously cozy closeness between government and large industry in Japan and South Korea probably makes it easier for the government to carry out its plans. But I don’t see how this could be a major factor. One still needs competition, vision, and a source of investment. These can be done in a more open corporate environment too.

Then we get to factors that do lie within telecom policy. Competition is a factor in the success of every country that provides widespread broadband. This competition has to be brought about not simply by allowing the entry of competing telephone companies, but by aggressively demanding that the incumbent companies offer their lines and equipment to competitors at low prices.

The FCC tried, in the U.S., to ensure low costs and access to equipment in the 1990s, but the telephone companies succeeded in outmaneuvering and stonewalling them. Finally, when competition from new entrants had nearly disappeared in 2003, the FCC gave up and told the incumbents they could pretty much do what they wanted.

By that point, FCC chairman Michael Powell essentially hoped that the phone companies would compete with the cable companies–but that’s not enough to get major investment flowing–and that a third entrant would provide a magic “triple play” boost to competition. I believe governments have to be the third entrant.

Government investment in Japan and South Korea took many forms, some of them subtle.

Bleha writes, “Authorities set out to devise significant incentives to persuade Japanese companies to invest in new ultra-high-speed cable, especially in rural areas….The government used tax breaks, debt guaranties, and partial subsidies….It made well-considered and timely decisions to allot cost-free spectrum for each new mobile-phone generation. In so doing, it gave up badly needed revenue, but it retained full control over the terms of licensing and the flexibility to reassign spectrum according to future technological developments.”

The ITU report on Korea highlights how bonds and tariffs on telephone use contributed to universal phone service (p. 6). The government offered low-interest loans to bring high-speed access to apartment complexes(p. 12). It provided networked computer systems in schools. And it spent a lot on its own computer systems, which is now one of its top ten expenditures (p. 32).

The most outstanding expenditure mentioned in the Korea report is, “In 1999 and 2000, the government provided Facilities-based Service Providers (FSP) with US$ 77 million, at a very low interest rate, to invest in broadband networks.” The effect was to create services worth over seven billion dollars and five to eight thousand jobs (p. 32).

It’s time to set aside the conventional wisdom (to use the phrase coined by the recently departed John Kenneth Galbraith) and just do what works–without apology and without encumbrances from the past.