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CHAPTER IV - Turning the Vision into Reality: Adjacent Market Entry

A future of wireless mesh networks and 5G access structuring consumers’ access to the Internet is not inevitable. 5G itself is not well defined and much less well understood as to its use cases and the complementary investments needed to give it life. As Arun Palakurthy, Vice President and Shareholder of Dodge & Cox Funds said, if 5G is to truly be the era of spectrum abundance, then standards bodies and government have work to do to ensure that 5G can support radical decentralization of the marketplace. Tim Wu, Columbia Law School’s Isidor and Seville Sulzbacher Professor of Law, added that the role of unlicensed spectrum in a 5G world must also be defined, and has to be a part of future wireless ecosystem.

In the meantime, a sign of health in the broadband marketplace is the degree to which adjacent market entry is viable. Competition in broadband may not come from an established network provider seeking to build a new network where an incumbent currently resides. Verizon, for example, may not enter a market where Comcast holds a large share of the broadband service market because the chances may not be good that Verizon will gain enough of the market to justify the investment. That is why FiOS build out was eventually played out only in the markets Verizon initially announced—and in some cases not as extensively in those markets as promised. Jonathan Chaplin, Managing Partner of New Street Research, noted the difficulty Verizon had in turning a profit from FiOS, observing that Verizon sold off all its FiOS assets in three major markets (at very low prices) because they did not generate sufficient return on invested capital.

Rather than entry from an established player, market entry might come from a company who participates in a related market—in other words, an adjacent market. Some firms may see an opportunity to expand in a direction that departs from their core functions; this may constitute a threat to firms which it heretofore had not competed with. Policymakers cannot force adjacent market entry, but they can do things to make it more attractive for firms to go down the path of entering an adjacent market.

For broadband, the main means to encourage adjacent markets is to lower the cost of the inputs necessary to build a network, said Blair Levin, Nonresident Senior Fellow at the Brookings Institute, and Executive Director of Gig.U. Accessing public rights of way, conduit under streets or utility poles are indispensable for building new fiber networks. They are also costly—making up as much as 20% of the over- all cost of network deployment. Yet these are costs over which government has some control—and lowering these costs can spur new fiber builds. This was much of the rationale behind Gig.U and also has made Google Fiber deployments more economically attractive. Google Fiber represents a classic example of adjacent market entry, as it expands from search to the infrastructure that delivers search results to users.

For wireless and 5G, the conditions for adjacent entry require that spectrum not be in short supply in the market. This requires ongoing work on initiatives that have been under discussion for the past several years. Incentive auctions must proceed to capture spectrum unused by broadcasters and re-auction it for commercial use, as well as continue to search for ways for government to better share its spectrum with the private sector. More provocatively, the Coalition for Green Capital’s Reed Hundt raised the notion of “use it or lost it” for current spectrum rights-holders, which is to say that if a company that holds spectrum rights does not put it to commercial use after a certain time period, that company must return it to the public domain for reallocation. It includes developing 5G, which, as noted, means that standards bodies must make choices that allow the private sector to commercialize products. Most participants agreed that spectrum scarcity would not be a characteristic of the 5G era—and that indeed spectrum abundance is a necessary condition for the 5G era to flourish.

Whatever the uncertainties about 5G or future fiber deployments, there was consensus on the market structure for broadband in the medium term. Jonathan Chaplin of New Street Research noted that, as of 2015, about 16% of households have access to a fiber broadband provider, with another 10% estimated to have access within the next few years, based on announced deployments. He envisions about half the country, over time and given existing market conditions, having access to a fiber option and one other (most likely a cable provider) for home Internet service at speed thresholds (i.e., 25 Mbps download) identified by the FCC. This leaves open the question of the other half of the country, which would likely have access to only one broadband provider.

However, the question of speed threshold for what qualifies for broadband, garnered much less consensus. In a 2014 speech, FCC Chairman Tom Wheeler declared that having access to 25 Mbps net- work speeds “is fast becoming ‘table stakes’ in 21st century communications” and said that 80% of American homes have access to networks whose speeds are 25 Mbps or better. The problem, argued Wheeler, is that too few households have more than one choice of home Internet service providers that offer those speeds. According to FCC data, 25% of households have access to two or more providers offering network speeds of 25 Mbps or greater, leaving “three quarters of American homes…with no competitive choice for the essential infrastructure of 21st century economics and democracy.”

Two objections arose pertaining to the FCC’s 25 Mbps threshold. First, as Richard Clarke, Assistant Vice President of Economic and Regulatory Policy at AT&T said, consumers’ speed preferences vary depending on the consumer. Wireless access at LTE speeds (typically no more than 12 Mbps) may be acceptable to some consumers, meaning such services constitute a competitive threat to broadband ISPs. He also reminded participants of the dynamic nature of the broadband land- scape. When FCC Chairman Wheeler defined broadband as 25 Mbps in 2014, the AT&T’s typical network speed to customers was 24 Mbps. By 2015, AT&T had upgraded its network speeds to 45 Mbps for 60% of its customer base. Second, Comcast (in comments in the proposed Time Warner Cable-Comcast merger) found “no basis” for the 25 Mbps threshold, saying that consumers “enjoy—and are using—a variety of DSL, wireless and other broadband services” to meet their needs.

Whatever the merits of specific speed thresholds, there was consensus that households should have broadband at sufficient speeds to sup- port video (whether that is for entertainment or other purposes). There was also agreement that substantial portions of the country are unlikely to have the choice of more than one provider at very high speeds.

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