Fiber to the People – When customers own the network, everyone wins.

Burlington, Vermont, is building a network. Like many municipalities across North America, it has decided to construct an advanced fiber network on its own. The AFN is being deployed first to support city services. Then, as part of the four-phase project, this municipality of just 40,000 will extend blazingly fast Internet service to businesses and residences.

By Lawrence Lessig Wired.com

To many, this just looks like more socialism from Vermont. Why should government be in the business of providing high-speed networks? Isn’t that what free markets are for? Haven’t we all learned that the market is more efficient at supplying goods and services? Do we really need to rediscover the failings of Karl Marx at 100 megabits per second?

The answer, as Cornell economist Alan McAdams argues, has nothing to do with Karl Marx and everything to do with basic economics. AFNs are natural monopolies. That doesn’t mean that there can be only one, but rather that if there is one, then it is far cheaper to simply add customers to the one than to build another. The electricity grid in a local neighborhood is a good example of a natural monopoly. Sure, we could run four wires to every home, but do we really need four electricity companies serving every home?

Most economists would leap from the premise of a natural monopoly to the conclusion that such a monopoly must be regulated. But regulation is not the end that McAdams seeks. Ownership is. If a traditional network provider owned an AFN in a particular area, that network provider, acting rationally, would charge customers a monopoly price, or restrict service to get its monopoly benefit. But if the customer owned the network, then the customer could get the same access at a much lower price and be free of use restrictions. McAdams is pushing – and Burlington and other cities are actually deploying – customer-owned AFNs.

The point is obvious when you think about corporations. Boeing, for example, has installed a massive AFN on its campuses. That AFN enables the company to offer itself extraordinary network capacity at extremely low cost. Technically, Boeing is the monopoly provider of network services to Boeing. But as McAdams nicely puts it (so nicely that we might call this the McAdams theorem), you don’t monopolize yourself. Boeing gets cheaper services than if a network provider owned the same natural monopoly – indeed, vastly cheaper, McAdams argues, when you look at the efficiencies of AFNs.

The sticking point, however, comes whenever governments get involved. And no doubt, this is skepticism with good reason. But city council members are not stringing AFNs; nor is fiber being manufactured in local communes. Instead, global firms such as Black & Veatch string the fiber and set up the networks. These companies don’t own the networks they build, any more than highway contractors own the highways they build. Yet because they operate in a competitive market, the service they provide is efficiently priced. They build the networks that the customer owns, and the customer escapes the burden of a monopolist network provider. The key is ownership, and the different incentives that ownership creates.

For a long time now, the FCC has been pushing the idea that ownership matters. In the past four years, it has relaxed common-carrier-like regulations on cable and telecom providers on the theory that otherwise these companies won’t have enough incentives to deploy broadband networks. Common-carrier regulations, this view fears, would transform IP traffic into a commodity. And capital markets aren’t eager to fund commodity infrastructures.

That might be right about cable and telecom companies. Freeing AOL and Comcast from some regulation might be the only way they could afford to deploy high-speed access. But it doesn’t follow that AOL and Comcast are the most efficient providers of high-speed network access. They might not want to be in a commodity business, but commodities are precisely the efficiencies that drive economies. And as more firms persuade more municipalities to develop competing high-speed networks, then we might learn again why GM doesn’t own the highways, and why neither cable nor telecom companies should own IP access.

Lawrence Lessig ([email protected]) is a professor at Stanford Law School.

http://www.wired.com/wired/archive/11.12/view.html?pg=5?tw=wn_tophead_2