A Presentation at the 35 th Annual Conference of the International Institute of Communications

1. ICE (Information, Communications and Entertainment) MELTDOWN and CONVERGENCE: CULTURAL, TECHNOLOGICAL and BUSINESS CHALLENGES A Presentation at the 35th Annual Conference of the International Institute of Communications Montego Bay, Jamaica Oct. 11, 2004 Rob Frieden, Pioneers Chair and Professor of Telecommunications Penn State University rmf5@psu.edu; http://www.personal.psu.edu/faculty/r/m/rmf5/

2. Convergence Requires Inter-cultural Competency

3. TECHNOLOGICAL EXPLANATIONS FOR THE DOTCOM & TELECOMS IMPLOSION • Moore’s Law Applies to Both Information and Telecommunications Technologies. • Digitization and “Killer” Applications Ruin Business Plans. • Technological Innovations Failed to Stimulate Sufficient Demand. • Convergence Proved Difficult to Implement and Exploit. • Most Technologies Still Have High Sunk Costs. • Legacy Facility Retrofits Proved Costly and Difficult to Achieve. • Irrational Exuberance Created a Bubble and Bandwagon Mentality.

4. The Impact of Moore’s Lawin Data Processing

5. Moore’s Law Applied to Telecommunications

6. Marketplace Explanations Flawed Assumptions, False Expectations, Empty Promises One Stop Shopping Proves Difficult to Implement and Sell. Advertising Supported Access to Content Not Always Viable. Gold Rush Exuberance Drove a Quest For Shelf-Space Without Regard to Near Term Revenue Prospects. Low Interest Rates Triggered a Migration From Bonds to Stocks and Venture Financing; Vendors Willing to Finance Deals. Business Fundamentals Apply to ICE Industries. Executives Talked Up Stock Prices So That Options Paid Off Handsomely. Y2K Stimulated a Short Term Cash Infusion Possibly Misinterpreted as Evidence of the Information Revolution.

7. Flaws in the many nations’ Telecommunications Laws. Legislatures considered telecoms a cash cow, e.g., 3G spectrum auctions. Incumbents less willing to relinquish near captive markets in exchange for new market opportunities. Prior regulatory compacts typically offered guarantees, or at least safeguards on the downside. New markets opportunities ended up being less profitable and less desirable than previously anticipated. Procompetitive and trade initiatives (reduced restrictions on foreign ownership) reduced market entry barriers and contributed to the supply glut. Many users consider the Web a source for free content. In the U.S. stakeholders dissatisfied with the deal they negotiated litigated and stalled. Appellate courts accorded the FCC little deference and rejected “rough justice” policies. Resale opportunities may have reduced incentives for facilities-based competition. LEGAL/REGULATORYEXPLANATIONS

8. NEAR TERM OUTCOMES • Incumbents Leverage Investment in Exchange for Favorable Deregulation and Relaxed Antitrust Enforcement. • Legislatures and Regulatory Agencies Appear Willing to Abandon Procompetitive Policies in Exchange for Network Investment Promises by Incumbents. • Telecommunications has Lost Its Public Utility, Low Risk Status as Well as Its Growth Market Cache. • Technological and marketplace convergence has become a reality, but some of the winners win by exploiting inconsistent regulations, e.g., VOIP, Internet access via cable television vs. telephone networks. • Convergence ruins regulatory regimes based on mutually exclusive categories, e.g., streaming video vs. broadcasting. • Incumbents must strive to retain market share and relevance.

9. GOOD NEWS: NEW OPPORTUNITIES • Content rules; despite a plethora of options, most consumers stick with a few web portals and a handful of video sources. • Incumbents can leverage free spectrum, market share and brand. • New content access options rely heavily on incumbent sources, e.g., web and mobile video. • A more sober growth posture favors incumbents who diversify intelligently. • Less broadcast/cable consumption generates more consumption of related media. • DVRs force changes in advertising, e.g., product placement, not the demise of advertising. • Convergence changes and diversifies distribution channels, not the thirst for content.

10. THE WAY FORWARD • Regulators need to maintain a “level” competitive playing field. • While properly striving for regulatory symmetry between competing technologies, regulators should not abandon procompetitive interconnection and facilities access policies. • The EU horizontal regulatory model makes sense in a convergent environment: emphasize competition policy rather than regulate by category. • Legislatures should concentrate on creating incentives to invest in the sector through coherent ICT development strategy.

11. Best Practices in ICE Development—Government Roles • Successful ICE development requires a government role as incubator, steward, partial underwriter and anchor tenant without being central manager. • Government develops a vision and executes a multi-faceted strategy to achieve articulated goals. • Government funds partially support specific projects, but emphasizes private enterprise and facilities-based competition. • Funding reaches a variety of different grant seekers and supports digital literacy and not simply installation of equipment. • Creates incentives for investment and disincentives for litigation and other delay tactics. • Initial government services offered via ICE include healthcare, education, access to information, licensing and broadcasting. • Government revises and reforms safeguards to promote trust, security, privacy and consumer protection in ICE services, especially e-commerce.

12. Best Practices in ICE Development—Non-Government Roles • Entrepreneurial and development hot beds such as Silicon Valley show that the U.S. ventures can successfully incubate ICE. • Academia and commercial ventures can collaborate and exploit favorable and transparent rules of the game, i.e., a meritocracy that rewards talent and ability coupled with laws and regulations that support access to capital, research and development, risk taking and even failure. • A critical mass occurs when a talented work force and entrepreneurial risk takers gravitate to the same region that openly welcomes innovation. • ICE development requires a specialized business infrastructure serviced by consultants, lawyers, venture capitalists and executive recruiters. • Despite traffic congestion, high costs and a relentless pace hot beds provide a high quality of life.

13. Conclusions • Promoting near term availability of nearly ubiquitous broadband infrastructure does not require “heavy handed” “command and control” centralized management by the federal government. • It requires a cohesive “top-down” vision coupled with “bottom-up” community champion projects that aggregate supply of services and demand for them. • Broadcasters need to think about their role when broadband networks are readily available; use spectrum for both a digital signal and supplemental services? • Incumbents may not be able to leverage future investment in exchange for even more regulatory forbearance. • Governments achieve ICE incubation success through diverse funding strategies including direct underwriting, loans, favorable tax treatment, financial support for research, development and technology demonstration projects (as was done with NSFnet). • Government can train people to become suppliers and consumers of network-mediated services.

14. More Conclusions • Universal service and ICE development policies generate unintended and sometimes adverse outcomes, e.g., below cost, unmetered basic phone service in the U.S. blunts migration to broadband while high, metered service elsewhere expedites migration. • Many nations did a better job than the U.S. in crafting a new telecommunications law and in implementing it. In the U.S. stakeholders get several due process bites of the apple leading to litigation, delay and opportunities to conserve capital/postpone risk taking. • Nations achieving comparatively greater success in ICE development demonstrate the effective and catalytic role of government. • Nations cannot simply throw money at the problem and declare victory. • Uncertainty in mission and policy leads to delay, lost productivity and competition in the courtroom instead of the marketplace.