Federal Communications Commission

Owning the Inevitable

April 21st, 2010 by Admin User

[Remarks by Omnibus Broadband Initiative Executive Director Blair Levin on April 20 at the American Cable Association’s 17th Summit at the Gaylord National Hotel and Convention Center in Maryland.]

One of the best pieces of advice I ever got in terms of investing was to “own the inevitable.”

To “own the inevitable”: To invest in those areas for which success—or failure—are already written on the proverbial wall.

Those words provide insight.

But not a complete answer.

It’s always important to make sure your bets are consistent with the macro trends.

But even if there are certain inevitabilities you can see generally—a rough outline of the shape of the future---you cannot clearly see, for example, specific winners or losers or critical, formative details.

Even as early as 1994, at the beginning of the mass market for Internet access and mobile services, one could see the inevitability of mobile phones with computer capabilities. 

But the details were missing: I don’t remember people anticipating having cameras in nearly all those devices.

Even as late as 2007, when the iPhone was introduced, few—not even Apple—saw its impact as a platform for hundreds of thousands of applications.

In 1994, you could envision as inevitable the Internet replacing existing platforms for communications and entertainment.

And based on numerous metrics, that transformation is well underway.

What wasn’t clear or inevitable, though, was who would become the primary provider of the access.

In this country—unlike every other country save perhaps Canada—it is cable companies.

And given that the cost of upgrading the performance of the cable platform from DOCSIS 2.0 to DOCSIS 3.0 is significantly lower than the telcos’ cost to upgrade, it is likely--though not inevitable—that cable will increase its lead.

Of course, this is not without significant private investment risk—while the upgrade from 2 to 3 is relatively inexpensive, the original DOCSIS upgrade was more costly.

Cable deserves credit for seeing the potential of Internet access and investing in it, because the return on that investment was not inevitable.

And this offers an important lesson for the future, too—and one that our plan embraced: private investment and market forces must drive deployment of future networks, a topic I’ll discuss more in a speech tomorrow. 

Cable also deserves credit from an historic perspective because what one generally sees in enterprises that require large capital expenditures, face little competition, and boast high margins--as cable had in 1994--is a desire to milk embedded investment and a reluctance to invest towards a different future.

Indeed, cable may be one of the only businesses to ever build out an infrastructure and then completely rebuild it for a product that is likely to challenge, if not replace, the product for which the original infrastructure was built.

Overcoming the incentives to do business consistent with one’s embedded costs, rather than future opportunities, is one of the more perplexing challenges business faces, as all who read the 1997 business classic, The Innovator’s Dilemma learned.

It is also one of the most difficult challenges for our country in capturing the value broadband presents.

What I would like to discuss today are a few broad strokes that, after having worked to develop a national broadband plan, appear inevitable.

They may not be so, but it’s important to get them on the table to help frame the most critical challenges for you, as well as the country.

First, if not reformed, the current system of universal service and intercarrier compensation will collapse.

Today’s system is premised on an industry providing voice service over a circuit network.

That is the system of yesterday, not of today, and certainly not of tomorrow.

The Plan lays out a ten-year plan for shifting universal service funding from supporting the technology of the last century to that of the next.

In this area, the Plan benefitted from your participation in the process. You provided keen insights into unintended consequences for competition of the current system, the need to clarify interconnection rights, the importance of supporting some middle mile costs, the importance of pole attachment reform, and how to structure the new Connect America Fund.

We didn’t adopt your ideas wholesale—and I know that some in this room don’t agree with every proposal.

But in many areas, we found we agreed with you, and moved in the direction you sought. For example, we recommend allowing cable companies to compete for Connect America funding, because we want the most efficient solutions to close the gap in broadband availability.

And across many of the universal service recommendations, there now appears to be general consensus of where we need to go.

Consider the recent Senate Commerce Committee meeting, there were numerous, often contentious, issues discussed.

In a classic case of what Sherlock Holmes would refer to as the importance of a dog not barking, no Senator chose to spend his or her time talking about universal service or intercarrier compensation.

I am not claiming that means they all agree.

But I do think it is significant that the recommendations that are probably the most detailed in the plan, that would reallocate the largest amount of money, and that confront a historically-contentious set of issues did not generate the controversy one might have imagined at the beginning of the process.

Second, Over-the-Top Video will eventually emerge as a challenge to the current model of multi-channel distribution of large and increasingly expensive bundles of linear programming.

Over-the-Top Video is an enormous business challenge.  My sense, having talked to business leaders throughout the ecosystem about it is that everyone is both excited and scared by what it may do.

Which makes perfect sense.

Cheap broadband distribution has challenged many different business models, and traditional multichannel video delivery will not be immune.

Many things can affect the path of over-the-top video, but I would just note two things.

First, I often hear and read that consumer resistance to price increases in the current bundle are reaching the kind of resistance—even anger—we saw in the years leading up the 1992 Cable Act.

Just as in the late 1980s there were a number of actions that laid the kindling for a legislative response, there are a number of elements today laying the groundwork for some kind of response, either in the market or from the government.

Second, over-the-top video is a big bandwidth hog, giving a competitive advantage to platforms well-equipped to provide massive bandwidth.

In most of the country, cable will be the best positioned platform.

But there are still big questions about who will own this inevitability and when it will arrive.

A third inevitability is someone will invent the iPhone equivalent for the set-top box.

While the cable industry was supportive from the start about many parts of the plan, I know some were concerned about our view that the rules regarding set-top boxes had to be reformed.

We agreed with some of those concerns, and adjusted accordingly. But I know there remains potential for disagreement about how to proceed.

The Commission is moving full speed ahead with a proceeding that will be the right forum for exploring all issues in detail.

But again, the question is who owns the inevitable. 

There was a time when there was only one manufacturer of phones and phones came in one color.

Now, there are many manufacturers’ and innovation in those devices, such as the iPhone, has increased the demand for mobile bandwidth.

In 1996 Congress asked for competition in set-top boxes.

In 2006, two providers still had 87% market share.

In 2007, CableCARD rules went into effect, designed to produce competition.

In 2009, the two providers had 95% share.

The current system is not providing the kind of choice Congress asked for and consumers want.

Someone out there is developing the device or software that will provide the kind of experience on our television that the iPhone produced on a mobile device--providing the kind of integrated experience that we didn’t know we needed, but now can’t live without.

The top two providers may provide that, but experience teaches that is unlikely without a greater push from other sources.

There are many valid arguments to be made about the best way to achieve that. 

But the bottom line for you, I think, is that you do not want to be the industry that said no to the set-top equivalent of the iPhone. 

Particularly when, as with broadband, such a functionality offers a competitive edge over DBS.

And if you’re a smaller player, that innovation, those options, can offer you more freedom. 

Moreover, if that functionality increases demand for bandwidth, you have the pole position.

Fourth, the power of targeted, interactive advertising will come to video programming.

The growth of Internet advertising, and its impact on television’s advertising market, was not pre-ordained.

Instead, some folks much smarter—and younger, and, now, richer—than I figured out how to match the ads with the context of the web content in a way that was accountable and provided advertisers with a better return on their investment. 

This created a revolution in advertising—a revolution that is only just beginning.

We talk a lot about this data revolution in the plan, as it has enormous consequences for national priorities such as education, health care, energy, and job training.

It will also shift dollars in advertising. 

Your industry knows this, and is developing technology to take advantage of the inevitable shift to more targeted advertising.

What is not inevitable is how we as a country allow personal data to be utilized for advertising purposes across a variety of mediums.

Personal data may be the most underutilized asset in the broadband ecosystem, but unlocking the value is difficult.

Based on many things I read while we were developing the broadband plan, consumers will not tolerate widespread collection and aggregation of that data unless they have a higher level of control over and confidence in the security of the data than they do today.

It is inevitable that someone will unlock that value, but the timing and the identity of that entity is very much up for grabs.

A final inevitability I will note today is the growth of mobile broadband.

As noted above, one could see it coming from years away but it looks like it big bigger than even the most optimistic projections of those times.

It will clearly be a platform for economic growth and innovation.

It is less clear what its impact on the market for fixed broadband will be.

But as 4G services offer performance levels similar to what most Americans are using today with their fixed service, it is reasonable to believe, mobile broadband will start to put either pricing or performance pressure on the lower tiers of fixed services.

These last points—over-the-top video, set-top boxes, personal data, and mobile broadband—are all deeply linked. 

They all, in my view, represent both opportunities and threats to your business models.

More important, I think they all are part of inevitable trends that represent value that remains to be tapped in the broadband ecosystem and that whatever industry puts together the puzzle piece correctly, can, as cable did in the 1990’s, lead our country to a new wave of innovation and growth.

But I recognize this isn’t easy.

I want to close with an example of the difficulty in understanding the implications of the inevitable. At the Western Cable Show in 1992, John Malone gave a speech in which he brilliantly predicted that the impact of fiber optics, digitization, and microprocessors would change the world.

Right on the mark.

He then went on to predict that the impact of that change would be a “500 channel universe.”

Not so much on the mark.

Thanks to many things, including a then-unknown student named Marc Andreessen at the University of Illinois at Urbana-Champaign, the 500 channel universe was overtaken by a broadband universe of infinite channels.

In thinking about owning the inevitable, you can have all the data right, all the analysis right, and still get the conclusion wrong.

But just as important, we learn from Malone that we can course correct.

Within a few years, Malone led the cable industry into a deal with John Doerr to create @Home, which led the way to cable becoming the leading broadband provider in the United States.

So as you face certain inevitabilities, and as the country faces those inevitabilities, it is important that we understand that our broadband plans are in beta, and always will be.

Like the Internet itself, we will be forever changing-- adjusting to new realities, new data and new analysis.

But for you, and for the United States, the key is to not to turn a blind eye to the inevitabilities but to see with clear eyes and a brave heart how best to benefit.

Thank you.

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