High prices, slow speeds for U.S. Internet users

Editor's note: Excerpted from "Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age."

Terry Huval is a large, friendly man with a lilting Southern accent who plays Cajun fiddle tunes in his spare time. He is also the director of utilities in Lafayette, La. "Our job is making sure we listen to our citizens," he says.

In recent years, the citizens of Lafayette have been asking for speedier Internet access.

In 2004, the Lafayette utilities system decided to provide a fiber-to-the-home service. The new network, called LUS Fiber, would give everyone in Lafayette a very fast Internet connection, enabling them to lower their electricity costs by monitoring and adjusting their usage.

Push-back from the local telephone company, BellSouth Corp., and the local cable company, Cox Communications Inc., was immediate. They tried to get laws passed to stop the network, sued the city, even forced the town to hold a referendum on the project -- in which the people voted 62 percent in favor. Finally, in February 2007, after five civil lawsuits, the Louisiana Supreme Court voted, 7-0, to allow the network.

From 2007 to mid-2011, people living in Lafayette saved $5.7 million on telecommunications services.

Since Lafayette went down this path, other communities have followed. According to the Institute for Local Self-Reliance, a group that advocates for municipal fiber networks, these community-owned networks are generally faster, more reliable and cheaper than those of the private carriers, and provide better customer service.

It's not free. Fiber connection costs $1,200 to $2,000 a house. It can take two to three years for revenue from any given customer to offset the upfront investment. But then the fiber lasts for decades. Municipal networks are seeing more than half of households adopt the service. And scores of communities are discovering that the networks bring new jobs.

Since the city utility in Chattanooga, Tenn., began offering fiber-to-the-home, some businesses in Knoxville -- a hundred miles to the northeast -- have been adding jobs in Chattanooga. Yet when the utility tried in 2011 to expand its fiber services to towns outside Chattanooga, the area's private carriers initiated a lobbying assault and defeated a bill in the state legislature that would have allowed the expansion.

Also in 2011, six Time Warner Inc. lobbyists persuaded the North Carolina legislature to pass a "level playing field" bill making it impossible for cities in that state to create their own high-speed Internet access networks. Time Warner, which reported $26 billion in revenue in 2010, donated more than $6.3 million to North Carolina politicians over four years. Eighteen other states have laws that make it extremely difficult or impossible for cities to provide this service to their residents.

Still, other experiments are under way. In 2009, when Google announced it would conduct a fiber-to-the-home pilot project, more than 1,100 communities applied. The Kansas City area, the winner, is now enjoying the launch of a fiber network -- the fastest and most reliable way to access the Internet.

Internet access, like electricity, is crucial to the economic and social health of the country. Electricity, however, is provided by largely reliable, taxpayer-supported entities, and no one seems to think the country would be better off if a purely private, wholly deregulated operator were in charge. Such a company might decide to provide service only in New York, Washington and other big cities, at very high rates for those who could afford it, and refuse to serve small towns and less- successful areas.

This is exactly what happened in the 1880s, when privately owned electric companies served big cities and the homes of the rich, and everyone else intermittently if at all. By the mid-1920s, 15 holding companies controlled 85 percent of the nation's electricity distribution, and the Federal Trade Commission found that the power trusts routinely gouged consumers.

In response, thousands of communities formed their own electrical utilities. Now more than 2,000 U.S. communities, including Los Angeles, San Antonio and Seattle provide their own power. And electricity is a regulated public utility.

Why don't Americans apply this same thinking to communications?

After the Great Depression, the Federal Communications Commission was given the job of providing the U.S. with a high- quality communications system at reasonable rates. For 50 years, the state oversaw the development of phone service. Providers were prohibited from entering into other businesses and were obliged to serve the public on nondiscriminatory terms. Anyone could make a phone call to anyone else.

In the 1970s, communities began handing out exclusive franchises to cable companies that could bring remote entertainment into homes. Over the next 20 years, the cable companies consolidated and swapped system franchises. By the mid-1980s, the phone companies wanted to expand their bandwidth to allow video delivery, too, but said they couldn't attract the needed capital unless they were released from the conditions imposed on them by the AT&T breakup.

The arrival of commercial Internet communications in the mid-1990s posed a threat to both the phone and cable companies; eventually, the FCC deregulated the entire sector, thinking that competition among various modalities of Internet access -- cable, phone, wireless, satellite -- would protect Americans. And in 2002, when the five-year period of deregulation began, there was indeed rough parity in speed and price between the cable companies and telephone companies providing Internet access.

Soon, however, cable companies found a way to upgrade their networks to provide connections perhaps 100 times faster than what was possible over copper wires, and at much lower expense than the phone companies incurred replacing their phone lines.

The American copper wire telephone system is, in fact, becoming obsolete. The physical switches used in the network are reaching the end of their useful lives. But now that cable has won the battle for wired Internet service and consumers are moving to mobile phones for voice service, the telephone companies are looking to shed the obligation to maintain their networks at all.

Meanwhile, the United States is rapidly losing the global race for high-speed connectivity, as fewer than 8 percent of households have fiber service. And almost 30 percent of the country still isn't connected to the Internet at all.

To fix this problem, a new approach is needed.

The first step is to decide what the goal of telecommunications policy should be. Network access providers -- and the FCC -- are stuck on the idea that not all Americans need high-speed Internet access. The FCC's National Broadband Plan of March 2010 suggested that the minimum appropriate speed for every American household by 2020 should be 4 megabits per second for downloads and 1 Mbps for uploads. These speeds are enough, the FCC said, to reliably send and receive email, download Web pages and use simple video conferencing. The commission also said it wanted to ensure that, by 2020, at least 100 million U.S. homes have affordable access to download speeds of at least 100 Mbps and upload speeds of at least 50 Mbps.

Such rates wouldn't be difficult. Comcast Corp. is already selling its 100-megabit service in the richest American communities, though it costs $200 a month. In a sense, the FCC adopted the cable companies' business plan as the country's goal. The commission's embrace of asymmetric access -- slower upload than download speeds -- also serves the carriers' interests: Only symmetric connections would allow every American to do business from home rather than use the Internet simply for high-priced entertainment.

Other countries have different goals. The South Korean government announced a plan to install 1 gigabit per second of symmetric fiber data access in every home by 2012. Hong Kong, Japan and the Netherlands are heading in the same direction. Australia plans to get 93 percent of homes and businesses connected to fiber. In Britain, a 300 Mbps fiber-to-the-home service will be offered on a wholesale basis.

The current 4 Mbps Internet access goal is unquestionably shortsighted. It allows the digital divide to survive, and ensures that the U.S. will stagnate.

A smarter goal would be to give most Americans access to reasonably priced 1 Gb symmetric fiber-to-the-home networks. This would mean 1,000 Mbps connections, speeds hundreds of times faster than what most Americans have today. Only fiber can meet the growing demand for data transmission.

Think of it this way: With a dial-up connection, backing up 5 gigabytes of data (now the standard free plan offered by many storage companies) would take 20 days. Over a standard (3G) wireless connection, it would take two and a half days. Over a 4G connection it would be more than seven hours, and over a cable DOCSIS 3.0 connection, an hour and a half. With a gigabit fiber-to-the-home connection, it can be done in less than a minute.

If the U.S. had a fully fiber-based network, Hollywood blockbusters could be downloaded in 12 seconds, video conferencing would become routine, and every household could see 3-D and Super HD images. Americans could be connected instantly to their co-workers, their families, their teachers and their health care monitors.

To make this happen, though, the U.S. needs to move to a utility model, based on the assumption that all Americans require fiber-optic Internet access at reasonable prices.

How much would it cost to bring fiber to the homes of all Americans? Corning Inc., the American glass manufacturer, and others have estimated that it would take between $50 billion and $90 billion.

The Internet has taken the place of the telephone as the world's basic, general-purpose, two-way communication medium. All Americans need high-speed access, just as they need clean water, clean air and electricity. But they have allowed a naive belief in the power and beneficence of the free market to cloud their vision. As things stand, the U.S. has the worst of both worlds: no competition and no regulation.

• Susan Crawford is a contributor to Bloomberg View and a visiting professor at the Harvard Kennedy School of Government and Harvard Law School. She is a former special assistant to President Barack Obama for science, technology and innovation policy. This is the last in a series of three excerpts from her new book, "Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age," which will be published Jan. 8 by Yale University Press.