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Perspective

Barriers to Entry:
Fortnightly Magazine - December 2004

public policy. ISPs, however, can partner with BPL entrepreneurs and electric utilities (some have already done so) to design platforms, and develop proprietary applications as well as content.

Advocates for application and content "open access" support maximum interoperability of different broadband transport platforms through the government mandated use of standard nonproprietary protocols (, TCP/IP). While cable modem and DSL broadband now use TCP/IP, a general protocol standardization mandate could be a deterrent to the entry of new competitive broadband transport platforms such as BPL.

One commentator on broadband technology has argued that it has natural monopoly characteristics, including high sunk costs, as well as supply and demand-side scale economies. If required by regulation to use standard, nonproprietary protocols, all such broadband transport platforms would tend to produce a homogeneous "high-speed" service. In these circumstances, the firm with the highest traffic volumes could underprice its rivals and dominate the market. 8 But some cable companies have publicly announced that they will not compete on price with DSL. Those companies may try to segment the market by offering higher speeds than telephone companies can achieve with DSL, for higher prices than telephone companies charge for their service. Cable companies also are bundling proprietary content and applications with their cable modem and traditional television service offerings.

New broadband platforms are more likely to enter this market if their operators are free to design them without government-mandated standardization constraints. For example, BPL platforms with proprietary protocols and designs different from those employed by cable and telephone companies may facilitate new applications, such as the automated load controls in which electric utilities are interested. Thus, if the policy goal is to encourage economic broadband transport platform entry, regulators should support flexible, creative designs, and should not mandate standardization. 9

Nor should government adopt a flat ban against vertical integration by broadband transport operators into applications and content. A profit-maximizing broadband transport operator has an ongoing incentive to pursue a strategy that will produce innovation in applications and content markets to integrate the complementary efficiencies that make its platform more valuable. That strategy may include support of independent applications and content competitors, vertical integration, or licensing a limited set of independent providers, in whatever combination will achieve the desired complementary efficiency objective. 10

BPL vs. DSL and Cable

Because electric utilities provide a regulated monopoly transmission and distribution service, their provision of a competitive BPL service would present a risk of cross-subsidy by the former to the latter. To avoid that risk, it might be argued that regulators should prohibit electric utilities from investing in BPL, require them to allow independent BPL service providers to have access to their distribution systems, and impute foregone contributions from BPL to fixed-system costs for utilities that deny such access. Such a policy, however, would be of doubtful legality, and go well beyond the "light hand" of regulation the FCC has recommended for competitive broadband platforms. Moreover, it would deter competition because it would require BPL to be produced as a separate product and deprive it of the economies of scope enjoyed