Ajit Pai: Light-touch regulation lets telcos invest

Ajit Pai Photo: Shlomi Yosef

The US FCC chairman tells "Globes" that, "If regulation is not market-based enough, then companies will find they can't make a business case for deploying 5G networks."

Federal Communications Commission (FCC) chairman Ajit Pai was in Israel recently for the "Globes" Business Conference. The 45 year-old Harvard graduate and University of Chicago Law School graduate is the son of immigrants from India. He was appointed to the FCC in 2012 and became chairman in January 2017.

He diplomatically sidesteps an opportunity to criticize the heavy regulation in Israel's telecom sector, which is currently inhibiting investment in 5G and fiber optic networks. But in his interview with "Globes," he repeatedly espouses the virtues of "light-touch" regulation and letting the marketplace drive development - the opposite situation to Israel.

Globes: Can you give Israel some advice on the cellular market. Our prices went down but we have a problem with investment in 5G and fiber optic?

Every country has its own unique market structure and has to make its own determination on what regulations are appropriate. For our part at least, we have found that a more market-based approach has been the successful one in terms of promoting innovation and investment in wireless networks and services. So that means you're getting as much spectrum into the commercial marketplace, mainly regulating how the networks are constructed and managed and ultimately that will create a situation that will maximize the companies' incentives and ability to invest in these networks. So I don't think there is an optimal market structure necessarily but I do think that if the regulatory framework is certainly not market-based enough, then companies will find that they can't make a business case for deploying 4G and 5G network and especially in a country like Israel where there are densely populated areas with a high amount of upward mobility, I think you would find a massive case for wireless carriers to deploy and invest in networks."

What is the role of the FCC?

"Technology is increasingly becoming a part of American consumers' lives and I think that is true for consumers around the world and so I see it as our mission at the FCC to empower every American to take advantage of the technology and that involves a philosophy from the FCC of what I call regulatory humility. We don't try to dictate to the results, we try to set light-touch market based regulations to give the private sector maximum incentive to invest, to innovate and to create value for consumers and whether it's 5G the next generation wireless connectivity or fiber cables that help deliver high speed Internet access, we want companies to deliver these communications services to create as much infrastructure and as many services as possible.

What are your aims?

"I think the American Internet economy is a very strong one but I think there is still some room to go and what we see is in parts of the country not all Americans are able to take advantage of these next-generation technologies. That gap is something that we call the digital divide and we want to make sure that we close that divide so that every American has access to the Internet and every American has the ability to take advantage of some of the services that the Internet offers from telemedicine to precision agriculture to online education and the like. So we've been focusing at the FCC to adopting policies to modernize our rules, to update regulations, to help close that digital divide and I'm proud to say that over the past two years we've had a lot of success. In fact over the last year or so there has been a 40% increase in speeds and more Americans than ever before are getting Internet access. Entrepreneurs are creating companies and applications that were unthinkable a generation ago.

Speed for cellular or landlines?

"Both. In terms of fixed markets the speeds are going up and infrastructure investment is appearing to go up as well. On the mobile side too, we see companies exploring 5G trials and they are doing some of those trials with an eye to wider deployment in the future and so from the FCC's perspective, when it comes to things like 5G we are getting much more of a spectrum into the commercial marketplace making it easier to deploy wireless infrastructure that will suit these 5G networks, things like small cells and distributed antenna systems and the like. And on the fixed side too, we are modernizing our rules to make sure that fiber deployment is as deeply penetrated into the countryside as possible.

We understand that in the US mobile telephony is progressing but the picture is not so rosy with fiber optic deployment.

"I think that there are two basic challenges. One is that the geography and demography of the US is challenging. It's a very large country and in many parts of the country there aren't many people per square mile or square kilometer and so it's difficult to build a business case for deploying in those areas. The second challenge has been regulatory uncertainty.

How do you meet these challenges

"When I came into office, for example, there were rules still on the books that required companies to maintain their fixed copper lines that had been in the ground, in some cases, for decades and every dollar that was spent maintaining those networks was a dollar that could not be spent deploying fiber optic cables and the like. And so one of the things we have been trying to do is modernizing our regulations in order to make sure that the companies can focus their investment on fiber deployment and make the business case for deployment stronger, and also with respect to the geographic and demographic challenges, we've been modernizing our universal service fund system, which is the federal subsidy program that directs investment to unserved parts of the country and by using unique mechanisms like a reverse auction we have been able to distribute that funding in a very efficient way to make sure that connectivity reaches unserved Americans. The other thing that we have been doing with respect to unserved parts of the country is encouraging much more competition from non-traditional players from electric utilities, for example, or fixed wireless companies who need access to unlicensed spectrum or satellite companies. We have been approving the first generation of mobile non-GSP station orbit satellite companies. Companies like SpaceX or OneWeb, they are looking to serve some of these areas that in part might be prohibitively expensive to serve with fiber optic cables.

How do you encourage companies to invest in remote regions?

"In some cases yes, so we are using this reverse auction method to encourage a wide variety of companies to compete. Telephone companies, cable companies, satellite companies and wireless companies and others and electric utilities, and we said, how much will it cost you to serve this particular geographic area? And because they are all competing with each other that drove the cost down of the subsidies that we had to distribute and that was one of the things that we found notable, so we originally estimated that it would take about $5 billion to serve the areas that we had targeted but eventually it cost $1.5 billion because of that competition among different technologies and between different geographies. I think that is a good blueprint for the future.

Are you subsidizing just fiber optic deployment or also 5G cellular deployment?

"Any technology, so it could be a cable company or it could be a satellite company, as long as they met certain speed and service thresholds, and they were able to get funding. So I am proud to say that over 99% of the companies that won funding from our reverse auctions are meeting the 25 megabit per second standard that the FCC is using to define broadband.

Are you dictating what technologies the operators use?

"Through our subsidy program we offer different service tiers, so we said you can offer 25 megabits per second or you can offer higher as well if you offer 100 megabits per second, you can get even more subsidies - a gigabit. So it was a scale that allowed companies to compete by offering higher speeds. Interestingly because more companies were competing using different technologies and there was a speed tier approach, I think a lot of people thought ok, let's offer the best speeds that we can."

Who chooses which technology to deploy

"Alright, so they would choose which broadband technology they could deploy. This was not so much on the mobile side, this was primarily for fixed broadband connectivity, so 5G and millimeter wave based technologies were not part of that auction. We are also going to be doing a wireless auction, cellular auction to get 4G LTE to serve parts of the country as well and that's one of the things that we are exploring on the mobile side."

"Ultimately the promise of 5G using this spectrum is that it could be a substitute for any kind of connectivity whether its cellular or fix and that if you that at some of the trials, companies are achieving incredible speeds. I think that could be a very good thing for the future both for high capacity services, for example commercial grades, backhaul services or even low-band width industrial services, industrial IoT could rely on some of these - low-band widths but low latency services that 5G can offer.

If companies like Verizon or AT&T want to use advanced technologies like millimeter waves, do you designate the use of these wavelengths for landline or mobile infrastructures?

"No our purpose has been flexible use. We want to put as much spectrum into the marketplace as possible and then let the market decide how it can most efficiently deploy that spectrum. We believe that free market approach that we have had for a quarter century is the best way to maximize the value of this scarce public resource and over the last several years we have been pushing much spectrum into the marketplace over the next year and a half or so we will be allocating approximately 5 gigahertz of spectrum, which is more spectrum than is currently held by terrestrial broadband providers in the US combined. This is a huge influx of supply and we are confident that all sort of entrepreneurs will be able to use this to develop all kinds of 5G services that will be terrific for consumers in the marketplace.

How do you encourage operators to invest?

"Ultimately we want to see more competition in the marketplace and competition is the best way to ensure that the prices remain competitive. We see a tremendous amount of competition. There are four national wireless carriers and regional carriers. And increasingly these mobile carriers are competing with fixed companies. There is intermodal competition as well. So we are hopeful that in the future we will see a tremendous amount of competition in the marketplace that will put downward pressure on prices."

"The difficulty with pre-emptive price regulation from the government is that it involves a lot of central planning that ultimately might deter investment in networks. The best example of that was that the FCC would traditionally engage in regulating business data services. These are enterprise broadband services. It had micro-managed the prices of these services for many, many years and what we found was that these pricing regulations ended up deterring investments both by incumbents and by potential new competitors. For incumbents the government is limiting your rate of return on investments, meaning you are less likely to invest in new infrastructure. It also limited the investment incentives of competitors because if they were able to gain access to an incumbent's facilities at below market price, they would have less incentive to build their own infrastructure. Ultimately, by relaxing the pricing regulations what we have found is that enterprise broadband investment has gone up. In fact, last year a report came out which suggested that more businesses in the US are connected with high speed broadband than any year since records were first kept. I think part of the reason for that is that the FCC has allowed market forces as opposed to government to regulate how prices were determined.

How do you explain the gap between Europe and the US?

"Every region has different approaches. Over time we believe that infrastructure investment is absolutely critical. You have to allow the private sector to build a business case for deployment. After all, these broadband networks do not have to be built, capital does not have to be raised, crews do not have to be hired and services do not have to be delivered and they won't be if the regulatory system is so difficult that companies cannot find the way to make an investment. So ultimately it should be the market and not government that should drive investment and innovation in broadband networks. That has been the case in the US and we are confident that especially with 5G networks that is going to bew critical."

Why are Google and Facebook against you and charging that you are damaging the market?

"I think that in some cases for many companies wanting to engage in regulatory arbitrage, it's very easy to say regulate my rivals and not me and I think that is something that many Americans including policymakers are skeptical of, and I think that when it comes to things like privacy, for example, and data security, I think people realize that we have to have a consistent level of regulation across the economy not just in network regulation in particular but heavy handed regulation that was developed in 1934, which was not only decades ago in real terms but eons ago in terms of technology.

In 3G the US slipped behind the world but with 5G you are again leading. What happened?

"We have adopted what we call the 5G fast plan that includes three basic components. Getting more spectrum in the marketplace, making it easier to deploy wireless infrastructure and modernize the rules to promote the fixed infrastructure, fiber in particular, that will be necessary for backhaul and getting Internet traffic into the core of the networks. We are confident that if we execute on each of those three plans, we will be able to deliver 5G and I think that we are making great strides so far, as I said we are in the middle of a 28 gigaherz auction right now and this will be followed by a 24 gigahertz auction and bigger ones. We even have a proceeding for 95 gigahertz.

What will be the fate of the cable and satellite TV companies in the era of Netflix and Amazon?

"I think competition is fiercer than ever before in the video marketplace and it is in striking contrast when I was a child and you couldn't time schedule when you wanted to watch shows. For my kids TV is streamed onto an iPad using an app and so with the competition fiercer than ever it is important for regulatory authorities to modernize themselves as well and increasingly streaming becomes a serious competitor to the more traditional services, I think that is going to create challenges for the companies' business models.

So the traditional cable and TV companies must shift their infrastructure to applications?

"They are experimenting a lot. Some of the cable and satellite companies are for example experimenting with skinny bundles and so instead of offering you hundreds of channels, they might offer you 20 channels or 40 channels that are more tailored to what you might want to watch and at a price point you might find more appealing. Some of the programmers as well are experimenting with online apps, for example CBS has something called all access that they use try to drive viewership on the online platform as opposed to the traditional linear platform. A lot of the companies are trying to figure out. We know the viewers are out there and we know they are eager for content, so how do we reach them on the platform and at the time they find most appealing and that's something that's very much in flux for cable programmer and satellite programmers and the like.

Do they ask for assistance from the FCC?

"No. If anything they are asking for continued light-touch regulation. So a few years ago there was a proposal for us to regulate streaming services in a similar way to the way that the FCC regulates cable companies' delivery services. That was rejected and that was probably the right approach. What the marketplace develops organically lets these business models thrive and what the businesses what the consumers decide in their aggregated decision is the best approach."

Published by Globes, Israel business news - en.globes.co.il - on January 14, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Ajit Pai Photo: Shlomi Yosef
Ajit Pai Photo: Shlomi Yosef
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