George and Larry’s Excellent Peruvian Broadband Adventure…

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Last week, George and I returned from an amazing trip to Peru where we held two days of workshops with OSIPTEL—the Peruvian telecoms regulator—as part of a project for USAID.  As we covered a wide range of topics, we were once again reminded that while language and individual political nuances among various countries may differ, the fundamental economics—and concurrent complex policy issues—facing telecom regulators remain universal.  That is, how do we get more broadband deployed when it isn’t necessarily profitable to do so?

In light of this universal question, we spent a significant amount of time talking about the economics of the “last mile” and the effect of regulation on entry and new investment.  Among other topics of interest to OSIPTEL was the rise, and ultimate demise, of the U.S. unbundling experience (a topic which we at the Phoenix Center are intimately familiar with).  As we explained to OSIPTEL, the U.S. unbundling experience collapsed for essentially three principle reasons.

First, unlike the successful long-distance model upon which the 1996 Act was based, the economic foundation for using resale competition to “seed” the eventual transition to alternative local copper-based facilities-based networks in the United States simply was not viable.  Building local networks is simply too expensive for widespread replication.  Second, given the inherent conflicts created by a mandatory wholesale supplier/retail competitor regulatory regime, it was impossible to get the incentives lined-up correctly.  As a result, the incumbents never had any incentive to cooperate with the unbundling regime; instead, they would always seek to sabotage it.  Finally, and perhaps most significantly, technology simply passed the paradigm by.  Indeed, with the advent of cable and stand-alone VoIP, along with high-quality, cheap wireless services, imposing massive amount of regulations to sustain an unbundling regime of the traditional copper-switched network makes little sense.  Today, only about 40% of households in the United States subscribe to local telephone service offered by an ILEC, and it was this service that was the primary target of unbundling policy.  So, if the United States could not make unbundling work, we recommended that in light of Peru’s still-developing economy and OSIPTEL’s limited resources, perhaps OSIPTEL should better allocate their efforts to other regulatory priorities.

We also talked at length about net neutrality.  Just like the debate in the United States, while everybody is in general agreement that an “open internet” is a worthy concept, ideas are not policy.  “Open Internet” has a nice ring to it, but the real issue is what set of legally-enforcable rules get you there without too heavy a dose of unintended consequences?  We failed in this regard in the U.S., where the chosen policy (of price regulation) actually promotes the very behavior the FCC was allegedly trying to attenuate (a point demonstrated in this Perspective).  Consistent with our past research on the subject, we cautioned OSIPTEL that if they are to enact a net neutrality regime, we would recommend staying away from “bright line” rules in favor of a flexible, ad hoc approach.  The logic is straightforward:  if more investment and wider coverage is a goal, then regulatory interventions that offer no plausible positive incentive to deploy network must be carefully considered.

And, of course, we talked a bit about the FCC’s National Broadband Plan.  While the FCC’s Plan offered some useful suggestions, many were somewhat obvious (e.g. more spectrum, more subsides, more investment-inducing regulation and deregulation).  Also, many important issues were not directly addressed in the Plan.  For example, we noted that while the Plan offered a sophisticated model to estimate how much broadband costs to deploy, it was largely silent on how much money the government should spend to deploy it.  That is, the Plan did not answer the critical question of what is the social cost-benefit tradeoff of broadband deployment?  Some guidance on the question appears to be hidden in the document (see our discussion here), but I suspect the Eighth Floor did not want to burden itself with a conceptual framework for such a critical issue.

Our hosts at OSIPTEL were both gracious and attentive, and we thank them for a wonderful experience.  (We would also like to give particular kudos to the official translator, who not only had to translate complex and nuanced economic concepts from English to Spanish, but who also had to decipher George’s heavily accented English.)

Finally, although this is typically not the kind of topic we write about here at @lawandeconomics, I would be remiss if I did not provide some quick comments on the Peruvian food scene.  Bottom line:  the cuisine in Peru is absolutely fantastic and we recommend it heartily.  For example, it was a pleasure to have cerviche (the national dish of Peru) prepared exactly as it is supposed to be served:  incredibly fresh seafood with Peruvian limes (which, ironically, they refer to as lemons) and Peruvian corn (which have the biggest kernels you have ever seen).  We also heartily enjoyed fresh scallops in the shell (complete with roe) covered on fresh Parmesian cheese and broiled to perfection.  And speaking of corn, George bravely enjoyed some pink corn beer (from a communal glass no less) in the local market in Cuzco as part of our side-trip to Machu Picchu.  We also enjoyed real grass-fed beef from neighboring Argentina, which was off the charts.  I also was brave enough to try the other Peruvian National Dish: cuy (pronounced coo-ey).  So what is cuy you may ask?  Cuy is guinea pig.  And, yes, it was delicious.