TELECOMMUNICATIONS

New Hampshire's Digital Economy and Government Regulation of Access

Testimony before the NH House Science, Technology and Energy Committee on
House Bill 1372

January 25, 2000

Prepared by Lisa Shapiro, Ph.D.

Hands Off The Internet

Hands Off The Internet is a national, not-for-profit coalition of Internet users, including information technology companies, high-tech associations, consumer advocates and public policy organizations. Hands Off The Internet supports an unregulated approach to Internet access in which consumers, not government, choose the method that is best for accessing the Internet.

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Growth of High Tech Industries Is Fueling New Hampshire's Economic Growth

• High technology is more concentrated in New Hampshire than in most other states, and the nation as a whole.

• New Hampshire has a higher concentration of high technology workers than any other state in the country.

• About 4 percent of New Hampshire businesses are in high technology industries, compared to 2.5 percent for the nation as a whole. American Electronics Association, Cyberstates 3.0. June 1999

• While 8.2 percent of private sector workers are in high technology jobs, high technology industries accounted for nearly 15.5 percent of New Hampshire's Gross State product, higher than other states on average. American Electronics Association, Cyberstates 3.0. June 1999

• Fifty-nine percent of the total value of New Hampshire's exports are from high technology, more than twice the U.S. average, ranking New Hampshire 7th in the nation. American Electronics Association, Cyberstates 3.0. June 1999, p. 91.

Investments in Digital Infrastructure Are Necessary for Continued Growth
(used to be roads primarily, now investments in people and technology)

• The national and state economies are changing.

• Technology innovations and the dramatically improved ability to transfer information are changing the way we do business.

• Information Technology (IT)-producing industries (i.e., producers of computer and communications hardware, software, and services) that enable e-commerce, play a strategic role in the growth process. Between 1995 and 1998, these IT-producers, while accounting for only about 8 percent of U.S. GDP, contributed on average 35 percent of the nation's real economic growth. Department of Commerce, The Emerging Digital Economy II, June 1999.

• In 1996 and 1997, falling prices in IT-producing industries brought down overall inflation by an average 0.7 percentage points, contributing to the remarkable ability of the U.S. economy to control inflation and keep interest rates low in a period of historically low unemployment. Department of Commerce, The Emerging Digital Economy II, June 1999.

• IT industries have achieved extraordinary productivity gains. From 1990 to 1997, IT-producing industries experienced robust 10.4 percent average annual growth in value added per worker. In the goods-producing subgroup of the IT-producing sector, value added per worker grew at the extraordinary rate of 23.9 percent. As a result, value added per worker for the total private non-farm economy rose at a 1.4 percent rate, despite slow 0.5 percent growth in non-IT-producing industries. Department of Commerce, The Emerging Digital Economy II, June 1999.

• By 2006, almost half of the U.S. workforce will be employed by industries that are either major producers or intensive users of information technology products and services. Department of Commerce, The Emerging Digital Economy II, June 1999.

• There continues to be unprecedented growth in the use of Internet, as use at home for both work and personal use continues to grow.

• Currently, an estimated 50% of New Hampshire businesses and 17% of households who are on line use broadband connections. One-half percent of New Hampshire households have a broadband connection to the Internet, compared to the national average of 2.2 percent. Digital New Hampshire: An Economic Fact Book, (Washington: The Progress & Freedom Foundation, October 1999).

• Broadband Technologies are just beginning to be deployed and have little market penetration. New technologies are being tested and developed as well.

• A number of different technologies compete to provide high speed access to both businesses and homes, and while analysts differ on forecasted penetration rates, most agree there is significant competition among different technologies.

• New Hampshire should support policies that encourage private investment in the digital infrastructure.

• Competition between technologies is spurring investment. "The early deployment statistics and anecdotal evidence suggest that in areas where cable modems are deployed, the deployment of DSL follows closely. Sometimes DSL deployment spurs cable modem deployment, but it is fairly clear that the rate of deployment of one technology influences the rate of the other. As cable and DSL are deployed in the same markets, we also have observed aggressive price competition. In various markets, DSL prices have been lowered to be competitive with cable modem service." Broadband Today A Staff Report to William E. Kennard, Chairman, Federal Communications Commission, October 1999.

• Investments in broadband technology are risky and regulatory uncertainty, especially initiated at a state level, is likely to cool investments in that state. These uncertainties are reflected in a letter to the FCC from prominent Silicon Valley companies including Intel, Cisco, Novell, Compaq and IBM. The letter states: "It is a simple but undeniable reality that new and unnecessary regulations will diminish the willingness of capital markets to finance the construction of new broadband networks. This is true for a number of reasons. As a threshold matter, such investments are very risky and lack any guaranteed return." Broadband Access Report, City of Los Angeles Information Technology Agency, June 1999.

Markets and Industries Are Changing Rapidly

• New markets are emerging for New Hampshire companies, while old markets and industries are evolving and expanding.

• Expanded communications capabilities creates access to new markets for New Hampshire companies (New Hampshire's businesses now have access worldwide; example of E-Bay businesses in the North Country).

• Inevitably means new competition for New Hampshire businesses.

• Ability of companies to market services and products is improved (need for intermediaries or 'salesman' to provide information is less as people can access wide range of standardized information on products and services).

• Increased competition requires companies to maximize efficiency, and examine ways of improving the marketing of services and products.

• Expanded communications and ability to distribute information are changing industries, including traditional industries (example of Paper, Chemical, Trucking, Airlines).

• Consumers are benefiting from new products and services.

• Evolving technology creates new equipment for high speed transfer of voice, video and data.

• Technologies and software give average citizens new abilities (financial management software, online trading and reliable financial information on companies).

• Consumers are benefiting from existing products and services being sold differently.

• Online purchases up, with consumers having greater choice and convenience.

• Merger of content companies with Internet companies (AOL/Time Warner) will accelerate rollout of services over Internet for households.

• Consumers get more services and more choices.

• Businesses are migrating transactions to the Internet.

• In 1998, $43 billion worth of goods, or five times U.S. online retail sales, were sold in the U.S. through business-to-business transactions on the Internet. The Digital Economy Fact Book, First Edition, 1999.

• Forrester Research projects that by 2003 Internet revenues will account for about 10 percent of non-service-sector business-to-business revenues, up from virtually nothing in 1997. In some sectors, such as computing, electronics and utilities, the Internet is projected to account for a much more significant proportion of total business-to-business revenues. The Digital Economy Fact Book, First Edition, 1999.

• Case and Point: Encyclopedia Britannica Blown to Bits, Philip Evans and Thomas Wurster, Harvard Business School Press, 1999.

• Company was started in Scotland in 1768, and, through various owners including Sears and Roebuck, evolved into the world's most comprehensive and authoritative encyclopedia.

• By 1990, Britannica sales had reached about $650 million, company maintained dominant market share and its sales force was one of the most aggressive and successful in the world.

• Britannica viewed the introduction of the CD-ROM as irrelevant to its business, while Microsoft licensed the text of Funk & Wagnalls' encyclopedia and changed the name of its product to Encarta.

• Since 1990, Britannica's U.S. sales have dropped by 80 percent.

• Encarta was "give away" software with most personal computers, while Britannica was selling its book set for approximately $1,800.

• When Britannica did recognize the threat of the CD-ROM and the PC, it was not able to respond quickly because its content was too big to fit on a CD-ROM, the sales force revolted against change due to loss of commissions, and it was saddled with other legacy assets.

• The company was sold in 1996 for half its book value due to its failure to recognize the importance of new information technology and its inability to change quickly.

Government Cannot Control These Changes

• Land line, cable, digital subscriber lines (DSL), satellite, and wireless are all evolving technologies, with other connection technologies likely to be developed.

• New technology includes new ways of combining distribution, content, and services.

• Wireless Internet.

• WebTv.

• TV services over DSL lines.

• Internet telephony.

• Mobile Internet.

• Moore's Law: "Every eighteen months it is possible to double the number of transistor circuits etched on a computer chip," Gordon Moore, former Chairman of Intel.

• Law implies a tenfold increase in memory and processing power every five years.

• Technologies are evolving more rapidly than regulations could keep up with them.

Companies Cannot Have a "Market Concentration" in a Service When the Very Definition of That Service Is Changing Daily

• Wireless e-mail and Internet service is now being offered in New Hampshire, and is competing with other technologies.

• Will television programming come over your computer soon?

• Internet telephony could have significant market share in foreseeable future.

Innovation and the "Gold at the End of the Rainbow" (IPO, Stock Options)

• Many New Hampshire employees moving from wage earners to equity holders.

• Several New Hampshire high tech firms have offered IPOs in the past few years, bringing new capital into the state.

• Venture capital investments continue to grow.

Companies Are Using Different Business Models for Attracting and Keeping Customers

• AOL/Time Warner with entertainment and cable.

• AT&T with cable and telephone service.

• Independent cable.

• Various joint ventures.

• Free Internet connection.

• Bundled service package.

• Risk of development of closed systems; but no evidence to support government control, there is healthy competition, and "winners" likely to be open solutions.

Government Forced Access Will Be Like Holding a Stop Sign at the Door of the New Hampshire Economy

• Government regulation will label New Hampshire as a technology unfriendly state, where government is trying to control the evolution of Internet technology.

• While New Hampshire has a strong foundation for continuing to benefit from growth from the new economy, it does have some vulnerabilities as well.

• There are labor shortages for high technology workers in New Hampshire.

• New Hampshire is still not generally known as a high technology state.

• Other states' high technology industries are growing at a faster rate than New Hampshire.

• Any government regulation is likely to tip the scales in favor of one technology over another in an extremely competitive and dynamic market.

• Regulation of the Internet will make New Hampshire unique among states.

• Government regulation will force companies to take a "wait and see" position on high tech investments in New Hampshire, shifting some of the economic evolution to the other forty-nine states.

• This type of regulation is likely to move the debate to the courts, and reinforce the image of New Hampshire as a "lawsuit" state.

• Government should be encouraging investments, not trying to control them. "Without fanfare, state officials have signed a pact with an upstart Waltham telecommunications provider to bring 'broadband' Internet access to every school building, Town Hall, and police and fire department in Massachusetts." January 24, 2000. "Agreement to put Mass on Internet's high-speed lane," Boston Globe, January 24, 2000.

 

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