Korea's Broadband Miracle

[David Farber <dave () farber net>]

Begin forwarded message:

From: "John F. McMullen" <observer () westnet com>
Date: August 27, 2004 11:11:33 PM EDT
To: johnmac's living room <johnmacsgroup () yahoogroups com>
Cc: Dave Farber <farber () cis upenn edu>
Subject: Korea's Broadband Miracle

From the Wall Street Journal --  
http://online.wsj.com/article/0,,SB109347596701001364,00.html? 
mod=opinion%5Fmain%5Fcommentaries

COMMENTARY
Broadband Miracle
By THOMAS W. HAZLETT

In the mid-1990s, Korean policy-makers set out to inject competition  
into local telephone service. They enacted rules allowing rivals to  
challenge the erstwhile state monopoly, Korea Telecom. Yet, by  
mid-2004, KT still accounted for 95% of local phone lines.

A failure? On the contrary, Korea's policy has proved a smashing  
success. Because, as an additional lure to attract phone entrants, the  
government ended regulation of advanced telecom applications. The  
result: While competitors largely avoided (regulated) voice services,  
they invested billions to create new (unregulated) high-speed Internet  
networks. The broadband technologies unleashed by telecom rivals forced  
KT to modernize its network, which now serves just half of the  
high-speed market.

And that's a big market: 78% of Korean households subscribe to  
broadband, the highest penetration rate in the world and well over  
twice that of the U.S. While broadband via standard cable modems and  
digital subscriber line (DSL) services are available for about $27 a  
month, households paying about $52 a month receive lightning fast 20  
mbps VDSL service -- connections sufficient to receive live  
high-definition TV. In short, the apartment dweller in Korea enjoys the  
same level of Internet service as the largest corporate customers in  
the U.S. All this in a country of 48 million which, in 1979, had just  
240,000 phone subscribers.

Circle back to the government's original goal: introducing local phone  
competition. It flopped, at least in the way regulators expected. While  
minutes of use on KT's phone network declined by a stunning 12% last  
year, the primary reason is intermodal competition as consumers switch  
to mobile phones (with 36 million subscribers) and Internet  
substitutes. Given ubiquitous broadband, voice traffic is migrating to  
"Voice over Internet protocol" (VOIP) and e-mail.

U.S. policies and outcomes are different. The 1996 Telecommunications  
Act set about to introduce local rivalry just as the Koreans were  
making their policy moves. But while the Act struck down state  
franchise phone monopolies, going to competition cold turkey was  
considered too harsh. Regulators attempted to ease the transition with  
ambitious network sharing mandates. These allowed entrants to use the  
existing phone network facilities at prices set by regulators. (The  
rules are typically referenced as "unbundling," as they allow new  
retail service competitors to use various pieces of an incumbent's  
network.) Determining these complicated terms and conditions has taken  
more than eight years. And in June, federal rules lapsed after being  
overturned by the courts, leaving the entire regulatory arrangement in  
limbo.

Korea avoided this path. KT's new rivals Hanaro and Thrunet (among  
others) were denied the opportunity to use KT's network to deliver  
signals the "last mile." They scrambled for efficient alternatives. By  
using fiber-optic capacity leased from a power company, cable TV lines,  
and new transmission facilities built from scratch, competing networks  
emerged and broadband services took off.

Sang-Seung Yi, an economist at Seoul National University, explains that  
the "Korean broadband market succeeded because of fierce  
facilities-based competition among Hanaro, Thrunet and KT. This took  
place not because of 'smart' government regulation such as unbundling,  
but because of the absence of regulation." Other factors feed the  
broadband miracle, of course. Koreans live in close proximity to one  
another, so the cost of building networks tends to be low. The Korean  
government has subsidized certain applications and invested public  
monies in broadband and wireless. And the fabled Korean demand for  
online gaming suggests a hunger for broadband applications.

But these alibis for why others do not do as well are overrated. Most  
Koreans do not live in apartments, and many parts of the U.S. are much  
more densely populated than many parts of Korea. Subsidies have been  
handed out in Korea, but the major network competitors depend on  
private capital markets. Thrunet reorganized under bankruptcy laws in  
2003, and Hanaro reported its first profits only in mid-2004. The U.S.  
annually pours multibillion-dollar subsidies into network services,  
while even larger cross-subsidies are embedded in rates, all without  
seeming to gain any advantage in network growth. As for appetite,  
Korean demands were revealed only after Internet cafs -- or "PC baangs"  
-- dotted the country, luring customers to online games, music, and  
videos. Networks then built-out; subscribers followed.

One large disadvantage of broadband providers in the U.S. is rarely  
cited: cheap dial-up. Local phone service in most countries, including  
Korea, is metered; in the U.S., local residential calls are priced at  
zero. Even at $25 a month, unlimited broadband is more expensive in  
America than most dial-up service (when a voice line is shared),  
whereas in Korea broadband is faster and less expensive. U.S.  
regulation of local rates inadvertently tips the scales against  
broadband.

But it is also crucial that Korea's deregulatory climate has protected  
investments in new infrastructure, inducing capital to flow freely into  
broadband. As Prof. Yi explains, "Because Hanaro could not 'free-ride'  
on KT's investments, they made massive investments in laying out  
fiber-optic cables. That, in turn, prompted KT to make its own massive  
investments. And it could realize 100% of its returns, because it had  
no unbundling requirements." A report issued by Korea's Ministry of  
Information and Communications likewise claims that the key to the  
broadband market is "facilities-based competition."

Traction in the broadband market powers virtuous circles. "Korea's VOIP  
production is by far the most advanced," writes one consultancy of  
technology solutions for the about-to-explode Internet telephony  
market. Overall, the Korean government reports that IT now accounts for  
13% of GDP, easily above the U.S. level of 8%.

In campaign 2004, Americans have already been treated to the candidates  
jockeying over the broadband problem. President Bush stated the basic  
position of both candidates when he declared: "[W]e rank 10th amongst  
the industrialized world in broadband technology and its availability.  
That's not good enough for America. Tenth is 10 spots too low as far as  
I'm concerned." The policies are far more troubling than the rounding  
error. The lesson offered by the country in first place is that  
deregulation, cold turkey, may actually work a lot better than the  
alternative.

Mr. Hazlett, a senior fellow at the Manhattan Institute, formerly  
served as chief economist of the Federal Communications Commission.

Copyright 2004 Dow Jones & Company, Inc.
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