Six paradigm shifts—an oft-used phrase, but an apt one—are coming together to produce this "mega-trend" result:

• Information Paradigm: from Analog to Digital. Digitalization makes information easily translatable between network nodes and user devices—from computers to cameras to televisions to telephones to CD players, etc.
• Communication Paradigm: from Voice to Data. The underlying public-switched network is increasingly not a voice network with a data overlay, but instead a "datanet"—data, image and motion video—with a voice overla y.
• Transport Paradigm: from Narrowband to Broadband. Broadband transport enables real-time transfer and management of data files, transforming the "World Wide Wait" into a true World Wide Web.
• Connection Paradigm: from Circuit to Packet. Circuit networks reserve end-to-end circuits per call; "connection-less" packets route calls adaptively, use bandwidth when needed and delay rather than block calls.
• Location Paradigm: from Fixed to Mobile. The nomadic user enjoys portability (location-independence), mobility (motion-independence), separability (device-independence) and can take advantage of ubi quity (availability of network access points). "Nomadic" applies not just to the user, but also to a user’s access device(s) and computing environment(s).
• Networking Paradigm: from Physical (hardware) to Virtual (software). Hardware is configured for a minimal set of options; real-time management of network software multiplies user options and creates "virtual" net working.

Collectively, these changes comprise what the telecom industry calls in trade-speak, Information Movement and Management (IM&M). The transition from plain-vanilla telephony to IM&M has followed closely the evolution of the computing indust ry—indeed, the public-switched telephone network (PSTN) is often likened to a large, networked computer.

That evolution has traversed four phases, each one representing a fundamental shift in the role of the customer:

• Centralized Computing: Passive Consumption. First came the mainframe, guarded by a white-coated techno-aristocracy that administered not only the equipment—remote and dumb—but also, to a significant degree, the users—remote, and confined to th e dumbness of their devices.

• Distributed Computing: Remote Creation. Second came the personal computer, which distributed computing power to end users, liberating their creativity and ending control by the centralized administrator.

• Distributed Private Networking: Peer Collaboration. Third came the privately-networked desktop computer local area network (LAN), which enabled end users to collaborate in real-time across a shared communications network.

• Distributed Public Networking: Personal Network Management. Fourth came the commercialization of the Internet, transforming what had been a set of private networking arrangements between researchers and government types to an instrumentality f or widespread public networking.

The key facet of IM&M is not that part of the second "M" that represents how providers manage their networks; providers have always extensively managed their networks, an always resource-intensive task. Rather, it is the impact of the second "M" on the customer, who ascends to the role of network manager. True, in the golden days of voice telephony the customer made simple choices: calling collect (or rejecting a collect call), calling off-peak, or making a confer ence call all constitute rudimentary forms of network "management." But the new level of management with which today’s customers are being empowered is so vastly greater in degree as to be fundamentally different in kind.

Value-added services begin with those available in the handset—caller ID, call forwarding, etc. Screen phones add applications like home banking. The real pay-off is with the power of the PC. Windows95 offers numerous options for customers to configure not only their desktop computing environment, but also how they network with others—e.g., use a dial-up connection or use a LAN connection; process data locally or remotely; screening incoming e-mail.

Much of this is today too arcane for many users; for them the mysteries of (Windows95) Control Panel seem insoluble. But management choices are made for them, as it were, by default—i.e., by the system vendor. That such choices a re made without purposeful customer action does not change the fact that the customer, if inclined and sufficiently knowledgeable, has in fact the ability to exercise choice, i.e., actively manage resources and do so in real-time.

And more active customer management is inevitable as customers, whether from school or workplace experience become more choice-literate. Deciding to send a file in real- versus delayed-time is no more complicated than deciding between the Pony Express and Federal Express: How much speed and reliability are you willing to pay for? Downloading a video file involves a time/bandwidth trade far greater than for a text file. Already, users setting up Internet access choose a default access mode—dial-up, I SDN, etc.—that simply by re-entering Control Panel they can change at any time; access modes compressed into a "macro" would enable easy, real-time "point-and click" management.

Abundant bandwidth exponentially multiplies the real-time management choices available to the consumer-manager—reflecting the speed and flexibility that will be the hallmark of the Bandwidth Economy.

Critical to the evolution of the bandwidth economy is not only technology, but also regulation. Silicon Valley affords a stellar example of marketplace evolution driven by technology; regulation imposed costs on the margin but did not alter the fu ndamental course the industry took. Other times the roles of technology and regulation are reversed, with regulation the primary driver and market development severely impeded. Such was the case with cellular service, whose advent was delayed over a dec ade and whose market penetration has been slower in the US than in Europe due to the rules adopted (e.g., multiple standards, "called party pays" pricing).

Thus, maximizing the user’s options as network manager entails in part a scheme of regulation that, if it cannot actively aid proliferation of choice at least does not unduly hinder growth. The discussion below compares unbalanced and balanced approac hes to network regulation.

In a recent article, the author discussed at length policies of the Federal Communications Commission (FCC) that are impeding deployment of advanced services, a discussion that is here briefly recapitulated to lay the foundation for proposing alter native regulatory principles. (Excluded, as "in the regulatory pipeline" and thus not ripe for discussion: The FCC is currently considering petitions filed by three RBOCs seeking deregulation of advanced network services, with reply round comme nts due next week. By August 8, 1998 the agency must institute a proceeding on implementing section 706 of the Telecom Act. Decisions therein may affect deployment of new services considerably.)

Telecom deregulation has evolved over four decades and has, more by a series of ad hoc decisions than advance planning created a fundamental asymmetry in terms of incentives given telecom firms: For incumbent firms regulators increasin gly are socializing opportunity while privatizing risk, while for entrant firms regulators are privatizing opportunity and socializing risk. This imbalance has arisen out of three types of FCC actions: (1) communization of incumbent network assets; ( 2) confiscation of incumbent network investment; and (3) socialization of incumbent network services. Communization describes the appropriation of network assets for use by competitors; confiscation results from under-compensation of incumbent investment for use of their assets: and socialization represents the historic—and continuing—imposition of unique service requirements on incumbents.

Evidence exists that such regulation impedes capital investment. Telecom investment is lagging other industries in the 1990s, a period of dynamic industry evolution. Further evidence is the sub-par performance, vis-a-vis the S&P 500, of telecom s tocks during a roaring bull market. Thus, for 1994-1996 one composite index of telecom stocks showed a decline of 25 percent (63, 41, 33 and 21 percent declines, respectively for cable, wireless, Big-Three long distance and local exchange carrier segments). In four of five years this decade for which telecom investment data exist industry growth was negative.

The FCC’s policies thus collectively make the polar opposite policy error vis-a-vis federal S&L regulators in the 1980s, who privatized S&L investment opportunity while continuing to socialize (at higher levels) S&L lending risk. In the S& amp;L case the result was to subsidize profligate investments that but for the government’s largesse (at taxpayer expense) would never have been made. In the FCC case the result—equally predictable—is to discourage network investment.

In sum, the FCC has in effect been policing pockets—namely, the pockets of incumbent carriers whom FCC policy disfavors. Instead of policing competition as a process, the agency has been aiding favored competitors by affording them discounted a ccess to and use of incumbent networks, and exempting them from service obligations imposed on incumbents. In the monopoly era the set of separate rules for incumbents made sense: opportunity was socialized—but so was risk. Incumbents accepted limitatio n of prospective return on investment, but were protected from new entry.

With open entry, regulation is supposed to protect competition in general, not particular competitors. In passing the Telecom Act, Congress sought to create a genuinely neutral regulatory framework. The dilemma in telecom policy is, of course, how to manage the transition from ancien to nouveau regime. The Telecom Act attempted to address the transition towards opening both local and long distance markets to wider competition. It sought to minimize and, critically, to rapidly "su nset" continuation of asymmetric regulation and, upon completion of the transition replace asymmetry with a symmetrical scheme of regulation.

For the Regional Bell Operating Companies (RBOCs) the statutory time sequence called for them to first comply with a 14-point "competitive checklist" to win entry into long distance. Compliance points were specified in the statute itself, wi th no license given the FCC to add items of its own. For non-RBOC carriers checklist compliance was not even made a temporal prerequisite.

The Act also mandated new entrant access to incumbent networks, but at prices competitively neutral so as to give new entrants incentives to build their own networks. Incumbents are entitled to cost plus a "reasonable profit," with resale at the incumbent’s wholesale cost less incumbent "costs that will be avoided."

Universal service was to be "preserved and expanded"—at a measured pace, in accord with market evolution and other extraordinary public interest factors. Funding of social subsidies would be shared equitably among industry firms, in a non-di scriminatory manner.

Thus, the legislation sought balance. It "grandfathered" certain traditional regulatory doctrines—"last resort" carriage; open network access—but otherwise sought to move towards wider deregulation. Congress attempted to strike a balance between competing interests; put another way, the Congressional design was for predominantly symmetric regulation—privatizing opportunity as well as risk for non-voice services. The prospect of ultimate socialization of non-voice services is contemplated in section 254, but not immediate, precipitate steps in advance of market receptivity plus other public interest factors.

Transitional regulation under FCC rules has not followed the mostly symmetric design of Congress. Instead it follows the FCC’s own asymmetric policy predilection, by continuing perverse policies that privatize incumbent risk while socializing incumben t opportunity. Its justification for doing so was that incumbents still retain sufficient market power arising out of their local exchange "bottleneck." Even were incumbents to retain market power, pure asymmetric regulation is flawe d because it distorts incumbent investment incentives. What Congress sought was limited asymmetric regulation, a rapid transition to symmetry and in the interim structured to avoid distorting network investment.

But how much power to exclude or destroy competitors exists—actually, not in theory—in the local exchange today? Theory rests on the presumed ability of incumbent carriers to leverage "bottlenecks" via discriminatory interconnection a nd/or predatory cross-subsidy, and thus exercise "market power"—i.e., raise prices above or restrict output below the levels that would prevail in a freely competitive marketplace.

Yet while regulators accept and regulate according to such fears, marketplace investors pour money into competitive access providers, market failure has led local exchange carriers to exit diverse markets and incumbents are losing market share in key m arkets. Marketplace reality, however, has failed to trump entrenched regulatory attitudes. And so incumbent investment lags, and thus the prospect of optimal multi-network end-to-end bandwidth abundance.

For the Bandwidth Economy, prolonged continuation of asymmetric regulation will (as Congress understood) not do. What is needed is to balance the regulatory equation—symmetry of risk and opportunity for all classes of carriers.

B. Policing Packets: Balancing the Regulatory Equation.

Promoting packetized services requires shifting the focus of regulation from pockets to packets—from competitors to competition—by following four telecom regulatory precepts: (1) reciprocal availability of interconnected network assets; (2) regu latory neutrality towards firm-specific network investment; (3) restraint in socialization that enables non-essential services to flower or fail per market forces; and (4) balancing policy so that socialization/privatization is uniformly applied to bot h opportunity and risk for each service.

Asset Reciprocity: Give and You Shall Receive. An essential element of maximizing bandwidth abundance is that networks interconnect freely. Perpetuation of asymmetric interconnection at the expense of incumbent carriers confers a perman ent competitive advantage upon entrants not saddled with such rules. Congress sought to encourage facilities-based competition, with resale and unbundled element options an interim alternative only.

Investment Neutrality: Bandwidth Free-for-All. The FCC has over the years stated ad nauseum that investment incentives skewed by regulation will distort market forces. Congress sought in the Telecom Act to create the proverbial & quot;level playing field"—comparable ability to compete and incentive to invest. That is one reason why (besides the desire to guard against under-funding) Congress mandated equitable contribution of all providers to support universal service. By m aximizing every carrier’s incentive to invest, the prospects for bandwidth abundance are maximized as well.

Service Selection: Necessity Versus Convenience. In telecom policy there are two forms socialization takes: (1) making a service available, regardless of cost, to all end users; and (2) making an incumbent offer a service to competitors on the same terms and conditions. The former, if instituted prematurely, can undercut incentives for network investment; the latter, if implemented so as to insulate competitors from investment risk while guaranteeing them equality of investment opportun ity vis-a-vis incumbents, can undercut incentives for new facilities investment.

The Telecom Act envisaged ultimate, not precipitate, socialization of new services as universal, contingent upon determination of what is "essential," what is actually being deployed, and what has achieved major residential market penetration . To foster competitive equity the Act sought to create a regulatory framework in which regulation does not artificially tilt the calculus of risk and opportunity so as to favor one class of competitors over another.

As to universality, once a service has penetrated widely in the marketplace the question becomes whether to artificially push diffusion past economic users on grounds of social necessity. That social decision was made as to universal voice telephony. No comparable societal consensus exists today as to data services, including Internet access. The Telecom Act’s "substantial residential majority" criterion for universal service expansion expresses a strong preference for deferring sociali zation of data access, unless truly considered "essential."

The Internet/schools policy debate perfectly frames the application of section 254 of the Act. A common estimate is that 40 percent of residences have personal computers, of whom 60 percent have Internet access—in other words, about 25 percent of Amer ican homes have Net access. Estimates of school (not classroom) penetration range from 50 to close to 70 percent nationwide. Thus, market diffusion of Internet service appears to be well underway.

Actual usage level, however, varies hugely—no city’s residents having yet crossed the 50 percent Internet usage threshold. AT&T estimated that under its unlimited access plan 3 percent of its users averaged 400 hours per month, whereas the remaini ng 97 percent averaged 25 hours; Netcom On-Line Communications Services had a similar experience, finding that 3 percent of its customers absorbed 30 percent of total capacity.

Prominent computer folk—and others—have questioned wiring the schools. Nor is this an urgent case of trailing a mortal international rival, as when Sputnik I was launched in 1957 at the height of the Cold War and America launched a crash program to sp ur nationwide science education. Here the US, far from trailing global Internet growth, is its prime driver.

Thus it is no surprise that the FCC’s hasty adoption of full-scale Internet access for the schools and libraries raised hackles in Congress, given the lack of societal consensus on its value. Absent such consensus Internet access cannot be said to hav e acquired in the public mind the status of genuine societal need.

Another factor is that absorbing new technology is a time-consuming process. Premature deployment, in advance of the market’s pace, of a declining-cost technology wastes money if users cannot fully absorb it. They will have paid prices higher than if absorption had followed natural marketplace diffusion, and without having received comparable premium customer value for paying extra.

There is another critical element in the Internet policy equation: The impact of accelerating Internet access in the schools may well dilute funds available to support universal telephone service, squarely counter to the Act’s priorities.

Policing Packets: Socialize Necessity, Privatize Convenience. Telecom policy mavens face a fundamental policy choice: privatization or socialization of emerging telecom services. There is a logic behind either solution, if implemente d in a unified manner. Pure socialization limits investment risk but also limits investment opportunity; in underwriting private investment the government justifiably limits the range of risk to which the taxpayer is exposed, by banning investments j udged improvident. Pure privatization opens investment opportunity but also opens investment risk; improvident investment is curbed by the discipline of the market. Traditional voice telephony exemplifies symmetric socialization; Silicon Valley epitomiz es symmetric privatization.

It is when the government mixes the two strategies that trouble is guaranteed. Combining privatization and socialization of the same services either encourages improvident investment if risky investments are subsidized as with the S&Ls, or discourages prudent investment if such is penalized, as with telecom policy.

Technological and market developments in the past five years have laid the foundation for bandwidth abundance and marketplace choice. America is better-positioned than any other country to be the world bandwidth leader in the global economy, with global shares of 30 percent of international traffic, 40 percent of multinationals—the largest customers—and 60 percent of Internet hosts. The US has the highest worldwide PC and Internet penetration, and in Silicon Valley has the single greatest engine driving economic growth in the world today.

Current policies of regulators have not been adjusted sufficiently to foster full efflorescence—to let, so to speak, one hundred telecom flowers bloom. Regulation of abundance requires, above all, policing packets, not pockets.

Balancing regulation to match market realities means regulating in response to observable market reality—proliferating entrants siphon off high-volume traffic while incumbents exit adjacent markets.

One FCC Commissioner, Michael Powell, recently addressed the entry issue directly. In a speech he drew an analogy to famed daredevil Evel Knievel:

Powell further notes that competition does not imply players equally matched:

Regulation in a bandwidth-saturated world will have to allow firms to move with speed and flexibility. The customer should have the full resources of network bandwidth available in order to assume the role of active network manager and thus optimize n etwork value. Such will require that all types of carriers have maximum incentive to invest—to assume financial risk. Incumbents are no more inclined to pursue socialized opportunity while facing privatized risk than would be any non-incumbent fi rm.

A balanced bandwidth-friendly regulatory policy—symmetrically policing packets instead of asymmetrically policing pockets—will foster network growth and underwrite growth of the Bandwidth Economy. And to the extent that America remains the prime info- age economic driver global economic growth will also benefit from domestic regulatory reform.

Historically, network evolution was driven centrally, providers negotiating with regulators. The arrangement made sense because ubiquitous far-flung communication networks were new and mass markets presented producers with demand profiles that if not uniform were fairly limited in number. And regulation of mass markets could be conducted with regulators having a broad general knowledge of present—albeit not future—mass market demand.

Mass markets are a weighted economic democracy—customers "vote" with their purchases and producers respond by supplying "lowest common denominator" products; such a market was voice telephony. In a mass market-based economy only th e richest customers enjoy the luxury of custom service, for only they can cover the enormous fixed cost of producing custom goods. Private networks have hitherto been a luxury available only to businesses and governments.

But custom bandwidth markets differ fundamentally, with preferences changing so rapidly that any marketplace snapshot upon which regulators rely will have changed by the time regulations are promulgated. Indeed, today mass and custom markets are conve rging—as the roles of user and manager converge.

In an age often called one of "mass customization" the telecom equivalent is that of the customer as network manager, registering preferences in real-time and largely unconstrained by choices made by other customers. Instead of crude consume r democracy the customer commands personal service. And because of the steeply declining cost curve of info-age products the marginal cost of customizing is drastically reduced. Customers, in choosing among network services, manage network assets. A private network can be set up today between end-terminal PC-LAN networks without active intervention by the carrier; the customer merely need reserve sufficient network bandwidth to enable the requisite end-to-end network performance.

Managing complex assets imposes unprecedented responsibility upon the customer to exercise continual choice. Acceptance of default choices is one—today the most common—form of choosing. But as bandwidth and associated networking options radically inc rease, the benefits of active, real-time customer management increase commensurately. What also increase are "opportunity costs": by accepting the vendor’s default settings in lieu of non-default options, customers forego potentially sup erior personal choices they might have made.

The customer who sees the network as not just a set of services from which to choose but as a collection of assets to intelligently manage in accord with one’s individual preferences, will reap the greatest benefit from bandwidth abundance. Providers who treat customers as active network managers instead of passive consumers stand to be star performers in tomorrow’s marketplace. Providers whose pockets are not being picked by asymmetric regulation will be better able to provide packets for customers to manage.

Regulation can foster bandwidth—and packet—abundance by pursuing regulatory symmetry between investment risk and investment opportunity for all classes of carriers, and by applying symmetry of risk and opportunity to each service. Packets should be po liced without policing pockets. Only then will the full energy potential of the Bandwidth Economy be released to work its wonders.