Aspen Institute Fellow Recommends Big Changes In USF, Intercarrier Compensation, Use of Satellite Broadband

Blair Levin, Aspen Institute Fellow, says $10 billion, spent over 10 years, is enough to provide a minimum 4 Mbps downstream service for Americans in rural and isolated areas.

He proposes that the money be gotten by revamping the Universal Service Fund, including reducing or freezing funds currently allocated under the Interstate Access Support and Interstate Common Line Support funds, steps that would have immediate impact on many rural telcos and rural mobile providers.

Levin points out that there are about seven million housing units (about five percent of the total) without access to the 4 Mbps downstream and 1 Mbps upstream services the Federal Communications Commission now believes is a minimum.

The FCC has estimated the cost to provide such service with wired broadband at $32.4 billion, with a revenue projection of only $8.9 billion, leaving a $23.5 billion gap.

But Levin maintains that the costs are so high because of costs to build wired infrastructure to just 250,000 homes. Reaching those 250,000 homes would cost about $13.4 billion. Levin does not appear to believe that is a wise investment. So he suggests using satellite to reach the most-isolated, high-cost homes, instead. That would free up enough money to build out facilities to the roughly 6.75 million other rural homes.

In 2010, the federal fund (USF) is projected to make total outlays of $8.7 billion, but not specifically to support broadband access.

Some $4.6 billion is set aside for deployment of networks to high-cost areas, where population density or other factors would cause the price of services to consumers to be at a level that would not reasonably compare to urban areas (this is in addition to the 21 states that have similar high-cost funds that distribute a total of over $1.5 billion).

About $1.2 billion is allocated to provide discounts to make basic telephone service available
and affordable to low-income consumers (in addition, 33 states have similar programs).

Another $2.7 billion is reserved for subsidizing telecommunications services, Internet access and
internal connections to enable schools and libraries to connect to the Internet (in addition, nine states have similar programs).

Making better use of existing funding should be the first priority in any reform effort, Levin says. The universal service contribution factor—an assessment on interstate and international charges that usually appears as a surcharge on consumers’ phone bills—is already at about 15 percent (having risen dramatically in the last decade), he notes.

Further increases would create both political and policy problems, he suggests.

"More ambitious goals in terms of network speeds, at this time, would cause such an increase in the assessment on the current system that it could backfire in terms of driving America’s use of broadband," Levin argues. "For example, the FCC calculates that going from 4 Mbps to 6 Mbps would increase the investment gap by more than 100 percent."

The rational approach would be to avoid building fixed-line networks to serve a quarter million homes, at a cost of $13.4 billion, using satellite broadband. That would free up nearly all of the available funds to build fixed-line networks for 6.75 million rural households.

There are a number of problems with the current Universal Service Fund, Levin suggests. "Among these are that the fund is targeted to support analog voice requirements, rather than data networks; that the fund does not target unserved areas but rather funds particular kinds of companies; that the fund provides incentives for inefficient build outs; that there is no accountability for actually using the funds for their intended purposes; and that the support programs are not coordinated to
leverage the funds to maximize broader policy objectives," says Levin.

Though rural telcos might not like the idea, there are a number of current programs within the Universal Service Fund that need to be changed.

About $4 billion could be redireted to broadband support, over 10 years, by reductions in USF payments to wireless providers.

Interstate Access Support (IAS) payments could be reoriented to broadband, adding approximately $4 billion over 10 years.

Freezing Interstate Common Line Support (ICLS) would limit the growth of the existing high-cost fund and result in savings of about $1.8 billion over 10 years. Those funds also could be redirected to broadband support.

To accomplish this, the FCC would have to require that rate-of-return carriers move to incentive regulation.

Phasing out remaining legacy high-cost support for competitive carriers (wireless, primarily) would yield up to an additional $5.8 billion over the coming decade.

Together these actions would result in between $15 and 16 billion in savings from the existing high-cost program that could be used to support broadband facilities construction.

As logical as the changes might be, there will be resistance from any number of firms that currently rely on the current mechanisms for significant portions of their current revenue, including but not limited to, rural telcos.

Economic Impact of Higher-Speed Broadband Remains Unclear

Logic suggests that there is some positive relationship between broadband availability and economic growth, though it is hard to separate "causal" from "correlated" effects.

"We estimate that between 1998 and 2002, communities in which mass-market broadband was available by December 1999 experienced more rapid growth in employment, the number of businesses overall, and businesses in IT-intensive sectors," say researchers By William H. Lehr, Carlos A. Osorio and Sharon E. Gillett of the Massachusetts Institute of Technology and  Marvin A. Sirbu, of Carnegie Mellon University. See http://www.broadbandproperties.com/2005issues/dec05issues/Measuring%20Broadband%20Eco%20Impact,%20Lehr,%20Gilett,%20Sirbu.pdf.

Connected Nation likewise argues that broadband promotes economic growth. See http://connectednation.org/_documents/Connected_Nation_EIS_Study_Full_Report_02212008.pdf. The Organization for Economic Cooperation and Development likewise concurs. See http://www.oecd.org/dataoecd/62/7/40781696.pdf.

What remains unclear is what relationship exists between "ultra-high" broadband and merely "fast" broadband. One might legitimately point out that it is hard, in advance, to determine the impact of features not widely used. But the question is a fair one, given the huge investments that will have to be made to provide 100 Mbps service, for example. If one assumes investmetn capital will be scarce, a rather reasonable assumption, then the question becomes a matter of where to make broadband investments to reap the highest social reward.

These days, it is hard to argue that returns are not greater in the wireless, than in the fixed network sphere.

Nor is the eivdence about how broadband availability affects rural areas uniformly clear or positive. See
http://bits.blogs.nytimes.com/2009/02/20/rural-broadband-no-job-creation-machine/. In fact, Professor Raul Katz says it simply isn't clear whether broadband in rural areas is all positives, and no negatives. See http://www.elinoam.com/raulkatz/Dr_Raul_Katz_-_BB_Stimulus_Working_Paper.pdf.

Beyond that, the issue is whether the economy and society are better served by investment in mobile or fixed networks, beyond a certain point, if choices have to be made. And few would doubt that choices in fact must be made. There simply isn't enough capital, or enough demand, to invest very aggressively in both fixed and mobile networks, if the goal is 100 Mbps on the fixed network and 50 Mbps or more on the wireless networks.

That's one reason why fixed network investment has been "starved" so the wireless network can be fed, or why the number of employees in the wireline segment have been shrinking, while the number of employees working on the wireless network has been growing.

The issue is not so much whether there will be investment in either network. The issue is how much investment, and where those making the investment believe they can earn the higher returns.

The point is simply that, so far, there is no real evidence that the return from 100-Mbps networks is twice that of 50-Mbps networks, in terms of economic growth or social welfare.

Just about anybody likely would argue that a 100-Mbps network is better than a 50-Mbps network. The rub is that it is harder to determine whether 50-Mbps wireless networks might be even better, or whether 50-Mbps fixed or wireless networks would provide more economic growth and welfare than 100-Mbps fixed networks.

Does Intense Price Competition Drive U.S. Wireless Industry Concentration?

Can price and other forms of competition beneficial for users still occur when markets are highly concentrated? Yes, say Jerry B. Duvall and George S. Ford of the Phoenix Center for Advanced Legal and Economic Public Policy Studies. The question now matters, once again, as the Federal Communications Commission seems to be hinting it thinks the U.S. wireless market is growing unduly concentrated.

The important observation is that, in some markets, even high levels of supplier concentration do not preclude important, even robust levels of competition, on price, quality and other dimensions.

When analyzing levels of competition in a market, economists often, and rationally,  infer it from the level of industry concentration, where higher levels of concentration indicate the presence of market power. But industry concentration is related to the size of a market as well as high sunk costs or intense price competition, or some combination.

High industry concentration can be the result of a limited market or high fixed costs, as for a water, electricity or wastewater system, for example, all cases where fixed costs are so that facilities-based competition is not possible.

In some other markets, high capital investment requirements can create huge barriers to entry. Where that barrier exists, even when competition increases because of new entrants in a market, market concentration could still increase, even in the face of price competition. Market concentration appears to reach a lower bound, despite continuing growth in the size of the market.

It is possible that the apparent lower bound on market concentration could reflect economic and technological constraints that continuing growth in the number of competitors will not, and cannot, affect. In other words, some markets might always feature few competitors, for logical reasons. Few today would agree that telecommunications is a natural monopoly. But neither would many agree that the number of facilities-based contestants can be a large number.

The video entertainment market is less price competitive than the broadband access, fixed voice or wireless markets, but perhaps not because the number of competitors is notably less.

The implication is that telecommunications market structure will always be relatively concentrated compared to industries where entry does not require substantial upfront capital costs.

The relationship between the number of firms and market power, where market power is defined as the ability of firms to price above marginal cost, implies that that some communications firms will now, and in the future, possess some degree of market power, Duvall and Ford say. Competition will not be "perfect," but rather workable.

Still, there is an important observation: tthe more intense is price competition the higher is industry concentration. The typical view of competition has price competition increasing with declines in industry concentration. In other words, the more firms in a market, the more “competitive” that market is.

The implication is that high concentration can be the result of intense price competition, rather than market defects.

In the summer of 2000, the proposed merger of MCI-WorldCom and Sprint was abandoned due to the
challenge of the merger by antitrust authorities. In retrospect, one can note that faulty conclusions were drawn from incomplete analysis. Market power in the long distance industry actually was illusory. Even strong industry concentration did not actually imply serious market power, as price competition, for example, was intense.

The obvious implication is that high levels of wireless industry concentration do not preclude or foreclose robust levels of competition. In fact, robust competition causes industry concentration. See http://www.phoenix-center.org/pcpp/PCPP10Final.pdf, for example.

Why Wireless Might be the Best Way to Serve the "Unserved"

A new study produced by the Federal Communications Commission might be interpreted as arguing for a wireless approach to bringing broadband to many unserved locations, said by the FCC to number seven million homes, adequate for service at 4 Mbps downstream and 1 Mbps upstream.

The most rural 250,000 housing units account for $13.4 billion of the total $23.5 billion investment required. In fact, as cost varies inversely with density and distance from a central office or cable headend, the cost curve is a reverse Pareto distribution (a reverse "long tail").

The FCC says wireless, such as a fourth-generation wireless network, is the lowest-cost technology in 90 percent of cases. The point is that population density generally is inversely related to access cost.

FCC Leaning Against Title II Regulation of Broadband Access

Julius Genachowski, Chairman of the Federal Communications Commission, apparently now is leaning away from any attempt to re-regulate broadband access as a common carrier service, a move that would have set off a political firestorm.

The Washington Post reports that the chairman "is leaning" toward keeping in place the current regulatory framework for broadband services but making some changes that would still bolster the FCC's chances of overseeing some broadband policies.

The sources said Genachowski thinks "reclassifying" broadband to allow for more regulation would be overly burdensome on carriers and would deter investment, a belief likely bolstered by the constant criticism Verizon Communications has taken from investors who have questioned Verizon's investment in fiber-to-the-home almost every step of the way.

Congress could "remedy" the situation by passing new legislation directing the FCC to take action along the lines of reclassifying broadband access as a common carrier service, but prospects for any such legislation are unclear.

Aside from the historic objections cable and telco industry segments have had to common carrier regulation of data services, both industries are widely expected to oppose in the strongest possible way any moves to limit their ability to innovate in the area of services and features for broadband services, especially any moves to prohibit any forms of quality of service features.

"Network neutrality" rules that prohibit any form of packet discrimination would effectively prevent the creation of QoS features guaranteeing video or voice performance, for example, even if those are features end users actually want.

Some policy advocates fear that Internet access providers will not voluntarily and adequately police themselves, but end user pressure has proven to be quite effective in the applications space, and even firms that have attempted some forms of network management have voluntarily agreed not to use some forms of management that essentially
"block" legal applications.

That isn't to argue that there are no dangers, but simply that market pressure and end user outrage have so far proven to be effective inhibitors of anti-competitive behavior. Even without title II common carrier regulation, the amount of end user and policy attention now paid to anti-competitive behavior in the Internet business would effectively encourage responsible ISP behavior.

Proponents opposed to "over-regulating" the developing business have argued that any abuses that do arise can be dealt with as they potentially occur, and that this is preferable to regulating in advance, or that the proper venue is the Federal Trade Commission or Justice Department, in any case.

Aside from all those issues, nobody really believes that anything but growth lies ahead for the broadband access business. 'More bandwidth" does not solve all problems, but does solve many of the concerns users or policy advocates might have about continued progress on the bandwidth front.

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About 1/2 of 1 Percent of Time Warner Cable Customers Buy 50 Mbps Service

It's likely fair to keep in mind, as ISPs, regulators and policy advocates ponder future service offerings at speeds of 100 Mbps, or even higher, that few U.S. consumers appear to want to buy service at speeds of 50 Mbps or higher.

Time Warner Cable  added 212,000 high-speed Internet subs in the first quarter, with about 1,000 buying the ultra-high-speed Docsis 3.0 services. That represents about one half of one percent of new customers, roughly in line with the few figures that have emerged from other ISPs able to sell 50 Mbps to 100 Mbps access services in Europe or North America.

The number of wideband subscription adds in the first quarter are consistent with recent trends at TWC, the only major US MSO so far that's even been willing to share those numbers. In January, TWC said it added only about 2,000 wideband subs in the fourth quarter of 2009.

Comcast, which has 80 percent of its plant wired up for wideband and intends to finish the job later this year, hasn't disclosed any D3 subscriber figures.

AT&T noted during its first quarter conference call that 59 percent of its customers buy access at speeds of at least 3 Mbps. What that might suggest is that most consumers still do not buy ultra-fast connections, preferring medium-speed connections instead.

Study Confirms: Wireless Cheaper than Fixed for Rural Broadband

Wireless infrastructure has significant cost advantages over wired access in reaching homes in rural areas, it is often the most efficient way to provide broadband access, says the Brattle Group. That will come as no surprise to anybody who ever has attempted to model the cost of building broadband access infrastructure

The Group's analysis suggests that the cost of bringing high-speed access to most rural counties is between $1,000 per household to $7,500 per household.

The bigger issue is the degree to which mobile broadband can be a viable subsitute for fixed broadband in urban areas where fixed access already is plentiful.

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Former FCC Chairmen Talk Broadband

This video provides an excellent example of the old adage that having shared objectives does not mean policy proponents agree about the methods which will lead to achievement of the goals. Still, it is nice to see former Federal Communications Commission chairmen who pursued quite-different policies re-emphasize the importance of the end point.

FCC National Broadband Plan Does Not Require Title II, AT&T Says

Robert Quinn, Senior VP, federal regulatory, for AT&T, argues that the FCC does not need to redefine broadband as a Title II telecommunications service in order to implement its proposed national broadband plan, particularly its changes to the Universal Service Fund.

The "Open Internet Coalition" including  Google, Sony, Public Knowledge and the Free Press have been arguing for that classification as necessary for the plan's recommendations.

AT&T filed an analysis with the FCC Monday saying it thought the commission still has "all the authority it needs" to migrate the Universal Service Fund from phone to broadband service or to implement the online privacy recommendations. "The FCC has all the authority it needs to go out and do the things it has identified in the national broadband plan," Quinn argues.

He said suggestions that the court decision could significantly impede the broadband plan were overblown, and that classifying it as a more regulated Title II (common carrier) service would chill investment, which could adversely impact broadband deployment.

"I think at a time when we need more than anything else is infrastructure investment, I think it would provide a huge disincentive for entities to invest in this space," Quinn says.

Quinn said, ultimately, Congress may need to step in and clarify the scope of the FCC's broadband oversight, but that in the meantime the FCC has authority over changes to universal service, protecting proprietary customer information online and making broadband accessible to disabilities, for example.

National Broadband Plan: Where Does U.S. Rank? Where Can it Rank?

A six-spot gain to 9th place in international broadband rankings would be a successful outcome for the Federal Communications Commission’s National Broadband Plan, says the Phoenix Center.

Historical trends suggest the United States will likely move to 13th in broadband adoption by 2012 even without significant policy changes, however.

The new Phoenix Center study, "Evaluating Broadband Stimulus and the National Broadband Plan: Establishing Expectations for Broadband Rankings", uses a variety of standard econometric techniques to determine where the United States is expected to rank given current trends, and where the United States should rank if the National Broadband Plan and federal broadband stimulus are successful.

“As we point out in our prior research, relying upon the OECD’s flawed methodology as an
accurate metric of a country’s broadband performance is fraught with peril,” says Phoenix Center
President and study co-author Lawrence J. Spiwak. “However, as some policymakers continue to
use the OECD’s methodology as the definitive broadband metric, our analysis establishes a
performance metric by which to assess the success or failure of new broadband interventions using
the OECD’s rankings. In so doing, we hope that our analysis can make a positive contribution to
the debate by establishing a standard by which to measure the success of new policies.”

Many observers point to U.S. rankings on global indices of broadband penetration, cost or speeds as evidence that the United States is lagging behind other nations. But comparing very-large countries with very-small countries, with different population densities, government policies, household sizes and incomes is difficult.

For example, the United States ranks no better than 15trh in global measures of telephone density. But nobody really suggests the United States has a fixed-line voice availability problem. In fact, most observers say demand for that product is declining.

So where does the United States currently rank on per-capita measures of broadband penetration? 15th, as it turns out; precisely where it has long ranked in terms of fixed-line voice line penetration. If one is not a problem, why is the other?

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National Broadband Plan is Mostly a "Grab Bag" of Proposals

There were few, if any surprises, when the Federal Communications Commission finally released its proposed "National Broadband Plan," whose centerpiece is an effort to free up about 500 megahertz of spectrum for wireless access. A modest amount of incremental spending for rural broadband is proposed. '

Perhaps the real story here is a recognition that not much really can be done, or perhaps ought to be done, about the existing fixed-line broadband access market, except to encourage existing providers to upgrade speeds.

National Broadband Plan Suggests Wireless Future

There are some fairly-significant implications one might draw from the Federal Communications Commission's proposal for National Broadband Policy. First of all, the plan explicitly relies on private capital and private firms to get the job done.

There are some important tweaks to funding of services rural high-cost areas, and a bit of new spending in other areas. But those are a gloss. The heavy lifting clearly is going to have to be done--or left undone--by private capital and existing service providers.

People can continue to advocate for, and support, alternative ways for getting things done, but there is at this moment no sense that radical changes in industry structure are possible. Some might argue that the country would be better off with a robust wholesale infrastructure, retail provider model, but that is not on the table.

The other really-significant implication is that the future will belong to wireless. In fact, the really-big proposal is to reallocate 500 megahertz of wireless spectrum away from TV broadcasting and to wireless communications.

In fact, though any of us might grumble that prices are too high and speeds too low, the FCC's own data suggests that "access" actually is not a problem, even restricting the definition to fixed networks.

The FCC says 78 percent of U.S. homes already have access to two broadband service providers. About four percent have a choice of three providers. Another 13 percent have at least one provider. Only five percent of homes do not have at least one fixed services provider. And, again, those estimates do not include two satellite broadband providers and between one to four mobile broadband providers as well.

Separately, the FCC notes that 77 percent of U.S. households already can buy service from three wireless broadband providers. Another 12 percent of homes have a choice of two mobile broadband providers, while none percent of homes have at least one mobile broadband service provider. Only two percent of U.S. homes cannot buy mobile broadband service.

For a variety of reasons, the FCC plan implicitly acknowledges that the current fixed broadband duopoly is about as good as it will get, and that, going forward, mobile broadband is the new battleground.

The FCC probably is completely right in that assessment. Mobility is the one industry segment that would have relatively little trouble attracting lots of new capital investment, and mobility is the one segment of the whole communications business that is exploding globally, not just in the United States.

Mobility is the segment where innovation already is the fastest, where new applications and devices are proliferating most rapidly, and where consumer interest and new adoption is highest.

Like it or not, the FCC always works within a political context. It has to work within the constraints of what is possible, and the emphasis on wireless is a clear reflection of those constraints. The FCC is smart enough to understand that, so long as private capital and private firms must drive the bulk of national investment and service provision, the agency must work within the constraints of the capital markets, which clearly signal that the perceived upside, and therefore investment interest, lie in wireless and over-the-top applications, not more wired infrastructure.

Except for Wireless, National Broadband Plan Much Ado About Almost Nothing

Oddly enough, the proposed National Broadband Plan is light on new spending and puts primary emphasis on wireless, while mixing in a bit of a grab bag of existing and vexing voice-related issues. The goal of getting 100 Mbps service to 100 million U.S. homes by 2020 appears to be just that, a "goal," not a requirement.

Some people would call that a mistake, but the Federal Communications Commission is not unmindful of some basic facts, including the requirement that the investment heavy lifting must be done by private industry, and that means raising lots of investment capital from private sources.

Those sources already have made clear their fears that too much tinkering with broadband regulations, especially regulating broadband access as a common carrier service, will choke off investment.

The single-biggest substantive proposal is the plan to make 500 megahertz of new spectrum available for wireless communications by reallocating spectrum presently used by TV broadcasters.

It might be close to heresy, but if you look out 10 years, the business case for investing lots of money in fiber to home facilities is starting to look worse, not better. Many policy advocates call for much-higher speeds and lower costs at the same time. That's not a convincing scenario for investors who would have to take a chance on loaning money in that sort of market.

Also, to the extent that entertainment video has been a big part of the business case, not many observers would believe the future is as bright as the past has been. With voice also under pressure, it may not make as much sense as it once did to invest too aggressively in fixed broadband. Broadband still is the foundation service for fixed networks in the future.

But that is a different issue from the separate issue of how much investment ought to be made, because it is unclear how much users are willing to pay for really-fast service, or how much incremental revenue might actually be created by new applications that require really-fast broadband.

FCC to Propose Spectrum for "Free or Low Cost" Broadband Access

The Federal Communications Commission appears to be ready to license some spectrum, as part of its proposed national broadband plan, for free or very-low-cost access. It is not clear whether the agency envisions giving a single national operator the entire frequency block, whether it will license the spectrum for free or for fee, or whether the plan mirrors other proposals that have been advanced.

FCC statement

The FCC has provided no additional details, but the thought is not new. Outgoing Federal Communications Commission Chairman Kevin Martin in 2008 had pushed for action on a plan to offer free, pornography-free wireless Internet service to about 95 percent of the country, using about 6 MHz of spectrum in a block of about 25 MHz. The licensee would have been free to create a revenue-generating plan using about 19 MHz.

The FCC's proposal mirrored a plan offered by M2Z Networks, which has been proposing
 providing free, wireless, family-friendly service at speeds of 512 kbps, providing a basic and relatively slow 384 kbps for downloads and 128 kbps for uploads.

M2Z Networks had proposed using AWS-3 spectrum in the 2155-2180 MHz band.

Advertising revenue would support the free service, while M2Z also proposed offering faster "for fee" services at speeds up to 3 Mbps.

M2Z also has said it would pay the government about five percent of revenues from such a service.