Hyper local view of Internet telecom infrastructure misguided, reinforces network access disparities

City Broadband Plans: One Vision, Four Markets, Four Issues | Benton Foundation: My message today is simple: every city needs its own broadband plan.

At one time, I would have agreed with this statement by Blair Levin, who wrote the 2010 U.S. "National Broadband Plan" while serving on the staff of the Federal Communications Commission. I even went as far as paraphrasing the late House Speaker Tip O'Neill by declaring "all broadband is local" on this blog.

I no longer hold that view. It's not just about "broadband" in a given municipality or as is more often the case, a particular neighborhood. Instead, the truly important issue is ubiquitous Internet telecommunications infrastructure in keeping with the FCC's recent reclassification of Internet service as a common carrier utility. And that infrastructure is fundamentally interstate -- much like the federally funded interstate highway system -- and global. In that regard, it's not directly comparable to the municipal and cooperative electric power systems created in the early 20th century that generated and distributed power consumed locally. The Internet is a telecommunications network that reaches far beyond the borders of a given city or town and whose true value is recognized by Metcalfe's Law, which holds a network increases in utility as more users are added to it. In short, it's all about the network and not "broadband" or discrete "gigabit cities."

The hyper-local focus on this essential infrastructure for the 21st century is well meaning and understandable in the absence of strong federal leadership and support. But it's also misguided and dangerous because it serves to reinforce incremental thinking and Internet infrastructure disparities that have plagued the nation for a generation. It's also unrealistic to expect local governments to shoulder the financial burden as they continue to deal with the adverse impacts of the 2008 economic downturn and are strapped to fix crumbling roads, schools, sewer and water infrastructure and fund enormous public pension obligations.

If it is to realize the full value of the Internet, the United States should instead adopt a bold, wholistic and robustly funded national Internet infrastructure initiative to bring fiber infrastructure to all homes, businesses and institutions.

U.S. needs complete telecom infrastructure construction strategy, not minimalist incrementalism

The United States needs a comprehensive, holistic approach to ensure the construction of fiber optic infrastructure to provide robust Internet enabled telecommunications services in the 21^st century on a par with universal telephone service in the 20^th. The nation won’t achieve that standard in a timely manner by relying on incremental, one off builds.

While it’s laudable that some local governments have built or are planning fiber infrastructure in response to private sector market failure on the supply side (as spotlighted this week in Cedar Falls, Iowa by President Obama), these builds without significant and sustainable funding support cannot cumulatively provide the telecommunications infrastructure the nation needs and should have been planning at least two decades ago. As Steven S. Ross notes in his article in the November-December, 2014 issue of Broadband Communities, Bandwidth: Good for Rural Residents, Good for the Country, these localities that have or are putting in place modern telecommunications infrastructure participate in the same economy as do others lacking it.

New York State’s initiative announced this week it would dedicate $500 million of a $4.5 billion windfall arising from the settlement last year of prosecutions of alleged misconduct by banks and insurance companies to subsidize fiber construction. That’s one time, opportunistic funding that will help construct fiber in areas where it doesn’t exist. But it addresses only a small fraction of the state’s significant need as shown by the accompanying map. The money will quickly be exhausted with no plan fiber up the rest of the Empire State, reinforcing existing disparities. Similar underfunded initiatives exist in other states. Incrementalism allows policymakers to claim small, short term victories but leaves incomplete networks in its wake over the longer term.

Other examples of incrementalism are the continuing circa 2002 debate over “broadband speeds” -- which grows increasingly irrelevant in an age of fiber optic-based telecommunications technology -- and “net neutrality.” Net neutrality – the principle that all Internet traffic be given equal priority – is meaningless without robust network service in the first place. A more important principle than net neutrality is Metcalfe’s Law. It holds that the value of a communications network increases as the number of connections to the network grows. With so many Americans not offered fiber Internet service, the U.S. has a long way to go to recognize the full value of Metcalfe’s Law. It won’t get there with piecemeal incrementalism.

Verizon CEO wrongly compares Internet usage to basic utility consumption

Internet Service Cost: Verizon CEO says heavy broadband users pay more | BGR: Are you constantly streaming high-definition video, downloading tons of Xbox One games and sending massive files to friends and family? You should pay more for Internet access than your neighbor, who only uses a 10-year-old PC in his living room to read email and occasionally browse the Internet for cat GIFs. This is the position of Verizon CEO Lowell McAdam, who said this week that heavy broadband users should have to pay more for home Internet access than those who don’t take full advantage of the service for which they already pay top dollar.

McAdam's logic would make sense if an Internet service was like that of other utilities such as electric power, water or natural gas. These are limited commodities that require some incentive to conserve their use so that they may be available to all who need them. That's why these utility providers use tiered billing schemes that tap into price elasticity -- the tendency to use less of a commodity as its price increases -- and create incentive to conserve via penalties for excessive consumption. There is no similar need to conserve Internet bandwidth. Someone who uses more of it does not impose higher marginal costs on Verizon or any other Internet provider to deliver that higher level of usage.

That said, McAdam is correct to expect that customers of its FiOS fiber to the premise service to help offset the capital and operating costs of the service. But treating bandwidth as a limited commodity when in fact it is not isn't the way to go about it. Instead of creating a false paradigm of bandwidth scarcity, McAdam and other industry leaders should endeavor to foster a mindset of bandwidth plentitude. Big bandwidth promotes more uses and applications of it, making it more valuable to households and businesses. And as those users realize that value, demand for fiber connections will grow, in turn increasing the value of the network under Metcalfe's Law and Verizon's investment in it. When it comes to the Internet, more is better -- not less.  What Verizon and other telecommunications companies should remember is they are not in the business of bundling and selling bandwidth. They are in the communications business.

How Google Fiber is revolutionary -- and how it's not

Google Fiber is revolutionary with the medium of its infrastructure: fiber all the way to the customer premise and the enormous headroom it offers to accommodate future bandwidth growth and new, high bandwidth services. This will allow Google Fiber to leap past the big incumbent national telephone and cable companies bogged down by their existing investment in wire cable infrastructure designed for a pre-Internet era. As Marshall McLuhan put it, the medium is the message. And the medium is fiber to the premise.

Google Fiber also has a revolutionary business model that lessens the pressure to get customer premises to subscribe in order to make the network economics pencil out. It allows customers to sign up for a low cost, multi-year, flat rate connection designed to cover the cost of connecting the premise. The big telcos and cablecos, by comparison, typically charge many thousands of dollars to connect a premise lacking access to a connection, with cablecos charging about $65,000 per mile.

Where Google Fiber's business model is not revolutionary is that like the big legacy incumbents, it is a closed "walled garden" that seeks to own the customer rather than an open access network that sells access to customer premises on a wholesale basis to those wanting to market services over it. This imposes major marketing costs to acquire subscribers one at at time, limiting Google Fiber to those areas where it can get a good return for its marketing and infrastructure investment.

Critics of this business model such as Michael Elling (featured in this video) contend it degrades the value of the network by limiting its ability to scale, invoking Metcalfe's Law -- that implies a network is only as valuable as the number of subscribers on it. Since fewer subscribers can connect to a limited, closed network, it becomes less lucrative in the larger scheme for those at the core providing Internet delivered services such as Netflix, Amazon and ironically, Google itself.

Strong parallels between individual health insurance and Internet service markets

Telecommunications providers, consumers and policymakers should be aware of the strong parallels between wireline residential Internet service and the individual health insurance marketplace as it existed prior to the market reforms of the Patient Protection and Affordable Care Act.

Both residential Internet providers – and formerly individual health insurers -- shared a business model whose success is ironically predicated on not selling to all potential customers in their market areas. The underlying principle is risk aversion: vendors believe they cannot adequately manage the risk of loss associated with an expanded market. A smaller, more certainly profitable customer base is better than a larger one notwithstanding the potential for greater revenues.

Before the Affordable Care Act outlawed the practice starting this month, individual health insurers employed underwriters charged with selecting relatively healthy individuals less likely to incur high medical costs, refusing to offer coverage those who didn’t meet specified underwriting standards. Similarly, wireline residential Internet service providers offer service to one address while declining to serve another nearby – even as close as quarter of a mile away or less. As individual health insurers did, these providers reject the latter residences (as well as some small business sites) as more costly to serve and thus less potentially profitable. Their infrastructures are engineered and built to accommodate preferred addresses and redline the rest.

The problem with this business model for individual health insurers is that medical underwriting limited the size of the pool of individuals and families who could pay premiums to cover claims costs. Consequently, the pool and the number of healthy people staying in it shrank to the point it was on the verge of collapse when the Affordable Care Act was enacted in 2010. The federal law intervened to head off market failure by requiring health plan issuers to sell to anyone applying for coverage regardless of medical history or health condition.

The restrictive marketing practices of Internet service providers bring about a similar problem. Just as insurance pools are more viable with more people in them, telecommunications networks are more valuable when more people are on them or able to get on – both for providers and subscribers. This principle is known as Metcalfe’s Law. Those who argue for broader deployment of fiber to the premise (FTTP) Internet infrastructure carry over the Metcalfe principle to economic activity and education. Greater numbers of premises with modern Internet access can lead to more online commerce and business formation. Increased access to information and educational curricula, similarly, lead to a more informed and better educated society.

As time goes on and these broader benefits – and conversely costs of not having affordable premises Internet access – become more evident, it could lead to large scale market reforms such as are now reshaping the individual health insurance market.