Biden administration's telecom infrastructure plan effectively says, "Time's up. We have to turn a new page. History demands it."

Former FCC Chairman Ajit Pai said Thursday that the allocation of $100 billion to expand broadband networks in the U.S. under the Biden administration will only serve to hurt consumers and stifle innovation. 

AJIT PAI: The FCC alone already has in the pipeline almost $40 billion to help close that digital divide and ensure that Americans have access to the internet that serves their needs. That’s before any of this $100 billion plan that the President proposed even comes to the table and so that’s part of the concern that many have is that there are already plans to attack this problem.

Moreover, the plan itself seems to suggest that they want to overbuild private networks with public funds and have governments own or operate or even micromanage how those networks are going to be constructed and operated.

Biden's $100B internet overhaul will hurt consumers, stifle innovation: Former FCC chairman | Fox News: 

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Pai's right in that there will be some overlap of public option fiber infrastructure in neighborhoods where investor owned providers have deployed fiber to homes, comprising about a third of all U.S. homes. Implicit in the telecom component of the Biden administration's American Jobs Plan is these providers have gone as far as they can over the past three decades modernizing legacy copper telephone lines built for analog voice communications in the 20th century to fiber for the 21st century's digital services. 

They've harvested the low hanging fruit and will struggle to build out to the remaining two thirds of American homes in a timely manner given their lack of patient investment capital relative to the need and their debt burdened balance sheets. The experience of the current pandemic has demonstrated modernization to fiber is far behind where it should be at the start of the new century's third decade. The Biden administration's plan effectively says, "Time's up. We have to turn a new page. History demands it."

Housing development -- not geographical region -- key determinant of fiber deployment

One of the biggest challenges America has faced over the past two decades resolving its entrenched advanced telecommunications infrastructure deficiencies -- and specifically homes and small businesses where copper telephone lines have not been upgraded to fiber -- is how this nationwide challenge is defined.

The problem tends to be delineated in geographic terms as a modifier to throughput (versus infrastructure), e.g., “urban broadband” and “rural broadband.” This bifurcated geographic focus also drives misguided, ill-fated efforts to “broadband map” regions by census tract based on throughput providers report to the Federal Communications Commission.

It’s often inaccurately compared to electrical power infrastructure in early 20th century America. Electrical power distribution infrastructure fell rather neatly along urban and rural lines in a far less populated nation, with the former electrified while the latter went unwired until the federal government stepped in with loans for consumer utility cooperatives.

Disparate deployment of fiber is far more granular than these regional distinctions. The key determinant isn’t so much whether a region is urban, suburban or exurban. Rather, it’s the type of neighborhood development that exists or is planned over the next five years. New and dense development is favored for fiber builds. Older and less dense is not, even in relatively affluent neighborhoods.

Large ISPs have specialized units dedicated to bringing fiber to multi-family housing and planned unit development neighborhoods. They advertise in a trade journal aptly titled Broadband Communities. Investor-owned providers aren’t likely to build fiber outside of these preferred forms of residential development since they are believed to represent greater assurance of faster returns on investment their shareholders expect. In an article appearing in the January-February 2021 issue of the publication, Jeff Storey, CEO of Lumen, was quoted as telling industry analysts in late 2020 the telephone company will be "micro-targeting in selecting the areas we serve.” 

While that's a prudent strategy to satisfy investors, it clashes with public expectations of access to robust home connectivity regardless of their home address, which by definition isn't likely to be part of a "micro-targeted" fiber deployment.

That’s where the Biden administration’s infrastructure proposal, the American Jobs Plan, comes in to address public expectations that have been conveyed to elected representatives. It would appropriate $100 billion for fiber infrastructure to be deployed by local governments, nonprofits and consumer cooperatives. Notably, the administration’s proposal explicitly recognizes these entities are not expected to generate rapid returns for investors and offer a much needed alternative business structure to ensure fiber is deployed to homes not preferred by investor-owned providers.

Public option advanced telecommunications infrastructure is NOT market competition

This piece by Bloomberg Law repeats the common misconception that advanced telecommunications infrastructure owned by nonprofit consumer cooperatives and public sector entities equates to market competition with incumbent investor-owned providers. 

It’s wrong on two counts. First, advanced telecommunications infrastructure is by definition not a competitive market in which many sellers compete for the business of many buyers. It’s a natural monopoly because high-cost barriers to entry and first mover advantage keep out would be competitors.

Second, consumer cooperatives and public sector providers aren’t formed to gain market share from other sellers. They are created in response to sell side market failure because in a natural monopoly, there isn’t sufficient incentive for multiple sellers to enter the market and compete. That leaves buyers without options and at the mercy of monopoly providers. Government and cooperative owned networks are formed to provide a public option to remedy private market failure.

Why is properly framing government and consumer cooperative owned networks important? It’s very important from a public policy and regulatory perspective. Incumbent providers complain public option providers constitute “unfair competition” because they don’t have to reward investors and enjoy income tax exemptions. The playing field isn’t level, they complain. But it was never a level competitive playing field in the first place, rendering the incumbents’ position moot.

Three propitious elements of Biden administration’s infrastructure proposal

There are three propitious elements relating to advanced telecommunications infrastructure in the Biden administration’s American Jobs Plan asking Congress to invest trillions of dollars in America’s aging infrastructure. As the plan is drafted into legislative language, it is critical these elements be more clearly defined. The administration wants to turn a new page, with an infrastructure reboot for the 21st century as its chief legacy. But in order to do so, it must avoid past references that will make it harder to turn the page and quickly move to a new future.

This paragraph from the White House fact sheet on the proposed plan hits on the key infrastructure policy proposals:

Build high-speed broadband infrastructure to reach 100 percent coverage. The President’s plan prioritizes building “future proof” broadband infrastructure in unserved and underserved areas so that we finally reach 100 percent high-speed broadband coverage. It also prioritizes support for broadband networks owned, operated by, or affiliated with local governments, non-profits, and co-operatives—providers with less pressure to turn profits and with a commitment to serving entire communities.

The first of the three positive elements is mentioned in the first sentence: “future proof” infrastructure. That is widely interpreted to mean replacing outdated copper telephone lines that reach nearly every American doorstep with fiber. Only fiber has the capacity to keep up with future growth in applications and services that require ever greater amounts of carrying capacity. Legislative language implementing the administration’s plan should set an explicit fiber to the premises (FTTP) infrastructure standard.

The second positive element is in the paragraph title: “100 percent coverage.” In other words, universal service like that achieved with voice telephone service by the latter half of the 20th century. That’s one of the most positive aspects of the plan given America’s checkered crazy quilt of some neighborhoods having landline advanced telecommunications infrastructure reaching all premises while adjacent ones even less than a mile away do not. It will be critical the legislative language incorporate a universal service standard by classifying fiber delivered IP protocol-based telecommunications as a common carrier utility under Title II of the Communications Act.

The administration’s proposal also refers to prioritizes building advanced telecommunications infrastructure in “unserved and underserved areas.” This is a potential minefield that could bog down a future bill implementing the plan given long running debates over the definition of unserved and underserved areas. Enabling legislation should avoid these or similar terms relative to prioritizing spending.

The third and related salubrious piece of the administration’s proposal recognizes that investor owned providers aren’t up to the goal of universal service. Expecting them to finance, own, build, operate and maintain advanced telecommunications infrastructure demands too much from their shareholders and violates their expectations for robust earnings and dividends. It’s long past time to abandon total reliance on them to build the infrastructure the nation needs.

Consistent with a universal FTTP infrastructure standard, legislation should create a “public option” and support the construction of “networks owned, operated by, or affiliated with local governments, non-profits, and co-operatives—providers with less pressure to turn profits and with a commitment to serving entire communities.” Many of these entities have already begun to plan and deploy FTTP networks and are properly prioritized in the administration’s proposal.

ITIF grossly misrepresents nature of advanced telecom infrastructure -- a natural monopoly-- as competitive market

WASHINGTON—Following the Biden administration’s budget plan today, announcing a $100 billion investment over the next eight years to deploy broadband throughout rural America, the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy, released the following statement from ITIF Director of Broadband and Spectrum Policy Doug Brake:

Biden’s broadband infrastructure plan goes overboard and threatens to undermine the system of private competition that successfully serves most of the United States.  

No doubt, the United States sorely needs subsidies for rural broadband, but this isn’t an area to turn all the dials up to 11.

If not properly targetted, such a large investment risks undermining incentives for private capital to invest even where it can do so profitably, which ultimately erodes the engine of innovation for next-generation connectivity.

https://itif.org/publications/2021/03/31/biden-broadband-plan-goes-overboard-and-threatens-undermine-private

This is a gross misrepresentation. Telecommunications infrastructure does not and cannot practically function as a competitive market. High cost barriers and first mover advantage make it unfeasible to have multiple operators. If Brake's logic held and other utilities were a competitive market, Americans would have multiple electric, gas and water lines connecting to their homes, with each provider competing to have consumers choose their line. That's not the case because utilities function as a natural monopoly and not a competitive market.

It's also inaccurate to portray the nation's advanced telecom infrastructure deficiencies as limited to rural areas. They exist anywhere deemed insufficiently profitable by investor owned providers as the ITIF's statement suggests. 

 

Biden administration’s infrastructure initiative must reorder roles and responsibilities for advanced telecommunications

If the United States is to rapidly modernize its outdated copper telephone infrastructure to fiber optic lines reaching every American doorstep – the need for which became painfully apparent with pandemic public health restrictions that turned homes into offices, classrooms and clinics – it’s imperative the Biden administration’s infrastructure revitalization initiative reallocate roles and responsibilities in order to make that happen.

A major impediment has been expecting too much of legacy telephone companies. For the past three decades, advanced telecommunications policy has placed the burden on them to do it all: own, finance, design, build and operate. They simply lack the capacity to take on all five functions, even with subsidies to make financing easier. Subsidies haven't worked because unlike legacy voice telephone service where companies must provide connections to all homes requesting them, there is no regulatory incentive to utilize them.

Infrastructure requires billions of dollars. Investors in these companies aren’t willing to make those major investments unless they generate returns in five to six years. That limits them to dense urban and suburban neighborhoods and greenfield and multifamily developments, leavings others unfibered for the foreseeable. These companies also have highly leveraged balance sheets that limit their ability to finance construction even if their investors were more favorably inclined and willing to wait longer for financial paybacks or accept lower shareholder dividends.

These circumstances demand a reallocation of the five functions between the public and private sectors to get the nation to where it needs to be in the 21st century of digital, Internet protocol powered advanced telecommunications. The public sector and utility consumer cooperatives will have to take on finance and ownership and leave it to the investor-owned companies to do what they can reasonably be expected do and do best: design, build and operate -- and not own and finance. As the Biden administration introduces its proposed infrastructure revitalization program, this reordering of roles and responsibilities will be an essential component.

ITIF’s flawed stance on subsidization of advanced telecommunications infrastructure

The Information Technology & Innovation Foundation (ITIF) aptly notes that federal government subsidization of U.S. advanced telecommunications infrastructure has fallen short. Despite tens of billions in subsidies, the ITIF writes in a policy paper issued today, too many American homes lack connectivity. But the ITIF makes the common error of inaccurately defining the scope of the problem as “rural-urban.”

That ignores the fact that advanced telecommunications infrastructure deployment is far more granular. It’s no longer 1950 when most Americans lived either in cities or on farms. They now live in a variety of communities including exurbs at the edges of metro areas and small towns. Many are poorly served because large investor-owned telephone companies have modernized outdated copper lines designed for 20th century voice telephone service to fiber optic lines needed for the digital 21st for only about a third of homes in their service territories. They’ve largely skipped over homes in the exurbs and small towns and instead cherry-picked homes in more densely developed metro centers that better conform to their business models requiring rapid return on investment.

The ITIF correctly notes a major weakness of current U.S. advanced telecommunications infrastructure subsidization policy intended to support bringing service to every American doorstep (the Universal Service Fund) relies on an outdated formula designed for 20th century voice telephone service. It’s highly illogical because extracting subsidies from old technology in decline does not scale up to support the growth of Internet protocol-based technology that’s replacing it.

The ITIF indirectly argues against subsidies for fiber to the premises (FTTP) infrastructure, terming it an overly costly “gold plated” technology. The other side of that argument is subsidy dollars are best invested in delivery technology with life expectancies of multiple decades and not a single decade or less. As the adage goes, one can pay now or one can pay later. A major fault of American advanced telecommunications infrastructure subsidy policy has tended toward the later. The leaves ongoing infrastructure deficits the ITIF points out, requiring the indefinite, repeated need for additional subsidies. Policymakers didn’t subsidize copper telephone infrastructure that way, nor should they with advanced telecommunications infrastructure. Copper proved “future proof” for most of the 20th century as would fiber in the 21st.

Finally, the ITIF’s concern with the higher cost tradeoff of investing subsidy dollars in fiber over inferior and more obsolescence prone infrastructure fails to consider the inherit conflict of interest between investors and end users of advanced telecommunications infrastructure. Large investor-owned companies must answer first to their shareholders and are naturally sensitive to the cost of building and maintaining advanced telecommunications infrastructure. When cost considerations are brought to bear, households are likely to lose out in the calculation of how to apply subsidies. Particularly when subsidies are awarded without regulatory incentive – the universal service requirement that was put in place for legacy copper telephone service.

Shifting post-COVID-19 residential settlement trend requires new direction on advanced telecom infrastructure

COVID19 has opened our eyes to a new possibility.  Give people a choice of where to live – one that does not depend on where they make their living – and they vote with their feet for lower density, more green space and, most of all, for affordable costs. It has become clear that the celebrated “magnet cities” are threatened by their own success.  They are dangerously overcrowded.  They are vastly over-priced for all but the most over-paid.  That’s why San Francisco and Manhattan have only half the number of children per household as the US metropolitan average, while suburbs and exurbs have over one-third more.  Without kids, a community stagnates, even if it you can’t see it now.

The Intelligent Community Forum has been predicting for some time that the future belongs to small-to-midsize places with the broadband assets to fully participate in the global economy.  The internet is a distributed platform that offers equal access to those who can afford it regardless of location – as long as your location has good broadband. The unexpected gift of COVID19 is to show that this future possibility is real.  It is not where you live that determines your economic destiny.  It is how well connected you are and whether you have the education and skills to make the most of it.  Those are the issues that deserve our full attention as we recover from the first global plague of the 21^st Century.

https://www.benton.org/blog/whatever-happened-magnet-cities

America's current reliance on large investor owned companies to build and operate advanced telecommunications infrastructure has led very uneven, highly granular deployment and affordable access. These companies prefer to build infrastructure to serve dense housing development because their investors require rapid returns on capital investment. A higher concentration of homes better assures those rapid returns investors demand. 

As this article notes, demand for advanced telecommunications is heading in the opposite direction, toward less dense development, a trend that preceeds the pandemic. That has enormous implications for U.S. telecom policy and suggests a new direction is necessary, shifting away from reliance on large investor owned providers and toward alternatives. These include companies backed with patient investment capital more aligned with the high costs and slow ROI of infrastructure, regionally owned and operated public sector owned infrastructure and consumer cooperatives.