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.

Congress and Biden administration have historic opportunity to reset American telecommunications policy.

Congress and the Biden administration have an historic opportunity to reset American telecommunications policy and put it on a more progressive path going forward. In 1996, Congress and the Clinton administration enacted the Telecommunications Act. It’s based on the goal of attaining higher throughput – referred to as “broadband” and “high speed Internet.” The statute become law at a time when it was decidedly sluggish and most Americans were “going online” with dialup modems connected to copper telephone lines designed and built to provide voice phone service in the early to mid-20th century.

A major flaw of the law is it failed to provide a clear policy framework to guide and speed the migration of that copper to fiber to deliver Internet protocol-based voice, data and video services in the 21st. Instead, the policy underpinning the 1996 law was “technology neutrality,” grounded in the hope that market competition would somehow deliver better throughput.

Twenty-five years later in the third decade of the new century as a pandemic has made homes into offices, classrooms and clinics, Americans continue to struggle with slow and unreliable connectivity and access and affordability challenges. Elected representatives are deluged with constituent complaints as policymakers unproductively argue over “broadband” speeds, maps and subsidies. It is exceedingly clear new policy direction is needed to ensure fiber reaches every American doorstep just as copper telephone line did in the previous century and that service is affordable.

A vignette that aptly illustrates America's troubled transition from copper to fiber

Jared Mauch, a senior network architect at Akamai in his day job, moved into his house in 2002. At that point, he got a T1 line when 1.5Mbps was "a really great Internet connection," he said. As broadband technology advanced, Mauch expected that an ISP would eventually wire up his house with cable or fiber. It never happened.

He eventually switched to a wireless Internet service provider that delivered about 50Mbps. Mauch at one point contacted Comcast, which told him it would charge $50,000 to extend its cable network to his house. "If they had priced it at $10,000, I would have written them a check," Mauch told Ars. "It was so high at $50,000 that it made me consider if this is worthwhile. Why would I pay them to expand their network if I get nothing back out of it?"

AT&T, the incumbent phone company, finally offered DSL to Mauch about five years ago, he said. However, AT&T's advertised plans for his neighborhood topped out at a measly 1.5Mbps—a good speed in 2002, not in 2020. AT&T stopped offering basic DSL to new customers in October and hasn't upgraded many rural areas to modern replacements, leaving users like Mauch without any great options.

 

This account is not atypical and illustrates how telecom infrastructure bogged down in the transition from analog voice telephone to digital Internet protocol (IP) services, leaving consumers in the lurch. And why cable TV companies can't be expected to fill the gap because they are in the entertainment business and not telecommunications.