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African American communities shouldn’t wait on the State to close the digital divide

I have to wonder if the broadband digital divide is more a question of the broadband financing management. I believe more could be done with revenues collected by the black church when addressing the digital divide, particularly in the area of ownership of technology and content delivery platforms.

By some estimates, black churches have collected $420 billion in revenues since 1980. That’s close to $12 billion in annual revenues. I know some black churches invest in businesses within their communities; and while a very small fraction of the venture capital community, African Americans are joining the ranks of venture capital firms.

Venture capital likes areas of that offer large returns and for venture capital those areas are primarily technology. Historically when we talk about the digital divide we talk about access to broadband, but I don’t buy into that definition. African Americans are over-indexed on smart phone ownership and use of social media. Where African Americans are not over-indexed on is platform ownership. While on the energy end the argument has been that the capital intensity for building a grid makes it near impossible for minority ownership of electric utilities, the open architecture of the internet chips away at that notion.

And waiting on government is not a wise plan, if you want to call waiting a plan. The Federal Communications Commission is more concerned with underwriting broadband providers via its Connect America Fund versus promoting the deployment of content delivery networks. Private sector initiatives like those taken by Facebook, Google, and Microsoft to build their own global private networks are best for deploying content delivery networks, not only for the delivery of content but to capture and analyze data as well. This is where the money is, in my opinion, for communities of color and where venture capital generated in communities of color should be going.

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Communications law’s imbalanced approach to the broadband market

If Congress and the Federal Communications Commission want to manipulate the broadband market, they should take a balanced approach. Balance is missing particularly when it comes to the universal service subsidies directed toward broadband carriers. That’s my take away from a study of broadband service competition conducted by Steven Titch, an independent communications policy consultant formerly of the Reason Foundation.

In his report, Mr. Titch studies the effect of wireless and satellite services on rural universal service policy. He concludes that these subsidies, which are fueled by universal service fees assessed on consumers of telecommunications services, are no longer needed. Innovation in broadband services made available by wireless and satellite providers has increased competition in the availability of data and voice services in rural areas. Citing data from the FCC, Mr. Titch notes that 99.9% of all Americans have access to some form of broadband with download speeds exceeding 3 Mbps and that for rural consumers with no access to cable or FiOS, broadband services can be obtained from digital subscriber line services via existing copper lines.

What would be the effect of continued subsidization of wired broadband deployment from universal service programs such as the Connect America Fund? According to Mr. Titch broadband providers in rural areas would have little if any incentive to invest in infrastructure which eventually leads to fewer people being able to access high-speed Internet services.

Of the four areas where subsidies are directed, low-income support; schools and libraries support; rural health providers support; and high-cost support, Mr. Titch is most concerned about high-cost support. While admitting that lower density of buildings and businesses increase the cost of broadband deployment in rural areas, the idea that rural services cannot be delivered at a profit is pretty outdated, says Mr. Titch. Satellite and wireless providers may be able to provide broadband services to rural consumers at lower capital costs, providers that the FCC’s universal service policies ignore. Inefficiencies arise when costlier broadband delivery platforms are subsidized versus consumers using less costly, at least in terms of capital outlay, services provided by wireless and satellite providers.

Addressing the problem with high-cost support being directed to inefficient broadband delivery platforms may lie in an imbalanced approach that policy takes the communications market overall. If the broadband eco-system, like the overall economy, is truly consumer driven, why should the fourth leg of universal service policy direct any funds to providers at all?

The overall policy underlying the Communications Act is to make available “so far as possible, to all the people of the United States” a nationwide communications network. Even the Act recognizes that there will be limits to getting communications or advanced communications to all Americans, but the emphasis in Section 151 of the Communications Act was on consumer access to a network.

This focus is continued in the policy rationale for universal service as spelled out in Section 254 of the Communications Act. Low-income support (Lifeline); rural health care support; and schools and libraries support are representative of consumers of communications services. Low-income consumers, rural health care providers, and schools and libraries receive direct or indirect support from universal service programs so that they may access and consume services. While you can argue that unless broadband providers are subsidized so that there are services available for consumption, the counter to that, based on Mr. Titch’s analysis, is that lower capital cost alternatives such as wireless and satellite services, remove the need for subsidies as a result of the innovation these alternative providers bring to the market.

Congress should consider, at a minimum, removing high-cost support from universal support resulting in the FCC getting rid of the Connect America Fund geared toward broadband. In an eco-system where high-cost support no longer exists, wired providers will be forced to develop delivery platforms requiring lower capital costs in order to compete with encroaching wireless and satellite providers with consumers benefiting from lower communications bills.

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Dig deeper into this order and uncertainty abounds

Upon receiving an invite from an associate to spend the evening in the Bedouin’s tent with a lady of his choice, James Bond quipped, “When in Egypt, one must dig deeply into her treasures.” Next to Goldfinger telling Bond he expected the British agent to die, I don’t remember to many lines from the movie series, but the Egypt line stood out when I read this latest Federal Communications Commission order released earlier today.

The FCC clarified that price capped local exchange companies (phone companies not subject to rate-based regulation) must use a portion of their frozen high-cost support either to recover the cost of past network upgrades to extend broadband-capable networks in areas substantially unserved by an unsubsidized competitor or to maintain and operate existing networks in such areas, or a combination of the two.

I’ve always thought of price capped carriers as the big brothers that went off to college or the Army while the little brother rate-based carriers were left at home to sulk. Price capped carriers received their designations during that period where competition was thought to be right over the horizon. Given shrinking market shares and the argument that an alternative regulatory scheme was needed to unleash completion in the local markets, price capped regulation was given a try.

It seems this time that big brother prefers keep the gloves on and the FCC is willing to acquiesce. The FCC is willing to let these price cap companies maintain two networks; a broadband network and whatever legacy network existed before that was being used to serve rural customers.

For example, FairPoint, one of the original petitioners that spawned the issue addressed in the order, serves mostly rural customers. The company did not want to allocate one-third of frozen universal support to broadband deployment. That position flew smack in the face of the FCC’s plan to connect rural households to the high-speed broadband. But with this order, FairPoint gets to have it both ways.

Either market intervention via universal service doesn’t appear to bring about the broadband social policy goals the FCC wants or the FCC may have to be firmly restate that it promotes an IP transition. The FCC acknowledges the costs of maintaining two networks in this order. It should move to have all carriers pursue that goal. The treasures of an IP transition demand it.

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A number of rural carriers say no to FCC’s rate of return analysis

A number of rural telecommunications carrier associations yesterday filed joint reply comments in a Federal Communications Commission proceeding where the FCC is considering reducing authorized rate of return on a rural carrier’s assets from the current 11.25% to a rates of return range of 7.39% to 8.79%.

Needless to say the rural carriers are a bit miffed. The rate of return is used to determine how much revenue a carrier can generate on assets put into use to provide telecommunications services. When the revenue is determined, the FCC determines the appropriate rates for interstate special access services and common carrier line rates, as well as the appropriate amount of universal service contribution a rural carrier may receive. The higher the rates of return, the greater the rates a carrier may charge to recover these revenues.

The carriers argue that lowering the ROR means there will be less funds available for reinvesting in the deployment of broadband facilities. The FCC argues that since 1990, the last year the ROR was determined, changes in technology warrant a change in these rates and initially found that the appropriate rate should be around 9%.

But could that be the FCC’s approach from the beginning? Regulators reason that the higher the rate of return, the less the incentive to invest in innovation. I don’t think that is necessarily true. For example, if a carrier has aging assets in its rate base, they will remove them, either on their own or as a result of a rate review. As technologies change and carriers find themselves facing competitive pressures brought on by cord cutting and cable companies able to bundle in on-demand services, these carriers will want to keep up, but they will need the revenues necessary for purchasing and deploying the facilities necessary for deploying new facilities and services. It’s during this period that ROR should be remain at the same level or even increased.

The FCC’s logic seems to be centered on keeping rural carriers captive to the updated, new and improved universal service fund. We’ll keep your interstate rates low and force you to come to the trough and drink even if you feel your customers are better served if you fund broadband deployment on your own dime. The FCC believes that there is market failure sufficient enough to keep rural providers from meeting voice and broadband needs of consumers. If that is the case, then the FCC is ensuring that market failure by decreasing the ROR rural carriers should earn.

It’s truly ironic given the FCC’s policy goal of basing inter-carrier compensation received by rural carriers on a free market framework, but I see nothing free market about forcing rural carriers to stay on a universal service funding scheme premised on fake innovation.

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Why can’t Amazon pay for broadband adoption

The Federal Communications Commission pushes its universal service program the way a drug dealer pushes cocaine. To keep carriers in check, it has devised a system that some carriers believe they have to depend on, while the FCC sells them on the need to keep doing lines because it will give the carrier the confidence it needs to go out and serve unserved areas of the country. It’s time for carriers to break the dependency and free themselves from this regulatory crossfire. The carriers are not the bad guys when it comes to broadband adoption and I would go further and argue that they should not be responsible for financing its expansion. That responsibility should lie with online content producers, including companies that publish news, movies, and blogs.

Content providers, not broadband providers, are the primary beneficiaries of broadband adoption by the remaining 100 million households the FCC targeted in its national broadband plan. If a land developer wants to ensure people come to its development, buy houses, and live in the development, the land developer is going to build roads, lay conduits for communications and water, and maybe throw in a school building. Google, Amazon, and Netflix are not doing that with broadband, even though it’s broadband that brings them the eyeballs for their content.

Content providers are not doing that with broadband networks. With the help of the FCC, they have dumped the negative externality of adoption costs unto broadband providers. Net neutrality is famously their prime mechanism for doing so; by requiring that traffic from all content providers be given first class treatment on a broadband provider’s network. The other instrument, universal service via the moniker Connect America Fund, while reimbursing broadband providers for the cost of deploying facilities where their business models dare not tread, really takes final payment of this subsidy out of the wallets of the end using consumer.

The Connect America Fund had about $185 million left on the table for broadband providers to apply for and use to help with the cost of getting broadband to Farmer Smith and Dr. Jones so that they can deliver services to an increasingly demanding broadband consumer. These funds are also meant to help people access the Internet at high-speed so that they can take advantage of news,information, goods, and services provided by larger e-commerce entities including Amazon, Ebay, Walmart, and Google.

If these companies, who need the Internet like humans need air, want to reach their potential customers that bad, why don’t they invest the cash sitting on their books to subsidize broadband adoption? For example, Google, with four dollars of current assets with one dollar of current liabilities, has enough cash on hand to kick in and incentivize broadband adoption. And let’s not forget Facebook, with 1.1 billion subscribers, some of whom are connecting via wired and wireline broadband, has ten dollars in current assets for every dollar of current liability has enough liquidity and cash to kick in some direct funding for broadband adoption.

Carriers are just middlemen, unless they are endowed with content properties like Comcast. Being in the middle makes you a target for regulation, including the onerous requirements of a universal broadband service fund, but equity calls for the incidence of broadband adoption initiatives to fall on the entities with the most to gain, and those entities are the content providers and e-commerce companies selling goods and services.