The FCC has issued its order regarding the “experimentation” with the evolution of the public network—both from TDM to IP and from wireline to wireless. The details of the process are no surprise. The FCC wants to understand how a modernization trend would impact the four “core values” of public safety, universal service, competition, and consumer protection. I have my own solution. Forget wireline completely; let natural forces drive the market. Guarantee universal mobile broadband service instead.
Behind this order isn’t a desire of our public officials to stay up to date with technology trends, but the fact that the regulatory framework that started in the 1930s with the Communications Act and evolved through the Telecom Act of 1996 has essentially set rules that anchored operators in current practices that are increasingly unprofitable. We now have to decide what we’re going to do about it, and one area of cost-cutting opportunity is to shed the notion that a single model of telephony (or broadband) can cover the country.
The only rational measure of the ability of a geographic area to sustain profitable communications infrastructure is the “demand density”, which is based on the combination of service opportunity per square mile and the cost of carrying infrastructure to those consumers (“pass cost” as it’s called). By this measure, which I’ve tracked since the ‘90s, the US varies from state to state in terms of telecom opportunity by more than a thousand times. Other countries like Australia (which I’ll get to in a moment) have similar or even larger variations in demand density, but some (generally Asian countries and much of Europe) have much better density numbers. When we read that some country is ahead or behind in terms of telecom, we need to consider that question in the light of their natural demand density—it’s easy to set policy on communication when the services are inherently profitable.
Demand density explains a lot in the US market. Why does Verizon decide to roll out FiOS while AT&T depends on copper-loop U-verse services? Because Verizon has on the average seven times the demand density of AT&T. Why do both Verizon and AT&T want to sell off some areas of their territory to independent telcos? Because their demand density is low. That’s also why we’re having the current “modernization” debates. If we want to offer “universal service” to consumers we’ll need to define what services are going to be declared as the targets and what technologies are going to be permitted to meet them.
Public policy here is difficult. Does everyone have the right to a home phone? We’ve said “Yes” to that one all along. Do they have a right to Internet access? Most say “Yes” to that. Do they have a right to stream five HD movies at once? Well…that’s going to be tough because the cost of providing that kind of capability universally will run into the tens of billions of dollars and it’s very unlikely voters would sustain the subsidization needed.
Australia has faced this sort of problem, and they demonstrate in particular the conflict between the notion of universal service and the notion of competition. Australia has long had a combination of a geography that’s a poster child for radical variations in demand density from place to place, and a regulatory framework that’s been called “radically favoring consumers” over providers. The most dramatic result was the creation of NBN, the national broadband infrastructure that was to take over providing services to everyone and would, by cross-subsidizing the sour areas from the sweet ones, provide at least a decent national service level. The problem is that in the better areas there’s pressure to allow competitors to enter the market to improve consumer services there, but these competitors would essentially be cherry-picking by selecting only high-demand-density zones and setting prices that would not provide the cross-subsidy. So what our friends in Oz are saying is “Does everyone have the right to the same thing?” If we make the argument they do, in communications, then does that mean that roads and public services and perhaps even cars and housing quality are also “leveled?” Obviously that’s a major public policy decision, one that neither I nor any other single individual has the right to make in a democracy.
So what is this FCC experiment going to prove? The answer is that it will prove that we can’t go on the way we are. There will be a low threshold set for “broadband” service that would come under universal service. There will be a gradual elimination of wireline services where higher-margin services can’t be profitably delivered there. There will be an end to the “black phone” or “plain old telephone service” (POTS)—because to demand that these services continue is to demand that we subsidize nostalgia instead of subsidizing broadband effectively. Every dollar the FCC demands operators spend at an inferior rate of return will lower the standards of broadband overall, because you can’t force public companies to invest at a loss. What the experiment is about is proving what everyone inside the process already knows (though often won’t admit). We will have to pick our battles here carefully, recognizing that whether we try to level the playing field on communications services through universal service funds or through a national broadband network that cross-subsidizes among subscribers, we’re not ever going to make everyone the same. Wireline services can’t be made equal across all customers, or even “acceptable” across all customers, at costs voters will pay.
Habit changes might, though. We are seeing a shift toward mobile broadband as people become wedded to mobile devices. At some point, it might be that all the average consumer cares about is their smartphone, and that’s something we could make universal. It’s this point I think the FCC should focus on. Forget wireline; we will never get fiber to every home, or even a third of them. Focus on universal wireless instead, because that we could do and that’s something that might eventually get public policy and public habits into sync.