competition

Last month, the Daily Yonder offered a short history of Universal Service in telecommunications in the U.S. Due to the high costs of providing services in many areas of the country, private network owners have never demonstrated an interest in providing universal service, leading to various government initiatives to expand access to telecom networks.

One of the reasons we support publicly owned networks is because we strongly believe in universal service. Universal access to fast and affordable broadband is an important goal for a variety of reasons, not the least of which is its potential to democratize and enhance educational opportunities.

Readers of this site undoubtedly recognize why fast and affordable access to broadband is important to people in rural areas. What is often forgotten is why people who already have access to such broadband should care about extending access to those who don't yet have it -- aside from simply caring about fellow Americans.

There are actually self-interested reasons why everyone should support extending networks into rural areas. Perhaps the best reason is something called the "network effect" which refers to the principle that the value of a network increases as more users join. One example of this is the telephone, where a telephone network becomes more valuable as more people are on it - allowing subscribers greater access to each other.

Another benefit rooted in self-interest is analogous to benefits of rural electrification. When publicly owned electrical networks electrified the country-side, new markets were created as people with electricity began buying appliances, creating a demand for more products and services. Though the effect may not be as strong with broadband, the new technologies will create new markets, creating more opportunities for everyone.

I do not suggest these self-interested motivations are the sole or best reasons for universal service, but I also want to make sure they are part of the discussion because we all benefit by ensuring everyone has access to these essential infrastructures.

To return to the Daily Yonder piece, it notes the beginning of universal service (and also the importance of "interconnection"):

The concept a universal service originated in the early days of the telephone industry, between 1894 and 1912, after Alexander Graham Bell's patents had expired and before the federal government granted the Bell company "natural monopoly" protections. As Martin Mueller points out in his book "Universal Service," during this period of open competition, scores of telephone providers raced to set up networks and overcome Bell's considerable lead. But Bell refused to connect its networks with those of the independent providers; as a result, subscribers found themselves unable to connect with subscribers from other competing local exchanges. At the time, the only way to resolve this division was to subscribe to both the Bell network and the local independent network. This solution (of sorts), known as "dual service," was generally affordable only for businesses.

In 1907, there was a push to force interconnection between these proprietary networks. That was the first meaning of "universal service."

The article offers interesting details of how perceptions and policies changed, leading up to the 1996 Telecom Act:

Under the 1996 Act, the FCC was explicitly tasked with ensuring that such basic telephone services should be available "at just, reasonable, and affordable rates," and that the list of services covered under the universal service provision be periodically updated to reflect new technological developments. The 1996 Act also acknowledged the uneven geographic distribution of services and sought to correct this inequality by stipulating that consumers in rural areas be provided with telecommunications services at a level of quality and at rates "reasonably comparable" to those available in urban areas.

We may take ubiquitous electrical and telephone networks for granted, but they were a conscious decision. And as we move forward with universal service, we must push for public ownership to properly align incentives. The public should own the networks to ensure everyone is properly served while allowing independent service providers to compete for subscribers. Universal access -- with freedom of choice between providers. It is possible and should be our goal.

As we have noted previously, Longmont, Colorado, has seen a number of private companies attempt to offer Wi-Fi broadband and then go out of business. As Colorado preempts local authority by requiring a referendum by the city before it can offer services itself, Longmont recently had a vote to authorize telecommunications services. Voters defeated the option.

As is common in these referendums, voters were blanketed with reasons to vote against it as incumbents (Qwest and Comcast) spent $200,000 opposing competition whereas the city is prevented by law from advocating for a ballot measure.

Now the Wi-Fi network will be auctioned off in pieces because it cannot pay taxes.

Ohio-based DHB Networks owes the Boulder County treasurer’s office $87,000 in unpaid business personal property tax, and the county demanded the company cease operations unless it pays those taxes.

DHB also owes the city of Longmont. Longmont-based RidgeviewTel is running the network, at least until the Wi-Fi equipment is auctioned off Thursday — at which point, 400 to 600 customers will be without Internet access, RidgeviewTel CEO Vince Jordan said.

Though the city already has fiber assets that could be used for backhaul as well as other expertise it could use in continuing to run the network, it cannot step in to run a network that would be useful to the community:

While the city can step in and operate the system, it would be only for municipal needs — such as police, fire and utility services — and not to provide Wi-Fi to customers.

“Our hands were always tied,” Roiniotis said. “We could buy the system and operate it, but only for our own purposes. We can’t provide the retail part of it.”

The city’s hands also were tied when it came to campaigning. State law bans governments from spending public money to campaign for or against local ballot questions.

Though 400-600 people may not seem like a lot of people to leave stranded, many of those on the network were the ones that needed a low cost alternative. This is one of the reason some hoped for a last minute resolution to the impending auction.

The city doesn’t plan to bid on the Wi-Fi equipment because owning the equipment doesn’t make sense if the city can’t operate an wireless service — or even partner with a private company to provide it, director of Longmont Power & Communications Tom Roiniotis said after the council meeting Tuesday night.

Several residents told the council Tuesday night that they rely on wireless Internet service as a less-expensive alternative to Qwest’s DSL or Comcast’s cable broadband.

Some may believe a required referendum to offer retail telecommunications services is a good idea or at least a relatively harmless barrier as local officials should be able to demonstrate public support for such a significant investment (and Colorado's majority-support referendum is certainly less onerous than Minnesota's 65% super majority requirement).

While it is true that local officials should be able to demonstrate strong community support, the reality is also that a referendum allows absentee opponents a great opportunity to dump a lot of money into the community to confuse and obfuscate the issue while supporters are outspent (often on the order of between 10:1 to 25:1) and City Hall is prevented by law from supporting the referendum.

For this reason, we oppose such referendum requirement -- remember that these decisions remain accountable to the public via the democratic process. Additionally, many communities already place requirements for referendum on communities when they are financing the network, providing an additional check once they have developed a plan.

UPDATE: As for Longmont, the wireless network has found a new private buyer that will be investing in WiMAX apparently.

We occasionally look in on Seattle's broadband discussions because they are the largest city in the U.S. in which there is something approaching a serious discussion about a publicly owned community fiber network. They have a mayoral candidate who makes it a high priority and their Chief Technology Officer, Bill Schrier, both gets it and has an excellent staff that understands the benefits of such a network.

Glenn Fleishman has just interviewed Bill Schrier about the network and subsequently discussed the public need for broadband in specific neighborhoods due to extreme market failure. I like Glenn's style - he asks difficult questions and pushes for real answers. That said, I still want to push back on one of his statements because I think it instructive:

Government is often criticized for eliminating competition, inefficiently providing private services, and removing the profit motive. However, market failures are often where governments are asked or begged to step in, and, when accomplished correctly, can provide new opportunities for private enterprise.

Glenn is absolutely right both in capturing some of the criticisms leveled at public networks as well as noting that publicly owned broadband tends to occur in the most difficult environments. Contrary to telco rhetoric, local government officials tend not to want to jump into telecommunications efforts unless they see it as vital for the community. They are busy enough and these networks take years of planning, public hearings, and lots of loud attacks from the very companies that refuse to build the needed networks.

But look at the first two items that Glenn notes government is accused of: eliminating competition and inefficiently providing services. How is it that it can do both? Governments cannot coerce people into using the network and federal regulations prevent the local government from abusing its authority over the rights-of-way for the public network. Local governments can use untaxable bonds but private companies get depreciation, tax incentives, and can cross-subsidize from the nearby communities where they charge monopoly prices.

As for removing the profit motive - this is hardly a criticism. Infrastructure should not be controlled by any entity with a profit motive - it is the foundation of all other markets. If the infrastructure is too expensive, all other markets are harmed. High-cost broadband makes all businesses less competitive. Removing the profit motive is a tremendous benefit - it allows local government to put money into local support services rather than off-shoring those jobs and paying a dividend to people living outside the community.

Go Seattle! My impression is that if Seattle can move forward, it will spur decisions in Portland, San Francisco, and perhaps other large cities that are currently seeing Verizon build out the suburbs with FiOS and hollowing out the urban centers.

Photo used under creative commons license from flickr.

The Minnesota Independent took Pawlenty's Administration to task last week for its decision to give more money to the telecom company front group Connected Nation. To be clear, this is not the money for infrastructure (yet - time will tell how the state encourages the feds to allocate the grants). This was the mapping money.

Peter Fleck, of PF Hyper blog, put it well:

“My understanding is that we have allowed the companies that have not provided the needed broadband coverage in our state to steer the broadband mapping process itself because of a stated need for confidentiality. That need is questionable,” said Fleck.

“And it puts the state in a position where if the maps show there is no problem with broadband coverage, then we won’t need legislation, regulation, or any other policies and it creates the risk that the telecom industry can continue to provide inadequate coverage to underserved areas — usually areas of low-density and low-income. And because of the inadequacy of these maps, eventually we will have to undertake broadband mapping again at taxpayer expense. To me, this is an irresponsible use of public money.”

The story also quotes me and links back to our story on Connected Nation in Minnesota.

I want to note that states and federal agencies can demand more in terms of better maps and data transparency. It is somewhat disingenuous to lay the blame solely at the doorstep of this telecom-front organization when elected officials refuse to demand more from an industry that has long retained legions of lobbyists. Make no mistake, Connected Nation's conflict of interest is a serious problem, but we need our elected officials to stand up to the telecommunications companies and demand better mapping data. We had higher hopes from the NTIA, but clearly that was misplaced.

More recently, Sharon Schmickle of MinnPost wrote about plans for a publicly owned network in Cook County, Minnesota. It touches on the major issues that many communities face when deciding whether to build their own network.

I wanted to add some comments to it that will add perspective to the story - I encourage you to read the whole Schmickle piece because I pick only a few points below to expand upon.

Regarding Cook County's application for broadband stimulus funds, the incumbent phone provider to much of the area (Qwest), has brought a we-won't-build-it and we-won't-let-you-build-it-either attitude. Local businesses and the Forest Service cannot even get a T-1 line (which would offer about 1.5 megabits and would probably cost $800/month give or take $500 depending on Qwest's mood at the time). The phone lines are in such a state of disrepair that dial-up is even slower than average and businesses can go days without any telecom services.

Dana MacKenzie, the information systems director for the County, previously told the MN Broadband Task Force that when the single connection to the area goes down (somewhere on the road to Duluth), all telecom stops up there. No redundancy means no credit card transactions, no 9-11 service, no nothing until the line is repaired. Profit-maximizing companies have little incentive to provide redundancy when residents have no real choice in providers.

Unfortunately, Jack Geller lets these companies too far off the hook. I find Geller, a member of the state's broadband task force, to be a deep-thinking person, so I hope this quote was out of context.

"Whether you agree or disagree with how good a job your incumbent providers are doing, you have to admit that they have invested millions of dollars in your community," Geller said. "Now we are saying we need more, and the government should provide it … should use taxpayer dollars to compete with the private sector."

These companies have not invested millions out of charity - they were originally granted a government-sponsored monopoly to ensure they would be profitable and they have continued to make profits while refusing to invest in better networks (here, I aim my criticism at the large, absentee companies - the smaller independent telcos that are rooted in their communities have continued investing in the community).

As for whether taxpayer dollars should compete with the beneficiaries of government-granted monopolies (though such monopolies ceased to exist, their legacy continues to shape our telecom landscape), I think the answer is muddier than he suggests. Further, most community networks emphatically do not use taxpayer dollars, so the argument is largely academic anyway. Jack and I have previously discussed the role of government competing with the private sector, but that is different from phrasing it as "taxpayer dollars" that are funding the networks - something almost guaranteed to result in a knee-jerk reaction opposing the idea (creating more heat than light rhetorically).

Finally, I think Jack's larger point would be that private companies cannot, even if they were willing, build out the networks that are needed in many rural areas. The costs are too high and returns too low. This is something I agree wholeheartedly on - which is why I find it ludicrous that some still think the private sector is capable of building this essential infrastructure throughout the country without continuing to damage our ability to compete with peer nations. And it remains frustrating that these companies, who will not build the needed networks, have the money and lobbyists to prevent others from doing it.

A final criticism of Shmickle's piece is that I was disappointed to see her treat the Monticello lawsuit as though it had any merit. It was thrown out by every court in Minnesota at the earliest opportunity - the only reason it lasted so long is because we have a massive backlog of cases and too few judges. It was a frivolous lawsuit meant to delay competition and it succeeded. It was an abuse of the justice system that has successfully scared other communities from exercising their legitimate power for fear of being locked in an expensive court battle (is there any other kind?) that would drain their resources despite an inevitable victory. Large companies like TDS have lawyers for this very reason - they probably profited from their court loss due to the delay of more than a year whereas Monticello had to hire representation to respond.

Photo by Jackanapes, used under creative commons license.