Archives For digital divide

Municipal broadband has been heavily promoted by its advocates as a potential source of competition against Internet service providers (“ISPs”) with market power. Jonathan Sallet argued in Broadband for America’s Future: A Vision for the 2020s, for instance, that municipal broadband has a huge role to play in boosting broadband competition, with attendant lower prices, faster speeds, and economic development. 

Municipal broadband, of course, can mean more than one thing: From “direct consumer” government-run systems, to “open access” where government builds the back-end, but leaves it up to private firms to bring the connections to consumers, to “middle mile” where the government network reaches only some parts of the community but allows private firms to connect to serve other consumers. The focus of this blog post is on the “direct consumer” model.

There have been many economic studies on municipal broadband, both theoretical and empirical. The literature largely finds that municipal broadband poses serious risks to taxpayers, often relies heavily on cross-subsidies from government-owned electric utilities, crowds out private ISP investment in areas it operates, and largely fails the cost-benefit analysis. While advocates have defended municipal broadband on the grounds of its speed, price, and resulting attractiveness to consumers and businesses, others have noted that many of those benefits come at the expense of other parts of the country from which businesses move. 

What this literature has not touched upon is a more fundamental problem: municipal broadband lacks the price signals necessary for economic calculation.. The insights of the Austrian school of economics helps explain why this model is incapable of providing efficient outcomes for society. Rather than creating a valuable source of competition, municipal broadband creates “islands of chaos” undisciplined by the market test of profit-and-loss. As a result, municipal broadband is a poor model for promoting competition and innovation in broadband markets. 

The importance of profit-and-loss to economic calculation

One of the things often assumed away in economic analysis is the very thing the market process depends upon: the discovery of knowledge. Knowledge, in this context, is not the technical knowledge of how to build or maintain a broadband network, but the more fundamental knowledge which is discovered by those exercising entrepreneurial judgment in the marketplace. 

This type of knowledge is dependent on prices throughout the market. In the market process, prices coordinate exchange between market participants without each knowing the full plan of anyone else. For consumers, prices allow for the incremental choices between different options. For producers, prices in capital markets similarly allow for choices between different ways of producing their goods for the next stage of production. Prices in interest rates help coordinate present consumption, investment, and saving. And, the price signal of profit-and-loss allows producers to know whether they have cost-effectively served consumer needs. 

The broadband marketplace can’t be considered in isolation from the greater marketplace in which it is situated. But it can be analyzed under the framework of prices and the knowledge they convey.

For broadband consumers, prices are important for determining the relative importance of Internet access compared to other felt needs. The quality of broadband connection demanded by consumers is dependent on the price. All other things being equal, consumers demand faster connections with less latency issues. But many consumers may prefer slower speeds and connections with more latency if it is cheaper. Even choices between the importance of upload speeds versus download speeds may be highly asymmetrical if determined by consumers.  

While “High Performance Broadband for All” may be a great goal from a social planner’s perspective, individuals acting in the marketplace may prioritize other needs with his or her scarce resources. Even if consumers do need Internet access of some kind, the benefits of 100 Mbps download speeds over 25 Mbps, or upload speeds of 100 Mbps versus 3 Mbps may not be worth the costs. 

For broadband ISPs, prices for capital goods are important for building out the network. The relative prices of fiber, copper, wireless, and all the other factors of production in building out a network help them choose in light of anticipated profit. 

All the decisions of broadband ISPs are made through the lens of pursuing profit. If they are successful, it is because the revenues generated are greater than the costs of production, including the cost of money represented in interest rates. Just as importantly, loss shows the ISPs were unsuccessful in cost-effectively serving consumers. While broadband companies may be able to have losses over some period of time, they ultimately must turn a profit at some point, or there will be exit from the marketplace. Profit-and-loss both serve important functions.

Sallet misses the point when he states the“full value of broadband lies not just in the number of jobs it directly creates or the profits it delivers to broadband providers but also in its importance as a mechanism that others use across the economy and society.” From an economic point of view, profits aren’t important because economists love it when broadband ISPs get rich. Profits are important as an incentive to build the networks we all benefit from, and a signal for greater competition and innovation.

Municipal broadband as islands of chaos

Sallet believes the lack of high-speed broadband (as he defines it) is due to the monopoly power of broadband ISPs. He sees the entry of municipal broadband as pro-competitive. But the entry of a government-run broadband company actually creates “islands of chaos” within the market economy, reducing the ability of prices to coordinate disparate plans of action among participants. This, ultimately, makes society poorer.

The case against municipal broadband doesn’t rely on greater knowledge of how to build or maintain a network being in the hands of private engineers. It relies instead on the different institutional frameworks within which the manager of the government-run broadband network works as compared to the private broadband ISP. The type of knowledge gained in the market process comes from prices, including profit-and-loss. The manager of the municipal broadband network simply doesn’t have access to this knowledge and can’t calculate the best course of action as a result.

This is because the government-run municipal broadband network is not reliant upon revenues generated by free choices of consumers alone. Rather than needing to ultimately demonstrate positive revenue in order to remain a going concern, government-run providers can instead base their ongoing operation on access to below-market loans backed by government power, cross-subsidies when it is run by a government electric utility, and/or public money in the form of public borrowing (i.e. bonds) or taxes. 

Municipal broadband, in fact, does rely heavily on subsidies from the government. As a result, municipal broadband is not subject to the discipline of the market’s profit-and-loss test. This frees the enterprise to focus on other goals, including higher speeds—especially upload speeds—and lower prices than private ISPs often offer in the same market. This is why municipal broadband networks build symmetrical high-speed fiber networks at higher rates than the private sector.

But far from representing a superior source of “competition,” municipal broadband is actually an example of “predatory entry.” In areas where there is already private provision of broadband, municipal broadband can “out-compete” those providers due to subsidies from the rest of society. Eventually, this could lead to exit by the private ISPs, starting with the least cost-efficient to the most. In areas where there is limited provision of Internet access, the entry of municipal broadband could reduce incentives for private entry altogether. In either case, there is little reason to believe municipal broadband actually increases consumer welfarein the long run.

Moreover, there are serious concerns in relying upon municipal broadband for the buildout of ISP networks. While Sallet describes fiber as “future-proof,” there is little reason to think that it is. The profit motive induces broadband ISPs to constantly innovate and improve their networks. Contrary to what you would expect from an alleged monopoly industry, broadband companies are consistently among the highest investors in the American economy. Similar incentives would not apply to municipal broadband, which lacks the profit motive to innovate. 

Conclusion

There is a definite need to improve public policy to promote more competition in broadband markets. But municipal broadband is not the answer. The lack of profit-and-loss prevents the public manager of municipal broadband from having the price signal necessary to know it is serving the public cost-effectively. No amount of bureaucratic management can replace the institutional incentives of the marketplace.

As Thomas Sowell has noted many times, political debates often involve the use of words which if taken literally mean something very different than the connotations which are conveyed. Examples abound in the debate about broadband buildout. 

There is a general consensus on the need to subsidize aspects of broadband buildout to rural areas in order to close the digital divide. But this real need allows for strategic obfuscation of key terms in this debate by parties hoping to achieve political or competitive gain. 

“Access” and “high-speed broadband”

For instance, nearly everyone would agree that Internet policy should “promote access to high-speed broadband.” But how some academics and activists define “access” and “high-speed broadband” are much different than the average American would expect.

A commonsense definition of access is that consumers have the ability to buy broadband sufficient to meet their needs, considering the costs and benefits they face. In the context of the digital divide between rural and urban areas, the different options available to consumers in each area is a reflection of the very real costs and other challenges of providing service. In rural areas with low population density, it costs broadband providers considerably more per potential subscriber to build the infrastructure needed to provide service. At some point, depending on the technology, it is no longer profitable to build out to the next customer several miles down the road. The options and prices available to rural consumers reflects this unavoidable fact. Holding price constant, there is no doubt that many rural consumers would prefer higher speeds than are currently available to them. But this is not the real-world choice which presents itself. 

But access in this debate instead means the availability of the same broadband options regardless of where people live. Rather than being seen as a reflection of underlying economic realities, the fact that rural Americans do not have the same options available to them that urban Americans do is seen as a problem which calls out for a political solution. Thus, billions of dollars are spent in an attempt to “close the digital divide” by subsidizing broadband providers to build infrastructure to  rural areas. 

“High-speed broadband” similarly has a meaning in this debate significantly different from what many consumers, especially those lacking “high speed” service, expect. For consumers, fast enough is what allows them to use the Internet in the ways they desire. What is fast enough does change over time as more and more uses for the Internet become common. This is why the FCC has changed the technical definition of broadband multiple times over the years as usage patterns and bandwidth requirements change. Currently, the FCC uses 25Mbps down/3 Mbps up as the baseline for broadband.

However, for some, like Jonathan Sallet, this is thoroughly insufficient. In his Broadband for America’s Future: A Vision for the 2020s, he instead proposes “100 Mbps symmetrical service without usage limits.” The disconnect between consumer demand as measured in the marketplace in light of real trade-offs between cost and performance and this arbitrary number is not well-explained in this study. The assumption is simply that faster is better, and that the building of faster networks is a mere engineering issue once sufficiently funded and executed with enough political will.

But there is little evidence that consumers “need” faster Internet than the market is currently providing. In fact, one Wall Street Journal study suggests “typical U.S. households don’t use most of their bandwidth while streaming and get marginal gains from upgrading speeds.” Moreover, there is even less evidence that most consumers or businesses need anything close to upload speeds of 100 Mbps. For even intensive uses like high-resolution live streaming, recommended upload speeds still fall far short of 100 Mbps. 

“Competition” and “Overbuilding”

Similarly, no one objects to the importance of “competition in the broadband marketplace.” But what is meant by this term is subject to vastly different interpretations.

The number of competitors is not the same as the amount of competition. Competition is a process by which market participants discover the best way to serve consumers at lowest cost. Specific markets are often subject to competition not only from the firms which exist within those markets, but also from potential competitors who may enter the market any time potential profits reach a point high enough to justify the costs of entry. An important inference from this is that temporary monopolies, in the sense that one firm has a significant share of the market, is not in itself illegal under antitrust law, even if they are charging monopoly prices. Potential entry is as real in its effects as actual competitors in forcing incumbents to continue to innovate and provide value to consumers. 

However, many assume the best way to encourage competition in broadband buildout is to simply promote more competitors. A significant portion of Broadband for America’s Future emphasizes the importance of subsidizing new competition in order to increase buildout, increase quality, and bring down prices. In particular, Sallet emphasizes the benefits of municipal broadband, i.e. when local governments build and run their own networks. 

In fact, Sallet argues that fears of “overbuilding” are really just fears of competition by incumbent broadband ISPs:

Language here is important. There is a tendency to call the construction of new, competitive networks in a locality with an existing network “overbuilding”—as if it were an unnecessary thing, a useless piece of engineering. But what some call “overbuilding” should be called by a more familiar term: “Competition.” “Overbuilding” is an engineering concept; “competition” is an economic concept that helps consumers because it shifts the focus from counting broadband networks to counting the dollars that consumers save when they have competitive choices. The difference is fundamental—overbuilding asks whether the dollars spent to build another network are necessary for the delivery of a communications service; economics asks whether spending those dollars will lead to competition that allows consumers to spend less and get more. 

Sallet makes two rhetorical moves here to make his argument. 

The first is redefining “overbuilding,” which refers to literally building a new network on top of (that is, “over”) previously built architecture, as a ploy by ISPs to avoid competition. But this is truly Orwellian. When a new entrant can build over an incumbent and take advantage of the first-mover’s investments to enter at a lower cost, a failure to compensate the first-mover is free riding. If the government compels such free riding, it reduces incentives for firms to make the initial investment to build the infrastructure.

The second is defining competition as the number of competitors, even if those competitors need to be subsidized by the government in order to enter the marketplace.  

But there is no way to determine the “right” number of competitors in a given market in advance. In the real world, markets don’t match blackboard descriptions of perfect competition. In fact, there are sometimes high fixed costs which limit the number of firms which will likely exist in a competitive market. In some markets, known as natural monopolies, high infrastructural costs and other barriers to entry relative to the size of the market lead to a situation where it is cheaper for a monopoly to provide a good or service than multiple firms in a market. But it is important to note that only firms operating under market pressures can assess the viability of competition. This is why there is a significant risk in government subsidizing entry. 

Competition drives sustained investment in the capital-intensive architecture of broadband networks, which suggests that ISPs are not natural monopolies. If they were, then having a monopoly provider regulated by the government to ensure the public interest, or government-run broadband companies, may make sense. In fact, Sallet denies ISPs are natural monopolies, stating that “the history of telecommunications regulation in the United States suggests that monopolies were a result of policy choices, not mandated by any iron law of economics” and “it would be odd for public policy to treat the creation of a monopoly as a success.” 

As noted by economist George Ford in his study, The Impact of Government-Owned Broadband Networks on Private Investment and Consumer Welfare, unlike the threat of entry which often causes incumbents to act competitively even in the absence of competitors, the threat of subsidized entry reduces incentives for private entities to invest in those markets altogether. This includes both the incentive to build the network and update it. Subsidized entry may, in fact, tip the scales from competition that promotes consumer welfare to that which could harm it. If the market only profitably sustains one or two competitors, adding another through municipal broadband or subsidizing a new entrant may reduce the profitability of the incumbent(s) and eventually lead to exit. When this happens, only the government-run or subsidized network may survive because the subsidized entrant is shielded from the market test of profit-and-loss.

The “Donut Hole” Problem

The term “donut hole” is a final example to consider of how words can be used to confuse rather than enlighten in this debate.

There is broad agreement that to generate the positive externalities from universal service, there needs to be subsidies for buildout to high-cost rural areas. However, this seeming agreement masks vastly different approaches. 

For instance, some critics of the current subsidy approach have identified a phenomenon where the city center has multiple competitive ISPs and government policy extends subsidies to ISPs to build out broadband coverage into rural areas, but there is relatively paltry Internet services in between due to a lack of private or public investment. They describe this as a “donut hole” because the “unserved” rural areas receive subsidies while “underserved” outlying parts immediately surrounding town centers receive nothing under current policy.

Conceptually, this is not a donut hole. It is actually more like a target or bullseye, where the city center is served by private investment and the rural areas receive subsidies to be served. 

Indeed, there is a different use of the term donut hole, which describes how public investment in city centers can create a donut hole of funding needed to support rural build-out. Most Internet providers rely on profits from providing lower-cost service to higher-population areas (like city centers) to cross-subsidize the higher cost of providing service in outlying and rural areas. But municipal providers generally only provide municipal service — they only provide lower-cost service. This hits the carriers that serve higher-cost areas with a double whammy. First, every customer that municipal providers take from private carriers cuts the revenue that those carriers rely on to provide service elsewhere. Second, and even more problematic, because the municipal providers have lower costs (because they tend not to serve the higher-cost outlying areas), they can offer lower prices for service. This “competition” exerts downward pressure on the private firms’ prices, further reducing revenue across their entire in-town customer base. 

This version of the “donut hole,” in which the revenues that private firms rely on from the city center to support the costs of providing service to outlying areas has two simultaneous effects. First, it directly reduces the funding available to serve more rural areas. And, second, it increases the average cost of providing service across its network (because it is no longer recovering as much of its costs from the lower-cost city core), which increases the prices that need to be charged to rural users in order to justify offering service at all.

Conclusion

Overcoming the problem of the rural digital divide starts with understanding why it exists. It is simply more expensive to build networks in areas with low population density. If universal service is the goal, subsidies, whether explicit subsidies from government or implicit cross-subsidies by broadband companies, are necessary to build out to these areas. But obfuscations about increasing “access to high-speed broadband” by promoting “competition” shouldn’t control the debate.

Instead, there needs to be a nuanced understanding of how government-subsidized entry into the broadband marketplace can discourage private investment and grow the size of the “donut hole,” thereby leading to demand for even greater subsidies. Policymakers should avoid exacerbating the digital divide by prioritizing subsidized competition over market processes.

On March 19-20, 2020, the University of Nebraska College of Law will be hosting its third annual roundtable on closing the digital divide. UNL is expanding its program this year to include a one-day roundtable that focuses on the work of academics and researchers who are conducting empirical studies of the rural digital divide. 

Academics and researchers interested in having their work featured in this event are now invited to submit pieces for consideration. Submissions should be submitted by November 18th, 2019 using this form. The authors of papers and projects selected for inclusion will be notified by December 9, 2019. Research honoraria of up to $5,000 may be awarded for selected projects.

Example topics include cost studies of rural wireless deployments, comparative studies of the effects of ACAM funding, event studies of legislative interventions such as allowing customers unserved by carriers in their home exchange to request service from carriers in adjoining exchanges, comparative studies of the effectiveness of various federal and state funding mechanisms, and cost studies of different sorts of municipal deployments. This list is far from exhaustive.

Any questions about this event or the request for projects can be directed to Gus Hurwitz at ghurwitz@unl.edu or Elsbeth Magilton at elsbeth@unl.edu.

I had the pleasure last month of hosting the first of a new annual roundtable discussion series on closing the rural digital divide through the University of Nebraska’s Space, Cyber, and Telecom Law Program. The purpose of the roundtable was to convene a diverse group of stakeholders — from farmers to federal regulators; from small municipal ISPs to billion dollar app developers — for a discussion of the on-the-ground reality of closing the rural digital divide.

The impetus behind the roundtable was, quite simply, that in my five years living in Nebraska I have consistently found that the discussions that we have here about the digital divide in rural America are wholly unlike those that the federally-focused policy crowd has back in DC. Every conversation I have with rural stakeholders further reinforces my belief that those of us who approach the rural digital divide from the “DC perspective” fail to appreciate the challenges that rural America faces or the drive, innovation, and resourcefulness that rural stakeholders bring to the issue when DC isn’t looking. So I wanted to bring these disparate groups together to see what was driving this disconnect, and what to do about it.

The unfortunate reality of the rural digital divide is that it is an existential concern for much of America. At the same time, the positive news is that closing this divide has become an all-hands-on-deck effort for stakeholders in rural America, one that defies caricatured political, technological, and industry divides. I have never seen as much agreement and goodwill among stakeholders in any telecom community as when I speak to rural stakeholders about digital divides. I am far from an expert in rural broadband issues — and I don’t mean to hold myself out as one — but as I have engaged with those who are, I am increasingly convinced that there are far more and far better ideas about closing the rural digital divide to be found outside the beltway than within.

The practical reality is that most policy discussions about the rural digital divide over the past decade have been largely irrelevant to the realities on the ground: The legal and policy frameworks focus on the wrong things, and participants in these discussions at the federal level rarely understand the challenges that define the rural divide. As a result, stakeholders almost always fall back on advocating stale, entrenched, viewpoints that have little relevance to the on-the-ground needs. (To their credit, both Chairman Pai and Commissioner Carr have demonstrated a longstanding interest in understanding the rural digital divide — an interest that is recognized and appreciated by almost every rural stakeholder I speak to.)

Framing Things Wrong

It is important to begin by recognizing that contemporary discussion about the digital divide is framed in terms of, and addressed alongside, longstanding federal Universal Service policy. This policy, which has its roots in the 20th century project of ensuring that all Americans had access to basic telephone service, is enshrined in the first words of the Communications Act of 1934. It has not significantly evolved from its origins in the analog telephone system — and that’s a problem.

A brief history of Universal Service

The Communications Act established the FCC

for the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States … a rapid, efficient, Nation-wide, and world-wide wire and radio communication service ….

The historic goal of “universal service” has been to ensure that anyone in the country is able to connect to the public switched telephone network. In the telephone age, that network provided only one primary last-mile service: transmitting basic voice communications from the customer’s telephone to the carrier’s switch. Once at the switch various other services could be offered — but providing them didn’t require more than a basic analog voice circuit to the customer’s home.

For most of the 20th century, this form of universal service was ensured by fiat and cost recovery. Regulated telephone carriers (that is, primarily, the Bell operating companies under the umbrella of AT&T) were required by the FCC to provide service to all comers, at published rates, no matter the cost of providing that service. In exchange, the carriers were allowed to recover the cost of providing service to high-cost areas through the regulated rates charged to all customers. That is, the cost of ensuring universal service was spread across and subsidized by the entire rate base.

This system fell apart following the break-up of AT&T in the 1980s. The separation of long distance from local exchange service meant that the main form of cross subsidy — from long distance to local callers — could no longer be handled implicitly. Moreover, as competitive exchange services began entering the market, they tended to compete first, and most, over the high-revenue customers who had supported the rate base. To accommodate these changes, the FCC transitioned from a model of implicit cross-subsidies to one of explicit cross-subsidies, introducing long distance access charges and termination fees that were regulated to ensure money continued to flow to support local exchange carriers’ costs of providing services to high-cost users.

The 1996 Telecom Act forced even more dramatic change. The goal of the 1996 Telecom Act was to introduce competition throughout the telecom ecosystem — but the traditional cross-subsidy model doesn’t work in a competitive market. So the 1996 Telecom Act further evolved the FCC’s universal service mechanism, establishing the Universal Service Fund (USF), funded by fees charged to all telecommunications carriers, which would be apportioned to cover the costs incurred by eligible telecommunications carriers in providing high-cost (and other “universal”) services.

The problematic framing of Universal Service

For present purposes, we need not delve into these mechanisms. Rather, the very point of this post is that the interminable debates about these mechanisms — who pays into the USF and how much; who gets paid out of the fund and how much; and what services and technologies the fund covers — simply don’t match the policy challenges of closing the digital divide.

What the 1996 Telecom Act does offer is a statement of the purposes of Universal Service. In 47 USC 254(b)(3), the Act states the purpose of ensuring “Access in rural and high cost areas”:

Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas ….

This is a problematic framing. (I would actually call it patently offensive…). It is a framing that made sense in the telephone era, when ensuring last-mile service meant providing only basic voice telephone service. In that era, having any service meant having all service, and the primary obstacles to overcome were the high-cost of service to remote areas and the lower revenues expected from lower-income areas. But its implicit suggestion is that the goal of federal policy should be to make rural America look like urban America.

Today universal service, at least from the perspective of closing the digital divide, means something different, however. The technological needs of rural America are different than those of urban America; the technological needs of poor and lower-income America are different than those of rich America. Framing the goal in terms of making sure rural and lower-income America have access to the same services as urban and wealthy America is, by definition, not responsive to (or respectful of) the needs of those who are on the wrong side of one of this country’s many digital divides. Indeed, that goal almost certainly distracts from and misallocates resources that could be better leveraged towards closing these divides.

The Demands of Rural Broadband

Rural broadband needs are simultaneously both more and less demanding than the services we typically focus on when discussing universal service. The services that we fund, and the way that we approach how to close digital divides, needs to be based in the first instance on the actual needs of the community that connectivity is meant to serve. Take just two of the prototypical examples: precision and automated farming, and telemedicine.

Assessing rural broadband needs

Precision agriculture requires different networks than does watching Netflix, web surfing, or playing video games. Farms with hundreds or thousands of sensors and other devices per acre can put significant load on networks — but not in terms of bandwidth. The load is instead measured in terms of packets and connections per second. Provisioning networks to handle lots of small packets is very different from provisioning them to handle other, more-typical (to the DC crowd), use cases.

On the other end of the agricultural spectrum, many farms don’t own their own combines. Combines cost upwards of a million dollars. One modern combine is sufficient to tend to several hundred acres in a given farming season. It is common for many farmers to hire someone who owns a combine to service their fields. During harvest season, for instance, one combine service may operate on a dozen farms during harvest season. Prior to operation, modern precision systems need to download a great deal of GIS, mapping, weather, crop, and other data. High-speed Internet can literally mean the difference between letting a combine sit idle for many days of a harvest season while it downloads data and servicing enough fields to cover the debt payments on a million dollar piece of equipment.

Going to the other extreme, rural health care relies upon Internet connectivity — but not in the ways it is usually discussed. The stories one hears on the ground aren’t about the need for particularly high-speed connections or specialized low-latency connections to allow remote doctors to control surgical robots. While tele-surgery and access to highly specialized doctors are important applications of telemedicine, the urgent needs today are far more modest: simple video consultations with primary care physicians for routine care, requiring only a moderate-speed Internet connection capable of basic video conferencing. In reality, literally megabits per second (not even 10 mbps) can mean the difference between a remote primary care physician being able to provide basic health services to a rural community and that community going entirely unserved by a doctor.

Efforts to run gigabit connections and dedicated fiber to rural health care facilities may be a great long-term vision — but the on-the-ground need could be served by a reliable 4G wireless connection or DSL line. (Again, to their credit, this is a point that Chairman Pai and Commissioner Carr have been highlighting in their recent travels through rural parts of the country.)

Of course, rural America faces many of the same digital divides faced elsewhere. Even in the wealthiest cities in Nebraska, for instance, significant numbers of students are eligible for free or reduced price school lunches — a metric that corresponds with income — and rely on anchor institutions for Internet access. The problem is worse in much of rural Nebraska, where there may simply be no Internet access at all.

Addressing rural broadband needs

Two things in particular have struck me as I have spoken to rural stakeholders about the digital divide. The first is that this is an “all hands on deck” problem. Everyone I speak to understands the importance of the issue. Everyone is willing to work with and learn from others. Everyone is willing to commit resources and capital to improve upon the status quo, including by undertaking experiments and incurring risks.

The discussions I have in DC, however, including with and among key participants in the DC policy firmament, are fundamentally different. These discussions focus on tweaking contribution factors and cost models to protect or secure revenues; they are, in short, missing the forest for the trees. Meanwhile, the discussion on the ground focuses on how to actually deploy service and overcome obstacles. No amount of cost-model tweaking will do much at all to accomplish either of these.

The second striking, and rather counterintuitive, thing that I have often heard is that closing the rural digital divide isn’t (just) about money. I’ve heard several times the lament that we need to stop throwing more money at the problem and start thinking about where the money we already have needs to go. Another version of this is that it isn’t about the money, it’s about the business case. Money can influence a decision whether to execute upon a project for which there is a business case — but it rarely creates a business case where there isn’t one. And where it has created a business case, that case was often for building out relatively unimportant networks while increasing the opportunity costs of building out more important networks. The networks we need to build are different from those envisioned by the 1996 Telecom Act or FCC efforts to contort that Act to fund Internet build-out.

Rural Broadband Investment

There is, in fact, a third particularly striking thing I have gleaned from speaking with rural stakeholders, and rural providers in particular: They don’t really care about net neutrality, and don’t see it as helpful to closing the digital divide.  

Rural providers, it must be noted, are generally “pro net neutrality,” in the sense that they don’t think that ISPs should interfere with traffic going over their networks; in the sense that they don’t have any plans themselves to engage in “non-neutral” conduct; and also in the sense that they don’t see a business case for such conduct.

But they are also wary of Title II regulation, or of other rules that are potentially burdensome or that introduce uncertainty into their business. They are particularly concerned that Title II regulation opens the door to — and thus creates significant uncertainty about the possibility of — other forms of significant federal regulation of their businesses.

More than anything else, they want to stop thinking, talking, and worrying about net neutrality regulations. Ultimately, the past decade of fights about net neutrality has meant little other than regulatory cost and uncertainty for them, which makes planning and investment difficult — hardly a boon to closing the digital divide.

The basic theory of the Wheeler-era FCC’s net neutrality regulations was the virtuous cycle — that net neutrality rules gave edge providers the certainty they needed in order to invest in developing new applications that, in turn, would drive demand for, and thus buildout of, new networks. But carriers need certainty, too, if they are going to invest capital in building these networks. Rural ISPs are looking for the business case to justify new builds. Increasing uncertainty has only negative effects on the business case for closing the rural digital divide.

Most crucially, the logic of the virtuous cycle is virtually irrelevant to driving demand for closing the digital divide. Edge innovation isn’t going to create so much more value that users will suddenly demand that networks be built; rather, the applications justifying this demand already exist, and most have existed for many years. What stands in the way of the build-out required to service under- or un-served rural areas is the business case for building these (expensive) networks. And the uncertainty and cost associated with net neutrality only exacerbate this problem.

Indeed, rural markets are an area where the virtuous cycle very likely turns in the other direction. Rural communities are actually hotbeds of innovation. And they know their needs far better than Silicon Valley edge companies, so they are likely to build apps and services that better cater to the unique needs of rural America. But these apps and services aren’t going to be built unless their developers have access to the broadband connections needed to build and maintain them, and, most important of all, unless users have access to the broadband connections needed to actually make use of them. The upshot is that, in rural markets, connectivity precedes and drives the supply of edge services not, as the Wheeler-era virtuous cycle would have it, the other way around.

The effect of Washington’s obsession with net neutrality these past many years has been to increase uncertainty and reduce the business case for building new networks. And its detrimental effects continue today with politicized and showboating efforts to to invoke the Congressional Review Act in order to make a political display of the 2017 Restoring Internet Freedom Order. Back in the real world, however, none of this helps to provide rural communities with the type of broadband services they actually need, and the effect is only to worsen the rural digital divide, both politically and technologically.

The Road Ahead …?

The story told above is not a happy one. Closing digital divides, and especially closing the rural digital divide, is one of the most important legal, social, and policy challenges this country faces. Yet the discussion about these issues in DC reflects little of the on-the-ground reality. Rather advocates in DC attack a strawman of the rural digital divide, using it as a foil to protect and advocate for their pet agendas. If anything, the discussion in DC distracts attention and diverts resources from productive ideas.

To end on a more positive note, some are beginning to recognize the importance and direness of the situation. I have noted several times the work of Chairman Pai and Commissioner Carr. Indeed, the first time I met Chairman Pai was when I had the opportunity to accompany him, back when he was Commissioner Pai, on a visit through Diller, Nebraska (pop. 287). More recently, there has been bipartisan recognition of the need for new thinking about the rural digital divide. In February, for instance, a group of Democratic senators asked President Trump to prioritize rural broadband in his infrastructure plans. And the following month Congress enacted, and the President signed, legislation that among other things funded a $600 million pilot program to award grants and loans for rural broadband built out through the Department of Agriculture’s Rural Utilities Service. But both of these efforts rely too heavily on throwing money at the rural divide (speaking of the recent legislation, the head of one Nebraska-based carrier building out service in rural areas lamented that it’s just another effort to give carriers cheap money, which doesn’t do much to help close the divide!). It is, nonetheless, good to see urgent calls for and an interest in experimenting with new ways to deliver assistance in closing the rural digital divide. We need more of this sort of bipartisan thinking and willingness to experiment with new modes of meeting this challenge — and less advocacy for stale, entrenched, viewpoints that have little relevance to the on-the-ground reality of rural America.

Of Cake and Netflix

Gus Hurwitz —  6 September 2013

My new FSF Perspectives piece, Let Them Eat Cake and Watch Netflix, was published today. This piece explores a tension in Susan Crawford’s recent Wired commentary on Pew’s 2013 Broadband Report.

I excerpt from the piece below. You can (and, I daresay, should!) read the whole thing here.

In her piece, after noting the persistence of the digital divide, Crawford turns to her critique of both Pew’s and the FCC’s definition of “high-speed internet” – 4 Mbps down/1 Mbps up – and the inclusion of mobile Internet access in these measurements. She argues that this definition … is too slow. What if you wanted to watch two HD quality videos at once over a single connection? […]

But the digital divide isn’t about people today not being able to watch movies on Netflix. And it’s definitely not about people today not being able to use future service that may or may not require the sort of infrastructure Crawford wants the government to build. […] It’s about the (very real) concern that, as civic and democratic institutions increasingly migrate online, those without basic Internet access or knowledge will be locked out of a vital civic and democratic forum. […]

None of [applications central to concerns about the digital divide] require bandwidth sufficient to stream high-quality video. Indeed, none of them should require such capacity. Another very real concern related to the digital divide is that various groups with disabilities – the deaf and blind, for instance – are already unable to avail themselves of these online forums because they rely too much on sophisticated multimedia formats to provide basic information. […]

I would suggest that a better target for Crawford’s efforts – if she is really concerned about lessening the digital divide (and I do fully believe that her convictions are well meaning and sincere) – would be to advocate for government institutions and other civic and democratic forums to develop online applications that do not require high-speed broadband connections. […]

In a world where consumers perceive a non-zero marginal cost for incremental bandwidth consumption – perhaps, as an example, a world with consumer bandwidth caps – there would be consumer demand for lower-bandwidth versions of websites and other Internet services. Rather than ratcheting bandwidth requirements consistently up – increasing the size of the digital divide – the self-interested decisions of consumers on the fortunate side of that divide could actually help shrink that divide. […]

The tragic thing (though, to economists, not surprising) about demands that the Internet economy disobey laws of supply and demand, that Internet providers offer consumers a service unconstrained by scarcity, is that such demands create the Internet-equivalent of bread lines. They are, in fact, the wedge that widens the digital divide.