What to do with Government Telecom Money?

Now that the United States has now apparently allocated several billion dollars to improve the telecommunications infrastructure of the country, the real question is what to do with the money (assuming we do not want it to go to waste).  First, where could we spend the money?

• Spreading WiMAX around the country, especially in rural areas
• Increasing 3G wireless deployment to places where coverage is currently spotty
• Improving wireline access capabilities

Each of the above, or a mix, would have a positive impact on network accessibility and should therefore enable current applications as well as novel applications to drive economic value.   However, there is only a limited amount of money, so trying to do too much in too many areas may spread the money too thinly and have very limited impact.  To avoid this, more concrete goals need to be established.

For any program, there has to be some guiding goals for success and principles on which to determine how to spend the money to achieve those goals.  Some possible goals are:

•  Increase the capability and reduce the cost for telecommunication services for business with bandwidth between 10 to 100 Mbps to the Internet
• Increase the capability and reduce the cost for telecommunication services to the home.  With bandwidth between 5 to 20 Mbps to the Internet
• Increase Internet mobility (i.e., wireless) with bandwidth around 1 to 3 Mbps

The first goal is to ensure that businesses can get affordable Internet service so that they can run their business applications and bandwidth does not limit the capabilities of business-to-business and business-to-consumer applications.  Novel business applications could include voice and web integration, online video conferencing for customer support, and web-based services.  The second goal feeds what is the largest segment of the Internet population – the home user.  Applications here abound, including voice, downloading and streaming video, social networking, and consumer purchases of goods.  Internet mobility enables business to work on the move and provides the foundation for applications that are currently only in dreams.  However, these applications will only work if we ensure the quality of the services being provided.

To ensure quality, we may need to specify other important requirements over and above raw bandwidth:

• All traffic must be treated the same, unless the customer or a service pays more for better service for a particular type of traffic
• Customers much be able to buy at a reasonable rate 10 Mbps or more of sustained download speeds to enable streaming of High Definition video channels
• Voice over IP traffic gets higher priority service, at least for three voice channels at no additional cost

·         Basic infrastructure must meet reasonable reliability goals that are close to traditional telco standards

If the government is going to subsidize network capital, then equality must be provided for traffic types, but we should not limit the ability for customers or suppliers to buy more capability.  The second goal is twofold.  First, providing 10 Mbps guaranteed to every home may cost too much, and second, there must be incentive for companies to provide additional services.  The next goal is to ensure that consumers and business have a real choice in voice service providers by leveraging Voice over IP (VoIP).  This is especially important if, as discussed below, the majority of the money goes to ILECs and cable companies.

With these goals and requirements, how do we determine where to spend money?  Since we still have a commercial marketplace, the government has to decide if it is going to play favorites.  This is especially important if the government wants to get the most bang for its buck (well, really the people’s bucks).  What does this mean?

• Fund Sprint, Verizon Wireless, and AT&T to roll out 3G (and 4G) services to locations not currently served and more rapidly upgrade existing systems
• Fund AT&T, Verizon, Qwest, and the other Incumbent Local Exchange (ILEC) providers (in many cases independent rural companies) to increase capability to every home
• Fund the Cable companies to increase their capabilities to business and the home

Oops, where are the CLECs?  For business services, the typical CLEC may have dozens or a hundred or so buildings on-net in a particular city and tiny fraction consumers.   What this essentially means is that sending money to the CLECs will likely have less impact on providing a large number of businesses or consumers new services.  You may believe that this is unfortunate, but we could spend a million dollars on increasing capabilities for 100,000 consumers to 10 Mbps or spend the same million dollars and improve service for only 100 or so businesses.  The bottom line, the ILECs and cable companies have much more substantial fiber, copper, and rights-of-way than anyone else.

For wireless, the picture is more complicated.  There are many wireless companies, and incenting the development of new towers and systems means that again, you have to play favorites.  Approaches include:

• Creation of municipal systems that then lease service to the major wireless companies
• Map poorly served locations and create a bidding environment with the winner getting a regulated franchise for service in that area

How do we reconcile this against current law and regulation?  Since the government is making wholesale changes in the banking and healthcare markets, why not toss the Telecom Act too.  It is the telecom act that created the idea that the ILECs had to share their access lines and infrastructure.  Good for the CLECs, it made the business cases to upgrade ILEC facilities more difficult.  Companies and the government have spent much effort and expense to ensure that the ILECs play fair with CLECs.  In fact the ILECs could claim what the CLECs really accomplished was to cherry pick the larger higher revenue customers away, leaving lower margin smaller customers to the ILECs.  Because of this, one could argue that the current regulatory environment is not productive and in fact has led us as the current state of affairs where we are behind other nations in terms of affordable broadband penetration to the home and business.

One approach to change is to remove the cost of regulation and let the ILECs have their access lines back to do what they will – with a little old-style monopoly regulation to tame the beast.  In doing this, there are some consequences.  First, we are essentially abandoning competition in the wired home and the small business marketplace.  By subsidizing the incumbent providers we are going to hurt competitive access providers and simply reinforce the current duopoly, especially at the home (this being the cable company and the ILEC).  To make this work, we could go back to rate-of-return regulation with the government subsidizing the initial capital costs to enable the providers to get a fixed percentage return on operations.

Another approach, one that does not play favorites, is to establish a hyper marketplace:

1. Create a government clearing house for all  requests for Internet services
2. Service providers provide bids to the government that represent their capital costs to serve the location or area and the recurring costs for the service
3. The government selects the service provider with the lowest evaluated lifecycle costs wins the bid, with the government subsidizing the capital cost

So, what works best?  Do we trust that a regulated duopoly will work or that a government run marketplace will do the trick?  In either case, the government now becomes the decider on what gets done or not, who wins and who loses.  There are many questions that are raised by this type of intervention, that include creating mechanisms to ensure technology upgrades.  Simply making winners and losers does not mean that the country is well served in the long term.  Unfortunately, the break-up of the Bell System that enabled the creation of new companies that brought new services, and yes the very Internet to the world, was long ago enough (1984) that many of us do not remember the previous technology stagnation.

Finally, there is an impact to service providers when we are able to provide high-quality Internet services that enable the streaming of High Definition video and Voice over IP services.  What is happening, and what will continue to happen is the decoupling of the physical service provider and the actual content itself.  A reasonable analogy has already happened in the music industry and the effect of Apple’s iTunes and like services has been the essential destruction of the previous distribution chain of music stores.  This could happen to the video game industry, but this industry has worked for years to make it extremely difficult to duplicate their software by keeping the creation and duplication of software for gaming consoles tightly controlled.

For the cable providers and ILECs providing cable and on-demand television services, this decoupling could be very frightening and may cause a re-evaluation of their business models for services such as FiOS and U-verse.  The reason is that these service providers make assumptions of Average Revenue Per User (a.k.a. ARPU) that included traditional cable TV subscriptions and premium and on-demand channel purchases.  With a decoupling of the service provider from the content and adequate bandwidth for streaming and downloadable content, consumers will be able to go closer to the source of the content and pick and choose what they want.  Services like Hulu and from the content providers themselves (e.g., USA Networks) are starting make large inroads into how people will watch television especially as a new generation of TVs come Internet enabled out-of-the-box.

Ooops, I think that I stumbled back onto the real question: What is the value chain in Internet services?  More on this in another post.