Viodi View - August 9th, 2006 Issue

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Viodi View Newsletter - August 9th, 2006

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Regulatory Roundup

By Ken Pyle, [email protected], Managing Editor, Viodi View

Net Neutrality Impacts Rural Telcos More than Urban Telcos…..

The Phoenix Center’s study is important to independent telcos, if no other reason than it demonstrates that equal costs do not translate into equal impact for the urban and rural carriers. Lawrence Spiwak, President of the Phoenix Center, agreed that the methodology applied in this study is universal and would be applicable to any regulation or anything else that raises the cost of deployment. This knowledge is implicit in much government regulation, as there are waivers and exemptions for smaller companies as regulations impact them much greater than larger companies.

Although the analysis in this study is very thorough and it provides pretty convincing proof that, as the reports indicates, the, “differential reduction in service availability for high-cost rural areas is six times as much as in lower cost, more urbanized markets,” the study does not provide the absolute dollar impact of Net Neutrality regulations (given that there is no specific legislation, it would be impossible to give specific numbers).

In an email exchange with Viodi, Spiwak indicated that, “This study was not funded by any particular group. The Phoenix Center has a long-standing policy of not accepting contributions for specific research; we only accept donations for general support. Our research is independent and we retained full control of the paper from inception to publication.”

“UNIVERSAL SERVICE” TELEPHONE SUBSIDIES: WHAT DOES $7 BILLION BUY?

The Seniors Coalition uses a great deal of hyperbole and generalization to describe the report they sponsored that is titled, "Universal Service” Telephone Subsidies: What Does $7 Billion Buy? Still, this study must not be dismissed as it raises some valid concerns about USF. This 91 page report, authored by Thomas W. Hazlett Professor of Law & Economics and Director, Information Economy Project, George Mason University; and Senior Advisor to the Analysis Group, provides a critical look at the Universal Service Fund and suggests that the USF may be counterproductive in that the higher fees it requires could actually discourage telephone use by lower income people.

The report suggests that:

“High-Cost Fund payments to phone carriers assure profits, and are distributed in a manner that encourages phone carriers to be inefficiently small. The results are predictable. Rural phone operators are, in general, extremely expensive to operate, yet highly profitable.”

In a nutshell, the study argues that telephone service is no longer a natural monopoly, even in rural areas. This is because more than 95% of households have competitive alternatives (cable, wireless) to traditional telephone service. It points out that loss of rural lines to wireless is roughly the same in rural and urban areas and this is an indication that consumers do not believe that landline telephone service is the necessity it once was.

The report’s author suggests there are better ways to encourage companies to provide telecommunications to un-served areas than is done currently. It doesn’t suggest a single prescription for solving the shortcomings of USF, but it does push for the idea of giving subsidies to the consumers instead of network owners.

It also criticizes the administration of the e-rate program, suggesting that this funding goes to educational institutions in places like Beverly Hills and Fairfax County, where it really isn’t needed. Examples of fraudulent behavior and the involvement of the Gambino crime family are given as evidence of how the program is ripe for abuse. It pokes holes in the idea of associating USF fees with numbers when it suggests that this would actually be a regressive tax and would hurt telephone service affordability for both individuals as well as institutions like colleges and universities..

Although the report provides a great deal of statistical analysis, it does not look at the impact of rural carriers upon the economies of their service area. It would be interesting to see a comparison of the economic development of rural areas served by independent telcos versus those that are served by national carriers. From my experience, the majority of the rural telcos reinvest their profits to improve their communities, as opposed to milking the networks as cash cows.

The study also doesn’t look at the benefits that rural telcos provide as they build broadband networks outside their existing exchange areas and into rural regions that national carriers have ignored. Some of the data may be distorted to the extent that the timing of network investments may make it appear as if some telcos are extremely inefficient. It also doesn’t address the idea that broadband is really the next frontier of Universal Service (although the author would probably argue that it is available, without subsidies, in 98% of households, thanks to cable and the remaining 2% could be served via WildBlue and other satellite means).

The study should be a wake-up call, as it is another signal that the days of protected revenue streams could be in jeopardy. It points to the need for diversification of revenue streams away from basic telephone services into other related lines of businesses.

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