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Where Will Infrastructure Bill Take Telecom Industry?
Focusing on enterprise communications, I don’t usually address topics involving the regulatory aspects of our business. Further, it has been my experience that IT pros are generally wary of communications services providers, looking at them more in terms of a cross they must bear rather than trusted partner. However, the massive shift to work from home (WFH) has made residential broadband access a critical issue for enterprises. Organizations headquartered in smaller cities and towns have had to tackle this problem for years, particularly in providing remote access to their employees who work on the outskirts of those locations.
One of the widely touted features of the massive infrastructure bill the Senate passed last week is the $65 billion being put toward increasing broadband Internet access for more Americans. This is on top of the $20.4 billion allocated for the Rural Development Opportunity Fund set up in 2019, and the $167 million in grants for rural broadband projects across 12 states as part of the U.S. Department of Agriculture’s Broadband ReConnect Program. In short, the government is pumping big money to incumbent and aspiring providers with the aim of increasing broadband access.
Since implementation of the Universal Service Fund (USF) set out in the Telecommunications Act of 1996, carriers have been collecting a fee added to customers’ bills to subsidize expensive-to-serve areas. But that fee has only amounted to $5 to $8 billion per year. Besides the amount of money involved, the big difference with this new infrastructure bill is that the funding comes from direct federal payments rather than from a tax assessed on carrier services.
So, Who Gets the Money?
The proposed bill identifies two underserved groups: 1) people living in areas where acceptable broadband access (defined as being at least 100/20 Mbps down/upstream) simply isn’t available, and 2) people living in areas where broadband access is available, but who can’t afford it. The Treasury Department has issued an interim final rule to states that calls for 100-Mbps symmetrical service, but I trust someone will fix that before it goes too far.
The bulk of the money, $40 billion, would be spent on the Broadband Equity, Access and Deployment program providing grants to broadband service providers; $100 million would be allocated to each of the 50 states, along with allocations for territories and tribal lands. The government estimates that 14 million people live in areas without broadband, though some private estimates put that number as high as 40 million.
The bill leaves a lot of latitude regarding how to achieve these goals, and pushes a lot of the important decision making down to state and local municipalities. Thankfully, the Senate removed a provision to include funding for public-owned networks (remember Muni Wi-Fi) from the final draft.
The other major element in the bill is the $14.2 billion allocated for an Affordable Connectivity Program, an expansion of the FCC’s existing $3.2 billion Emergency Broadband Benefit program established earlier this year. The program provides eligible households with a discount of up to $50 per month on their broadband bill; currently, more than 1,100 broadband providers are participating. In addition, the bill includes provisions for $1 billion in spending on a “middle mile” program for necessary infrastructure that “does not connect directly to an end-user location,” and money for the Digital Equity Act, to establish grant programs to help states fund digital equity plans and other digital inclusion efforts.
While an infusion of government cash to fund increased broadband access is welcome, the bill does include provisions that empower federal and state officials to direct how new subsidies are spent, require pricing disclosures, and authorize new rules preventing “digital discrimination.” As major consumers of these broadband network services, enterprises should be wary of any attempts to change the relatively free-wheeling regulatory environment that has been the foundation of Internet adoption and all the myriad advances that have sprung from that.
Understanding the History
“We’re from the government, and we’re here to help you” are words that have long struck fear into the heart of American businesses. The plain fact of the matter is that we have the regulated monopoly known as the Bell System to thank for how pervasive basic telephone service in this country became in the last century. In my years working within the Bell System and working at AT&T in the years leading up and after divestiture in 1984, I experienced a culture built on doing things at scale.
In my orientation, I learned about cross-subsidization, or the practice of overcharging for some products (e.g., local telephone service in large cities, long-distance calling, business telephone equipment like PBXs, etc.) to support provision of cost-effective service in less profitable areas. I also learned that cross-subsidization was fully approved by the U.S. government, as AT&T and its local subsidiaries operated as regulated natural monopolies. The idea was that running another pair of wires into every home and apartment simply wouldn’t be practical.
It should come as no surprise then that when competition did arise, it targeted the overpriced parts of AT&T’s empire: long distance (e.g., from MCI, whose antitrust suit against AT&T led to the divestiture settlement) and business telephone systems (e.g., initially from Rolm and Nortel, but eventually from Cisco and Microsoft).
Over time I figured out that if you assume the world never changes and technology never advances in ways you can’t predict, natural monopolies make a lot of sense. It also makes business decision making a lot simpler and saves countless billions in marketing and advertising. In short, it delivered on the immediate and limited goal of making basic telephone service virtually universal.
However, technology does advance, and entrepreneurs will do their best to let consumers see what it can do for them. Of course, those entrepreneurs found that an entrenched monopoly with lots of friends in government can be one significant obstacle to displace. And when Bill McGowan’s MCI launched its Execunet long-distance service in the late-1970s, AT&T’s lawyers responded with a vengeance. I guess the idea of offering better or cheaper services didn’t come up. (Check the prices in this MCI Execunet Sales Manual from 1978!)
The reality is that the natural monopoly structure cannot adapt to change nearly as fast as a competitive market, and actually has a major embedded interest in the status quo. That intransigence is reinforced by ignoring customers or simply telling them, “We know what’s best for you.”
If it’s any consolation, prices and service levels for basic telephone service were way worse in the rest of the world, with communications services being the responsibility of the post office via the old postal, telegraph, and telephone (PTT) entity.
The Current Rules
In the wake of divestiture, it quickly became apparent that lots of regulations were going to have to change, at least on the federal level. The most significant step in establishing that structure was the Telecom Act of 1996. The major theme that ran through the act was that wherever possible, put trust in competition rather than regulation. With all of the important technical developments that were to follow, it’s a really good thing that we didn’t need regulators to weigh in on each one.
There have been a bunch of mistakes (anybody remember competitive payphones?), but by and large, the decision to replace the heavily regulated pre-divestiture telecom environment with a more market-driven competitive environment has certainly allowed the industry to deliver the goods. In a few short decades, our industry has given consumers a truly marvelous variety of fixed and wireless communications capabilities linking them to an unbelievable cornucopia of information and services. Do you think that would have happened if the old Bell System executives and their government cronies were running the show?
Competition can be messy, but it’s the best way to find out what customers want and what they are willing to pay, and in our field, this competitive process has resulted in a range of communications and information services available to more people than we could ever have imagined when we were kids. Importantly, this is stuff that Americans are really good at, so we don’t want to screw it up.
Continue to Watch
The reason many of us are concerned about unnecessary government intrusion is that we’re doing pretty well with the system we’ve got. We heard countless howls of protest when former President Donald Trump’s FCC under Ajit Pei nixed the network neutrality rules, but what happened? Nothing! And now they’re bringing that up again?
The telecommunications carriers providing our wired and wireless communications infrastructures need more competition, not more government regulations. Look at the relentless barrage of new network-based applications and services that have flooded the market. What’s new in telecom services? When someone says “over the top,” you don’t have to ask, “the top of what?”
If you ask any of our three cellular carriers what’s new, they will likely tell you about 5G, but that’s just the same mobile broadband service they had before (you know, 2G, 2.5G, 3G, 4G…) only a little faster. Their last significant ”new” service was SMS and that came out last century. In the meantime, the government has sold away exclusive rights to major swaths of our most valuable radio spectrum to our three entrenched monopolists (or more precisely, oligopolists), basically putting them in charge of what we’ll be getting for public wireless services for the foreseeable future. Sounds like the old Bell System, only without the wires.
Like many things in our country, with telecom we got a whole lot right, but we still got some gaps; rural broadband access certainly falls into that category. Hopefully, this infusion of government capital to telecom providers will result in many more people getting access to what is clearly becoming an essential service, broadband Internet. If cost is the issue, a broadband subsidy isn’t too big an outlay compared to other government programs, and the potential benefit of exposing children to what the world has to offer should be justification enough.
However, in pursuing those goals, it is important to remember that it is entrepreneurial innovation that got us this far, not bureaucracy.
Get more insight from Michael Finneran and on communications infrastructure at this fall's Enterprise Connect 2021 event, coming to Orlando, Fla. Sign up now using the promo code NJAL200 to save $200 off your registration!