Should the FCC price-cap business broadband?

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Last month, prolific telecomm researcher Susan Crawford wrote about the multi-billion dollar market for business data services (BDS). This market consists of “middle mile” networks used to connect consumers and businesses across cities and neighborhoods. As I explained in a 2016 Quello Center presentation concerning this market (previously referred to as “special access”), these connections, which are owned by “local exchange carriers,” are used, for example, by large businesses to facilitate intranet communication, by cell-phone providers to funnel voice and data traffic between towers, and by banks to connect to their ATMs. Incumbent local exchange carriers (ILECs) also wholesale business data services to rival, competitive local exchange carriers (CLECs), who compete with them head on.

Ajit Pai reciting Lewis Carroll’s parable on the dangers of over-regulation in the communications sector.

Professor Crawford’s concern, and that of others before her,[1] is that unregulated ILECs will exploit their monopoly power to keep prices high and competition out. As Crawford notes, following a massive data collection to analyze the BDS market, in 2016, the Commission appeared on the cusp of extending regulation in this market, but reversed course following the 2017 change in leadership (see 2017 Commission Order here). In particular, the FCC provided that there would be no new regulation of packet-based BDS, and that the continuation of currently regulated TDM-based services would be determined by a market test that Crawford called “unbelievably counterfactual [and] low.”[2]

The regulation in question is price-cap regulation of ILECs’ wholesale and retail prices, which, in markets deemed not to be sufficiently competitive, constraints the prices that ILECs charge for various regulated business-data services that they offer. As my former FCC colleague, Omar Nayeem, and I show in a recent theoretical working paper motivated by the FCC’s BDS proceeding and set to be presented at next month’s TPRC conference, while the case for price-cap regulation appears rather strong, Chairman Pai is justified in his evident concern about the potential deleterious effect of regulation on competition.[3]

In our work, Omar and I study a setting in which an ILEC sells business data services in the (enterprise) “retail” market as well as to a potential CLEC, who purchases access to ILEC networks and/or facilities and resells it in the retail market.[4] Our interest is in the static welfare and dynamic investment ramifications of price-cap regulation in this market relative to what would happen without price-cap regulation.

Static Welfare Results: In our static analysis, we consider profits and consumer-surplus levels that would prevail if the FCC capped the ILEC downstream (retail) and wholesale prices for BDS at marginal cost as well as those that would prevail without price-cap regulation. Our interest is not on a comparison of these two scenarios—ILEC profits are obviously lower and consumer surplus higher following price-cap regulation—but rather how the relevant regulatory regime affects competition and incentives by ILECs to foreclose potential entrants.

To our surprise, we discovered that, when price-cap regulation is not in place in such a market, CLEC entry, at least in theory, leads to what Chen and Riordan (2008) have dubbed “price-increasing competition.” That is, the ILEC ends up setting higher prices following CLEC entry than it would as a monopolist. This occurs because the ILEC can exploit its control over the wholesale price of BDS to force the CLEC to set a high retail price, which mitigates the negative impact of entry on the ILEC’s retail sales. In addition, when the wholesale price is high, the incumbent incurs a greater opportunity cost of lowering its price through lost unit sales to the entrant. Thus, the entrant’s reliance on the incumbent in the upstream market undoes the typical effect of entry, which normally is a disciplining force on the incumbent’s retail price.

Naturally, the price-increasing competition that follows wholesale entry can lead consumers to be worse off than they might be under an ILEC monopoly. By forbidding price-increasing competition, price-cap regulation ensures that consumers are better off (because of their increased choice) following entry than they would be under a price-capped ILEC monopoly. Importantly, we find that price caps should not raise any concerns about foreclosure. In particular, the ILEC does not have an incentive to foreclose the CLEC when it is price-cap-regulated unless it also has that incentive in the absence of price caps. The intuition for this finding is rather straightforward: when ILEC retail prices are capped at marginal cost, the only way it can now earn positive economic profit is by selling to the CLEC at wholesale to save on any downstream retailing costs.

Dynamic Investment Results: Though Omar and I investigate the impact of price-cap regulation on both ILEC and CLEC investment incentives, for brevity (as if this blog post weren’t already long enough), I discuss here the impact of price caps on CLEC investments to self-provision. In other words, Omar and I ask the following question: might there be situations under which the CLEC would choose to invest in its own duplicative network facilities to obviate its reliance on wholesale BDS when the ILEC is not price-capped, but choose to continue to rely on wholesale BDS under price caps? Conversely, what about the other way around?

The answer is ex-ante unclear. Under regulation, the ILEC’s initial downstream price is relatively low (equal to marginal cost) and does not drop following self-provisioning (whereas it would drop without price caps as the ILEC responds to its competitor by lowering its price). This means that, under regulation, self-provisioning does not elicit a major competitive response from the ILEC, giving the CLEC a stronger incentive to do so. However, under regulation, the initial wholesale price is low as well (also equal to marginal cost), so that self-provisioning does not lead to as much of a marginal cost reduction as it would in the scenario without price-caps, in which the wholesale price is initially high. What we find is that the latter effect dominates under most reasonable values of the relevant parameters.

If the CLEC has a sufficiently low fixed cost of self-provisioning, it will do so regardless of the presence of price-cap regulation, whereas, if that fixed cost is sufficiently high, the CLEC will remain a wholesale entrant regardless of the regulatory regime. The significance of our finding is that, under most parameter specifications, there is an intermediate range of fixed costs of self-provisioning whereby a CLEC might invest in the scenario without regulation, but would not do so under price-caps.

The idea that regulation might forestall investment is far from new in telecommunications. In the debate over net neutrality, opponents frequently touted the likely deleterious effect of net neutrality on broadband investment.[5] Similarly, in various proceedings involving roaming by wireless service providers, opponents of FCC roaming regulations were concerned with attempts by rivals to “piggy-back” on their networks.

What we find is that this concern is relevant in the context of price-cap regulation as well. However, whether this concern justifies FCC actions to reduce the scope of price-cap regulation is an empirical question we leave for future researchers. In our work, Omar and I found that price-caps have positive social effects, both static and dynamic (though the latter are not discussed in this post). These benefits must be weighed against the concern about forestalling entrant investment.

 

[1] See, for instance, two posts from the Benton Foundation here and here.

[2] Unlike more recent packet-based technologies, time-division multiplexing (TDM) transmits signals by means of synchronized switches at each end of the transmission line.

[3] Most of the analysis in this work was performed while I was at the Quello Center and Omar was an economist at the FCC. In particular, the analysis was begun during the Wheeler administration and completed during the Pai administration, and represents the opinions of the authors, not the FCC or any of its Commissioners.

[4] Indeed, our theoretical framework applies more broadly to markets where firms supply their rivals (i.e., energy, water and sewage, etc.).

[5] George Ford discusses this concern and takes a straightforward econometrics approach to try to answer this question here and in other Phoenix Center Perspectives.

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Exploring the Value of Public Investment in “Generative” Fiber Infrastructure

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In an earlier post I described the BTOP Comprehensive Community Infrastructure (CCI) program as a “very good investment of public funds.” My reasons were twofold, the first one being that it expanded the availability of high-speed connectivity in underserved areas, including more than 42,000 miles of new and 24,000 miles of upgraded fiber infrastructure. The second was that research by ASR Analytics suggests that the CCI program accomplished this expansion in a way that addresses both forms of economic harm claimed by advocates on both sides of the special access regulation debate. As a result, I suggested “that the federal government consider expanding its CCI investment in geographic areas that the FCC’s special access data collection project indicates still face a lack of competitive options and an abundance of excess-profit-extracting prices in the special access market.”

In five related posts, I considered a number of issues and perspectives that inform this policy suggestion, including the following:

In this post I’m going to:

I’ll start with an excerpt from an earlier post:

According to Table 7 on pg. 15 of ASR’s final report, the total amount (including both federal grants and matching funds) budgeted for 109 CCI projects was $3.9 billion. The table also indicates that, at the time the study was done, these projects had connected 21,240 CAIs, at a budgeted cost of $184,141 per CAI. Assuming federal grants paid for 80% of this total cost, the average federal grant amount per CAI would be in the neighborhood of $147,300.

Table 13 on pg. 34 of the report shows the changes in subscription speeds and pricing experienced by the 86 CAI locations providing this information to ASR. The table shows very large increases in speed and, depending on the category of CAI, dramatic 94-96% average reductions in per-Mbps pricing. Table 14 on pg. 36 uses these reported changes in speed and price to extrapolate CAI cost savings from switching to CCI-provided fiber connections. Averaged across all CAI categories, the per-CAI annual savings amounted to $236,151.

This means that, in just one year, the average CAI saved 28% more in operating costs ($236,151) than the total capital cost ($184,141) required to connect it to a CCI fiber network, and 60% more than the federal government’s share of that investment ($147,300). Based only on these direct social costs and benefits, I’d consider this a good investment of public funds.

But these direct cost savings to CAIs were not the only impacts of the federally supported BTOP fiber deployment program that were considered by ASR. It also estimated economic benefits driven by increased broadband availability in areas newly reached by the BTOP fiber networks. Using matched pair county-level analysis, ASR found that CCI-impacted counties achieved broadband penetration two percentage points higher than control counties. Based on this, ASR derived estimates of economic benefits of the $3.9 billion in CCI network investments using a number of widely accepted economic impact models.  These impacts included:

These findings of the ASR Analytics study suggest that:

Building on the ASR Analytics evaluation study

As noted above, ASR’s BTOP evaluation study used matched pair analysis of CCI-impacted counties to compare their growth in broadband availability to that of counties that were comparable on key control variables. ASR used NTIA availability data for multiple time periods to measure and compare these changes in availability (for more details see Appendix D of the ASR final BTOP evaluation report).

As discussed above, ASR found that, on average, the increase in broadband availability for CCI-impacted counties was two percentage points higher than in control counties, using the then-current broadband speed threshold of 3Mbps downstream service. ASR then used this differential to estimate and extrapolate economic impact variables (e.g., GDP, job growth, income) using the broadband impact models referenced above.

In light of ASR’s well-documented research and its promising though preliminary findings, an effort to update and expand on the strong foundation it and NTIA have built strikes me as timely, especially with special access policy questions getting focused attention from the FCC. More specifically, what I’d propose is to:

1. Use updated FCC availability data to explore how the matched-county broadband availability differential has evolved over a longer period of time.

2. Examine this broadband availability differential using speed thresholds higher than the 3 Mbps downstream level used by ASR, including the FCC’s current threshold of 25 Mbps downstream and 3 Mbps upstream.

3. For counties for which data is available, add to the matched pair comparison an analysis of broadband adoption data derived from the Census Bureau’s American Community Survey (ACS). Beginning with 2013 data, this data is being released annually for geographies with populations greater than 65,000, and should be available for virtually all counties on a blended five-year basis starting in 2017.

4. Examine and compare actual county-level economic indicators (e.g., County Business Patterns and other datasets available from the Census Bureau and other sources) for the matched pair counties.  The goal here would be to explore the extent to which the economic impacts predicted by the models used by ASR actually occurred and/or whether there were other impacts suggested by these economic indicators.

5. Where notably large variations are found among the matched pair differentials in broadband availability and/or penetration, and/or in actual economic impact variables, explore potential reasons for these differentials based on qualitative and/or quantitative analysis of CCI projects and CCI-impacted counties exhibiting these large variations. The goal here would be to extract additional insights and lessons learned regarding how CCI networks can best deliver social value, as well as the contextual factors impacting how effective different approaches are in achieving that value.

Factors to be considered in #5 might include the ownership and management models employed by CCI grant recipients, the specific approach they take to providing “open access” to their fiber networks, as well as other policies and strategies they employ in relation to wholesale and last mile providers, CAIs, local community development programs, and local economic, demographic and institutional factors.

For example, the specifics of how CCI grantees approached the BTOP program’s open access requirement have not been uniform, as explained on pages 28-29 of ASR’s final evaluation report:

To help expand service within unserved and underserved areas…[e]ach of the grantees in the evaluation study sample implemented at least one strategy, and in many cases a combination of strategies, to ensure open access to the BTOP-funded network by third-party service providers. For example, the research and education network and the healthcare network in Arkansas established a partnership to deploy new and upgraded fiber and colocation facilities. Merit Network in Michigan offered indefeasible right-of-use agreements to private third- party service providers. MassTech fostered competition by helping CAIs compare services and prices offered by third-party providers that use the BTOP-funded network.

Similarly, different CCI grantees adopted different usage and pricing policies to support positive impacts of their network investments.  For example, as described on pages 3-4 of its case study of Merit Network, a Michigan-based CCI grantee owned by member institutions of higher learning, ASR explained that:

The Merit network connects institutions of higher learning and facilitates collaboration by allowing them to freely connect to other institutions on the network, or access on-net services at speeds up to 1 Gbps. This allows institutions to collaborate on research, and to cut costs by sharing services, including hosting. Merit provides some content over this network as well, including Internet2. These services give faculty, staff, and students fast and reliable access to educational and research opportunities…The free on-net services provide incentive for CAIs to create wide area networks (WAN) using Merit fiber…[and] cost-savings [and greater efficiency] for any CAI organization with multiple locations.

Merit is an example of the Research and Education Network (REN) category of CCI grantee.  Owned by member universities, it exhibits a range of generative characteristics, including support for training, collaboration and feedback among its user community, including:

[Regular] opportunities for Members to learn from each other and share best practices in the networking arena. Forums include the Michigan Information Technology Executive (MITE) Forum, Merit Joint Technical Staff (MJTS), Networking Summit, Bring Your Own Device (BYOD) Summit, and the Merit Member Conference (MMC).

The Merit Advisory Council (MAC) has a direct voice to our Board of Directors and leadership through which feedback and recommendations are provided.

The Merit Services Innovation Group enables Members to provide suggestions and feedback regarding current and future services.

Merit facilitates collaboration between Members and regularly contributes staff and resources to educational and research activities.

Professional Learning events are tailored to the needs of our Members and are offered at reduced cost.

One starting point for considering the impacts of differential policies, structures, strategies and programs among CCI grantees would be a careful review of the dozen CCI case studies conducted by ASR. Another would be using the expanded matched pair county analysis described above to identify differences in the availability, penetration and economic impact variables across CCI projects.

In my view, a research project along these general lines would: 1) help maximize the ongoing value provided by existing CCI projects; 2) provide valuable guidance for consideration of future programs designed to build on the success of and lessons learned from the BTOP program and; 3) shed light on policy debates and options related to special access and perhaps other communication and infrastructure policy issues.

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A “Public Infrastructure” Perspective on Special Access

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As I discussed in an earlier post, the Consumer Federation of America (CFA) recently released a paper by its Director of Research, Mark Cooper, which made the case that the FCC’s decision to deregulate special access in 1999 was premature and has resulted in large-scale economic harm, including an estimated $150 billion over the past five years. Cooper’s analysis focused on two elements of harm: 1) the direct cost associated with non-competitive excess-profit-extracting pricing and; 2) the indirect economic costs associated with this pricing regime.

As it turns out, a few days after Cooper presented an overview of his analysis at a New America Foundation event, a paper was published by Economists Inc. Written by EI principal Hal Singer and, according to its cover page, funded at least in part by USTelecom, the nation’s ILEC trade association, the EI paper approached the issue from a different perspective, as explained in its executive summary:

This paper seeks to model the likely impact of the FCC’s recent effort to preserve and extend its special access rules on broadband deployment, as telcos transition from TDM-based copper networks to IP-based fiber networks to serve business broadband customers. The deployment impact of expanded special access rules can be measured as the difference between (1) how many buildings would have been lit with fiber by telcos in the absence of the rules and (2) how many buildings will be lit with fiber by telcos in the presence of the rules. With an estimate of the cost per building, the deployment impact can be converted into an investment impact. And with estimates of broadband-specific multipliers, the fiber-to-the-building network investment impact can be converted into job and output effects.

The executive summary also highlights the study’s key findings:

In the absence of any new regulation (the “Baseline Case”), an ILEC is predicted to increase business-fiber penetration… from 10 to 20 percent over the coming years…Next, we model a scenario where special-access price regulation extends to the ILECs’ fiber networks. Assuming this scenario reduces an ILEC’s expected Ethernet revenue by 30 percent—the typical price effect associated with prior episodes of price-cap regulation and unbundling—the model predicts that ILEC will increase business-fiber penetration from 10 to 14 percent (compared to 20 percent in the Baseline Case)…Thus, the special access obligations under this scenario result in a 55 percent reduction in an ILEC’s CapEx relative to the Baseline Case….Thus, expansion of special access price regulation to Ethernet services is predicted to reduce ILEC fiber-based penetration by 67,300 buildings nationwide—a result that is hard to reconcile with the FCC’s mandate to encourage broadband deployment.

Singer then considers the spillover effects of this reduced ILEC investment in fiber infrastructure. Using “a jobs multiplier of approximately 20 jobs per million dollars of broadband investment” and “a fiber-construction output multiplier of 3.12,” Singer estimates the resulting economic harm of FCC special access rules to be an annual loss of 43,560 jobs and $3.4 billion in economic output over a five-year period.

It’s worth noting that Singer’s estimate of $17 billion in economic losses over a five year period due to imposition of special access rules is considerably lower than Cooper’s estimate of $150 billion in economic harm from the unregulated status quo in today’s special access market. While Singer and others will likely take issue with Cooper’s assumptions and estimates, the latter’s paper seems to, at the very least, make a strong case that the economic benefits and harms associated with different special access regulatory regimes don’t only flow in the direction analyzed by Singer, and that policymakers would be wise to carefully consider a full array of harms and benefits associated with alternative regulatory approaches.

An opportunity to explore new policy, funding, ownership models

My sense is that both of these studies raise valid points about the types of economic harm associated with different approaches to (de)regulating special access (and other telecommunications) markets.

I also believe that valuable perspective on this issue can be gained from a review of of ASR Analytics’ estimates of economic benefits resulting from BTOP investments in fiber infrastructure (some of which I discussed in a recent post).  Not only does the ASR study do a good job of applying prior knowledge and accepted methods in analyzing broadband-related economic impacts, it also suggests to me that, rather than getting caught up in the details of the Cooper/Singer and related debates, a more useful approach is to take a step back from the quantitative details of these dueling studies, and consider broadband public policy from a “public infrastructure” perspective.

In a follow-up post I outline a research project designed to build on the knowledge base developed by ASR’s study of the Comprehensive Community Infrastructure (a.k.a., “middle mile fiber”) component of the BTOP program.

In addition, I’ve prepared several other posts that try to explain some of the threads of scholarship that inform my own view of how—especially in cases lacking sufficient competition—special access and last mile access networks can deliver the most social value if treated as public infrastructure.

An annotated list of links to these posts is provided below.  I’d encourage anyone involved and/or interested in policy debates related to issues such as special access, community broadband, network neutrality and universal service to review these posts and perhaps also explore the sources they refer to:

a)  the relevance of Modern Monetary Theory (a.k.a. Functional Finance) to policymaking related to federal financial support for investments in telecommunications and other infrastructure;

b) the demand-side analysis of infrastructure resources  laid out by Brett Frischmann in his 2012 book, Infrastructure: The Social Value of Shared Resources, and the Internet- and telecom-related policies it suggests;

c) the analytical framework developed by author Marjorie Kelly in her book Owning Our Future, which highlights key differences between what Kelly refers to as “generative” vs. “extractive” ownership models. One post reviews Kelly’s key concepts and considers AT&T as an example of extractive ownership of telecommunications infrastructure.  A second post considers how Kelly’s framework applies to the role of community-owned broadband networks in the Internet access sector, and suggests research questions related to this that I believe are worthy of further investigation.

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BTOP’s Fiber Investment, Social Value & the Special Access Market

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During the past few days I’ve been: 1) reviewing the BTOP program evaluation study’s final report prepared in 2014 by ASR Analytics and; 2) doing some homework aimed at better understanding issues related to the FCC’s pending special access study and proceeding. The former relates to a pending Quello Center research project, while the latter was prompted by release of a paper written by Mark Cooper, Director of Research at the Consumer Federation of America (CFA).  Cooper presented the paper, entitled “The Special Problem of Special Access: Consumer Overcharges and Telephone Company Excess Profits,” at an April 5 event sponsored by the New America Foundation.

In his paper, Cooper made a theoretical and empirical case that “large incumbent telephone companies have engaged in abusive pricing practices” for special access services that have resulted in economic harm exceeding $150 billion over the past five years:

Today, special access is a $40 billion per year business, which works out to about $300 per household, which is almost equal to what they spend on landline telephone service…

This paper shows that about half of the total bill paid to the large incumbent local phone companies for special access service, who control between five-sixths and nine-tenths of the special access market, is the result of the abuse of market power – i.e. setting prices far above costs to earn excess profits…

Because of the importance of special access as an intermediate good, the $20 billion in annual overcharges suppresses a significant amount of economic activity, reducing economic output by at least another $20 billion. The magnitude of the harm has been growing steadily, so that the cumulative value of economic losses over the past five years is in excess of $150 billion.

While there’s much to consider and debate in Cooper’s analysis and, more broadly, related to the FCC’s pending special access proceeding (something that may be done in the future by me and/or MSU colleagues on this blog), for now I’m only going to use Cooper’s general argument as a jumping off point to consider a few metrics that struck me in ASR’s BTOP evaluation study.

As explained in the introduction to its final report, published in September 2014, ASR Analytics summarized the scope of and general methodologies used in its study:

The scope of work includes an assessment of the benefits that BTOP grants are having on broadband availability and adoption, and in achieving social and economic benefits in areas served by the grantees…

ASR developed its conclusions based on a mixed- methods approach that includes comparative case studies of BTOP-funded projects, input-output analysis of the short-term economic impacts of all BTOP budgetary spending, and a matched-pairs analysis of the counties served by infrastructure grants in the evaluation study sample.

The ASR study had lots of ground to cover and, in my view, did an admirable job of using mixed methods to leverage available qualitative and quantitative data to evaluate a large number of projects spanning three major categories: Comprehensive Community Infrastructure (CCI), sometimes referred to as “Middle Mile Fiber” projects, Public Computer Centers (PCCs) and Sustainable Broadband Adoption (SBA) projects. And, importantly, as ASR noted in the introduction to its final report, it was “required to provide NTIA with all data that created a foundation for the [report’s] analysis and conclusions, as well as all data that could be utilized by future researchers.”

In this blog post I’m going to focus on a few elements of ASR’s analysis of the impacts of CCI projects, whose purpose and nature are, in my view, closely tied to the issues surrounding the special access market. This is because most if not all CCI projects involved construction of fiber networks providing high-capacity, high-reliability connectivity to “community anchor institutions” (CAIs), including schools, libraries and government and healthcare facilities, as well as providing non-discriminatory open-access backbone connections to wholesale and last mile service providers.

As I see it, the BTOP CCI projects represent a significant wave of new players entering the special access space, the bulk of whose construction costs (up to 80%) were covered by federal grants, and whose terms of service are required to meet certain nondiscriminatory “open access” requirements. And, conveniently and importantly, thanks to NTIA and ASR, these projects have been the subject of careful study from their inception.

Though there’s plenty we can learn from the ASR study of CCIs, I’m going to focus here on some high-level numbers that the study gathered, estimated and extrapolated.

According to Table 7 on pg. 15 of ASR’s final report, the total amount (including both federal grants and matching funds) budgeted for 109 CCI projects was $3.9 billion. The table also indicates that, at the time the study was done, these projects had connected 21,240 CAIs, at a budgeted cost of $184,141 per CAI. Assuming federal grants paid for 80% of this total cost, the average federal grant amount per CAI would be in the neighborhood of $147,300.

Table 13 on pg. 34 of the report shows the changes in subscription speeds and pricing experienced by the 86 CAI locations providing this information to ASR. The table shows very large increases in speed and, depending on the category of CAI, dramatic 94-96% average reductions in per-Mbps pricing.  Table 14 on pg. 36 uses these reported changes in speed and price to extrapolate CAI cost savings from switching to CCI-provided fiber connections. Averaged across all CAI categories, the per-CAI annual savings amounted to $236,151.

So, in a single year, the average CAI saved well more ($236,151) in operating costs than the total capital cost ($184,141) required to connect it to a CCI fiber network.

These direct cost savings to CAIs were only part of the impacts considered by ASR. It also used previously developed models to estimate other economic benefits, as explained on pg. 33 of its final report:

Increased economic output: The largest long-term social or economic impact due to BTOP infrastructure spending is the yearly increase in GDP in the areas served by the new broadband infrastructure. ASR used two studies, Czernich et al. (2011) and LECG Ltd. (2009), to extrapolate the increase in economic output that could be expected in counties receiving BTOP- funded infrastructure. For the base case of a 2.0 percent increase in broadband availability, BTOP infrastructure spending could be expected to yield $5.7 to $21.0 billion in increased output annually using results from Czernich et al. (2011) and LECG Ltd. (2009) as the bases for extrapolation, respectively.

Long-term increased levels of employment: Kolko (2010) and Gillett et al. (2006) provide a basis for estimating the long-term increase in employment due to BTOP-funded infrastructure spending. Based on Kolko’s estimates, the additional broadband infrastructure provided by BTOP could be expected to create more than 22,000 long-term jobs and generate $1.1 billion in additional household income each year. Results from Gillett et al. (2006) suggest at least 6,900 long-term jobs could be created in the year following the construction of BTOP infrastructure, and potentially each year for at least the next four years due to increasing employment growth in areas with new broadband availability. These employment increases would result in a $328 million increase in household income for each year employment increases by the estimated amount in newly served areas.

Value to new subscribers: The Allen Consulting Group (2010) finds the value of broadband Internet access to the average American household is about 3.4 percent of average household income. Using the base case to determine the number of households adopting broadband, this translates into an estimated value of broadband to new subscribers of $2.6 billion per year.

Given all of the above, the CCI component of NTIA’s BTOP program strikes me as a very good investment of public funds in that it: 1) delivers substantial direct and indirect net social value, as suggested by the ASR study and; 2) helps correct the substantial excess-profit market failure suggested by both the CFA analysis and the dramatic cost savings reported by CAIs after connecting to BTOP-funded CCI fiber networks.  And given these strong indicators of net social value, I’d suggest that the federal government consider expanding its CCI investment in geographic areas that the FCC’s special access data collection project indicates still face a lack of competitive options and an abundance of excess-profit-extracting prices in the special access market.

I’ll have more to say about this perspective in future posts.

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