Dude, Where’s My National Broadband Plan?

Blair Levin Fellow

Aspen Institute Communications and Society Program Alaska Telephone Association

January 27, 2014 I am very happy to be with you today. O.K. On its face, that is about the dumbest opening ever to a speech. After all, who from Washington D.C., or pretty much anywhere north of the Mason Dixon line, wouldn’t be happy to be in Hawaii right now. But it’s more than the weather and the beauty of the Islands that makes me happy to be here. I like problem solving and I think our country and your industry has a big problem: how to make sure everyone in our country has access to essential communications infrastructure. Fortunately, we start with a pretty good base and that is a tribute to two great Americans and supporters of universal service: Ted Stevens and Dan Inouye. Both served their country in many ways and their friendship and productivity in the Senate is sorely missed. They collaborated brilliantly to make sure the state where we are and the state where you are from had the funds for that infrastructure. But Lincoln’s description of the situation in 1862-- “the dogmas of the quiet past are inadequate to the stormy present”—applies to the situation today with universal service. The framework that Stevens and Inouye helped build and support is no longer adequate for the technology and market of today. We tried to start addressing this change with the National Broadband Plan, but frankly, what has happened since we delivered the Plan kinda makes me feel like the dumb stoner dudes in the movie, “Dude, Where’s My Car?” who woke up one morning and discovered it was missing. I mean, heck, it was a pretty good plan. O.K., maybe it wasn’t a Lamborghini but it was at least a BMW, and now it seems to be missing. Now that is a bit of an exageration; after all, most of the debates on policy we have today are rooted in the plan. From incentive auctions to the IP transition to the public safety network to e-rate reform, you can find a critical turn, if not the orgin, in the story one of the chapters of the plan. Still, from the perspective of those of us who labored in the Plan’s vineyards, there is a sense that it is missing and unlike Ashton Kutcher in the film, I actually do know what happened to it. When we finished, we turned the keys over to folks who had a

short-term focus on press-driven statements of aspiration instead of a long-term focus on execution. During and since the Plan, I have been in many continents--last month in the Middle East, next month in Asia-- discussing national broadband plans. In every case, broadband plans, like all public policy efforts, boil down to three elements: aspiration, strategies to achieve that aspiration, and tactics to execute on those strategies. In every case, execution—and particularly review and course correction---is far more important than aspirations. Good execution can correct for any errors in aspiration. Great aspirations with lousy execution will ultimately fail. I’m not really here to discuss National Broadband Plans, but the execution problem underlies that big problem of getting everyone on the essential infrastructure of our information age. We have a consensus on aspiration; where we fail is in execution. To be fair to those who have executed poorly, it’s a difficult problem, particularly perplexing as the business model you built your business on, and the one on which government premised its policy on, is dying. You might say, we built our business based on the government’s commitment to support the old model. It’s a reasonable point of view. Others, however, would say, its absurd for the government to continue to support a specific business model when other models are more efficiently delivering what consumers and society need. Also, a reasonable way to see it. Neither view will prevail in a pure form. What is inevitable is that the social contract that both sides agreed to will no longer make sense. What happens in the business world when this happens is that the parties renegotiate and transition to a new agreement. Or if they don’t come to an agreement, there’s litigation and often Chapter 11 or Chapter 7 of the bankruptcy code comes into play. So the question here is how the government and the industry negotiate that transition so that those Chapters are not your fate. I am not saying it is easy. Indeed, when I think of the challenges you face, I find flaws in every answer I hear or can think of myself.

Essentially, two questions are at play:

How does our country assure that we meet the communications needs of Alaska and the United States?; and

How do you prosper as private enterprises? The National Broadband Plan focused on the first but was not indifferent to the second. I assume you are focused on the second but not indifferent to the first. We probably disagree on how to answer those questions. But I find discussions with people I disagree with much more interesting and illuminating and I hope you do as well. But in being honest about our views, I think it is most productive if our discussion focuses on the intersection. We should at least agree that if our country’s communications solutions do not have viable providers, it will not work. If, however, the solutions only serve the short-term profit concerns of the providers, a combination of market and political forces will render it unsustainable. I don’t know the answer to either of the two questions, but increasingly I hear an answer to the first that, if broadly accepted, renders the second irrelevant. It is that the first problem is already solved—that LTE and satellite will soon provide everything Alaska needs. This argument has some merit and while it is not widely accepted in Congress today, it will gain support as technology improves and problems with the current government approach become more apparent. For reasons I will discuss, I don’t yet find this answer persuasive, though it is more so than it was when I was working on the Plan. What I want to do now is lay out five truths that make it difficult to answer the questions but that inform the discussion, briefly discuss new challenges to the principle of universal service and close with a few suggestions about how you can answer those questions in ways that serve both your business and public policy interests.

1. The initial post Broadband Plan effort by the FCC to address unserved areas did not work, but that was not the problem.

I wasn’t troubled that the first phase of the implementation of the Connect America Fund—CAF1—did not accomplish what the Commission hoped it would. I have

spent most of my career in the private sector and most large enterprises have difficultly recharting the course with a single turn of the steering wheel. The problem, to me, was that despite the evidence, the Commission leadership wanted to pretend reform was working perfectly. Commissioner McDowell called it “a model of entitlement reform.” Then Chairman Genachowski praised it as a great accomplishment. I gave a speech last April suggesting that approach was like a marathon runner—and USF reform is a marathon—who throws his hands up after the 5th mile in victory and asks the audience for applause. Such a runner is unlikely to deserve the applause or to win the race. There is still much to do, with the hardest political issue, contribution reform, kicked down the road. As the FCC leadership only wanted to hear praise, it meant that the staff was not called upon to make an expert assessment of the why and how of CAF1 not stimulating much new investment. And that means the FCC effort did not engage in the spirit of rigorous reassessment. I often told the Commissioners that the Plan was not written in stone and that the most important line in the plan was this: “This plan is in beta and always will be.” Sadly, that spirit was not at play in the USF process. As a recent report noted, the FCC promised “ongoing evaluations of the effectiveness of the new rules; such regulatory evaluations have not been forthcoming.” Further, the pursuit of press coverage did not lead to a clear assessment of impact on existing providers. The Plan did propose some things I know you did not like. But to be clear: I liked them. Moreover, I continue to believe that both the Plan’s framework and the details were largely correct. Nonetheless, the Plan did not propose to take away the opportunity to recover the investments already made. Further, it addressed the need to change the ICC and USF mechanisms, and to target support where needed, but did not propose some of the outcomes we see.

In addition, the Plan identified the need for "several billion" in USF dollars to recover the existing investments that were being recovered by access charges, but which reform would eliminate. The Commission’s record on those parts of the Plan is mixed. For example, its clear the FCC has not viewed the issues holistically. For example, while the Commission deserves praise for attempting to improve the rural call completion situation, it also took rushed steps to grant non-carriers direct access to numbers in a way that the record says is likely increase that very problem it said it was trying to solve. Bottom line: it is not really a problem that CAF1 did not work immediately; it is a problem if the Commission doesn’t look at these issues honestly and course-correct. I have hope for the new leadership, particularly Tom who is a practical problem solver who will be guided by the facts on the ground, not the rhetoric in the media. I have known him in many different roles and am confident that he deeply believes that all Americans need access to modern communications services. I don’t know his specific views on any Universal Service issue but I do know two things: he will give you a fair hearing and you better be ready with a fact-based argument. Because I know he will be and I know that is what is going to drive his decision.

2. Wireless is going to undercut the business models of the rural wireline carriers by eviscerating voice revenues.

Wireless substitution also undercuts the assumptions underlying the RUS loans and the models that the FCC uses. This market-driven change means the people in this room are broadband pipe providers, not just switched voice service minute providers. In that light, you have to consider how to leverage the assets you have. You probably won't find it comforting, but the change in your traditional business plan is not as stark as the changes others have faced. Their reactions are instructive for what you need to do. Broadcasters used to own all the video distribution and audience share. Now they own a sliver of the first and a minority of the second. They missed multiple opportunities to use technology changes to increase their product offerings and the growth in video-related revenues has largely gone elsewhere. Cable faced an existential threat when the program access rules in the ’92 Cable Act gave a superior technology for delivering multichannel video non-discriminatory access to cable programming.

Cable, however, developed, new business lines, particularly broadband, which now form the core of their long-term value. On the telecom side, the once great long-distance companies of AT&T and MCI sold off their wireless businesses, unsuccessfully tried entry into other businesses. Both were swallowed up at values a fraction of what the market once thought they were worth. On the other hand, both NYNEX and SBC completely restructured themselves. Both were small regional wireline voice providers. But both understood the challenge to that business model and transformed themselves into national wireless, international enterprise, and regional video providers. You cannot duplicate their path but you face the same questions they faced.

3. Wireless may also significantly undercut broadband revenues from consumers and maybe some businesses.

Spoiler alert: 4G is potentially disruptive to some broadband markets. And the sun rises in the east. The competitive question is complicated and relies on whether wireless will really substitute for wired access for the things most Americans want to do over broadband. No one knows for certain where the market will be for most Americans’ bandwidth needs in a few years. For example, many argue that no one needs a gigabit to the home. True, we don’t know of products consumers crave that require such speeds yet, but consumers never ask for products they don’t know about; innovation comes from the unknown. No consumer in 1900 asked for a radio, a television, or a personal computer. As Henry Ford noted, if he had asked consumers what they wanted, they would have said faster horses. And we know there are bandwidth hogs in many fields, from genomics to robotics, from 4K TV to Big Data, which will develop products we can’t yet imagine. But consider the Kansas City Royals game last June where Google Fibered enabled a Kansas City boy stricken with a rare blood disease to throw out the first pitch from 1800 miles away. I’m not sure tele-robotic pitching is a consumer product.

But who would have considered the possibility a decade ago? It’s early in the game. Maybe there will be applications that will always require a wire. The problem you face is that we don’t know. If wireless really competes for broadband revenues, it’s hard to see how it doesn’t end badly for you. It will be very hard to continue to justify a government subsidy, particularly as the per-person subsidy goes up. And that will make it very hard to repay your loans.

4. Wireless is unlikely to be sufficient to serve institutional needs. Here is where I disagree with those who say cellular and satellite can address all the needs of rural communities. I doubt cellular-based solutions will ever be sufficient for schools, health care facilities, or many retail, government and other institutional users. Look at classrooms in particular. It’s great that, thanks to the E-rate Program, 13 years ago America lead the world in connecting classrooms but now classrooms need an upgrade and a wire has to be pretty close by. 80% of teachers say classroom bandwidth is already inadequate. That why last June President Obama called for an E-rate 2.0, to reform the E-rate Program to get to a gig into the classroom. He’s right. I know this from all the research as well from as my sister and brother-in-law, both of who work in public school classrooms, who have been telling me for years that my time in DC has not provided them the bandwidth they need to serve the needs of their students. I am hopeful that the President’s initiative will mean that some family reunion will not be filled with comments of my inadequacy, or at least not my inadequacy in bringing schools bandwidth. But the issue is larger than what the President called for. It really is about an upgrade agenda for all institutional users. Large private enterprises are able to obtain it. The question is whether the public sector, small and medium sized enterprises, the non-profit sector and rural enterprise users will be able to obtain the bandwidth that allows them to take advantage of high-performance knowledge exchange at an affordable cost. A

related question is: how do all those needs help drive an upgrade in the broader community? But the tricky question for you and the USF program is how to welcome the competition that reduces the need for USF subsidies for homes but undercuts the economic viability of providing the bigger bandwidth we need in communities.

5. Government does not yet have a clear path for how to analyze the competitive impact of wireless broadband on wired broadband and industry analysis is situational.

In the government review of the Verizon and cable industry deal, Spectrum Co., industry argued, and the government agreed, wireless did not compete so it was ok for Verizon to have a co-venture with cable but only where Verizon did not offer a wired service. After that was done, companies started saying wireless competes everywhere, as did others. Policy makers have generally demonstrated confirmation bias; those who favor deregulation only see facts that suggest competition and vice versa. I still think what I thought with the Plan—wireless doesn’t compete with wired for nearly all Americans—but that data was early, the data is still early, and we should not be blind to new data. My analysis is somewhat similar to that which Michael Balhoff and Brad Williams, two former colleagues from my Legg Mason days, for whom I have the greatest respect. Their White Paper, must reading in the field, lays out the case for the limits of wireless substitution, particularly as to price and bandwidth usage. But that analysis is not shaping the framework for the debate; moreover we do not know yet how consumers in rural areas will react. I suspect that some who have said wireless does compete may regret it when the FCC stops funding some RLECs who serve their constituents. From a political perspective, the current frame for this debate is going to prove problematic for you over the next few years. That brings us to the next topic: the appearance of a troubling change in how some think about the underlying principle of universal service. Universal service reflects a national consensus that all should have access to certain baseline services, like electricity, water, voice, and now broadband. In that light, we

contribute on a national basis to make sure that all areas in our nation receive those services. But now some are suggesting a new principle; that the contribution a state makes should not be significantly more than the state receives. I understand how some could be attracted to the principle that no state should get less than a certain percentage of their contribution. It is similar to the notion that states should be able to opt out of certain programs, which has gained in popularity in some circles. The problem is that ultimately it undercuts the national nature of the program. It eventually leads to a state-by-state program in which the federal role is largely just to collect and redistribute funds. Further, while the USF program needs changes, such a change is very problematic. I ran model in which no state receives less than 75% of what it contributes to USF—similar to what Sen. Ayotte proposes in her USF reform bill—and according to the model, current funding levels would require that 32 states would see a reduction in current levels of an average of 22%. In the case of Alaska, it would mean the current level of funding of about just over $300 million would be reduced by over $65 million. I respect Sen. Ayotte and I can see how if one looks at it from a state perspective, one might think her formula is fairer to all. As I look at it from a national perspective, I don’t see it that way because the new allocation model actually doesn’t solve the problem we as a nation are trying to solve—getting modern communications networks everywhere. The model also shows that the amount New Hampshire would receive under the formula would increase by nearly 60%. Senator Ayotte said something both insightful and troubling: “Imagine what we could do with another $24 million in terms of helping people in New Hampshire have better access to high-speed Internet.” The insightful part is that she’s right--$24 million spent on broadband to help New Hampshire could do a great deal of good. Indeed, that would be true for almost any Senator and any state. The troubling part is that if Senators look at the issue through the lens of their own state and only try to solve for the question of how to get their state more money or find a formula that works best for their own state, we will never improve Universal Service; indeed, it is unlikely that Universal Service will survive.

So the combination of these things represents a difficult environment in which to successfully both meet the public needs and to thrive as private enterprises. In that light, what are some things to be done?

I think it is hard. I will offer some blue-sky thoughts but I should say that for the most part, I have not fully thought these through. I offer them as a way of sparking conversation First, support E-rate Upgrade. Let me start by saying I am an unpaid consultant to a group that has this at the top of the agenda. You might think I am biased. I plead guilty. The reason I am doing it is I think it is the right thing to do for country. I think you should support it for the same reason. But I will argue this point not from that perspective—unless you want to give me an extra 30 minutes—but from a more self-interested perspective I don’t know the short-term implications for you of different approaches, but from a macro perspective, it demonstrates need for a big wire. And if you think about forces that are clouds on your horizon, the public need for a bigger wire is a ray of sunshine. Maybe you would argue that the FCC needs to focus the E-rate on the big wire and less on other, old school, uses. Or that the FCC needs to simplify the process of obtaining funds. Or that it needs to prioritize differently. Make those arguments. But here’s the important thing from a pure business perspective: it is an opportunity to drive a broader upgrade, with significant public support, that is in your interest. Second, work with whoever you can to develop applications that drive bandwidth use to substitute for other inputs. The list is endless: 4k video to monitor in home health care, real-time big data collaboration, educational, multi-player gaming, community meetings, etc. AT&T did a great thing for their business by working with Apple to make the iPhone the phenomenon that it became. What are you doing to help others to create products that need your networks? Third, go to your strength. Your strength is your connection to the community. If you treat them like a passive consumer, you have no advantage over larger providers; indeed you are at a distinct disadvantage.

Consider the Wall St. explanation of the survey that showed that an extraordinary, and unexpected, 77% of Kansas City is seriously thinking of subscribing to Google Fiber:

“the high awareness and purchase intent for Google Fiber detected by our Kansas City survey are driven by the community involvement.”

How did Google tap this community involvement? It wasn’t one thing. It was a lot of small things. And it was incredibly smart. None of it was Google rocket science; you could do everything they did. Whatever the future of the Google Fiber project, it provides valuable lessons in serving customers that most appear to be missing. Fourth, don’t go to your weakness. Your weakness is too great a dependence on government subsidies. I acknowledge that policy arguments that looked to me like transparent attempts to obtain a subsidized advantage over your competitors have worked in the past. I also acknowledge you would characterize the arguments differently. I don’t think they will work in the future; the politics have shifted. You are not without influence, but ideological objection to government (ironically rooted in those geographic areas most dependent on government support) makes it tougher, as does the increased level of competition in your areas. Neither will an argument that results in you getting a blank check. Two years ago I debated a rural telco executive in front of a rural telco convention and he berated me for advocating a per-home cap. He argued the law compels support no matter the cost. I asked him if he thought Congress would support a program that gave someone a $50,000 service that was marginally better than what that person could buy from a satellite for $500. He said yes. Not the way I would bet. But be my guest. I also don’t think you should argue for rules that eliminate accountability. On those issues—subsidies in competitive markets, caps and accountability—I think the Plan was successful in changing minds. Feel free to disagree but my advice is simple: don’t relitigate losing arguments.

Fifth, figure out a wireless strategy. I noted earlier that AT&T and MCI sold their wireless assets, one of several mistakes that lead to them being sellers, not buyers. Over the last decade, there has been a massive shift in how markets are investing capital expenditures in telecommunications, from supporting wired networks to wireless networks. The market is telling you something; you need a wireless strategy. There are several you could try. I know because I am involved in several and I am sure there are lots of others. My experience, which I don’t claim to be comprehensive, is that where you could be leading, you are waiting. All your customers want mobile options and there is a lot of spectrum in your areas. There is a business that is yours if you can figure it out. Finally, consider more radical options that accelerate the inevitable restructuring. For example, maybe you should ask the government to forgive any further payment of RUS loans in exchange for forgoing all CAF funds in the future. After all, the source of both is really the same group—all Americans. Such an idea is, in essence, a restructuring that always happens to any industry in transition. Because of the presence of so many government entities, however, it is an odd version of one. A similar idea is a one-time direct Congressional infusion to reduce your capital costs so much that you are viable today on an operating basis without further support. We called for something like that in Plan but it did not fly at that time. It’s still hard but if it reduces cost over time by lowering USF and avoids fight over contribution factor, maybe it’s now possible. From an economic perspective, it is similar to loan forgiveness. The key point of both: get freed up from debt incurred in under past assumptions and have the freedom to invest as current market forces dictate. Like I said at the start, I see flaws in all these ideas. But doing nothing is not a winning strategy for you. Hoping yesterday is the future isn’t either. I started with Lincoln’s observation that “the dogmas of the quiet past are inadequate to the stormy present.” Let me close with the rest of the quote: “the occasion is piled high with difficulty, and we must rise with the occasion. As our case

is new, so we must think anew and act anew.” I hope you have a strategy that reflects new thinking; one that takes advantage of your ability to take advantage of new technology, not old politics. Because if you have such a strategy, and can execute on it, rural America and all America will be better off. Thank you.