Testimony before the Testimony before the Florida House Committee Florida House Committee on Utilities and on Utilities and TelecommunicationsTelecommunications

Thomas M. KoutskyThomas M. KoutskyCo-Founder and Resident ScholarCo-Founder and Resident ScholarPhoenix CenterPhoenix CenterMarch 23, 2006March 23, 2006

About the Phoenix About the Phoenix CenterCenter

““Everyone is entitled to his own opinion, but not his Everyone is entitled to his own opinion, but not his own facts.”own facts.”

Sen. Daniel Patrick MoynihanSen. Daniel Patrick Moynihan

The Phoenix Center does not advocate for (or The Phoenix Center does not advocate for (or against) any particular legislative or against) any particular legislative or regulatory proposalregulatory proposal

Track record of publication in leading academic Track record of publication in leading academic journalsjournals

All research available to the public on our web All research available to the public on our web site, site, www.phoenix-center.orgwww.phoenix-center.org

We welcome rebuttals and debateWe welcome rebuttals and debate Our researchers have over a decade of research Our researchers have over a decade of research into cable and telecom barriers to entryinto cable and telecom barriers to entry

Organization of Organization of PresentationPresentation

Facilities-based entry is Facilities-based entry is difficult, costly and riskydifficult, costly and risky

Only a few players at bestOnly a few players at best If you want entry—take steps to If you want entry—take steps to lower lower cost of entry and do not artificially cost of entry and do not artificially limit the addressable marketlimit the addressable market

Build-Out requirements deter entryBuild-Out requirements deter entry Franchising and the “Digital Franchising and the “Digital Divide”Divide”

Do you want Facilities-Do you want Facilities-based Entry?based Entry?

Increase Gross ProfitsIncrease Gross Profits

Reduce Entry CostsReduce Entry Costs

But not in ways harmful to consumers!

Phoenix Center Policy Paper No. 21

Phoenix Center Policy Paper No. 22:Phoenix Center Policy Paper No. 22:Cable Build-Out RulesCable Build-Out Rules

An example of an area where public policy is An example of an area where public policy is raising the cost of entry—and a place where raising the cost of entry—and a place where policymakers can act to reduce entry costspolicymakers can act to reduce entry costs

Build-out requirements deter entry by Build-out requirements deter entry by raising entry costs and reducing profitsraising entry costs and reducing profits

No Build-out rules for new local telephone No Build-out rules for new local telephone entrants and all broadband providersentrants and all broadband providers ““[B]uild-out requirements are of central [B]uild-out requirements are of central importance to competitive entry because these importance to competitive entry because these requirements impact the threshold question of requirements impact the threshold question of whether a potential competitor will enter the whether a potential competitor will enter the local exchange market at all.” FCC No. 97-346 local exchange market at all.” FCC No. 97-346 (1997)(1997)

FCC preempted state/local franchising regulation FCC preempted state/local franchising regulation of cable modem services; decision upheld by of cable modem services; decision upheld by Supreme Court in 2005 in Supreme Court in 2005 in Brand X Brand X decisiondecision

Build-Out RulesBuild-Out Rules Simulations indicate that build-out Simulations indicate that build-out rules deter entry in the vast majority rules deter entry in the vast majority of markets (80-90%), even under of markets (80-90%), even under conservative assumptions conservative assumptions Policy Paper Nos. 22 and 24 (the latter Policy Paper Nos. 22 and 24 (the latter forthcoming); Faulhaber & Hogendorn, 2000.forthcoming); Faulhaber & Hogendorn, 2000.

Empirical evidence indicates that Empirical evidence indicates that level-playing field laws, like level-playing field laws, like Florida’s, deter entryFlorida’s, deter entry

Hazlett & Ford, Hazlett & Ford, The Fallacy of Regulatory The Fallacy of Regulatory Symmetry, Symmetry, Business and Politics, 2001)Business and Politics, 2001)

Phoenix Center Policy Paper No. 22

The Asymmetry of The Asymmetry of SymmetrySymmetry

Monopolist profit is $100. Duopoly profit Monopolist profit is $100. Duopoly profit is $40. Entry cost is $30. is $40. Entry cost is $30. With monopoly, profit is $70 (= 100 - 30).With monopoly, profit is $70 (= 100 - 30). With duopoly, profit is $10 (=40 - 30) for With duopoly, profit is $10 (=40 - 30) for each firm.each firm.

What if law makes entrants match What if law makes entrants match incumbents entry costs?incumbents entry costs? Monopolist spends an additional $11 on entry Monopolist spends an additional $11 on entry cost.cost.

Entrant’s profits are -$1 (=40 – 41). Entrant’s profits are -$1 (=40 – 41). Monopolist’s profits are $59 (=100 – 30 – 11).Monopolist’s profits are $59 (=100 – 30 – 11).

Symmetric regulation reinforces monopolySymmetric regulation reinforces monopoly

Hazlett & Ford, The Fallacy of Regulatory Symmetry (Business & Politics, 2001).

The link between video and The link between video and broadband deploymentbroadband deployment

Networks being constructed today support voice, Networks being constructed today support voice, video and data services—increasing the cost of video and data services—increasing the cost of providing one service (video) increases the cost of providing one service (video) increases the cost of providing another service (broadband)providing another service (broadband)

Federal policy goal of promoting open-entry for Federal policy goal of promoting open-entry for broadband servicesbroadband services

The increased cost is important because video is a The increased cost is important because video is a large portion of consumer spending on large portion of consumer spending on communications servicescommunications services

The impact is felt particularly hard in lower The impact is felt particularly hard in lower income neighborhoods, because in these areas, video income neighborhoods, because in these areas, video revenues are particularly important to the business revenues are particularly important to the business case for deploymentcase for deployment

Phoenix Center Policy Paper No. 23

Pew SurveyPew Survey

Monthly Communications SpendingMonthly Communications Spending

ServiceService MonthlyMonthly PercentPercent Percent Percent WirelinWirelin

ee

TelephoneTelephone $54$54 38%38% 50%50%

MobileMobile $35$35 24%24%

InternetInternet $14$14 10%10% 13%13%

Cable Cable TelevisionTelevision

$40$40 28%28% 37%37%

Source: Pew Internet & American Life Project survey October 2002 of 1,677 Americans.Source: Pew Internet & American Life Project survey October 2002 of 1,677 Americans.Phoenix Center Policy Paper No. 23

Census 2003, Census 2003, Subscription RatesSubscription Rates

IncomeIncome TelephoneTelephone InternetInternet Dial-upDial-up Cable/DSLCable/DSL

5000 To 74995000 To 7499 94.2 20.3 14.0 5.9

7500 To 99997500 To 9999 96.5 19.6 14.2 5.0

10000 To 1249910000 To 12499 97.1 22.8 16.5 6.2

12500 To 1499912500 To 14999 97.2 24.6 18.2 5.8

15000 To 1999915000 To 19999 96.8 29.5 21.5 7.8

20000 To 2499920000 To 24999 97.8 36.9 26.7 9.9

25000 To 2999925000 To 29999 98.3 42.6 29.6 12.0

30000 To 3499930000 To 34999 98.4 49.0 35.1 13.2

35000 To 3999935000 To 39999 98.7 57.7 41.9 15.0

40000 To 4999940000 To 49999 99.2 66.3 45.2 20.2

50000 To 5999950000 To 59999 99.2 71.9 47.0 24.0

60000 To 7499960000 To 74999 99.4 79.9 49.8 29.1

75000 To 9999975000 To 99999 99.3 84.2 48.0 35.2

100000 To 100000 To 149999149999

99.7 90.4 42.3 46.4

150000 and Over150000 and Over 99.7 92.4 36.4 54.2

Phoenix Center Policy Paper No. 23

2005 GAO Study2005 GAO Study

Phoenix Center Policy Paper No. 23

ImplicationsImplications

The business case for deploying an integrated voice, The business case for deploying an integrated voice, video and broadband network to low-income households video and broadband network to low-income households depends depends upon the ability to sell video serviceupon the ability to sell video service

Regulatory requirements that Regulatory requirements that increase increase the cost of the cost of video deployment video deployment effectively can create a type of effectively can create a type of broadband “red-lining” effectbroadband “red-lining” effect

Open video entry policies are part of the Open video entry policies are part of the solution solution to to a “Digital Divide”a “Digital Divide”

Stated another way: if you want to avoid a “Digital Stated another way: if you want to avoid a “Digital Divide,” policy should be directed at figuring out Divide,” policy should be directed at figuring out how to get video programming on broadband networkshow to get video programming on broadband networks

Phoenix Center Policy Paper No. 23

Phoenix Center Policy Paper No. 23, Table 2Phoenix Center Policy Paper No. 23, Table 2

Homes Passed by Income Group (%)Homes Passed by Income Group (%)

Block Groups by Block Groups by

Median IncomeMedian Income

Range Range

(y = income)(y = income)

(a)(a)

Homes Homes PassedPassed

(%):(%):

BroadbandBroadband

Only Only

(b)(b)

Homes Homes PassedPassed

(%):(%):

Broadband Broadband ++

Telephone Telephone

(c)(c)

Homes Homes PassedPassed

(%):(%):

Broadband Broadband ++

Video Video

(d)(d)

Homes Homes PassedPassed

(%):(%):

Broadband +Broadband +

Telephone +Telephone +

Video Video

y < 20,000y < 20,000 -- -- 8484 8888

20,000 < y <30,00020,000 < y <30,000 -- -- 8888 9090

30,000 < y <40,00030,000 < y <40,000 -- -- 9393 9595

40,000 < y <50,00040,000 < y <50,000 -- 44 9898 9999

50,000 < y <60,00050,000 < y <60,000 11 99 100100 100100

60,000 < y <70,00060,000 < y <70,000 22 22 100100 100100

70,000 < y <80,00070,000 < y <80,000 99 5454 100100 100100

80,000 < y <90,00080,000 < y <90,000 1414 7676 100100 100100

90,000 < y <100,00090,000 < y <100,000 3434 9292 100100 100100

100,000 < y 100,000 < y <125,000<125,000

8383 100100 100100 100100

125,000 < y 125,000 < y <150,000<150,000

9797 9797 100100 100100

y > 150,000y > 150,000 100100 100100 100100 100100Phoenix Center Policy Paper No. 23

Broadband Broadband Telephony

Broadband Video

Broadband Telephony

Video

0.1% 0.2% 1% 1%

87% 88% 90% 91%

Figure 4. Percent of Below-Poverty and Minority Homes Passed

Poverty Homes

Minority Homes

Phoenix Center Policy Paper No. 23: Texas

Phoenix Center Policy Paper No. 23: Pennsylvania

Broadband Broadband Telephony

Broadband Video

Broadband Telephony

Video

0.3% 0.6% 3% 4%

89% 90% 91% 92%

Pennsylvania Simulation: Percent of Below-Poverty and Minority Homes Passed

Poverty Homes

Minority Homes

Bibliography: Policy PapersBibliography: Policy Papers

The Impact of Video Service Regulation on the The Impact of Video Service Regulation on the Construction of Broadband Networks to Low-Income Construction of Broadband Networks to Low-Income Households Households (September 2005)(September 2005)Phoenix Center Policy Paper No. 23,Phoenix Center Policy Paper No. 23,http://www.phoenix-center.org/pcpp/PCPP23Final.pdfhttp://www.phoenix-center.org/pcpp/PCPP23Final.pdf

The Consumer Welfare Cost of Cable “Build-Out” RulesThe Consumer Welfare Cost of Cable “Build-Out” Rules(July 2005)(July 2005)Phoenix Center Policy Paper No. 22, Phoenix Center Policy Paper No. 22, http://www.phoenix-center.org/pcpp/PCPP22Final.pdf http://www.phoenix-center.org/pcpp/PCPP22Final.pdf

Competition After Unbundling: Entry, Industry Competition After Unbundling: Entry, Industry Structure and Convergence Structure and Convergence (July 2005)(July 2005) Phoenix Center Policy Paper No. 21, Phoenix Center Policy Paper No. 21, http://www.phoenix-center.org/pcpp/PCPP21Final.pdf http://www.phoenix-center.org/pcpp/PCPP21Final.pdf

Bibliography: Policy BulletinsBibliography: Policy Bulletins

A La Carte and “Family Tiers” as a Response to a A La Carte and “Family Tiers” as a Response to a Market Defect in the Multichannel Video Programming Market Defect in the Multichannel Video Programming Market Market (February 2006)(February 2006)Phoenix Center Policy Bulletin No. 14, Phoenix Center Policy Bulletin No. 14, http://www.phoenix-center.org/PolicyBulletin/PCPB14Final.pdf http://www.phoenix-center.org/PolicyBulletin/PCPB14Final.pdf

“In Delay There is No Plenty:” The Consumer Welfare “In Delay There is No Plenty:” The Consumer Welfare Cost of Franchise Reform Delay Cost of Franchise Reform Delay (January 2006)(January 2006)Phoenix Center Policy Bulletin No. 13,Phoenix Center Policy Bulletin No. 13,http://www.phoenix-center.org/PolicyBulletin/PCPB13Final.pdf http://www.phoenix-center.org/PolicyBulletin/PCPB13Final.pdf

Franchise Fee Revenues After Video Competition Franchise Fee Revenues After Video Competition (November 2005)(November 2005)Phoenix Center Policy Bulletin No. 12, Phoenix Center Policy Bulletin No. 12, http://www.phoenix-center.org/PolicyBulletin/PCPB12Final.pdfhttp://www.phoenix-center.org/PolicyBulletin/PCPB12Final.pdf