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Friday, May 6, 2005

Footnotes We Edited Out, or a Convoluted Solution to Redlining
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One great use of a blog is to recycle things that you decided weren't good enough for a more formal paper. Blogs -- the refuse pile of discarded thoughts. Now, there's a great slogan.

In our Progress on Point on video services released earlier this week, Kyle and I discussed potential solutions to the "redlining" issue that cable raises against telephone company entry into the video market. But then we deleted it from the final version because it detracted from the pure principles we were trying to represent. Nonetheless, here is the notional idea for the edification of our blog readers:

[T]he Bells former and the cable companies current cries of "redlining" are based on the build out requirements requisite on their respective networks. Under the regulate down principle, the solution would be to compensate the incumbent for this implicit universal service obligation. We are not sure what the methodology would be or who the payors should be, and are certain that it should not be an ongoing payment obligation but should instead be one-time compensation for the sake of simplicity and administrability. To be sure, it would be a unseemly process fraught with ambiguity and difficulty. Under a rough justice principle, the answer may be to negotiate a one-time payment based on some rough notion (the skeptics could call it ransoming the market to continue the Stockholm Syndrome analogy) of what it owed, and for policymakers to be done with it.

The idea here would be to figure out some process to relieve the implicit and ongoing universal service requirement on the incumbent represented by the build out requirement.

One objection to such an attempt is practical: such attempts at achieving perfect justice will be fraught with rentseeking and inevitably corrupted from their stated ends. There is much to this, which is why we would be against an ongoing mechanism to meliorate the supposed injustice of the incumbents' competing against new entrants not subject to the build out requirement.

Another intuition -- and one that I (Ray) used as a regulator when US West complained of redlining by new entrants -- is the rough justice principle (complete with mixed metaphor) of "it's water under the bridge and too twisted to set right, so let's go forward from here." This principle is eminently practicable and easy to apply. It says to the incumbent "too bad, so sad. Yes, you had a build out requirement that the new entrants do not. But, you also were conveyed enormous advantages by that because you also received a protected monopoly. You now have an installed base of 'sticky' customers from that former regulatory deal. So, going-forward you will have to compete against new entrants who will try to pick off your most lucrative customers. But, as a regulator, I have neither the capacity nor the means to calibrate a perfect competitive equity going forward."

There is much to recommend with this latter course because it avoids the ongoing attempts to quantify to costs and necessary remuneration for the buildout requirement. Plus, you don't erect the entry barrier against new entrants having to pay their way out of a build out obligation.

All that said, the path that we want to chart should be out of the franchising morass. It is expensive, unpredictable and delays competition. Thus, the outline of a compromise between cable and the Bells will need to buy off the municipalities who are dependent on the revenues and figure out some way to compensate (or not) the incumbents for the implicit universal service obligations they have been carrying through build out requirements.

posted by Ray Gifford @ 11:05 AM | Broadband , Cable , Wireline

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