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Tuesday, August 24, 2010

The Broadband Investment Leviathan
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The August 5th issue of The Economist had a compelling cover story entitled "Leviathan, Inc." in which the author notes "[p]oliticians are reviving the notion that intervening in individual industries and companies can drive growth and create jobs." But direct, long-term government management of companies, corporations or, worst yet, entire industries has proven time and again not to be successful.

Simply put, the head of a company makes decisions to maximize the outcome for that company and its owners or shareholders. Any government employee—even one in a role as acting head of a private company—is legally required to make decisions under a far stricter set of guidelines. Guidelines which force the decisions to be made for what is best not for the business they are charged with operating, but for the country as a whole. This is the case even if the decision made by the bureaucrat will result in a 'net negative' to the company and its owners/shareholders.

The article's anonymous author suggests that instead of "pick[ing] winners and coddl[ing] losers," government should improve the environment for all business by reducing regulations, investing in infrastructure, and "encourage winners to emerge by themselves, for example through the sort of incentive prizes that are growing increasingly popular."

The article's anonymous author suggests that instead of "pick[ing] winners and coddl[ing] losers," government should improve the environment for all business by reducing regulations, investing in infrastructure, and "encourage winners to emerge by themselves, for example through the sort of incentive prizes that are growing increasingly popular."

I wholeheartedly agree with the first and third points. In fact, former PFF Summer Koch Fellow Jeff Levy, in just the latest PFF piece on the subject, wrote a PFF Blog entry on incentive prizes. But I'm concerned with the unqualified suggestion of investing in infrastructure.

The Economist article states that "governments should invest in the infrastructure that supports innovation, from modernised electricity grids (a smarter way to help green energy) to basic research and university education." Yet the article itself points to Spain's subsidization of its solar power industry as an example of a government that was "seduced by the hype of voguish high-tech sectors." Government investments in high tech sectors can have the same unintended consequences as directly picking winners in a fast-moving global market. As the article explains, "[t]hanks to globalisation and the rise of the information economy, new ideas move to market faster than ever before" and no bureaucrat is able to accurately predict which products and industries will be successful. The result is often a stifling of innovation and a waste of taxpayer money.

The Obama administration's infatuation with increasing broadband deployment is unfortunately about to become another example. The American Recovery and Reinvestment Act directs $7.2 billion in one-time support for broadband initiatives across the United States. The goal of the program is to accelerate broadband deployment in "unserved" areas and improve access in "underserved" areas. But because the Act leaves these terms undefined, it is certain that funds will be used to overbuild in areas that are already served by competing providers, which will likely harm competition.

"Underserved" is a bureaucratic term utilized by several different federal agencies, each with a different definition. Even within agencies, conflicting definitions of "underserved" occur. Sadly, many of these definitions aren't based on measurable economic, racial, or social data but simply overly-broad attempts to overcompensate for a perceived but unproven problem. When the "maps" of the Treasury Department's definition of "underserved" are compared with the FCC's current definition, the Department of Agriculture's definition, or any of the many other Federal definitions, the differences are dramatic.

And it is not clear that Federal funds should be spent on expanding broadband service in "underserved" areas (which at the least means there is one existing provider) in the first place. An investigation of the Department of Agriculture's Rural Utilities Service ("RUS") broadband expansion program, which is similar to the broadband stimulus provisions in the Recovery Act, found that 42% of communities receiving funding through the program were already served by competing providers.

As the Department of Agriculture's Inspector General wrote,

  1. "[c]an the sparsely populated rural areas for which these loans are intended reasonably support multiple broadband service providers," or are the loans being made to systems that are doomed to fail?
  2. "What is the government's responsibility if, due to subsidized competition, a preexisting, unsubsidized broadband provider goes out of business?"
  3. as an equitable matter, "why should the government subsidize some providers in a given market and not others?"

There are many that subscribe to the "If you build it, they will come" philosophy when it comes to broadband investment: The belief that the secondary benefits of broadband are so immense, that it is worth building at any cost. But as the Economist article puts it, "In an age of austerity [governments] can ill afford to lavish money on extravagant industrial projects." At a cost of $350 billion, is the FCC's "100 Squared" initiative—a plan to connect 100 million households at 100Mbps—really a wise allocation of limited funds, compared to focusing on truly unserved areas? Or will it merely be a repetition of the RUS's bottomless pit of funding for special projects?

And as the FCC's official definition of what constitutes "broadband" increases in speed, small ISPs (especially Wireless ISPs), which are ready to expand their service to truly unserved areas, may no longer quality for Recovery Act funds. The government's attempt to invest in innovation and infrastructure would then serve only to kill off what, in many places, are the only businesses offering any sort of Internet access in truly underserved rural areas as well as creating a higher barrier to new entrants and competition.

posted by Adam Marcus @ 2:03 PM | Broadband , Communications , Economics , Philosophy / Cyber-Libertarianism , The FCC

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