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A national policy to create a fully capable broadband network universally available in rural areas and provided by regulated carriers using traditional costing methods would require far greater subsidies: total loop and non-loop costs per line in rural areas would range from $154 to $168 per month per line, depending upon whether deployment completion was targeted for a 10- or 20-year period. Since rural telephony per line revenues average approximately $54 per month, customer revenues or subsidies would have to bridge a $100 per month gap. These estimates exclude the incremental cost of any customer premises equipment that would be necessary.7 The regional bell companies and several of the largest cable multiple system operators are seeking or have entered into agreements with set-top box manufacturers, such as Digital and Scientific-Atlanta, to develop proprietary consumer premises equipment with an eye toward bringing the cost down to well below $1,000 per unit.8 Even if the nation chose to afford it, providing subsidies under a business-as-usual model would effectively prevent competitive entry and keep costs high. Since there is currently no two-way universal broadband network in place, there is no rationale for selecting and subsidizing one potential provider over another.

This paper does not propose to chart a hybrid middle ground between regulation and competition. It also neither evaluates existing and proposed narrowband transition plans nor offers any new transition mechanisms to end the current subsidy scheme for those universally available services. What this paper offers instead is a mechanism to provide universal two-way broadband service to high-cost areas in an industry- and technology- neutral way, through the use of a fully competitive marketplace, and at the lowest possible cost.

The Need for a Separate Broadband Paradigm

As noted above, the current Senate bill, S. 652, calls for an evolving definition of universal service. The law's effect would be to pull new broadband services into the subsidized and regulated carrier-of-last-resort mandatory provisioning scheme as such technology gained popular acceptance.9 As has already been discovered in narrowband communications markets supplied by multiple competing providers, the efficiencies of competition cannot be sustained if one or more parties' market behavior and obligations are being mandated by government. In an environment where there is a "network of networks" that both interconnect and compete with each other, intra-industry subsidies undermine and distort the marketplace while providing no direct end user benefit.

Although complaints about pricing and customer service led to the reregulation of cable television, cable companies are not monopoly suppliers of broadband services. A residential customer in search of broadband services has the technical capability to receive broadcast television, cable, multichannel multipoint distribution service, low-power satellite, and direct broadcast satellite signals. Portions of the entertainment and information that are received via such media are also available from newspapers, broadcast radio, on-line computer services, video cassettes, laser disks, computer diskettes, and CD-ROMs. The first principles of a new broadband paradigm rest on a free market foundation. Although robust narrowband local exchange competition will eventually arrive and enable the deregulation of that market, advanced infrastructure investment must go forward now in a "clean state" environment, in which government dictates neither the financial nor technical terms for the offering of new services. A distinct broadband deployment-friendly and regulation-free environment, possessing the following characteristics, is necessary:

LEC broadband investments that are neither subsidized nor regulated. It appears to be a political certainty that some price and service regulation of local exchange service will continue far into the future either in rate of return or price cap form. Given this fact, shareholders, not telephone ratepayers, should take the risks and rewards of broadband deployment. Whether in the form of video dial tone or more vertically integrated arrangements, broadband assets and expenses should be unregulated, below-the-line allocations or should reside in separate subsidiaries or affiliates.

Unregulated cable system broadband and telephony offerings.

Mandatory interconnection. All providers of telecommunications services, whether or not they have been previously regulated, should be required to interconnect with each other,10 but there should be no other day-to-day regulatory oversight or standards to which providers are obliged to adhere.



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