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“‘Building on What Works: An Analysis of US Broadband Policy’ with Jonathan Nuechterlein Shelanski” (Two Think Minimum)

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Scott Wallsten:

Welcome back to Two Think Minimum. I’m Scott Wallsten, President and Senior Fellow at the Technology Policy Institute. It’s Wednesday, December 16th, 2020, and I’m here with my cohost, TPI Senior Fellow Sarah Oh. Today, we’re happy to have Jonathan Nuechterlein and Howard Shelanski to discuss their new article, which is forthcoming in the Federal Communications Law Journal entitled, “Building What Works: An Analysis of US Broadband Policy.” Jon is a partner at Sidley Austin and has served as General Counsel of the Federal Trade Commission and Deputy General Counsel of the Federal Communications Commission. Howard Shelanski is a professor of law at Georgetown University and partner at Davis Polk and Wardwell LLP. He served as Administrator of the Office for Information and Regulatory Affairs, Director of the FTC’s Bureau of Economics, Chief Economist of the FCC, and Senior Economist for the President’s Council of Economic Advisors. Welcome to both of you. 

Jonathan Nuechterlein:

Thanks Scott. Good to be here. 

Scott Wallsten:

So, you know that there are several milestones to mark this year. Ten years since the National Broadband Plan, twenty years since we started thinking about how to classify a cable modem service, and twenty-five years since the beginning of the Telecom Act. How do all of those come together now to provide us some lessons for how to regulate broadband, which is basically a way of saying, tell us about your paper.

Jonathan Nuechterlein:

Sure. Happy to do it. And I guess we want to start with a disclosure, which is that our research was funded by USTelecom and NCTA. But the views that we expressed in the paper, which are the views expressed today, are ours alone. 

You are correct that we have those three milestones, and each of them has a tale to tell. The National Broadband Plan was a striking exercise in regulatory humility. Blair Levin and his team recognized—explicitly, in that report—there’s only so much the government can do to promote the ultimate objective that we all share, which is widespread broadband adoption and deployment. And so, the report focused on ways that the government can complement market forces, rather than try to restrict how they operate in practice. The 2000 Notice of Inquiry was issued when I was at the FCC, I think Howard had just departed, or maybe he was still there. Remember, it was a time when we were all confronting this new beast—cable modem service—that didn’t fit neatly within the titles of the Communications Act. Particularly lawyers like me had these long meetings where we talked about “What is this thing”, but more importantly, “What can we do to promote its proliferation throughout America?” And our joint boss, Bill Kennard, who at that time was the Chairman of the FCC, was very explicit that what we really needed to do was create conditions that optimized incentives for investment in these broadband facilities, and that we shouldn’t jump to conclusions about the applicability of monopoly era regulations for this new class of services. 

Both of those milestones suggest lessons for us today, but the third one then we also want to talk about is the 25th anniversary of Telecommunications Act of 1996. There we have a somewhat more cautionary tale because those of us who were litigating in the trenches in ‘96, remember the act more for its regulatory excesses than its regulatory achievements. Those achievements were non-trivial.

I mean the ‘96 act did a lot of good. It abolished, for example, exclusive franchises for cable companies and telecommunications carriers in local jurisdictions. And it unified coherent regulatory or deregulatory authority at the FCC at a time when the line between interstate and intrastate services was beginning to blur. But it’s also remembered for the years upon years of haggling about whether local landline telephone companies needed to share which elements of their networks to facilitate what was thought of as local competition. By local competition what people assumed was we have this mode of communication that involves putting wires into people’s houses and having them go to a particular room where the phone is and to talk on that phone, and we want more competition for that particular type of technology. And some of us spent 10 years litigating the details when the local telephone monopolies would have to share their wires and their switching capacity with long distance companies, so that long distance companies could offer a local telephone service in addition to the Baby Bells. But in reality, the real work for competition was being done by the market, and that work consisted of mobile phone companies deploying mobile networks throughout America, and ultimately creating disruptive shifts in the way that people thought about telephony.

Scott Wallsten:

Before you move on too far from the Telecom Act, we also need to move into facility sharing issues, which is a huge topic. I also worked on the Telecom Act as just a staff economist at the CEA, and I remember thinking a lot about these issues and sitting in the sides of the room while people were debating these things. And we worked on a report for the Council of Economic Advisers to the President on it, and it was all about using long distance service as a carrot to get local companies to open up their service. It seemed like a great idea at the time, of course, long distance turned out to be nothing, but given what we knew at the time, do you think those were mistakes? We turned out to sort of predict the direction of technology wrong, but how would you have done it differently? 

Howard Shelanski:

The carrot-stick idea was sort of a nifty thought. You have these high margin services in long distance that were a big incentive for the incumbent local operators to get into. I think that the idea of a carrot-stick approach for incentivizing the incumbent to share their facilities and to create the kinds of local competition that were envisioned was perhaps not, you know, a terrible idea in principle. And the idea of having a regulatory mechanism that builds in incentives for compliance and disincentives for resistance might be a good idea. Unfortunately, in this case, I think that the market was already in transition such that the carrot was not such a big carrot. And importantly, the thing that the carrot was designed to incentivize was becoming increasingly something that was threatening economically. This wasn’t just low margin, price regulated, local telephone service. I think at that point, we were already turning the corner, where the incumbent local operators were seeing two things coming that the regulators didn’t see coming. One was competition from mobile. That was something that a lot of people got wrong. I’m not saying anybody should necessarily have foreseen it in 1989 or 1995, but certainly by the late nineties, you could see a real shift. The one rate plan for AT&T made wireless telecommunications more affordable and accessible to the masses. But it’s important to realize it went from a period in 1996, when Congress passed the act, to five years later. You started at that five-year period with mobile being a real luxury, being very expensive, not really being seen as a credible full-on alternative, but more as a complement, to mobile being a complete alternative, very accessible in almost everybody’s pocket, and within a decade it really was in everybody’s pocket. So, I think the result was sort of a miss in terms of timing. Had the Telecom Act come three years later, it might’ve seen that the carrot of long-distance entry was not much of a carrot because long distance was being done in by mobile. And moreover, the consequences of giving up local connections meant a threat to broadband, a threat in what was going to be the most competitive area for the incumbents. I don’t think there was anything wrong in principle. I think just in fact at that particular moment, it turned out not to work.

Jonathan Nuechterlein:

The timing of the ‘96 act was peculiar, right? Because the bills were finalized in ‘95 and went into law February ‘96. There really wasn’t such a thing as residential broadband at the time. I mean, there were ISDN lines, I guess, but hardly anyone had them and they weren’t that fast. Cable modem service really hadn’t been deployed. And so when Congress conceptualized competition, what they were thinking about was, “Oh, the telephone companies are going to enter into the video distribution business, and the cable companies are going to offer this new thing called two way cable telephony.” What they didn’t foresee was this thing called the internet, the broadband internet. It would basically obliterate these technological silos. At the end of the day, the world was just going to be about broadband. There are hints that Congress knew what was coming, in Section 706 for the Telecommunications Act. But the act definitely had one foot in the old world that didn’t have a great deal of intermodal competition, and the intermodal competition foreseen by the drafters of the act turned out to be kind of off point. 

Howard Shelanski:

The relevance to our paper is pretty direct. When you look at what happened, it was by 1999 that everybody had figured out that the action was in this emerging local broadband thing. And as Jon said, all the debates at the commission were over access to the cable modem and open access to the box, and did you have to allow different ISPs to interconnect with different cable services? These are the kinds of debates that were going on. Bill Kennard, at the time, took a very modest approach. And, his famous remark that “this isn’t a monopoly. It’s not a duopoly. It’s a no-opoly…” 

Scott Wallsten:

Right.

Howard Shelanski: 

“…and what we need to do is to get traction.” I think that what happened was a market grew up around this convergence from intermodal forms of communication, so cable and telephone operators both started to get into the broadband game, and remember it was the cable operators who had the real leap. They had the far better technology at the time. The telephone companies, because they were still largely using twisted copper pair, were mostly operating over DSL. DSL was a heck of a lot better than dial up, but it was still pretty weak, and compared to cable, it was nothing. And so, the question was, to get really good intermodal competition, what did you do? Did you regulate? Or did you rely on the market forces that were developing? Because telephone companies had no business, nobody cared about local telephony anymore. You couldn’t make a living doing that. You had all the mobile operators. You had the cable folks providing, increasingly able to provide, telephony over cable, but that was a small piece of what they were doing. People were moving away from voice communications towards data. At some point, I don’t know, in those early years, the curves crossed and data communication soared way above voice communications.

So, driven by the need to compete and to have a commercial solution, we saw the telephone companies invest very heavily in the infrastructure that would support broadband and you began to get this emerging broadband market. And the question is where we stand today, where now we don’t question the importance of broadband. If anything, the current pandemic has underscored broadband as essential, not just to work, but to education, to basic civic participation. I think that life without broadband means a life disconnected from a lot of economic and educational opportunity. I think people understand that. There are areas of the country that have less access, areas that have more access, or people who can afford more access and people who can afford less access. So, now we’re back to asking the question, do we have enough broadband competition? Has the world, as it has evolved, given us something that we think is very promising and will continue to evolve to meet the challenges, or do we need some kind of regulation?

And I think what motivated us to write the paper was that there may well be areas in which regulation is highly appropriate in the broadband world. We do think that there are accessibility issues, affordability issues, build out issues, but what’s the right way to approach those? And what our paper does is to address the same question that Bill Kennard had to address, you know, twenty years ago, that the National Broadband Plan had to address ten years ago. Do we move to economic regulation of the providers of these services? And by economic regulation, we mean regulation of either the type that just preceded the Telecommunications Act of 1996 or of the kind that was created by the Telecommunications Act of 1996. So, what came before the ‘96 act was direct rate regulation of different kinds, but that was a direct way to constrain the perceived market power of AT&T and then later the Bell Companies. What the ‘96 act did was to say, “Hey, let’s replace that with regulation designed to facilitate competition.” So, indirectly constraining market power through network sharing, facilities access, those kinds of things. And so the question Jon and I are asking is, “Do we need economic regulation—meaning rate regulation or facilities sharing or bundling, network access regulation—to address the current problems of the broadband market, or would that actually be counterproductive?”

Scott Wallsten:

One of the things that you talk about when building up to the answer to that question in the paper is even just the phrase, “duopoly.” People often say, “Two providers, it’s a duopoly and therefore a problem,” and you note that even the phrase kind of obscures the debate rather than illuminating it.

Howard Shelanski:

I think our view on that is as follows: duopoly is obscuring in the sense that nobody thinks of duopoly when one thinks of a competitive market. We think of a much more fractured kind of market. I think what Jon and I are trying to point out is a duopoly may not be a perfect market, but the question is, “Under what circumstances is it a market in regulation can improve things?” And we try to identify the conditions under which regulation, economic regulation, which is what we’re trying to talk about in the paper, can improve things, where the regulator has a good chance of making a monopoly or a duopoly work better than it does left to itself, and what are the circumstances where that’s unlikely to be the case? 

And it’s not the case that all regulation is bad or that regulation will necessarily deter investment and innovation.  It’s a balance of risks. When is it likely to have an improving effect? When is it likely to have a harmful deterrent effect? And what we do is we look at the broadband market of today, and we say it doesn’t contain the kinds of features that would lead one to think that the cost-benefit analysis favors a regulatory approach. It’s not a market, for example, that is technologically very stable. It is a market, in fact, in which there’s quite a bit of technological dynamism. It is not a market where there are no potential entrants who might disrupt and contest. In fact, it’s a market where that’s very much the kind of thing that’s already starting to happen through the mobile operators coming more into directly challenging, whether over mobile or other, you know, fixed wireless solutions, the wired or the cabled broadband solutions. It’s not a market in which there is a clear monopoly margin that the regulator in identifying a regulated price is likely to hit.

It’s also not a market where investment has been static. And one of the things that has always been perplexing to me is that people look at the incredibly large amounts of money that have been invested over a very short period of time, over the last 20 years, and they kind of rolled their eyes at it. And yet if one looks at the data, it’s not just been a burst of investment followed by reaping the rewards of that. There has been continuous year-after-year investment, in the trillions of dollars, by the broadband operators. And that is not the kind of thing one expects to see in an atmosphere where there isn’t a feeling of competitive pressure, of the need to push forward. And when one looks also at the technological capabilities of the networks, they are reflective of that investment. So when we take all of that together, we see an environment here in which one can point to problems, but one is unlikely to identify problems that economic regulation is likely to improve on.

Jonathan Nuechterlein:

As to the competition issue, when people talk about a duopoly in today’s market, one of their many premises is that the only home broadband providers that count have fixed wires into your house. That presupposes a technologically static market structure in which mobile doesn’t seriously compete with fixed-line broadband. Now, to be sure today, you can make the argument that these are fairly distinct but overlapping markets, because lots of people have both home broadband and mobile broadband. But I think we’re likely to see another one of those technological shifts that characterize this industry over the next few years. Just as mobile telephony supplanted landline telephony, mobile broadband is going to be able to compete directly with fixed broadband as 5G gets deployed, as cell sites diminish in size, and as the economic constraints imposed by spectrum sharing are to some extent lifted by the ability to recycle spectrum from one small cell site to the next.

And so a lot of the pricing structure, I think we’ll see, will change for mobile broadband. It will adapt so that it becomes more feasible to substitute mobile broadband for fixed-line broadband. At the same time, today’s fixed-line broadband providers aren’t going to sit still while all this is happening. They’re going to be installing their own ubiquitous Wi-Fi hot-spots, which cable companies have already widely done, so that their home broadband service becomes more and more portable, and eventually mobile. So, the point of this is that if today you see three or four mobile broadband providers in a given geographic area and two landline providers, in five, six, seven years, those companies could all be extremely direct competitors. So, there’s something inherently unstable about any duopoly that people attribute to the home broadband market today.

Dr. Sarah Oh:

To add to your point, today, there was an article about satellite broadband. So, satellite broadband is coming online. I mean, that might be something in five years that we all take for granted. We don’t have today, but tomorrow… 

Jonathan Nuechterlein:

Yeah, so I take it those are low earth orbiting satellites that don’t present the speed of light problems that geosynchronous satellites present. 

Dr. Sarah Oh:

And also, the project Kuiper, the Amazon project, I think those might also be higher up. They’re doing 4k video. But in your paper, I wanted to bring up, you raise evidence of investment per capita as evidence of competition, and I thought that was a really interesting point that in the United States, between 2003 and 2015, average annual telecom capital investment per capita is near a world leader. It’s only surpassed by really small countries like Switzerland and Luxembourg, and then it’s far greater than the OECD average. How does the US compare with Europe, let’s say, for competition. 

Jonathan Nuechterlein:

To begin with, we have more of what we would call facilities-based or intermodal competition than these countries. So, in many foreign countries, and I think the Broadband Plan in 2010 made this clear, there’s one provider of fixed-line broadband service, and it’s the legacy telephone company, and they’ve invested in their facilities often with government support. What’s a little distinctive about the US market is that broadband began not with the telephone company, but with cable companies, and the telephone companies weren’t willing to cede the market to the cable companies, so, they built parallel infrastructure. And so right off the bat, because the market structure favors intermodal competition, you would expect to see more investment dollars.

Scott Wallsten:

One of the differences between here and Europe is their focus on facilities sharing, infrastructure sharing. And you talk a lot about what we’ve learned about it here, and the sort of disincentives to investment it seems to have created. I don’t know if you want to talk a little bit more about what we’ve learned about that, but also, are you concerned that that is coming back or that there’s a risk of that coming back here in the US? 

Howard Shelanski:

I’ll answer the first part of that, at least to start. You know, I think the lesson of Europe is interesting and it’s just a fundamentally different history because they had, you know, state run monopolies that then emerged in sort of this new world, and it was a state facility to which unbundling was being provided. And Europe is often held up as an example, because there are certain places in Europe where you can get very cheap service. You can get a lot of video, a reasonable degree of broadband, free telephony, all bundled up for, you know, €40 a month. And that looks like a very good deal. On the other hand, they have had significant quality issues and investment issues in Europe. And I think that a lot of the recent empirical work and analysis that’s coming out, suggests that Europe is not in the best model. And to be sure, if all you’re looking for is a static kind of burst of what looks like competition, requiring facility sharing is a good way to get that. And it might last as long as the facilities reflect current usage patterns and can be maintained. As for the facilities don’t meet current needs—and demand is always an evolving in the broadband space, how we use broadband, what we use it for, how much we need—the dynamic story in Europe has been a lot less good. If we also can do some of those studies comparing how well European networks have held up to the pressure of the pandemic compared to what’s happened in the US, those also suggest that the level of investment here has really been reflective of keeping up with current needs and, you know, really meeting current demand patterns as opposed to falling short, which has been increasingly happening in Europe. So, I think that one of the things that we’re learning and, you know, again, there’s a lot still to be learned and a lot still to be studied, is that the investment incentives do matter. And the ability to gain the returns on the investment in your network, as opposed to dividing those returns by somebody sharing your network, is going to be a very important determinant of how readily one continues the level of investment that we’ve seen remain quite robust here in the United States. 

Scott Wallsten:

And what about the prospect of that coming back here? Is that something we need to worry about? 

Jonathan Nuechterlein:

Events may overtake proposals for it. I think as it becomes clear that more and more young people in particular are relying mostly or entirely on mobile devices and tethering them to their laptops and making full use of mobile alternatives, it will become clearer and clearer that it’s somewhat artificial to have an additional layer of bundling requirements for one particular type of technology. It’s not even clear to me how you would unbundle the cable infrastructure to begin with. The telephone companies had a long history with having their facilities unbundled, first under the Computer Inquiries, and then later under the ‘96 act. Now, I’m not even sure that their present-day broadband infrastructure is particularly amenable to such an unbundling, but at least you can kind of conceptualize generally what it would look like. But with respect to cable companies, they’ve never been subject to these unbundling requirements. I remember like 20 years ago, when we were talking about open access proposals at the FCC, no one could really ever explain to me exactly what would happen if such requirements were imposed. There wasn’t any straightforward sense of what would happen. The FTC actually imposed open access requirements on Time Warner Cable in 2001, I think it was, in approving the Time Warner-AOL merger. That experiment just fizzled: there weren’t these ISPs out there that really wanted to lease those last mile facilities, and there wasn’t really a straightforward way for them to do that in the first place. So, you see a lot of academic advocacy for unbundling requirements for broadband facilities, but not really a plan as to what it would actually mean as an engineering matter. I also think that there are pretty significant legal obstacles to it as well. You know, that’s not going to keep people from continuing to advocate, but I think we’re some ways away from that advocacy ever actually reflecting real regulatory requirements.

Scott Wallsten:

An issue that’s related to the sense that it’s about who should have access to high cost facilities is net neutrality, which I think nobody likes to talk about, but it’s probably important to talk about because we do still hear about that. 

Jonathan Nuechterlein:

I want to talk about it.

Scott Wallsten:

Oh, excellent. Then you’re on. Well, I guess first of all, since the definition is always a little different, what do you think a net neutrality is, and how should we be looking at it going forward?

Jonathan Nuechterlein:

It is a slogan. And you know, we prefer to think in terms of concrete proposals and what they would mean as an engineering matter. Howard and I are pretty explicit in our paper that we believe in baseline no-blocking, no-throttling rules. Although, we don’t think it’s likely at all that ISPs, in the absence of such rules, are going to engage in widespread blocking or throttling because there’s now such a market norm opposing such practices, and any ISP that engaged in them would face extremely angry customers who would vote with their feet. That said, you know, we do believe that any net neutrality restrictions need to be clear and need to be focused on actual economic problems. So, they either need to focus on serious concerns about monopoly power and ways in which it can be used to harm consumers, or net neutrality requirements need to be justified by some sensible concern about preserving the externalities of an open internet. If a particular practice doesn’t necessarily reflect an abuse of monopoly power, particularly if there is no one with monopoly power, and if it doesn’t threaten the essential openness of the internet, we are hard pressed to see a policy justification for that sort of regulation given the harms that unnecessary regulation can impose on any industry.

Howard Shelanski:

And then just to add briefly,I agree with Jon. The original net neutrality debates really have this sense of the “paradise of the common”, preserving the “paradise of the common.” The internet was this great thing, and there was this enormous amount of edge innovation that created tremendous externalities of a positive kind, and so we needed to make sure that the “paradise of the commons” was not corrupted by those who could control last mile access. And so, the original idea behind network neutrality was sort of a nice one, nothing that would prevent all these edge innovators from reaching billions of consumers and creating these wonderful benefits and externalities. And that has a very great appeal and who could disagree with that? One of the really interesting things to me though, is when it came to the actual policy debates and the need for regulation, nobody could point to meaningful interferences with the “paradise of the commons”.

And so a lot of people who were advocating for network neutrality were advocating something much stronger than that in order to preserve the “paradise of the commons”, which was not really being interfered with. They wanted rules that also interfered with quite reasonable kinds of preservation of the commons in terms of mediating traffic by large content delivery networks and others who were putting a lot of traffic onto the internet. And that’s where, you know, these disputes between large players were being held up as reasons that you needed to have, you know, very strong forms of network neutrality regulation. 

And I think that, Scott, you’re right to point to the definitional issue. Preventing blocking and throttling, preventing interference with edge innovation and access to consumers by all these innovators on the internet is a great thing. If we start to move down towards mandatory carriage of large amounts of commercial traffic— which has its own sort of form of infrastructure sharing, you know; you’re not unbundling it to someone else who’s reselling it or packaging it in their own service, but you’re making it available—if those terms start to get regulated, if that’s what net neutrality is about, then I think there’s a really serious question to be had about whether it’s necessary, and whether the commercial kinds of arrangements that have grown up over the years on the internet, aren’t adequate. And to Jon’s point, that requires, I think, a much more serious economic analysis of, you know, what are the problems and what’s the right solution to them? Net neutrality is sort of this big term that covers all of it.

Jonathan Nuechterlein:

There are a lot of boogeyman in the net neutrality debate. They’re not even real business practices, much less threats to the internet. We keep hearing about paid prioritization. What is that thing? It hasn’t existed, ever. And the net neutrality rules were repealed almost four years ago now, have we seen paid prioritization arise? No. No one really knows what it is. 

I think what you see in these debates is attacks on certain retail practices that offend people’s sense of neutrality in the abstract, rather than any actual underlying economic concern. So, for example, sponsored data is economically indistinguishable from a bundled discount arrangement, but it nonetheless strikes people as not neutral to have an ISP pair up with a content provider to zero rate particular content. It doesn’t pose a threat to the integrity of the internet, but it does offend certain people’s ideals of neutrality. And I guess ultimately, the perspective that Howard and I bring is that government intervention can’t rest on people’s sense of offense to an abstraction. You need to tie it to some kind of economic harm that would otherwise occur in the absence of government intervention.

Scott Wallsten:

I also wonder if the debate might be somewhat different this time. I mean, things have changed. One is that I think during the pandemic, people may now realize that there might be a benefit of something called paid prioritization, if we could figure out exactly what that meant.

Jonathan Nuechterlein:

I agree. I’ve always thought so. I think it’s kind of a shame that we don’t have it, but we don’t have it.

Scott Wallsten:

I mean, we used to always give the example of telemedicine and people would always laugh and say, “Oh yeah, that’s never going to happen,” but now we’re all doing it. 

Jonathan Nuechterlein:

Well, that’s because we do have prioritized links. I mean, we have these managed services. Whenever I bring that up, you know, the usual response is that those are not part of the public internet. So, the thing that is part of the public internet that is defined as paid prioritization by net neutrality advocates, is not a thing that exists. It hasn’t existed for years, even though there’s been no prohibition on it.

Scott Wallsten:

I mean, you could imagine we want higher quality connections to schools for kids, so their lessons don’t drop out.

Jonathan Nuechterlein:

Yeah. I mean, there’s never been an FCC order that prohibits quality of service guarantees for dedicated networks.

Scott Wallsten:

Well, you can’t really have a discussion about broadband without talking about the digital divide, because that’s another thing that the pandemic has brought into stark relief. You talked a little bit about sort of the principles for how we might deal with the digital divide problems. Can you talk about that a little bit?

Jonathan Nuechterlein:

There are two digital divides. I mean, there are many digital divides, but there are two main categories of digital divides. They’re essentially an affordability divide between rich and poor, and a geographic divide between rural and urban. So, in the one case communities that need affordable broadband to participate fully in the economy and society, need help getting the high-quality broadband services that they need for those purposes. That’s an affordability and adoption divide. There’s also a supply divide in terms of what sources services you can get in more remote areas as opposed to more metropolitan areas. I’m speaking to you right now from western Albemarle County, where we have fewer choices here than folks do in DC. So, you know, we think that in general, the government has been on the right track and the Broadband Plan was on the right track in proposing targeted and more effective subsidies as a mechanism for addressing these digital devices. These are serious policy concerns that really should be the focus of the new administration and will be. I mean, there, there’s no way around it. These are widely acknowledged problems that need to be fixed. The fix comes in the form of targeted subsidies. Every once in a while, you read advocacy saying that if only we more intrusive government intervention into networks, we could somehow close these digital divides…

Scott Wallsten:

I’m not sure they put it exactly like that.

Jonathan Nuechterlein:

…that struck us as extremely counter-intuitive. 

Howard Shelanski:

The only point I would add to that is the digital divide is a genuine problem. And if we’re going to really talk about the problem seriously, we need to make serious commitments to how we address the problem. There are ways to address the affordability gaps, there are ways to address the supply gap. A targeted subsidy, a reverse auction of subsidies, there are all kinds of solutions that are available. Rate regulation or facilities sharing regulation—typical economic forms of regulation of the kinds people are talking about, sort of traffic carriage mandates, things like that—those are not going to solve that problem. Those problems really need to be solved directly, and those are going to be the most efficient and effective ways of solving those problems from a social cost standpoint.

So, there often seems to be a disconnect in the policy debates about the digital divide. People talk about the number of providers in a particular place, then say, “We need to regulate these providers because there’s a digital divide.” That is a non-sequitur without being extremely specific. What we need is policies and regulations to address the digital divide. If those happen to be policies and regulations directly on existing carriers, by all means, make the proposals and let’s see if they’re going to make things better and solve that problem. But the way that it gets discussed often in sort of casual debates, or a lot of the reported debates, is not really focused on solutions to the particular problems of uptake, of affordability, of supply and construction. 

Jonathan Nuechterlein:

And one thing that we point out is that the government obviously has implemented a series of subsidy regimes that are designed to close these divides, and so we’re not proposing anything particularly radical here. Although, there is a lot of room for reform. So, for example, the Lifeline Program needs serious reform. Congress should make clear that money can go directly to anchor institutions, to digital literacy efforts, and so forth. In addition, the contribution system that props up the Universal Service Subsidies today is completely irrational. It doesn’t rest on appropriate revenues. It rests on fees assessed against this arbitrary subset of services that don’t even include broadband. I mean, they include voice telephone service and special access services offered by telephone companies. It would make a lot more sense and be much more consistent with efficient investment incentives for the subsidies, like other subsidies, to come from tax revenues rather than from telecommunications-specific fees.

Scott Wallsten:

And it seems unlikely that that’s going to happen though, even though it’s an incredibly regressive system.

Jonathan Nuechterlein:

Well, every once in a while, somebody needs to remind the world that it’s a really, really good idea.

Scott Wallsten:

That’s true. Absolutely. 

Jonathan Nuechterlein:

There are some programs that rest on appropriations, but the big one, the one that is administered by the FCC, does not rest upon appropriations.

Scott Wallsten:

Right, right. It would be good for people to remember that, particularly if there’s talk of expanding the program, because then that just increases the burden on the mostly low-income people who pay that tax. One last question, I don’t really know how anybody figures out what this would necessarily mean, but what happens if we’re stuck with a 2-2 FCC next year. If Biden can’t get of third person confirmed, what does that mean for broadband policy? Do you see that as a good thing because they’ll keep them from being over-regulated, or is it a bad thing because we can’t get reforms that we need? What does a frozen regulator mean?

Jonathan Nuechterlein:

It’s bad because there’s a lot of work the FCC needs to do that isn’t related to the hot-button, politically sensitive issues that we’ve been talking about, and it would be a shame if the FCC couldn’t accomplish a lot of that extremely important work because of partisan divisions and the absence of a tie-breaking vote.

Howard Shelanski:

I couldn’t agree more with Jon. I mean, many of the things that they will do that are less visible to the public are actually essential to achieving a lot of the goals of greater competition, more access, a lot of the spectrum policy that’s related to that. And it would be, I think, a terrible thing to have an agency that was just occupying space and not solving these problems.

Jonathan Nuechterlein:

I mean, obviously one hopes the commissioners can put aside partisan differences and reach consensus on many of these issues, but I haven’t seen an FCC this internally bitter, ever. When I joined the FCC originally in ‘95, ‘96, the agency produced this thousand-page Local Competition Order implementing the Telecommunications Act of 1996. There was not a single dissent on any issue addressed by that order. It’s unfathomable that that could happen today.

Scott Wallsten:

That is really amazing. Well, I think we’re about out of time. On that note, let’s think about when there were no dissents. Maybe we’ll come back to that someday. Thank you so much for joining us today. I really enjoyed your paper, and I recommend it to everyone. We’ll have a link to it in the description.