Rural spending on broadband is an investment: despite recent report

Over my Christmas holiday I decided to read Gregory Rosston and Scott Wallsten’s report: The Broadband Stimulus: A Rural Boondoggle and Missed Opportunity. I had been warned that it wasn’t the most rural-friendly document out there. I remember Wallsten’s presentation to the original Minnesota Ultra High Speed Broadband Task Force in 2008. There he declared that there was no broadband crisis. That while compared internationally, the US wasn’t the best in broadband, we weren’t the worst either. And we had plenty of time to develop good policies. His big issues then were lack of good data and an emphasis on cost-benefit analysis on any proposal. His “inconvenient recommendations” included the following:

  • Remove entry barriers
    • Make more spectrum available
    • Streamline rights of way
  • If you want to increase broadband adoption
    • Focus more on low-income people than rural areas
  • If you want to increase broadband investment
    • Do not subsidize all new investment
    • Consider innovative approaches, such as West Virginia’s reverse auction

After reading the latest report, I can say that Wallsten remains consistent. The report starts with three assertions…

In this paper, we focus on three problems with the rural subsidy programs managed by NTIA. First, there is little economic rationale for subsidizing rural areas. Second, even recognizing that political realities might trump economic rationale and cause the political desire to subsidize rural areas, NTIA’s mechanism for selecting projects appears to have been largely incoherent. Third, the short-term infrastructure grants and loans could well lead to pressure for long-term operating subsidies from the Federal Communications Commission (“FCC”).

I’m going to start with the middle problem – because I can best understand that complaint. The stimulus awards often seemed capricious. The process was muddled and lacked transparency and that I think led to questions about how the awards were made. At one point states were asked to weigh in on proposals – some did some didn’t. And the NTIA and RUS didn’t always seem in synch with states. The path to success was unclear and that led to frustrations for applicants and likely applicants. Then as you may recall the stimulus funds were awarded before the National Broadband Plan was published, which didn’t help. I remember it felt like providers and proponents were asked to row – but not given a direction. So I can see some of the points that Rosston and Wallsten make. Ironically, the NTIA was looking for “shovel-ready” projects but they weren’t very shove-ready themselves.

I’m not is such agreement with their other points…

First – the idea that there is little economic rationale for subsidizing rural areas. A 2011 Minnesota Rural Partners report demonstrated that an investment in rural areas (at least Minnesota) reaps returns in both rural and urban areas. For example (from the report)…

If rural Minnesota’s manufacturing cluster experiences a 6 percent growth in output ($1 billion), the urban area picks up 16 percent of all the jobs gained and 38 percent of all additional output.

And as Jane Leonard from MN Rural Partners points out – the investment goes beyond economic…

There are three essential elements for life 1) food, 2) water and 3) energy. Cities are reliant on their urban counterparts for these elements. We need to be good stewards of these elements to safeguard our future; we ignore them at our own peril. Part of good stewardship is ensuring that rural areas have the infrastructure they need to thrive.

Finally I have seen others point out that Rosston and Wallsten’s report forgets Metcalfe’s Law – the value of a telecommunications network is proportional to the square of the number of connected users of the system. I think this is especially true from a government perspective. Building the infrastructure to provide healthcare, public safety and educational services online will reduce costs to serving rural areas

Finally Rosston and Wallsten claim that the short-term infrastructure grants and loans could well lead to pressure for long-term operating subsidies from the Federal Communications Commission (“FCC”). Yes that may be true. If it weren’t true it might indicate that there is a business case to be made to serve these areas and then I think commercial providers would be more likely to step up to the plate and provide service. This is a tricky point because it relates more to personal ideology on government spending than simply broadband. But I think – especially given the points made above – that the government is going to have to step in to support the most remote last mile service. At the Connect Minnesota broadband summit a few weeks ago, I heard the providers themselves say that government intervention is required to build broadband to reach everyone. Perhaps once the infrastructure is built and adoption is optimized, a business case can be made for a business to provide services but until then, it might take continued government subsidy. The question then I think becomes, can that expense be offset by reduced spending in other areas. For example, can broadband reduce plowing costs?

In terms of spending on rural broadband adoption programs, the Blandin Foundation that spending there is an investment too…

Over the 18 months under comparison, all of the DCs [Blandin MIRC demonstration communities] grew their rate of broadband adoption at an average rate of 12%, compared with a rural Minnesota statewide average of 10.3% for the same period. In both 2010 and 2012, all of the DCs scored well in broadband compared with national rates of adoption in comparable rural areas. Average penetration in the DCs in 2012 was 67.1%, however, which was still 5% below the rural statewide average of 70.6%.

A couple of other assertions in the paper that concerned me. Rosston and Wallsten seem to think this is only about reducing costs…

As a result, the subsidy may have reduced the nominal price of the broadband service, but not the cost of living in the rural area and subscribing to broadband.

The truth is there are areas (Sibley and Renville Counties come to mind) where costs isn’t the issue – access is. That’s not to say cost isn’t an issue in many rural areas, but before you can look at cost you have to look at access and if we’re talking about the most remote last mile – access is an issue.

Also Rosston and Wallsten seem to think all rural areas are alike.

Our proposal for BTOP competitive bidding would base support on the cost (as measured by its bid for subsidy) of the marginal supplier and use competition to increase efficiency. So, for example, even though only a single entity might be willing to serve a rural area in Texas, that firm would have to compete with firms that were willing to provide service in rural North Carolina and rural Montana.

Construction is not my long suit – but just as I’d rather ski in Grand Marias and farm in Le Sueur – I recognize that not all rural areas are the same. Also there are economies of scale – does the company in Texas already have staff there? Is there head end equipment in place? Or is there another business case to be made fairly unrelated to the cost of building broadband. (Such as the case with Google networks – providing broadband is really B Side of to their online advertising services.)

There’s my two cents on the report for all it’s worth!

This entry was posted in Funding, MN, Policy, Rural by Ann Treacy. Bookmark the permalink.

About Ann Treacy

I have a Master’s Degree in Library and Information Science. I have been interested or involved in providing access to information through the Internet since 1994, when I worked for Minnesota’s first Internet service provider. I am pleased to be a part of the Blandin on Broadband Team. I also work with MN Coalition on Government Information, Minnesota Rural Partners, and the American Society for Information Science and Technology.

2 thoughts on “Rural spending on broadband is an investment: despite recent report

  1. What did you think of NTIA’s response when asked to release the data that was used to award the grants? I find that response to be typical of how this entire program has addressed/responded to requests from the private sector that it now directly subsidizes competitors against – and not just in Broadband, but in Telephony and Video services.

  2. You mean the $140,000+ price tag to get the data? I always think that’s a low blow. Unfortunately I think it’s become a practice to avoid the Freedom of Information Act. I suspect the authors have the best counsel advising them – but often there’s a way to rephrase the request, especially if the goal is to get the info in aggregate, not individual proposals. Being the super advocate for transparency, I think if you submit a proposal for government subsidy that you open that proposal up to the public – but I suspect there are businesses that would disagree and/or that there are businesses would then not apply if that was a caveat.

    Part of the reason for government subsidy in my mind was the responsibility/opportunity for the businesses to share what they learn with other businesses – that way a wider group has the opportunity to learn from the process. And by process I mean broadband deployment and adoption – not the grant process.

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