April 26, 2010
The lack of wired and wireless broadband coverage in much of rural America is a persistent problem that Internet service providers sometimes suggest is caused by actual or proposed federal regulation, such as the Federal Communication Commission’s Open Internet policy principles. This study examines eighty counties in twenty-nine states. In each state, it pairs counties with the highest rate of 3G and 4G wireless broadband coverage and counties with the lowest rate of such coverage. The primary finding is that more than 70% of the variation in wireless broadband deployment in those counties is accounted for by five variables unrelated to network neutrality or any other regulation:
• population density;
• median household income;
• number of firms per square mile;
• percentage of population classified as rural by the U.S. Department of Commerce; and
• whether or not 75% of the county’s area is within five miles of an interstate highway.
This result suggests that 8-to-10 percent of rural America is likely to be permanently redlined by the incumbent wireless broadband providers because in those areas population density, median household income, and levels of commercial activity are too small to permit efficient aggregation of demand and too much of its geographic area is too remote from primary infrastructure (Internet backbone, interstate highways) to permit cost-effective deployment. This creates conditions under which deployment to such rural areas would depress the rate of return of wireless broadband providers sufficiently that the stock value of those providers would be punished by financial markets. Thus, at least 8-to-10 percent of rural America is left with no market remedy for being on the wrong side of the digital divide. Only government intervention in the form of direct public investment in deployment of wireless broadband infrastructure and/or subsidized service to these areas will prevent their permanent, market-driven redlining.
The contention by wireless broadband providers that the enforcement and potential expansion of net neutrality regulation restrains investment finds no support in the evidence from rural America. It is not fear of network neutrality rules but rather the fear of punishment by financial markets for deployments that would reduce overall rates of return that explains the redlining of rural America. Following on the recent study by S. Derek Turner, showing that ILEC capital expenditure investment in wireline/fiber broadband increased both absolutely and as a percentage of total revenue after the 2006 AT&T/BellSouth merger (in which the FCC mandated net neutrality conditions for approval of the merger), this paper shows that capital expenditures by the top four wireless broadband providers similarly increased after the AT&T/BellSouth merger and that this increase was characterized by a steady rise in both capital investment and in the rate of change in capital investment. Neither the results of the Turner paper nor those of this study are compatible with the conclusion that network neutrality regulation is likely to constrain investment by wireline/fiber or wireless broadband providers. Wireless broadband providers were willing to make huge investments in deployment, but chose not to deploy in rural areas which threatened to reduce their overall rate of return. Net neutrality is not the culprit in the redlining of rural America; market dynamics are.
To read the full report click here.