NECA says all aboard the packet train

Competition alone is not a realistic solution to the universal availability of broadband services, National Exchange Carrier Association Director of Demand Forecasting and Rate Development Victor Glass said today while introducing an outline of the organization’s latest study on the state of broadband in rural America.

The study, “The Packet Train Needs to Stop at Every Door,” was undertaken to supply policy-makers with financial and anecdotal information they could use when evaluating reform proposals that could affect the ability of NECA member companies to provide state-of-the-art services, according to Joe Douglas, vice president of government relations and communications for NECA.

“We want to give policy-makers a feel for what’s going on among rural telephone companies,” Glass said. "We ask a basic question: What will it take to make a basic triple-play [service] package universally available in rural telephone company serving areas?”

The answer to that question is approximately $11.9 billion for starters to upgrade the outside plant, or about 5.9 million local loops, alone. That doesn’t include ongoing maintenance and support or the core bandwidth increase that would eventually be required to support the increase in traffic. Nor does it include the cost of acquiring and delivering the content that makes up a triple-play package.

“Delivering the service is not cost free. That’s the main point,” Glass said.

$6.78 billion of that cost would go to the category known as the “unserved market,” which is the category least likely to lead to a return on investment.

While Glass does not try to tell policy-makers what to do, he does suggest they take a longer and broader view of the market, particularly the rural market. “We stick to the facts,” he said. “But in the past Universal Service and Interconnect Compensation were the lifeblood of the rural telephone company’s revenue stream, so by implication it is important to the future [as well].”

The study documents rural market trends such as how demand trends are moving toward broadband and how companies are responding to that demand. It looks at the actual costs of upgrading local loops to the 8 Mb/s minimum in order to handle multimedia services as well as the cost to deliver triple-play services and their expected revenue generation. The report also looks at the implications of the broadband revolution on Universal Service and Interconnect Compensation reform.

While the penetration rate for DSL in the rural markets has kept pace with the market in general--12% for rural telcos and 14% nationally at the end of 2004--the gap will widen as rural telcos try to reach their most inaccessible customers, where NECA finds that “upgrade costs are significant and economically prohibitive.”

Using the assumed minimum requirements of one voice line, two digital video lines and a 1.544 Mb/s Internet access connection, NECA determined the cost to upgrade facilities to this minimum for the different categories of customers a rural telco serves. Cost ranged from $998 for a customer served directly out of the central office to $3000 for each customer served with fiber and $4865 dollars to reach as yet unserved customers. Incremental costs for delivering the service come to about $92.91 per month, which Glass said is not very profitable when assuming a $99 price for this basic package.

“Broadband providers in rural-serving areas are going to have to get creative to meet the needs of their customers,” Glass said. “And policy-makers will need to look beyond traditional telephone company boundaries to really develop their policies--and they are--but they will have to have a broad view of the market to make broadband a reality in rural America.”

Because video is driving demand for DSL service, it is important to the overall triple-play package and in the long run should be considered an essential service, Glass said.

“Although some people don’t think video is critical, the market is headed toward integrated multimedia services where voice, video and data will combine in different ways and those are the types of product that will be [available,] Glass said. “I really do believe that in a few years they will be considered critical just the way voice service was considered critical in the 1930s. Traditional voice service is eroding and customers are demanding triple-play services, so it is a critical part of the path toward the future of multi-media services.”