Competition isn't just from cable and satellite anymore

The driving of the "golden spike" in May 1869 at Promontory Point in Utah marked the interconnection of the Western and Eastern portions of the transcontinental railroad, and the creation of a single mechanized transportation system to span North America. Notable was that the same locomotives and cars could run from one end of the system to the other without concern for track width. Although the government did not mandate this standardization, two government actions in 1862, at the height of the Civil War, were certainly catalysts. During that year, the United States Military Railroad Organization was formed to promote standardization among competing interests, and the Pacific Railway Act established the Union Pacific Railroad to reach the Pacific via public lands before 1872. One effect was that different transportation companies were now able to compete across the entire network, from end to end. If this were to take place today, we might say the government encouraged that there be a system with an open, unified and standards-based network architecture, but I digress.

Most in the telecommunications industry have finally adjusted to the idea that competition is not just between multiple service providers contending within the public telephone network, but also between owners of completely different networks. To wit, cable vs. telcos, cable vs. satellite, and so on. So far, they all serve their subscribers via their own networks, and if the FCC continues along its current course, it appears that individual incumbent providers will own the subscribers in their networks, rather than there being competition between multiple service providers within each of them. It is arguable as to whether this represents everyone's vision of competition.

With this as a backdrop, it is especially significant that a new type of telecommunications competitor is emerging: the public telecommunications service provider. These are service platforms built and managed by municipalities and public utilities that have taken it upon themselves to provide telecommunications-based services to residential and business subscribers.

How did these systems originate? Many public utilities and municipalities have built fiber networks with an intent to monitor publicly owned infrastructure within their service areas--for instance, a hydroelectric plant or a local power distribution network--or to monitor and control a region's irrigation systems. Because such systems tend to be in rural areas that require a long reach, the medium of choice has been optical fiber, having the potential to bring 100 megabit or even gigabit speeds to the customer. Because they were established by governmental organizations, these networks tend to have been funded through public bond issues or by government subsidy, or both.

Why are these entities considering offering telecommunications services to the public? Actually, there are a number of reasons. Some are based on practicality: As funding sources for some networks have become exhausted or have changed, service providers are faced with the prospect of either finding alternate funding sources or discontinuing operations. Others are managed by people that are sensitive to the need for economic development in their areas; leading them to research how they might attract it. Managers are beginning to reason that part of the solution might be to bring urban resources to the hinterlands by using their broadband networks. Resources such as university classes, the breadth of TV entertainment and news programming available in urban markets, and the possibility that local residents could suddenly offer their goods and services to the world via the Internet.

But how to fund this expansion into telecommunications services? One solution might be to seek additional federal funding. In fact, in pitching public broadband to the Senate's Commerce Science and Transportation Committee on October 1, 2002 (http://commerce.senate.gov), former FCC Chairman Reed Hundt even used the railroad analogy. Government support to the telecommunications industry is nothing new, of course. It took decades for telephony to appear in many rural areas. Telephone companies originally didn't see the need to make telephony universal, but rather saw it primarily as a tool for commerce. Those who were left out took it upon themselves to create telephone services on their own.  Hence the emergence of independent rural telephone companies. Government took an active role in the proliferation of telecommunications during the 1930s, coinciding with rural electrification, and the government loan programs that descend from these times are still in existence today. Why? Today, it's to span the digital divide, to foster economic development and to create new educational and occupational opportunities. 

In contrast, cable operators in rural and small markets continue to operate antiquated analog networks with a small number of channels because it's simply not economically feasible for them to convert it to the latest digital technology. This has had the effect of limiting access to the full range of TV-based informational, educational and entertainment services taken for granted in urban markets. Profitability goals take precedence, which is one of the reasons why rural telcos and satellite TV providers are experiencing success in providing TV services in such markets. So, why shouldn't public service providers try to capture some of this market opportunity if others won't? In fact, as organizations chartered to serve the public, might it be an obligation to do so?

In the public service provider scenario, the PUD or municipality furnishes the transportation infrastructure, and possibly even the storefronts, while the ISPs and content service providers, including companies that bundle TV programming for wholesale distribution, along with local and long-distance telephone companies function as retailers. Unlike the cable and satellite companies, which are closed systems that are increasingly vertically integrated with their programming, many public service providers are chartered to provide open access to any service provider, allowing these retailers to set up shop side by side.

All of this begs a fundamental question: Is it fair for public broadband telecommunications providers to compete with telecommunications business enterprises (whether they are publicly traded or private business entities)? Public service providers have a lower cost of transport, because they can use the rights-of-way used for electricity and water and even exercise a right of eminent domain. They can allocate the costs of their telecommunications services across other cost centers within their jurisdiction. They have immunities from paying the taxes that commercial enterprises must pay.

Predictably, many say it is unfair. To the private service provider, dependent upon serving its subscribers via its own private network, the public service provider represents a significant threat, from several perspectives. It's a threat to revenues--if a competitor were allowed within the cable operator's network, it would have to compete on merit, rather than by virtue of local monopoly. It's a threat to their business model as well. Yet the advocates of the public service providers will point to documented cases of predatory pricing, price increases well in excess of the rate of inflation and limited TV programming selection, as reasons to allow municipalities and PUDs into the mix.

Some advocates feel that if the public service provider phenomenon were to take its full course, the entire media business could be turned on its head.  Suddenly, as happened with the Internet before it, the consumer will have the power of choice. To get an inkling of what might happen to the media conglomerates, the ISP services and even long distance and local phone service providers, look at some of the Web services that we now take for granted. Look at Priceline.com, eBay, and Yahoo just to pick a few. In each case, the consumer is in control, not the service provider. Yet all of them have managed to develop profit-capable business models. And all of them are forced to compete on merit.

If local and regional governmental bodies decide to build such a broadband railroad, not to add value of its own, but simply to "build the railroad," and the federal government continues its historical support toward equalizing telecommunications access for all, will it be a good thing?  Only time will tell.

Steve Hawley is principal and consulting analyst of Advanced Media Strategies. He may be reached via his Web site, www.tvstrategies.com.