Promoting innovation and the deployment of advanced telecommunications services to businesses

Contemporary Economic Policy, April, 2008 by David J. Gabel, Kenneth Guang-Lih Huang

I. INTRODUCTION

The ultimate goals of the Telecommunications Act of 1996 (Preamble) are "to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies." In the terminology of economists, the Telecommunications Act is concerned with both static consumer welfare (the price and quality of a service) and the dynamic efficiency of the market (providing firms efficient incentives to innovate).

The desire to spur innovation has motivated many regulatory policies in the past 30 yr, most notably, the decision to break up AT & T (U.S. v. AT & T, 1978, p. 3). Because innovation in telecommunications is vital for the health of the economy (Paltridge, 2001), policy makers are rightly concerned about the impact of their policy decisions on the deployment of advanced telecommunications services (ATS). However, while promoting innovation and the deployment of ATS have long been widely held objectives, policy makers and economists are still engaged in a raging debate regarding the optimal market structure and regulatory policies necessary to provide firms the right incentives to innovate and deploy new services (Federal Communications Commission, 2003a).

In this study, the authors empirically evaluate how various policies (such as promoting competition, price cap (PC) regulation, subsidies, and the transfer of telephone exchanges to companies that are allegedly more focused on serving rural communities) simultaneously affect the deployment of ATS by incumbent local exchange carriers (ILECs). This paper begins with a brief summary of ATS and the technologies used to provide them. Section III discusses policy issues affecting the deployment of the services and technologies outlined in Section II. Section IV describes the data, while Section V highlights the statistical model and details the empirical findings. Section VI concludes.

II. DEFINITIONS

Broadband is a term that describes the capacity of a communication channel. According to the Federal Communications Commission (FCC), "advanced telecommunications capability is the availability of high-speed, switched, broadband telecommunications that enables users to originate and receive high-quality voice, data, graphics, and video using any technology." (1) ATS include services such as packet switching, digital signal level (DS) technologies, frame relay, asynchronous transfer mode (ATM), and synchronous optical network (SONET)-optical carrier (OC) transport.

ATS essentially consist of a few different modalities which businesses may select from based on needs, prices, capacities, and complexity concerns. Business customers face a decision tree where they must first decide if bandwidth or bandwidth plus network intelligence is required. If only bandwidth is required, the business may seek transport in the form of DS technologies or the higher capacity, more flexible SONET-OC architecture. In these situations, the role of the ILEC is limited--it merely rents out a share of its network. For this reason, the authors broadly categorize these forms of transport as DS and OC, respectively. Alternatively, if the business customer needs network intelligence in addition to bandwidth, they may choose packet switching using frame relay or ATM. In this case, the ILEC provides certain levels of switching, network control, and security in addition to bandwidth.

Network services and technologies such as packet switching, DS, frame relay, ATM, and SONET-OC are summarized in Table 1. For readers to get a better feel for these services, Table 1 also provides a typical example of tariff products under each service, where they are employed, and how they are used.

III. POLICY ISSUES

"Widespread access to broadband capability can increase our nation's productivity and create jobs. Access to broadband can also meaningfully improve our educational, social, and health care services" (Federal Communications Commission, 1999, par. 2). The availability of different ATS also demonstrates the level of innovation a telecommunications company is willing to undertake.

As shown in Table 2, in 2001, packet switching was offered by ILECs in a minority of wire centers in the United States. Table 2 also illustrates that large Regional Bell Operating Companies (RBOCs) were about two and three times as likely to tariff packet switching as medium and small firms, respectively.

In the remainder of Section III, the authors describe some of the public policy issues that may influence a carrier's decision to offer the services and technologies described in Section II at a published tariff rate.

A. Rate of Return versus PC Regulation

Historically, there has been a great deal of debate regarding the form of regulation that would most likely spur investment by regulated firms and thereby accelerate the rollout of ATS. The discussion has focused on the relative merits of rate of return (ROR) versus PC regulation (Federal Communications Commission, 2000, pars. 15-16).