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Broadband telecommunications in rural America
Broadband telecommunications in rural America Emerging infrastructures for residential service
Andrew Calabrese and Donald Jung
This article reviews the recent history of rural telecommunications policy In the social signifithe USA and m cance of emerging patterns of infrastructure development in the residential mclrket. Rural America provides an inlrresting IabomWy for experimenting with the shared and divergent interests of two major players in broadband tehcommunlcatlons which are mainly at odds, namely the telephone and cable industries. These interests, and their significance for current political and economic developments in rural America, are analysed in detail below. A brief overview of rural telecommunications development in the state of Indiana is provided for illustrative purposes. Andrew Calabrese is an assistant professor in the Department of Communication, Purdue University, West Lafayette, IN 47907, USA. Donald Jung is an assistant professor in the Department of Communication, University of Missouri, St Louis, MO 63121, USA. Research for this paper was originally conducted by the authors under contract with the Indiana Economic Development Council (IEDC). Indianaoolis. IN. The views expressed are those’of the authors and not necessarily those of the IEDC. ‘Act of 21 April 1902, ch 563, 32 Statutes 164-167; and Act of 24 August 1912, ch continued on page 226
This article reviews recent developments in rural telecommunications in the USA, focusing particularly on the residential market. Communication policies have figured centrally in the development of rural America and in its integration into the national and international economies, going back at least as far as the period when ‘rural free delivery’ (1902) and ‘parcel post’ (1912) were introduced.’ At that time the federal government approved the subsidization of low-density, higher-cost delivery in rural areas in order to achieve service comparable with that which was then only available in high-density urban areas. The building of post roads, the staffing of rural letter carriers and the acquisition of delivery vehicles contributed to the monumental costs which were undertaken to achieve universal postal service in a country whose population in 1890 was 65% ‘rural’.* Among the beneficiaries of these subsidies were national retail companies such as Sears, Roebuck Inc and Montgomery Ward, who made their initial successes through penetration into rural markets by mailing catalogues, receiving mail orders and shipping goods by parcel post to those areas. Losers in this transformation were small-scale local merchants and publishers.3 As with the institution of postal subsidies, the federal government figured centrally in the installation and maintenance of rural telephone service. In 1949 the Rural Electrification Act4 was amended to enable the Rural Electrification Administration (REA) to provide low-interest loans not only to rural electric companies but also to telephone companies serving rural areas. 5 Today not only are urban-centred businesses able to reach rural areas through a combination of regular mail, telephone, parcel post and private express delivery services, but some companies now depend on such systems to run bases of operation from rural areas. Among the chief attractions in operating a national business from a rural locale are the lower real-estate and construction
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continued from page 225 389, 37 Statutes 557-559. See also W.E. Fuller, RFD: The Changing Face of Rural Indiana University Press, America, Bloomington, IN, 1984. *L. Garkovich, Population and Community in Rural America, Greenwood Press, New York, NY, 1989. 7. Veblen, Absentee Ownership and Business Enterprise in Recent Times: The Case of America, B.W. Huebsch, New York, NY, 1923, pp 148-155; G.L. Weil and C. Buettinger, Sears, Roebuck, USA: The Great American Catalog Store and How It Grew, Stein & Day, New York, NY, 1977. 4Rural Electrification Act of 1938, 49 Statute 1363. ‘Act of 28 October 1949, 64 Statute 948. See also US Department of Agriculture, Rural Electrification Administration, Brief History of the Rural Electric and Telephone Programs, USDA, Washington, DC, 1986. ‘MR. Montgomery, In Search of L.L. Sean, Little,- Brown, Boston, MA, 1984; ‘Enhanced PBX svstem helps cataloa merchandiser handle-as many as 7500 phone calls per hour’, Communication News, July 1986, pp 31-33; ‘Fostering advanced telecommunications in rural areas’, Telecommunications, November 1989, pp 51, 53, 73. 7Despite the contradictory pattern of urban crowding, research has shown a distinct preference for rural locales, particularly if amenities were comparable to those available in urban settings. J.M. Wardwell and D.L. Brown, ‘Population redistribution in the United States during the 197Os’, in D.L. Brown and J.M. Wardwell, eds, New Directions in Urban-Rural Migration, Academic Press, New York, NY, 1980; J.J. Zuiches, ‘Residential preferences’, in D.A. Dillman and D.J. Hobbs, eds, Rural Society in the US, Westview Press, Boulder, CO, 1982. *SW. Head and C.H. Sterling, Broadcasting in America, 5th ed, Houghton Mifflin, Boston, MA, 1987, p 104. ‘In 1977 the US Court of Appeals for the District of Colombia ruled that the FCC did not have the authority to regulate premium or ‘pay TV’, which opened up new opportunities for cable systems to do more than simplv retransmit broadcast signals. Home Box &fkze, Inc v FCC 567 F.sd 9 (DC Cir 1977), cerf den 434 US 829 (1977). loHead and Sterling, op tit, Ref 8, p 108.
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costs compared with urban centres and the relatively low cost of labour due to high unemployment. For example, L.L. Bean, the catalogueorder outdoor clothing and equipment company in Freeport, Maine, is not a quaint little company store but a high-profile, multimillion dollar business operation which utilizes sophisticated computer and telecommunications facilities.6 Through increased public and private efforts to diversify rural economies and reduce rural dependence on primary economic sectors such as agriculture and the extraction of raw materials, we are likely to see further movement of mobile, urban-based capital into rural locales and growth in the number of technical and professional occupational opportunities there. This movement seems reinforced in part by the longstanding American preference for rural and small-town living.’ Given federal efforts to subsidize rural economic development and diversification in general, we can expect that upgrades in the telecommunications systems presently available in most rural areas will accelerate accordingly. In this article we focus primarily on residential markets, although we recognize there are many potential indirect benefits to rural dwellers through the ‘trickle down’ effects of developments targeted to business markets. Our reason for focusing on residential service, however, is based on the assumption that federal spending on an upgraded and expanded public telecommunications infrastructure will have to benefit the broadest possible base of users, particularly in sparsely populated areas where costs per unit of service tend to be higher than in urban and suburban areas. We are primarily concerned with broadband services for residential users, consisting mainly of cable television at this time. Many forecasts anticipate the eventual emergence of a nationwide, public switched broadband network which can deliver video, audio and data services to private residences and businesses. While we do not predict when such developments will occur, or even if this general goal is realistic for all rural areas, we recognize that related efforts are occurring in a number of ways, including research and development, commercial investment and a wide range of public policy initiatives. After an analysis is provided of particular trends in rural broadband development throughout the USA, a case study of related activities in the state of Indiana is presented. While no state can be seen as ‘typical’, Indiana arguably illustrates some of the key experiences common to states with largely rural and semi-rural populations.
Hardware, ownership and control The history of cable television in the USA is one of humble origins, beginning in the early 1950s with the construction of small systems in rural areas with hilly terrains where distant signal reception via broadcasting was poor.* It was not until 1977 that cable television began to develop an identity as an industry distinct from broadcasting.’ There were fewer than 200 cable systems receiving satellite signals in 1977, only one-quarter of which carried premium channels, but there were 8000 systems by 1983, more than three-quarters of which carried premium channels. lo According to Broadcasting Yearbook, in 1990 there were 9900 operating cable systems in the USA, and there are 200 more franchises approved but not yet built. The existing systems serve over 25 100 communities, reach 53 million subscribers and have a
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Yearbook, 1990, p D-3. ‘*E.B. Parker, H.E. Hudson, D.A. Dillman and A.D. Roscoe, Rural America in the llBroadoasting
Intimation Age: Telecommunications Policy for Rural Development, Aspen Insti-
tute and University Press of America, Lanham, MD, 1989; H.E. Hudson and E.B. Parker, ‘Information gaps in rural America’, Telecommunications Policy, Vol 14, No 3, June 1990, pp 193-205. ‘v. Clearfield and P.D. Warner, ‘An agricultural videotext system: the G&n Thumb oilot studv’. Rural Sociolwv, Vol 49, 198;1, pp 28&!97; D.F. Huds% ‘Information highways’, Rural Telecommunications, Vol 7, No 1, 1988, pp 2S32; D.A. Dillman and D.M. Beck, ‘Information technologies and rural development in the 199Os’, Journal of State Government, Vol 81, No 1, January/February 1988, pp 2%
38; A. Deeb and T. Monroe, ‘Fostering advanced telecommunications in rural November areas’, Telecommunications, 1989, pp 51, 53, 73. 14Food, Agriculture, Conservation and Trade Act of 1990, PL 101-624, 23 October 1990. 15/bid, Set 2352 (b).
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household
penetration
telecommunications
in rural America
rate of 57.1% . Total industry
revenues
in 1989 were estimated at $15 billion.” The average cable customer lives in an urban or suburban area and can receive as many as 50 channels of television programming. In rural areas of the USA channel availability and the technical sophistication of systems are more limited due mainly to the higher cost per household of installation, maintenance and service. Unlike voice telephony, which is widely available in rural areas as a result of REA subsidies to achieve universal service, rural cable service has historically been treated as less essential and has not been subsidized. While the level of sophistication of rural telephony is also below what is available to metropolitan inhabitants,12 that appears to be changing as rural and semi-rural locales become visible sites for experimentation with advanced telecommunications. l3 Consistent with these efforts, the $54 billion omnibus federal farm bill of 1990 contains provisions for increased REA spending in a variety of ways to encourage non-farm rural business development. This includes the funding of small-business ‘incubators’ (sites with shared facilities to support fledgling businesses) and allocations in the areas of health, education and welfare. Much of this spending goes towards the expansion and enhancement of telecommunications infrastructure and computer and information services targeted to rural dwellers.14 Implicit in the bill is the understanding by Congress of its own mandate to promote ‘universal service’ through ‘the development and enhancement of the rural telecommunications infrastructure in order to make modern telecommunications technology and services available at reasonable rates to the greatest practicable number of people in rural areas of the United States’.” Without such accountability the criteria for evaluating the future success or failure of innovation in rural telecommunications will remain a matter of concern to mobile urban capital and reflect less attention to economically depressed, relatively immobile and therefore vulnerable rural populations. Rural America seems to be an early testing ground for new cable technology, particularly through initiatives by telephone companies. Because of the minimal political resistance to telephone industry activities in the rural market, and due to the lower financial risk, telephone companies are able to ‘get their feet wet’ providing broadband services in rural areas much more easily than in urban areas. Nevertheless the geographical considerations for rural markets may dictate different technological and organizational strategies in rural than in urban areas, and perhaps even across rural areas. Among the major issues to be resolved is the type of system architecture which will prevail. Perhaps the most distinguishing feature at this time-relevant to both rural and urban markets - is whether or not a system is regulated as a ‘common carrier’, a matter of importance not only technologically but also in terms of industry structure. The different architectures of broadband delivery systems suggest different approaches to ownership and control, illustrated by the following discussions of conventional hard-wired systems, over-the-air systems and emerging switched broadband networks. Conventional hard-wired systems
Familiar to many, the conventional form of cable system ownership involves a single operator who, through a franchise agreement with a local municipal government, is the sole owner and operator of the
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physical facilities. The physical facilities include a central cable ‘headend’, the point where a variety of separately distributed programme channels are received and from which those channels cascade downstream to subscribers. With the exception of access channels mandated by the local franchise agreement, the system operator possesses broad editorial control over the mix of channels available on the system. Within this scope of discretion a multiple system operator (MSO) who also happens to own one or more cable channels is in a position to deny access to the system to a channel which competes for the same audience(s), which is a matter of some controversy.16 Under current federal cable laws municipal authorities have very limited control over such discretion once the franchise agreement is in place, which has raised concerns over anti-competitive consequences. The cable industry is increasingly coming under justifiable close scrutiny by congressional leaders concerned about the threats to competition and diversity posed by its present political and economic structure.i7 Leading the attack from the private sector is the telephone industry, whose own vested interests in becoming a major player are increasingly apparent. l8 Telephone carriers are prohibited from providing video programming or transmission facilities within their own telephone service areas unless they qualify for an ‘exemption’ under terms specified in the Cable Communications Policy Act of 1984 (the Cable Act) or unless they are granted a ‘waiver’ under statutory conditions specified in Federal Communications Commission (FCC) rules. The statutes do not apply ‘to any common carrier to the extent such carrier provides telephone exchange service in any rural area (as defined by the Commission)‘.” Based on these statutes, the FCC’s regulations specify that a telephone common carrier is exempt if the ‘incorporated’ or ‘unincorporated’ place in question has a population of 2500 or less and if the area is not included in an ‘urbanized area’.20 In its open docket on telephone-cable cross-ownership rules the FCC is considering the issue of ‘whether a revised population standard or a standard based on other criteria such as one related to telephone company size (access lines, revenues) might be acceptable’.21 In its specification of conditions under which a telephone common carrier may operate a cable system with a waiver, the Cable Act requires the demonstration that a cable system ‘could not exist except through a cable system owned by, operated by, controlled by, or affiliated with the common carrier involved, or upon other showing of good cause’.22 16W.0. Knox, ‘Cable franchising and the When these conditions are met, the Commission may waive the First Amendment: Does the franchising applicability of congressional restrictions. According to the relevant process contravene First Amendment rights?‘, Federal Communications Law FCC rules, waivers of the telephone-cable cross-ownership restrictions Journal, Vol36, December 1984, pp 317may be granted when: (1) a determination of public interest is made; (2) 335. the proposed service area has a population density of less than 30 “Senate Hearing 101-464, ‘Oversight of cable TV’, 16 and 17 November 1989. households per route mile of coaxial cable trunk and feeder line; and (3) ‘*A.M. Calabrese, ‘Telephone-cable crossno opposing party has a present intention to offer non-affiliated cable ownership: policy implications of video service.23 Relative to exemptions, which are granted automatically if the Communications common carriage’, and the Law, Vol 12, No 1, March 1990, relevant conditions are met, waivers are more difficult to obtain. pp 19-36. Telephone company involvement in cable operations is also con“47 USC (b)(3) strained by Section 214 of the Communications Act,24 which allows a 2047 CFR 63.58. “3 FCC Red No 20 at 5865. telephone company to undertake, within its own service area, construc**Set 613 [47 USC 5331 (b)(4). tion and leaseback arrangements. The FCC in reviewing Section 214 =47 CFR 63.56. applications focuses particularly on the potential for telephone com%ec 214 (47 USC 5331.
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panies to engage in anti-competitive behaviour through the monopoly of conduits or pole attachments to force their services on cable companies. Under Section 214 a telephone company may construct facilities to be used by others for video programming service in the telephone service area. Over-the-air systems
Beyond the use of standard AM, FM, VHF and UHF broadcast frequencies for delivering radio, television and teletext, microwave frequencies are also used. The most popular form in which such services is offered is ‘multichannel multipoint distribution service’ (MMDS). This is a delivery system which uses line-of-sight microwave to transmit four or more channels operated by a single company. MMDS or ‘wireless cable’ services reportedly had 350 000 subscribers in 45 communities in November 1989. A major advantage of wireless cable over hard-wired systems is that the cost of passing a home is much lower, although at present it remains a primarily urban phenomenon.25 Wireless cable may have a niche in rural markets, although its reliance on line-of-sight reception makes it effective only in areas that are extremely flat. Among all of the possible broadband delivery systems currently available, the greatest immediate potential for near-total rural market coverage is with satellite distribution. While the cost of laying cable or fibre in rural areas may be prohibitive without federal subsidies, the average total cost of reaching an entire rural region by satellite would be much lower. The cable and broadcasting industries, which deliver programming to scattered cable operators and broadcast stations, are predicted to remain the driving force for satellite-delivered consumer services through the 1990s. At present the home satellite market consists primarily of those households who own C-band dishes and can receive signals intended for broadcast and cable retransmission. Interestingly, the cable industry is becoming a significant player in direct satellite programme distribution as well. Today the high market penetration of cable service in the USA provides that industry with an organizational infrastructure which it has begun to use in handling local market sales, service and billing for C-band satellite broadcasting. A typical dish owner does not live in an area passed by a cable, but pays the nearest cable operator in order to legally receive unscrambled satellite signals. As is to be expected, piracy levels will be inversely proportionate to the pervasiveness of scrambling by individual programme distributors. Of the estimated 2 million private dish owners in the USA, approximately 700 000 pay to receive satellite signals while the remaining number do so ‘illegally’.26 Of course, efforts are also underway to launch or expand services targeted directly to consumers (as contrasted with cable systems and broadcast stations). Applicants to launch DBS services in 1992 include Hughes Communications, operator 25SenateHearing 101-464, op tit, Ref 17, of the largest fleet of US C-band satellites; Tele-Communications, Incorporated (TCI), the largest cable operator; and group broadcaster pp 423426; K. Pearce, ‘A chance arises’, Channels 1989 field Guide, December Hubbard Broadcasting.27 1966, p 119. An existing C-band service now targeted specifically to rural house28PersonaI interview with Mike Schroder. holds is run by the National Rural Telecommunications Cooperative Consumer Satellite Systems, Inc, Indiana: pdis, IN, 22 March 1991. Interviewed by (NRTC), a non-profit organization of 557 rural electric and telephone Andrew Calabrese. systems serving ‘sparsely settled’ areas of the USA. NRTC offers home *“Satellite broadcasting: cable connecsatellite service through its ‘Rural TV’ package, which contains 12 basic tion’, Broadcasting, 17 July 1969, p 56.
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scrambled services plus 23 scrambled services available as premium and optional channels. Bob Phillips, the CEO of NRTC, estimates that a home satellite dish can currently provide universal access to the 10-14 million rural homes that will never have access from a cable provider. However, he notes that NRTC’s programming costs per subscriber are much higher than the costs of providing the same programming via cable. For example, NRTC must pay 90 cents per household for Turner Broadcasting’s TBS channel while cable systems pay only 10 cents. NRTC has also not been able to get licences to carry all the channels it wishes to carry.28 Since there are close ties between some of the major cable multiple systems operators (MSOs) and major programming sources (like Turner and Viacom), third-party satellite services like NRTC are at a distinct disadvantage, the key obstacle being their lack of vertical integration (programming and distribution). NRTC’s long-term potential seems weak when compared with that of TCI, the country’s largest cable operator and shareholder in several cable channels. Not only does the service provided by NRTC require minimal technological infrastructure, which makes it easier to squeeze them out of the market, but NRTC’s market power also seems limited by the fact that the cable industry has significant control over available product. As a means of achieving greater competition, NRTC advocates that Congress ‘[rlestrict cable from control and ownership of both the content and the conduit of information to rural America’, and that a statutory mandate make it possible for third-party distributors of programming to compete with the cable distributors ‘on equal terms’.29 NRTC’s weak position highlights the fact that the vertically integrated cable industry increasingly monopolizes the availability of video programming not only in urban markets but also in rural markets. The new frontier: switched broadband networks
28Bob Phillips, ‘Telcokable crossownership is important, so is access to programming’, Rural Telecommunicstions, Vol 9, No 1, Winter 1990, pp 30-32; Senate Hearing 101484, op cif, Ref 17, pp 417422. ?Senate Hearing 101-484, op cif, Ref 17, p 422. 30Calabrese, op tit, Ref 18. 3’Third Computer Inquiry (Computer Ill), 104 FCC 2d 988, 1988; P. Huber, The Geodesic Network. US Department of Justice, Washington, DC, 198’7.
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Under telephone company ownership of broadband networks, one of two possible situations might occur. In the first situation a local telephone company would be allowed to own and operate the broadband facilities as well as provide information services, the latter either exclusively or as one among a number of competing information providers. In the second situation a telephone company would be permitted only to own and operate the transmission facilities, but not to provide information services. Telephone companies are already able to provide broadband transmission services, subject to certain restrictions discussed above, but they are now increasingly interested in becoming information providers as well. The question of telephone industry entry into the business of being video programming providers over broadband residential networks has become highly controversial in recent years. The telephone industry’s argument is that it is necessary to provide information services in order to ensure sufficient initial demand for the investment in new infrastructure to deliver a wide range of business and residential broadband services. A counter-argument might be that there is sufficient latent demand for the capacity as multiple information providers converge on a given market in the absence of a single editorial gateway characteristic of conventional cable operations.30 Through the principles of Open Network Architecture it is thought that greater interconnectivity and competition will occur at the local level among service and information providers.31 While today these
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32’Advance man for telco entry’, Broadcasting, 4 July 1968, p 35. 33’Commercial labs set pace in US photonit research’, Aviation Week & Space Technology, 30 January 1989, p 60. -P. Spenser and M. Wood, ‘NSF funds cooperative photonics and laser programs’, Laser focus World, Vol 26, No 1, January 1990, pp 19,23. 35GTE Telephone Operations, ‘The Cerritos project: update’, press release, November 1996. %ational Cable Television Association, Beneath the Veneer of ‘Telco TV’: Telephone Company Hype Versus Reality, NCTA, Washington, DC, nd. 37G. Fabrikant, Time-Warner constructing P-way cable TV system’, New York Times, 8 March 1991, p C5.
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principles are applied only to narrowband networks, they are guiding principles for future enhancement of broadband competition at the local level. Indeed, broadband services increasingly fall into the emerging vision of what should be defined as ‘universal service’. In 1988 the president of the United States Telephone Association suggested that the concept of ‘universal service’ should include not only voice telephone service but video as we11.32Today switched broadband networks constitute the technological core of visions for a new residential telecommunications infrastructure. As is now well known, the vision of many current and would-be broadband service providers is that fibre will be used to transmit video to the home. Introducing switched broadband networks involves more technological sophistication than simply laying the fibre. It also requires broadband switches in order to meet the demands for interconnectivity. Among the players conducting R&D in this area is AT&T, whose Bell Laboratories are presently working to develop a key component of the new generation of switching technology, namely a ‘photonic’ switching chip - or photonic integrated circuit - which responds to light at varying wavelengths. These ‘optoelectronic’ circuits integrate multiple interconnected guided-wave optical devices on a single semiconductor substrate. Other organizations involved in related research and development initiatives include United Technologies, the US Naval Research Laboratories, the Defense Advance Research Projects Agency (DARPA) and the US Air Force.33 Also significantly involved in photonics research is the National Science Foundation (NSF), which has brought together experts from universities, industry and the federal government. In 1984 the Lightwave Technology Program was established to focus NSF efforts on lasers and optical-information-systems-related components at four universities: the Center for Optoelectronic Computing Systems (University of Colorado at Boulder and Colorado State University), the Center for Compound Semiconductor Microelectronics (University of Illinois), the Center for Telecommunications Research (Columbia University) and the Center for Optical Circuitry (University of Arizona). Total NSF yearly funding for these centres is approximately $6.3 million, $3.3 million of which is to photonics research.34 Other efforts to develop broadband switches include that of GTE Corporation, which has developed its own electronic (not optical) broadband switch, now in limited experimental use to interconnect a very small number of residences with point-to-point video transmission and switching capabilities in its experimental cable system in Cerritos, California.35 Responding sceptically to the immediate and foreseeable technical feasibility of switched broadband networks, the National Cable Television Association (NCTA) has argued that the telephone industry is far from having developed ‘the final piece of their fiber puzzle’.36 While it clearly has its own vested interests in protecting the prevailing architecture now used by the cable industry, the NCTA seems correct at present. Nevertheless it is clear that there will be continued and increasing investment in R&D to complete the ‘fiber puzzle’ and that the technological threat is likely to come increasingly from formidable telephone industry entrants. Responding defensively, cable MSOs are moving as quickly as possible to install their own fibre systems which purport to render telco involvement in broadband residential services unnecessary.37
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At present, types: 0
0
38B. Winston, Misunderstanding Media, Harvard University Press, Cambridge, MA, 1986.
most residential
fibre experiments
are of two general
fibre-to-pedestal:
With these systems the ‘feeder’ cables which pass the homes may be made of fibre, but the transmission is converted from a light-pulse to an electronic signal at the point where a ‘drop’ line extends from the feeder to the home. With fibre-to-pedestal systems (also known as ‘fibre-to-the-kerb’), homes need not be equipped with the capability to convert light signals to electronic ones; fibre-to-home: With these systems it is necessary for subscribers to have the capacity to convert lightwaves coming into the home to electronic signals which can be used with existing electronic equipment. Some television manufacturers have begun to produce sets which can receive optical signals and convert them to standard electronic ones.
Forecasters tend to view fibre-to-pedestal as the more immediate means of implementing fibre systems for residential service. An obvious barrier to the diffusion of fibre-to-home systems at this time is the need for special conversion equipment by subscribers. Given that major corporations and federal agencies are investing in photonics R&D, it would seem as harsh to forecast the failure of the telephone industry to gain a significant technological lead as it would be foolhardy to predict a date when viable prototypes of broadband switches will be available. There is simply too much uncertainty, both technologically and in the marketplace. As Brian Winston observed in his analysis of several technological innovations in telecommunications, the ‘radical potential’ of a new technology can be suppressed by resistance from prevailing interests and institutional factors, both private and governmental.38 Nevertheless rural telecommunications development points in the direction of what appears to become a major thrust in the future, namely broadband switching. The conditions under which the push for a switched broadband network evolves, be they the introduction of greater or lesser competition in information services, are a worthwhile terrain of much further debate. Given the legitimate and ongoing congressional concerns over the vertical integration of transmission and programming in the existing cable industry, it hardly seems wise to encourage telephone industry movement in the same direction. This is particularly important under potential conditions in the rural policy arena where direct federal subsidies (through REA loans) are involved. Under conditions where an REA loan recipient owns and/or operates a vertically integrated (transmission and programming) cable system, federal subsidies would arguably consitute a form of state action to limit diversity in and access to the marketplace of ideas in rural television service. This would be the case particularly if there is a policy void in the creation of incentives to include third-party programmers on the system. While the REA presently does not directly fund telco instalment and operation of cable systems in rural areas, a move to do so would undoubtedly meet with resistance by the existing cable industry, and perhaps by public interest groups as well. In sum, the well-established and federally subsidized rural telephone industry is in an advantageous position for upgrading and expanding its services in the area of residential broadband communications when
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compared with potential competition from conventional cable television, ‘wireless cable’ and satellite distribution. That is not to say there will be no niche for these enterprises, which are potentially significant pieces in the mosaic of rural telecommunications services. However, it seems likely that the efforts to expand broadband services in rural areas will depend significantly on hard-wired system development, with switching being a potential area of further innovation. As the prevailing policy definition of ‘universal service’ comes increasingly to be redefined to include not only voice and data but also video programme distribution and other services currently not widely available in rural areas, the federal mandate to expand its financial support of broadband infrastructures is likely to occur in parallel. The trend in public policy to redefine ‘universal service’ to include broadband residential service is already evidenced by the recent omnibus federal farm bill, which enables the REA to make grants to public broadcasters ‘for the purpose of demonstrating the effectiveness of such systems in providing information on agriculture and other issues of importance to farmers and other rural residents’. Grants may be made for ‘capital equipment expenditures, start-up and program costs, and other costs necessary to the operation of such demonstrations’.39 With the proportion of rural residents engaged in non-farm occupations on the rise, it is difficult to determine what the limits will be on ‘other issues of importance’ to the new ruralists. A key concern with all future broadband subsidies should be over whether government funds are used to satisfy the television demands of privileged newcomers seeking to establish urban amenities in comfortable rural surroundings rather than being targeted to longstanding, disadvantaged rural communities. Federal subsidies of broadband services in rural areas should be tied to need, with the greatest emphasis going towards the preservation of existing rural communities rather than building high-tech rural havens. ‘Upscale welfare’ for affluent urban professionals chasing the good life in the country, and the likely inhibition of competition from other potential broadband service providers, do not appear to constitute a reasonable first order of federal priorities in rural subsidies.
Residential service in a rural state
=Food, Agriculture, Conservation, and Trade Act of 1990, op cif, Ref 14, Set 2386. 40Personal interview with Charles Hiltunen, Indiana Cable TV Association, Indianapolis, IN, 11 October 1990. interviewed by Donald Jung. 4 In the Matter of Telephone CompanyCable Television Cross-Ownership
RUk,
Further Notice of Inquiry and Notice of Proposed Rulemaking, 3 FCC Ftcd No 20 at 5857, 1988.
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The case of Indiana provides a useful illustration of the movement by telephone companies into rural broadband service. A total of 87 multiple system operators own cable systems in 342 cities in Indiana, serving a total of 890 355 households. By way of comparison, six telephone companies own and operate eight cable systems serving 14 cities in Indiana, passing approximately 5420 homes and having a total of 3807 subscribers.40 All the cable systems owned and operated by telephone companies in the state are serving areas classified by the Census Bureau as ‘rural’ (ie populations of 2500 or less), and all are operated by local telephone companies. Comparing telephone company involvement in rural cable service in Indiana with the national average is relatively straightforward. The FCC, in its open docket on telephone company-cable television crossownership rules, states that since exempting rural areas from restrictions in 1980 nearly 300 eligible telephone companies have filed for authority to provide cable service in rural areas.41 Dean C. Swanson, Chairman of the United States Telephone Association, in Senate hearing testimony
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that nationally over 200 telephone companies currently provide cable to rural areas.42 With the six Indiana telephone companies (three of which are REA telephone loan recipients) qualifying for ‘exempt’ status under the Cable Act and currently providing rural cable service, it can be concluded that the state is situated within the national average. While Indiana is not exceptional in terms of the level of telephone company provision of cable television service, there is one distinguishing feature. In addition to the above-mentioned telco cable systems, Ameritech Corporation and a local cable television company are planning a joint venture to experiment with the integration of broadband and narrowband service. Ameritech (1989 revenues: $10.2 billion) is the Chicago-based parent of the Bell companies serving Illinois, Indiana, Michigan, Ohio and Wisconsin, and owner of companies providing cellular communications, voice messaging, directories, audiotex services and lease financing. Its partner in the joint venture is Cardinal Communications, one of the five largest cable operators in the state, with seven offices serving approximately 80 000 subscribers. Ameritech and Cardinal Communications applied to the FCC for a Section 214 waiver to conduct tests in Indiana using optical-fibre cable to provide both telephone service and cable television programmes to residential customers in a development near Columbus, Indiana.43 Ameritech Services (the planning company for the five Ameritech Bell companies), Indiana Bell (the local operating company owned by Ameritech) and Cardinal Communications will test a fibre system manufactured by Broadband Technologies, Inc. The trial will connect fibre to both new and existing homes in Tipton Lake, a residential development approximately 45 miles south of Indianapolis. Approximately 20 existing homes will be connected by fibre, and 70-100 new homes will be built with access in the future. This digital video transport system will convert at least 35 cable television signals at Cardinal Communications’ Columbus, Indiana, office for fibre transmission through Indiana Bell’s switching centre to a remote digital terminal. There the television signals will be combined with telephone services. From these remote terminals, individual fibre cables will carry both voice and video signals to ‘pedestals’ in the residential area, where copper telephone wires and coaxial cables will carry the narrowband and broadband signals separately for the last leg of the route to individual households. Cardinal will control the cable drop to the home while Ameritech retains control of the twisted-pair drop.44 This is a variation of a ‘fibre-to-pedestal’ passive optical network, described above. Ameritech is also conducting a fibre experiment through its Ohio Bell subsidiary, which will initially carry narrowband telephone service beginning later this year in Cleveland, Ohio.45 While neither of these experiments represents significant movements towards the widespread commerical development of broadband residential services, Ameritech’s experimentation with fibre and its ability to draw in the future upon sizeable R&D resources (through Bellcore) suggest that it is now moving up the learning curve in hopeful anticipation of eventual 42Senate Hearing 101-464, op tit, Ref 17, congressional repeal of the statutory telco-cable cross-ownership bans. D 607. At that time Ameritech will presumably be ready with something close ‘3Ameritech new release, 26 June 1990. “Multichannel News. 2 Julv 1990. D 32. to a turnkey system design for rapid deployment in other markets. 45N&ional Cable Televisidn Association, Telephone Company Primer, NCTA, Knowledge and experience being acquired now will provide a valuable edge to Ameritech in competing with other RBOCs, independent telcos Washington,DC, May 1969, p 29. states
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and cable companies for the right to provide lucrative, densely populated urban markets with broadband delivery systems. Tipton Lake is small and relatively isolated, ideal for experimentation with new broadband systems and services, and the experiment enables Ameritech to learn both technically and organizationally in a low-risk, semi-rural (though not technically ‘rural’) environment.
Conclusions It is important that the cable-telco controversy, and others which exist or are emergent among telecommunications competitors, not function as smokescreens which obscure the benefits to the public in having greater diversity in and access to broadband services than is presently available. The issue of whether and under what conditions telephone companies are allowed to provide information services is one which will remain controversial, not only in the urban marketplace but in rural areas as well. The move by telcos to experiment with broadband services in rural markets may be - whether by design or by default - a case of the camel’s nose peeking under the tent of a major long-term push towards video common carriage. The telephone industry seeks in the long term to break the monopoly which the cable industry has on residential broadband service by replicating its narrowband dominance in the area of broadband development, perhaps eventually doing so in rural areas with federal subsidies from the Rural Electrification Administration. Today there are many fronts on which the expansion of telecommunications infrastructures is taking place in the USA, and no single approach to broadband service development is likely to satisfy the varied needs of different rural areas around the country. Of course there is great potential for hybridization among technologies, architectures and organizational forms, one example being the unique set of arrangements under which the Tipton Lake, Indiana, experiment is being conducted. As that project illustrates, the fact that the cable and telephone industries are at odds in the trade press seems to be an indication of short-term market positioning, not irreconcilable differences. It seems likely that we will see more technological convergence and institutional cooperation between the two industries in the future. That is not to say that the immediate interests of the US telephone and cable industries are completely compatible, for it is clear that each threatens the other. The cable industry maintains an integral link between its control over broadband infrastructure and programming, which weakens its arguments against the telephone industry entering and doing the same. In turn, there is a justified concern among many that telephone companies will engage in anti-competitive practices such as cross-subsidization from their regulated rate bases if they are permitted to provide video programming in their own service areas. Policy makers are accountable for making the field as level as possible, and one arena of rural broadband development where particular attention is warranted is that of public subsidies and public authorization of private cross-subsidization. Clearly there is a need for the state to play a leadership role in rural telecommunications development, but not for the purpose of fostering further telephone industry entrenchment. The state can potentially lead in further experimentation as rural areas increasingly become laboratories for technological and organiza-
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tional developments in broadband communications. As a resource for relatively low-risk experimentation (when compared with urban infrastructure development) rural areas should be treated by the state as arenas for developing alternative models which neither automatically favour the telephone industry nor prevent its potential to mitigate the anti-competitive vertical integration of the cable industry.
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Andrew Calabrese and Donald Jung
This article reviews the recent history of rural telecommunications policy In the social signifithe USA and m cance of emerging patterns of infrastructure development in the residential mclrket. Rural America provides an inlrresting IabomWy for experimenting with the shared and divergent interests of two major players in broadband tehcommunlcatlons which are mainly at odds, namely the telephone and cable industries. These interests, and their significance for current political and economic developments in rural America, are analysed in detail below. A brief overview of rural telecommunications development in the state of Indiana is provided for illustrative purposes. Andrew Calabrese is an assistant professor in the Department of Communication, Purdue University, West Lafayette, IN 47907, USA. Donald Jung is an assistant professor in the Department of Communication, University of Missouri, St Louis, MO 63121, USA. Research for this paper was originally conducted by the authors under contract with the Indiana Economic Development Council (IEDC). Indianaoolis. IN. The views expressed are those’of the authors and not necessarily those of the IEDC. ‘Act of 21 April 1902, ch 563, 32 Statutes 164-167; and Act of 24 August 1912, ch continued on page 226
This article reviews recent developments in rural telecommunications in the USA, focusing particularly on the residential market. Communication policies have figured centrally in the development of rural America and in its integration into the national and international economies, going back at least as far as the period when ‘rural free delivery’ (1902) and ‘parcel post’ (1912) were introduced.’ At that time the federal government approved the subsidization of low-density, higher-cost delivery in rural areas in order to achieve service comparable with that which was then only available in high-density urban areas. The building of post roads, the staffing of rural letter carriers and the acquisition of delivery vehicles contributed to the monumental costs which were undertaken to achieve universal postal service in a country whose population in 1890 was 65% ‘rural’.* Among the beneficiaries of these subsidies were national retail companies such as Sears, Roebuck Inc and Montgomery Ward, who made their initial successes through penetration into rural markets by mailing catalogues, receiving mail orders and shipping goods by parcel post to those areas. Losers in this transformation were small-scale local merchants and publishers.3 As with the institution of postal subsidies, the federal government figured centrally in the installation and maintenance of rural telephone service. In 1949 the Rural Electrification Act4 was amended to enable the Rural Electrification Administration (REA) to provide low-interest loans not only to rural electric companies but also to telephone companies serving rural areas. 5 Today not only are urban-centred businesses able to reach rural areas through a combination of regular mail, telephone, parcel post and private express delivery services, but some companies now depend on such systems to run bases of operation from rural areas. Among the chief attractions in operating a national business from a rural locale are the lower real-estate and construction
0306~5961/92/030225-12 @ 1992 Butter-worth-Heinemann Ltd
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continued from page 225 389, 37 Statutes 557-559. See also W.E. Fuller, RFD: The Changing Face of Rural Indiana University Press, America, Bloomington, IN, 1984. *L. Garkovich, Population and Community in Rural America, Greenwood Press, New York, NY, 1989. 7. Veblen, Absentee Ownership and Business Enterprise in Recent Times: The Case of America, B.W. Huebsch, New York, NY, 1923, pp 148-155; G.L. Weil and C. Buettinger, Sears, Roebuck, USA: The Great American Catalog Store and How It Grew, Stein & Day, New York, NY, 1977. 4Rural Electrification Act of 1938, 49 Statute 1363. ‘Act of 28 October 1949, 64 Statute 948. See also US Department of Agriculture, Rural Electrification Administration, Brief History of the Rural Electric and Telephone Programs, USDA, Washington, DC, 1986. ‘MR. Montgomery, In Search of L.L. Sean, Little,- Brown, Boston, MA, 1984; ‘Enhanced PBX svstem helps cataloa merchandiser handle-as many as 7500 phone calls per hour’, Communication News, July 1986, pp 31-33; ‘Fostering advanced telecommunications in rural areas’, Telecommunications, November 1989, pp 51, 53, 73. 7Despite the contradictory pattern of urban crowding, research has shown a distinct preference for rural locales, particularly if amenities were comparable to those available in urban settings. J.M. Wardwell and D.L. Brown, ‘Population redistribution in the United States during the 197Os’, in D.L. Brown and J.M. Wardwell, eds, New Directions in Urban-Rural Migration, Academic Press, New York, NY, 1980; J.J. Zuiches, ‘Residential preferences’, in D.A. Dillman and D.J. Hobbs, eds, Rural Society in the US, Westview Press, Boulder, CO, 1982. *SW. Head and C.H. Sterling, Broadcasting in America, 5th ed, Houghton Mifflin, Boston, MA, 1987, p 104. ‘In 1977 the US Court of Appeals for the District of Colombia ruled that the FCC did not have the authority to regulate premium or ‘pay TV’, which opened up new opportunities for cable systems to do more than simplv retransmit broadcast signals. Home Box &fkze, Inc v FCC 567 F.sd 9 (DC Cir 1977), cerf den 434 US 829 (1977). loHead and Sterling, op tit, Ref 8, p 108.
226
costs compared with urban centres and the relatively low cost of labour due to high unemployment. For example, L.L. Bean, the catalogueorder outdoor clothing and equipment company in Freeport, Maine, is not a quaint little company store but a high-profile, multimillion dollar business operation which utilizes sophisticated computer and telecommunications facilities.6 Through increased public and private efforts to diversify rural economies and reduce rural dependence on primary economic sectors such as agriculture and the extraction of raw materials, we are likely to see further movement of mobile, urban-based capital into rural locales and growth in the number of technical and professional occupational opportunities there. This movement seems reinforced in part by the longstanding American preference for rural and small-town living.’ Given federal efforts to subsidize rural economic development and diversification in general, we can expect that upgrades in the telecommunications systems presently available in most rural areas will accelerate accordingly. In this article we focus primarily on residential markets, although we recognize there are many potential indirect benefits to rural dwellers through the ‘trickle down’ effects of developments targeted to business markets. Our reason for focusing on residential service, however, is based on the assumption that federal spending on an upgraded and expanded public telecommunications infrastructure will have to benefit the broadest possible base of users, particularly in sparsely populated areas where costs per unit of service tend to be higher than in urban and suburban areas. We are primarily concerned with broadband services for residential users, consisting mainly of cable television at this time. Many forecasts anticipate the eventual emergence of a nationwide, public switched broadband network which can deliver video, audio and data services to private residences and businesses. While we do not predict when such developments will occur, or even if this general goal is realistic for all rural areas, we recognize that related efforts are occurring in a number of ways, including research and development, commercial investment and a wide range of public policy initiatives. After an analysis is provided of particular trends in rural broadband development throughout the USA, a case study of related activities in the state of Indiana is presented. While no state can be seen as ‘typical’, Indiana arguably illustrates some of the key experiences common to states with largely rural and semi-rural populations.
Hardware, ownership and control The history of cable television in the USA is one of humble origins, beginning in the early 1950s with the construction of small systems in rural areas with hilly terrains where distant signal reception via broadcasting was poor.* It was not until 1977 that cable television began to develop an identity as an industry distinct from broadcasting.’ There were fewer than 200 cable systems receiving satellite signals in 1977, only one-quarter of which carried premium channels, but there were 8000 systems by 1983, more than three-quarters of which carried premium channels. lo According to Broadcasting Yearbook, in 1990 there were 9900 operating cable systems in the USA, and there are 200 more franchises approved but not yet built. The existing systems serve over 25 100 communities, reach 53 million subscribers and have a
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national
Yearbook, 1990, p D-3. ‘*E.B. Parker, H.E. Hudson, D.A. Dillman and A.D. Roscoe, Rural America in the llBroadoasting
Intimation Age: Telecommunications Policy for Rural Development, Aspen Insti-
tute and University Press of America, Lanham, MD, 1989; H.E. Hudson and E.B. Parker, ‘Information gaps in rural America’, Telecommunications Policy, Vol 14, No 3, June 1990, pp 193-205. ‘v. Clearfield and P.D. Warner, ‘An agricultural videotext system: the G&n Thumb oilot studv’. Rural Sociolwv, Vol 49, 198;1, pp 28&!97; D.F. Huds% ‘Information highways’, Rural Telecommunications, Vol 7, No 1, 1988, pp 2S32; D.A. Dillman and D.M. Beck, ‘Information technologies and rural development in the 199Os’, Journal of State Government, Vol 81, No 1, January/February 1988, pp 2%
38; A. Deeb and T. Monroe, ‘Fostering advanced telecommunications in rural November areas’, Telecommunications, 1989, pp 51, 53, 73. 14Food, Agriculture, Conservation and Trade Act of 1990, PL 101-624, 23 October 1990. 15/bid, Set 2352 (b).
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household
penetration
telecommunications
in rural America
rate of 57.1% . Total industry
revenues
in 1989 were estimated at $15 billion.” The average cable customer lives in an urban or suburban area and can receive as many as 50 channels of television programming. In rural areas of the USA channel availability and the technical sophistication of systems are more limited due mainly to the higher cost per household of installation, maintenance and service. Unlike voice telephony, which is widely available in rural areas as a result of REA subsidies to achieve universal service, rural cable service has historically been treated as less essential and has not been subsidized. While the level of sophistication of rural telephony is also below what is available to metropolitan inhabitants,12 that appears to be changing as rural and semi-rural locales become visible sites for experimentation with advanced telecommunications. l3 Consistent with these efforts, the $54 billion omnibus federal farm bill of 1990 contains provisions for increased REA spending in a variety of ways to encourage non-farm rural business development. This includes the funding of small-business ‘incubators’ (sites with shared facilities to support fledgling businesses) and allocations in the areas of health, education and welfare. Much of this spending goes towards the expansion and enhancement of telecommunications infrastructure and computer and information services targeted to rural dwellers.14 Implicit in the bill is the understanding by Congress of its own mandate to promote ‘universal service’ through ‘the development and enhancement of the rural telecommunications infrastructure in order to make modern telecommunications technology and services available at reasonable rates to the greatest practicable number of people in rural areas of the United States’.” Without such accountability the criteria for evaluating the future success or failure of innovation in rural telecommunications will remain a matter of concern to mobile urban capital and reflect less attention to economically depressed, relatively immobile and therefore vulnerable rural populations. Rural America seems to be an early testing ground for new cable technology, particularly through initiatives by telephone companies. Because of the minimal political resistance to telephone industry activities in the rural market, and due to the lower financial risk, telephone companies are able to ‘get their feet wet’ providing broadband services in rural areas much more easily than in urban areas. Nevertheless the geographical considerations for rural markets may dictate different technological and organizational strategies in rural than in urban areas, and perhaps even across rural areas. Among the major issues to be resolved is the type of system architecture which will prevail. Perhaps the most distinguishing feature at this time-relevant to both rural and urban markets - is whether or not a system is regulated as a ‘common carrier’, a matter of importance not only technologically but also in terms of industry structure. The different architectures of broadband delivery systems suggest different approaches to ownership and control, illustrated by the following discussions of conventional hard-wired systems, over-the-air systems and emerging switched broadband networks. Conventional hard-wired systems
Familiar to many, the conventional form of cable system ownership involves a single operator who, through a franchise agreement with a local municipal government, is the sole owner and operator of the
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physical facilities. The physical facilities include a central cable ‘headend’, the point where a variety of separately distributed programme channels are received and from which those channels cascade downstream to subscribers. With the exception of access channels mandated by the local franchise agreement, the system operator possesses broad editorial control over the mix of channels available on the system. Within this scope of discretion a multiple system operator (MSO) who also happens to own one or more cable channels is in a position to deny access to the system to a channel which competes for the same audience(s), which is a matter of some controversy.16 Under current federal cable laws municipal authorities have very limited control over such discretion once the franchise agreement is in place, which has raised concerns over anti-competitive consequences. The cable industry is increasingly coming under justifiable close scrutiny by congressional leaders concerned about the threats to competition and diversity posed by its present political and economic structure.i7 Leading the attack from the private sector is the telephone industry, whose own vested interests in becoming a major player are increasingly apparent. l8 Telephone carriers are prohibited from providing video programming or transmission facilities within their own telephone service areas unless they qualify for an ‘exemption’ under terms specified in the Cable Communications Policy Act of 1984 (the Cable Act) or unless they are granted a ‘waiver’ under statutory conditions specified in Federal Communications Commission (FCC) rules. The statutes do not apply ‘to any common carrier to the extent such carrier provides telephone exchange service in any rural area (as defined by the Commission)‘.” Based on these statutes, the FCC’s regulations specify that a telephone common carrier is exempt if the ‘incorporated’ or ‘unincorporated’ place in question has a population of 2500 or less and if the area is not included in an ‘urbanized area’.20 In its open docket on telephone-cable cross-ownership rules the FCC is considering the issue of ‘whether a revised population standard or a standard based on other criteria such as one related to telephone company size (access lines, revenues) might be acceptable’.21 In its specification of conditions under which a telephone common carrier may operate a cable system with a waiver, the Cable Act requires the demonstration that a cable system ‘could not exist except through a cable system owned by, operated by, controlled by, or affiliated with the common carrier involved, or upon other showing of good cause’.22 16W.0. Knox, ‘Cable franchising and the When these conditions are met, the Commission may waive the First Amendment: Does the franchising applicability of congressional restrictions. According to the relevant process contravene First Amendment rights?‘, Federal Communications Law FCC rules, waivers of the telephone-cable cross-ownership restrictions Journal, Vol36, December 1984, pp 317may be granted when: (1) a determination of public interest is made; (2) 335. the proposed service area has a population density of less than 30 “Senate Hearing 101-464, ‘Oversight of cable TV’, 16 and 17 November 1989. households per route mile of coaxial cable trunk and feeder line; and (3) ‘*A.M. Calabrese, ‘Telephone-cable crossno opposing party has a present intention to offer non-affiliated cable ownership: policy implications of video service.23 Relative to exemptions, which are granted automatically if the Communications common carriage’, and the Law, Vol 12, No 1, March 1990, relevant conditions are met, waivers are more difficult to obtain. pp 19-36. Telephone company involvement in cable operations is also con“47 USC (b)(3) strained by Section 214 of the Communications Act,24 which allows a 2047 CFR 63.58. “3 FCC Red No 20 at 5865. telephone company to undertake, within its own service area, construc**Set 613 [47 USC 5331 (b)(4). tion and leaseback arrangements. The FCC in reviewing Section 214 =47 CFR 63.56. applications focuses particularly on the potential for telephone com%ec 214 (47 USC 5331.
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panies to engage in anti-competitive behaviour through the monopoly of conduits or pole attachments to force their services on cable companies. Under Section 214 a telephone company may construct facilities to be used by others for video programming service in the telephone service area. Over-the-air systems
Beyond the use of standard AM, FM, VHF and UHF broadcast frequencies for delivering radio, television and teletext, microwave frequencies are also used. The most popular form in which such services is offered is ‘multichannel multipoint distribution service’ (MMDS). This is a delivery system which uses line-of-sight microwave to transmit four or more channels operated by a single company. MMDS or ‘wireless cable’ services reportedly had 350 000 subscribers in 45 communities in November 1989. A major advantage of wireless cable over hard-wired systems is that the cost of passing a home is much lower, although at present it remains a primarily urban phenomenon.25 Wireless cable may have a niche in rural markets, although its reliance on line-of-sight reception makes it effective only in areas that are extremely flat. Among all of the possible broadband delivery systems currently available, the greatest immediate potential for near-total rural market coverage is with satellite distribution. While the cost of laying cable or fibre in rural areas may be prohibitive without federal subsidies, the average total cost of reaching an entire rural region by satellite would be much lower. The cable and broadcasting industries, which deliver programming to scattered cable operators and broadcast stations, are predicted to remain the driving force for satellite-delivered consumer services through the 1990s. At present the home satellite market consists primarily of those households who own C-band dishes and can receive signals intended for broadcast and cable retransmission. Interestingly, the cable industry is becoming a significant player in direct satellite programme distribution as well. Today the high market penetration of cable service in the USA provides that industry with an organizational infrastructure which it has begun to use in handling local market sales, service and billing for C-band satellite broadcasting. A typical dish owner does not live in an area passed by a cable, but pays the nearest cable operator in order to legally receive unscrambled satellite signals. As is to be expected, piracy levels will be inversely proportionate to the pervasiveness of scrambling by individual programme distributors. Of the estimated 2 million private dish owners in the USA, approximately 700 000 pay to receive satellite signals while the remaining number do so ‘illegally’.26 Of course, efforts are also underway to launch or expand services targeted directly to consumers (as contrasted with cable systems and broadcast stations). Applicants to launch DBS services in 1992 include Hughes Communications, operator 25SenateHearing 101-464, op tit, Ref 17, of the largest fleet of US C-band satellites; Tele-Communications, Incorporated (TCI), the largest cable operator; and group broadcaster pp 423426; K. Pearce, ‘A chance arises’, Channels 1989 field Guide, December Hubbard Broadcasting.27 1966, p 119. An existing C-band service now targeted specifically to rural house28PersonaI interview with Mike Schroder. holds is run by the National Rural Telecommunications Cooperative Consumer Satellite Systems, Inc, Indiana: pdis, IN, 22 March 1991. Interviewed by (NRTC), a non-profit organization of 557 rural electric and telephone Andrew Calabrese. systems serving ‘sparsely settled’ areas of the USA. NRTC offers home *“Satellite broadcasting: cable connecsatellite service through its ‘Rural TV’ package, which contains 12 basic tion’, Broadcasting, 17 July 1969, p 56.
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scrambled services plus 23 scrambled services available as premium and optional channels. Bob Phillips, the CEO of NRTC, estimates that a home satellite dish can currently provide universal access to the 10-14 million rural homes that will never have access from a cable provider. However, he notes that NRTC’s programming costs per subscriber are much higher than the costs of providing the same programming via cable. For example, NRTC must pay 90 cents per household for Turner Broadcasting’s TBS channel while cable systems pay only 10 cents. NRTC has also not been able to get licences to carry all the channels it wishes to carry.28 Since there are close ties between some of the major cable multiple systems operators (MSOs) and major programming sources (like Turner and Viacom), third-party satellite services like NRTC are at a distinct disadvantage, the key obstacle being their lack of vertical integration (programming and distribution). NRTC’s long-term potential seems weak when compared with that of TCI, the country’s largest cable operator and shareholder in several cable channels. Not only does the service provided by NRTC require minimal technological infrastructure, which makes it easier to squeeze them out of the market, but NRTC’s market power also seems limited by the fact that the cable industry has significant control over available product. As a means of achieving greater competition, NRTC advocates that Congress ‘[rlestrict cable from control and ownership of both the content and the conduit of information to rural America’, and that a statutory mandate make it possible for third-party distributors of programming to compete with the cable distributors ‘on equal terms’.29 NRTC’s weak position highlights the fact that the vertically integrated cable industry increasingly monopolizes the availability of video programming not only in urban markets but also in rural markets. The new frontier: switched broadband networks
28Bob Phillips, ‘Telcokable crossownership is important, so is access to programming’, Rural Telecommunicstions, Vol 9, No 1, Winter 1990, pp 30-32; Senate Hearing 101484, op cif, Ref 17, pp 417422. ?Senate Hearing 101-484, op cif, Ref 17, p 422. 30Calabrese, op tit, Ref 18. 3’Third Computer Inquiry (Computer Ill), 104 FCC 2d 988, 1988; P. Huber, The Geodesic Network. US Department of Justice, Washington, DC, 198’7.
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Under telephone company ownership of broadband networks, one of two possible situations might occur. In the first situation a local telephone company would be allowed to own and operate the broadband facilities as well as provide information services, the latter either exclusively or as one among a number of competing information providers. In the second situation a telephone company would be permitted only to own and operate the transmission facilities, but not to provide information services. Telephone companies are already able to provide broadband transmission services, subject to certain restrictions discussed above, but they are now increasingly interested in becoming information providers as well. The question of telephone industry entry into the business of being video programming providers over broadband residential networks has become highly controversial in recent years. The telephone industry’s argument is that it is necessary to provide information services in order to ensure sufficient initial demand for the investment in new infrastructure to deliver a wide range of business and residential broadband services. A counter-argument might be that there is sufficient latent demand for the capacity as multiple information providers converge on a given market in the absence of a single editorial gateway characteristic of conventional cable operations.30 Through the principles of Open Network Architecture it is thought that greater interconnectivity and competition will occur at the local level among service and information providers.31 While today these
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32’Advance man for telco entry’, Broadcasting, 4 July 1968, p 35. 33’Commercial labs set pace in US photonit research’, Aviation Week & Space Technology, 30 January 1989, p 60. -P. Spenser and M. Wood, ‘NSF funds cooperative photonics and laser programs’, Laser focus World, Vol 26, No 1, January 1990, pp 19,23. 35GTE Telephone Operations, ‘The Cerritos project: update’, press release, November 1996. %ational Cable Television Association, Beneath the Veneer of ‘Telco TV’: Telephone Company Hype Versus Reality, NCTA, Washington, DC, nd. 37G. Fabrikant, Time-Warner constructing P-way cable TV system’, New York Times, 8 March 1991, p C5.
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principles are applied only to narrowband networks, they are guiding principles for future enhancement of broadband competition at the local level. Indeed, broadband services increasingly fall into the emerging vision of what should be defined as ‘universal service’. In 1988 the president of the United States Telephone Association suggested that the concept of ‘universal service’ should include not only voice telephone service but video as we11.32Today switched broadband networks constitute the technological core of visions for a new residential telecommunications infrastructure. As is now well known, the vision of many current and would-be broadband service providers is that fibre will be used to transmit video to the home. Introducing switched broadband networks involves more technological sophistication than simply laying the fibre. It also requires broadband switches in order to meet the demands for interconnectivity. Among the players conducting R&D in this area is AT&T, whose Bell Laboratories are presently working to develop a key component of the new generation of switching technology, namely a ‘photonic’ switching chip - or photonic integrated circuit - which responds to light at varying wavelengths. These ‘optoelectronic’ circuits integrate multiple interconnected guided-wave optical devices on a single semiconductor substrate. Other organizations involved in related research and development initiatives include United Technologies, the US Naval Research Laboratories, the Defense Advance Research Projects Agency (DARPA) and the US Air Force.33 Also significantly involved in photonics research is the National Science Foundation (NSF), which has brought together experts from universities, industry and the federal government. In 1984 the Lightwave Technology Program was established to focus NSF efforts on lasers and optical-information-systems-related components at four universities: the Center for Optoelectronic Computing Systems (University of Colorado at Boulder and Colorado State University), the Center for Compound Semiconductor Microelectronics (University of Illinois), the Center for Telecommunications Research (Columbia University) and the Center for Optical Circuitry (University of Arizona). Total NSF yearly funding for these centres is approximately $6.3 million, $3.3 million of which is to photonics research.34 Other efforts to develop broadband switches include that of GTE Corporation, which has developed its own electronic (not optical) broadband switch, now in limited experimental use to interconnect a very small number of residences with point-to-point video transmission and switching capabilities in its experimental cable system in Cerritos, California.35 Responding sceptically to the immediate and foreseeable technical feasibility of switched broadband networks, the National Cable Television Association (NCTA) has argued that the telephone industry is far from having developed ‘the final piece of their fiber puzzle’.36 While it clearly has its own vested interests in protecting the prevailing architecture now used by the cable industry, the NCTA seems correct at present. Nevertheless it is clear that there will be continued and increasing investment in R&D to complete the ‘fiber puzzle’ and that the technological threat is likely to come increasingly from formidable telephone industry entrants. Responding defensively, cable MSOs are moving as quickly as possible to install their own fibre systems which purport to render telco involvement in broadband residential services unnecessary.37
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At present, types: 0
0
38B. Winston, Misunderstanding Media, Harvard University Press, Cambridge, MA, 1986.
most residential
fibre experiments
are of two general
fibre-to-pedestal:
With these systems the ‘feeder’ cables which pass the homes may be made of fibre, but the transmission is converted from a light-pulse to an electronic signal at the point where a ‘drop’ line extends from the feeder to the home. With fibre-to-pedestal systems (also known as ‘fibre-to-the-kerb’), homes need not be equipped with the capability to convert light signals to electronic ones; fibre-to-home: With these systems it is necessary for subscribers to have the capacity to convert lightwaves coming into the home to electronic signals which can be used with existing electronic equipment. Some television manufacturers have begun to produce sets which can receive optical signals and convert them to standard electronic ones.
Forecasters tend to view fibre-to-pedestal as the more immediate means of implementing fibre systems for residential service. An obvious barrier to the diffusion of fibre-to-home systems at this time is the need for special conversion equipment by subscribers. Given that major corporations and federal agencies are investing in photonics R&D, it would seem as harsh to forecast the failure of the telephone industry to gain a significant technological lead as it would be foolhardy to predict a date when viable prototypes of broadband switches will be available. There is simply too much uncertainty, both technologically and in the marketplace. As Brian Winston observed in his analysis of several technological innovations in telecommunications, the ‘radical potential’ of a new technology can be suppressed by resistance from prevailing interests and institutional factors, both private and governmental.38 Nevertheless rural telecommunications development points in the direction of what appears to become a major thrust in the future, namely broadband switching. The conditions under which the push for a switched broadband network evolves, be they the introduction of greater or lesser competition in information services, are a worthwhile terrain of much further debate. Given the legitimate and ongoing congressional concerns over the vertical integration of transmission and programming in the existing cable industry, it hardly seems wise to encourage telephone industry movement in the same direction. This is particularly important under potential conditions in the rural policy arena where direct federal subsidies (through REA loans) are involved. Under conditions where an REA loan recipient owns and/or operates a vertically integrated (transmission and programming) cable system, federal subsidies would arguably consitute a form of state action to limit diversity in and access to the marketplace of ideas in rural television service. This would be the case particularly if there is a policy void in the creation of incentives to include third-party programmers on the system. While the REA presently does not directly fund telco instalment and operation of cable systems in rural areas, a move to do so would undoubtedly meet with resistance by the existing cable industry, and perhaps by public interest groups as well. In sum, the well-established and federally subsidized rural telephone industry is in an advantageous position for upgrading and expanding its services in the area of residential broadband communications when
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compared with potential competition from conventional cable television, ‘wireless cable’ and satellite distribution. That is not to say there will be no niche for these enterprises, which are potentially significant pieces in the mosaic of rural telecommunications services. However, it seems likely that the efforts to expand broadband services in rural areas will depend significantly on hard-wired system development, with switching being a potential area of further innovation. As the prevailing policy definition of ‘universal service’ comes increasingly to be redefined to include not only voice and data but also video programme distribution and other services currently not widely available in rural areas, the federal mandate to expand its financial support of broadband infrastructures is likely to occur in parallel. The trend in public policy to redefine ‘universal service’ to include broadband residential service is already evidenced by the recent omnibus federal farm bill, which enables the REA to make grants to public broadcasters ‘for the purpose of demonstrating the effectiveness of such systems in providing information on agriculture and other issues of importance to farmers and other rural residents’. Grants may be made for ‘capital equipment expenditures, start-up and program costs, and other costs necessary to the operation of such demonstrations’.39 With the proportion of rural residents engaged in non-farm occupations on the rise, it is difficult to determine what the limits will be on ‘other issues of importance’ to the new ruralists. A key concern with all future broadband subsidies should be over whether government funds are used to satisfy the television demands of privileged newcomers seeking to establish urban amenities in comfortable rural surroundings rather than being targeted to longstanding, disadvantaged rural communities. Federal subsidies of broadband services in rural areas should be tied to need, with the greatest emphasis going towards the preservation of existing rural communities rather than building high-tech rural havens. ‘Upscale welfare’ for affluent urban professionals chasing the good life in the country, and the likely inhibition of competition from other potential broadband service providers, do not appear to constitute a reasonable first order of federal priorities in rural subsidies.
Residential service in a rural state
=Food, Agriculture, Conservation, and Trade Act of 1990, op cif, Ref 14, Set 2386. 40Personal interview with Charles Hiltunen, Indiana Cable TV Association, Indianapolis, IN, 11 October 1990. interviewed by Donald Jung. 4 In the Matter of Telephone CompanyCable Television Cross-Ownership
RUk,
Further Notice of Inquiry and Notice of Proposed Rulemaking, 3 FCC Ftcd No 20 at 5857, 1988.
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The case of Indiana provides a useful illustration of the movement by telephone companies into rural broadband service. A total of 87 multiple system operators own cable systems in 342 cities in Indiana, serving a total of 890 355 households. By way of comparison, six telephone companies own and operate eight cable systems serving 14 cities in Indiana, passing approximately 5420 homes and having a total of 3807 subscribers.40 All the cable systems owned and operated by telephone companies in the state are serving areas classified by the Census Bureau as ‘rural’ (ie populations of 2500 or less), and all are operated by local telephone companies. Comparing telephone company involvement in rural cable service in Indiana with the national average is relatively straightforward. The FCC, in its open docket on telephone company-cable television crossownership rules, states that since exempting rural areas from restrictions in 1980 nearly 300 eligible telephone companies have filed for authority to provide cable service in rural areas.41 Dean C. Swanson, Chairman of the United States Telephone Association, in Senate hearing testimony
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that nationally over 200 telephone companies currently provide cable to rural areas.42 With the six Indiana telephone companies (three of which are REA telephone loan recipients) qualifying for ‘exempt’ status under the Cable Act and currently providing rural cable service, it can be concluded that the state is situated within the national average. While Indiana is not exceptional in terms of the level of telephone company provision of cable television service, there is one distinguishing feature. In addition to the above-mentioned telco cable systems, Ameritech Corporation and a local cable television company are planning a joint venture to experiment with the integration of broadband and narrowband service. Ameritech (1989 revenues: $10.2 billion) is the Chicago-based parent of the Bell companies serving Illinois, Indiana, Michigan, Ohio and Wisconsin, and owner of companies providing cellular communications, voice messaging, directories, audiotex services and lease financing. Its partner in the joint venture is Cardinal Communications, one of the five largest cable operators in the state, with seven offices serving approximately 80 000 subscribers. Ameritech and Cardinal Communications applied to the FCC for a Section 214 waiver to conduct tests in Indiana using optical-fibre cable to provide both telephone service and cable television programmes to residential customers in a development near Columbus, Indiana.43 Ameritech Services (the planning company for the five Ameritech Bell companies), Indiana Bell (the local operating company owned by Ameritech) and Cardinal Communications will test a fibre system manufactured by Broadband Technologies, Inc. The trial will connect fibre to both new and existing homes in Tipton Lake, a residential development approximately 45 miles south of Indianapolis. Approximately 20 existing homes will be connected by fibre, and 70-100 new homes will be built with access in the future. This digital video transport system will convert at least 35 cable television signals at Cardinal Communications’ Columbus, Indiana, office for fibre transmission through Indiana Bell’s switching centre to a remote digital terminal. There the television signals will be combined with telephone services. From these remote terminals, individual fibre cables will carry both voice and video signals to ‘pedestals’ in the residential area, where copper telephone wires and coaxial cables will carry the narrowband and broadband signals separately for the last leg of the route to individual households. Cardinal will control the cable drop to the home while Ameritech retains control of the twisted-pair drop.44 This is a variation of a ‘fibre-to-pedestal’ passive optical network, described above. Ameritech is also conducting a fibre experiment through its Ohio Bell subsidiary, which will initially carry narrowband telephone service beginning later this year in Cleveland, Ohio.45 While neither of these experiments represents significant movements towards the widespread commerical development of broadband residential services, Ameritech’s experimentation with fibre and its ability to draw in the future upon sizeable R&D resources (through Bellcore) suggest that it is now moving up the learning curve in hopeful anticipation of eventual 42Senate Hearing 101-464, op tit, Ref 17, congressional repeal of the statutory telco-cable cross-ownership bans. D 607. At that time Ameritech will presumably be ready with something close ‘3Ameritech new release, 26 June 1990. “Multichannel News. 2 Julv 1990. D 32. to a turnkey system design for rapid deployment in other markets. 45N&ional Cable Televisidn Association, Telephone Company Primer, NCTA, Knowledge and experience being acquired now will provide a valuable edge to Ameritech in competing with other RBOCs, independent telcos Washington,DC, May 1969, p 29. states
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and cable companies for the right to provide lucrative, densely populated urban markets with broadband delivery systems. Tipton Lake is small and relatively isolated, ideal for experimentation with new broadband systems and services, and the experiment enables Ameritech to learn both technically and organizationally in a low-risk, semi-rural (though not technically ‘rural’) environment.
Conclusions It is important that the cable-telco controversy, and others which exist or are emergent among telecommunications competitors, not function as smokescreens which obscure the benefits to the public in having greater diversity in and access to broadband services than is presently available. The issue of whether and under what conditions telephone companies are allowed to provide information services is one which will remain controversial, not only in the urban marketplace but in rural areas as well. The move by telcos to experiment with broadband services in rural markets may be - whether by design or by default - a case of the camel’s nose peeking under the tent of a major long-term push towards video common carriage. The telephone industry seeks in the long term to break the monopoly which the cable industry has on residential broadband service by replicating its narrowband dominance in the area of broadband development, perhaps eventually doing so in rural areas with federal subsidies from the Rural Electrification Administration. Today there are many fronts on which the expansion of telecommunications infrastructures is taking place in the USA, and no single approach to broadband service development is likely to satisfy the varied needs of different rural areas around the country. Of course there is great potential for hybridization among technologies, architectures and organizational forms, one example being the unique set of arrangements under which the Tipton Lake, Indiana, experiment is being conducted. As that project illustrates, the fact that the cable and telephone industries are at odds in the trade press seems to be an indication of short-term market positioning, not irreconcilable differences. It seems likely that we will see more technological convergence and institutional cooperation between the two industries in the future. That is not to say that the immediate interests of the US telephone and cable industries are completely compatible, for it is clear that each threatens the other. The cable industry maintains an integral link between its control over broadband infrastructure and programming, which weakens its arguments against the telephone industry entering and doing the same. In turn, there is a justified concern among many that telephone companies will engage in anti-competitive practices such as cross-subsidization from their regulated rate bases if they are permitted to provide video programming in their own service areas. Policy makers are accountable for making the field as level as possible, and one arena of rural broadband development where particular attention is warranted is that of public subsidies and public authorization of private cross-subsidization. Clearly there is a need for the state to play a leadership role in rural telecommunications development, but not for the purpose of fostering further telephone industry entrenchment. The state can potentially lead in further experimentation as rural areas increasingly become laboratories for technological and organiza-
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tional developments in broadband communications. As a resource for relatively low-risk experimentation (when compared with urban infrastructure development) rural areas should be treated by the state as arenas for developing alternative models which neither automatically favour the telephone industry nor prevent its potential to mitigate the anti-competitive vertical integration of the cable industry.
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