The Phoenix Center does not advocate for (or against) an

1
Testimony before the Florida House Committee on
Utilities and TelecommunicationsThomas M.
KoutskyCo-Founder and Resident ScholarPhoenix
CenterMarch 23, 2006
2
About the Phoenix Center

• Everyone is entitled to his own opinion, but not
  his own facts.
• Sen. Daniel Patrick Moynihan
• The Phoenix Center does not advocate for (or
  against) any particular legislative or regulatory
  proposal
• Track record of publication in leading academic
  journals
• All research available to the public on our web
  site, www.phoenix-center.org
• We welcome rebuttals and debate
• Our researchers have over a decade of research
  into cable and telecom barriers to entry

3
Organization of Presentation

• Facilities-based entry is difficult, costly and
  risky
• Only a few players at best
• If you want entrytake steps to lower cost of
  entry and do not artificially limit the
  addressable market
• Build-Out requirements deter entry
• Franchising and the Digital Divide

4
Do you want Facilities-based Entry?

• Increase Gross Profits
• Reduce Entry Costs

But not in ways harmful to consumers!
Phoenix Center Policy Paper No. 21
5
Phoenix Center Policy Paper No. 22Cable
Build-Out Rules

• An example of an area where public policy is
  raising the cost of entryand a place where
  policymakers can act to reduce entry costs
• Build-out requirements deter entry by raising
  entry costs and reducing profits
• No Build-out rules for new local telephone
  entrants and all broadband providers
• Build-out requirements are of central
  importance to competitive entry because these
  requirements impact the threshold question of
  whether a potential competitor will enter the
  local exchange market at all. FCC No. 97-346
  (1997)
• FCC preempted state/local franchising regulation
  of cable modem services decision upheld by
  Supreme Court in 2005 in Brand X decision

6
Build-Out Rules

• Simulations indicate that build-out rules deter
  entry in the vast majority of markets (80-90),
  even under conservative assumptions
• Policy Paper Nos. 22 and 24 (the latter
  forthcoming) Faulhaber Hogendorn, 2000.
• Empirical evidence indicates that level-playing
  field laws, like Floridas, deter entry
• Hazlett Ford, The Fallacy of Regulatory
  Symmetry, Business and Politics, 2001)

Phoenix Center Policy Paper No. 22
7
The Asymmetry of Symmetry

• Monopolist profit is 100. Duopoly profit is 40.
  Entry cost is 30.
• With monopoly, profit is 70 ( 100 - 30).
• With duopoly, profit is 10 (40 - 30) for each
  firm.
• What if law makes entrants match incumbents entry
  costs?
• Monopolist spends an additional 11 on entry
  cost.
• Entrants profits are -1 (40 41).
• Monopolists profits are 59 (100 30 11).
• Symmetric regulation reinforces monopoly

Hazlett Ford, The Fallacy of Regulatory
Symmetry (Business Politics, 2001).
8
The link between video and broadband deployment

• Networks being constructed today support voice,
  video and data servicesincreasing the cost of
  providing one service (video) increases the cost
  of providing another service (broadband)
• Federal policy goal of promoting open-entry for
  broadband services
• The increased cost is important because video is
  a large portion of consumer spending on
  communications services
• The impact is felt particularly hard in lower
  income neighborhoods, because in these areas,
  video revenues are particularly important to the
  business case for deployment

Phoenix Center Policy Paper No. 23
9
Pew Survey
Phoenix Center Policy Paper No. 23
10
Census 2003, Subscription Rates
Phoenix Center Policy Paper No. 23
11
2005 GAO Study
Phoenix Center Policy Paper No. 23
12
Implications

• The business case for deploying an integrated
  voice, video and broadband network to low-income
  households depends upon the ability to sell video
  service
• Regulatory requirements that increase the cost of
  video deployment effectively can create a type of
  broadband red-lining effect
• Open video entry policies are part of the
  solution to a Digital Divide
• Stated another way if you want to avoid a
  Digital Divide, policy should be directed at
  figuring out how to get video programming on
  broadband networks

Phoenix Center Policy Paper No. 23
13
Phoenix Center Policy Paper No. 23
14
Phoenix Center Policy Paper No. 23 Texas
15
Phoenix Center Policy Paper No. 23 Pennsylvania
16
Bibliography Policy PapersThe Impact of Video
Service Regulation on the Construction of
Broadband Networks to Low-Income Households
(September 2005)Phoenix Center Policy Paper No.
23,http//www.phoenix-center.org/pcpp/PCPP23Final
.pdfThe Consumer Welfare Cost of Cable
Build-Out Rules(July 2005)Phoenix Center
Policy Paper No. 22, http//www.phoenix-center.or
g/pcpp/PCPP22Final.pdf Competition After
Unbundling Entry, Industry Structure and
Convergence (July 2005) Phoenix Center Policy
Paper No. 21, http//www.phoenix-center.org/pcpp/
PCPP21Final.pdf
17
Bibliography Policy BulletinsA La Carte and
Family Tiers as a Response to a Market Defect
in the Multichannel Video Programming Market
(February 2006)Phoenix Center Policy Bulletin
No. 14, http//www.phoenix-center.org/PolicyBulle
tin/PCPB14Final.pdf In Delay There is No
Plenty The Consumer Welfare Cost of Franchise
Reform Delay (January 2006)Phoenix Center Policy
Bulletin No. 13,http//www.phoenix-center.org/Pol
icyBulletin/PCPB13Final.pdf Franchise Fee
Revenues After Video Competition (November
2005)Phoenix Center Policy Bulletin No. 12,
http//www.phoenix-center.org/PolicyBulletin/PCPB
12Final.pdf
18
(No Transcript)