Testimony before the Florida
House Committee on Utilities and
Telecommunications
Thomas M. Koutsky
Co-Founder and Resident Scholar
Phoenix Center
March 23, 2006
About the Phoenix Center
“Everyone is entitled to his own opinion, but not his own facts.”
Sen. Daniel Patrick Moynihan
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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
Organization of Presentation
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Facilities-based entry is difficult, costly and
risky
Only a few players at best
 If you want entry—take steps to lower cost of
entry and do not artificially limit the addressable
market
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Build-Out requirements deter entry
Franchising and the “Digital Divide”
Do you want Facilities-based Entry?
 Increase
 Reduce
Gross Profits
Entry Costs
But not in ways harmful to consumers!
Phoenix Center Policy Paper No. 21
Phoenix Center Policy Paper No. 22:
Cable Build-Out Rules
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An example of an area where public policy is raising the
cost of entry—and 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
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“[B]uild-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
Build-Out Rules
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Simulations indicate that build-out rules deter
entry in the vast majority of markets (80-90%),
even under conservative assumptions
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Policy Paper Nos. 22 and 24 (the latter forthcoming);
Faulhaber & Hogendorn, 2000.
Empirical evidence indicates that level-playing
field laws, like Florida’s, deter entry
Hazlett & Ford, The Fallacy of Regulatory Symmetry,
Business and Politics, 2001)
Phoenix Center Policy Paper No. 22
The Asymmetry of Symmetry
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Monopolist profit is $100. Duopoly profit is $40.
Entry cost is $30.
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What if law makes entrants match incumbents
entry costs?
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With monopoly, profit is $70 (= 100 - 30).
With duopoly, profit is $10 (=40 - 30) for each firm.
Monopolist spends an additional $11 on entry cost.
Entrant’s profits are -$1 (=40 – 41).
Monopolist’s profits are $59 (=100 – 30 – 11).
Symmetric regulation reinforces monopoly
Hazlett & Ford, The Fallacy of Regulatory Symmetry (Business & Politics, 2001).
The link between video and
broadband deployment
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Networks being constructed today support voice, video and data
services—increasing 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
Pew Survey
Monthly Communications Spending
Service
Monthly
Percent
Percent
Wireline
Telephone
$54
38%
50%
Mobile
$35
24%
Internet
$14
10%
13%
Cable Television
$40
28%
37%
Source: Pew Internet & American Life Project survey October 2002 of 1,677 Americans.
Phoenix Center Policy Paper No. 23
Census 2003, Subscription Rates
Income
Telephone
Internet
Dial-up
Cable/DSL
5000 To 7499
94.2
20.3
14.0
5.9
7500 To 9999
96.5
19.6
14.2
5.0
10000 To 12499
97.1
22.8
16.5
6.2
12500 To 14999
97.2
24.6
18.2
5.8
15000 To 19999
96.8
29.5
21.5
7.8
20000 To 24999
97.8
36.9
26.7
9.9
25000 To 29999
98.3
42.6
29.6
12.0
30000 To 34999
98.4
49.0
35.1
13.2
35000 To 39999
98.7
57.7
41.9
15.0
40000 To 49999
99.2
66.3
45.2
20.2
50000 To 59999
99.2
71.9
47.0
24.0
60000 To 74999
99.4
79.9
49.8
29.1
75000 To 99999
99.3
84.2
48.0
35.2
100000 To 149999
99.7
90.4
42.3
46.4
150000 and Over
99.7
92.4
36.4
54.2
Phoenix Center Policy Paper No. 23
2005 GAO Study
Phoenix Center Policy Paper No. 23
Implications
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The business case for deploying an integrated voice, video and
broadband network to low-income households depends upon the
ability to sell video service
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Regulatory requirements that increase the cost of video deployment
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effectively can create a type of broadband “red-lining” effect
Open video entry policies are part of the solution to a “Digital
Divide”
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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
Phoenix Center Policy Paper No. 23, Table 2
Homes Passed by Income Group (%)
Block Groups by
Median Income
Range
(y = income)
(a)
Homes
Passed
(%):
Broadband
Only
(b)
Homes
Passed
(%):
Broadband
+
Telephone
(c)
Homes
Passed
(%):
Broadband
+
Video
(d)
Homes
Passed
(%):
Broadband +
Telephone +
Video
y < 20,000
-
-
84
88
20,000 < y <30,000
-
-
88
90
30,000 < y <40,000
-
-
93
95
40,000 < y <50,000
-
4
98
99
50,000 < y <60,000
1
9
100
100
60,000 < y <70,000
2
2
100
100
70,000 < y <80,000
9
54
100
100
80,000 < y <90,000
14
76
100
100
90,000 < y <100,000
34
92
100
100
100,000 < y <125,000
83
100
100
100
125,000 < y <150,000
97
97
100
100
100
100
100
100
y > 150,000
Phoenix Center Policy Paper No. 23
Figure 4. Percent of Below-Poverty and Minority Homes
Passed
Poverty Homes
87% 88%
90% 91%
Minority Homes
0.1% 0.2%
1% 1%
Broadband
Broadband
Telephony
Phoenix Center Policy Paper No. 23: Texas
Broadband
Video
Broadband
Telephony
Video
Pennsylvania Simulation: Percent of Below-Poverty and
Minority Homes Passed
Poverty Homes
89% 90%
91% 92%
Minority Homes
0.3% 0.6%
3% 4%
Broadband
Broadband
Telephony
Phoenix Center Policy Paper No. 23: Pennsylvania
Broadband
Video
Broadband
Telephony
Video
Bibliography: Policy Papers
The 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.pdf
The Consumer Welfare Cost of Cable “Build-Out” Rules
(July 2005)
Phoenix Center Policy Paper No. 22,
http://www.phoenix-center.org/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
Bibliography: Policy Bulletins
A 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/PolicyBulletin/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/PolicyBulletin/PCPB13Final.pdf
Franchise Fee Revenues After Video Competition (November 2005)
Phoenix Center Policy Bulletin No. 12,
http://www.phoenix-center.org/PolicyBulletin/PCPB12Final.pdf