Education & Workforce Development and Government and Technology

ECONOMIC ANALYSIS: Will telecom reform bring cell service to remote areas?

July 17, 2006

Those of us who spend a lot of time in airports get an effective education in the economics of competition by observing-and paying-the fares charged by airlines. It's really quite simple. Fly a route served by several airlines, especially if one of them is a low-cost, no-frills carrier such as Southwest, and fares will be reasonably low. But if you are unlucky enough to fly to or from a smaller city, or even a large one where a single carrier has captured a dominant share of landing slots, it's another story entirely.

Economists have begun to realize that the fruits of competition for the consumer can be realized with as few as two sellers of a product or service, especially if there is a credible threat of others entering the marketplace as well. Those benefits extend beyond price, to the important dimensions of quality, delivery and innovation.

In the arena of telecommunications, particularly for local telephone service, these fruits are too often dying on the vine. Too many states and localities, including most in Indiana, have made a deal with the devil-in the guise of a monopoly landline service provider-that they and many in the electorate who keep them in power have been too slow to undo.

Details vary, but the bargain struck many decades ago goes something like this. In return for a promise of universal service to city and countryside alike, and with a little extra sweetener in the form of an artificially low rate for residential service, states and regions signed away their rights to the benefits of competition by taking away the rights of all but one company to set up shop.

And so many generations of Hoosiers, like others throughout the nation, have lived knowing only the world of regulated phone service, where commissions hold hearings for public comment on rate increases and the chaos of competition is far away.

Yet today that world is crumbling. Customer counts and revenue for traditional phone-service providers have been in free fall the last several years, as wireless and digital-based phone-service usage has exploded, and businesses who pay the price for artificially low rates enjoyed by households have aggressively explored the alternatives that rapidly evolving technology offer them.

That evolution has produced a competition of sorts, but along two diametric poles. On one side of the street is the stable, familiar, yet ultimately unsustainable realm of regulated service providers. It speaks the language of regulation-devising pricing formulas that address bureaucratic concepts like embedded cost, rate bases and allowable rates of return.

On the other side are the cowboys of capitalism, skimming the most profitable, urban customers from both the regulated behemoths and one another, bundling phone service with a dizzying array of information, communications and entertainment services in ways we're still trying to get familiar with. No one tells them what to charge, or where to offer their services, for that matter. Yet prices remain in check by the same forces that constrain airlines to match fares of low-cost competitors along routes where competition exists.

It's mostly a happy story, but with one big catch. The competitive side of the street doesn't exist in areas of the state lacking access to the networks that make it all work. The world of poor cellular coverage, where broadband Internet access is nonexistent, is a much different place. Connecting those rural areas to the rest of us may be of little commercial value to the forprofit entities that own the networks, but it is of high importance to governments and other institutions that can thrive only when service is universal.

The irony is that among the companies best positioned to extend networks statewide to provide the fruits of competition to city and country dwellers alike are the same companies who are already there-the land-line telephone-service providers. Will Indiana's telecommunications-reform law spur them to invest in their networks to bring about this happy result? We'll all have to stay tuned.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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