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Regulation - What is it Good For?

Mandated Low-Income Prices

ISPs are vehemently opposed to a law recently passed in New York that requires ISPs to offer low-income broadband for prices of $15 to $20. The is a dreadful law for several reasons which I’ll discuss below. But before that, I have to first make fun of the main argument the ISPs are using to fight against the law.

An array of ISP trade associations opposing the law include the New York State Telecommunications Association, CTIA, ACA Connects, USTelecom, NTCA, and SBCA. It seems that the best argument these trade associations can muster for why this law should be invalid is that the State doesn’t have the right to impose this law because only the FCC has rate authority over broadband. The problem with that argument is that the FCC doesn’t have rate authority – or regulatory authority of almost any kind over broadband – due to heavy lobbying by these same trade associations that was able to kill Title II regulation. The group is pointing to a ruling made by FCC Commissioner Pai that says that States have no authority over broadband rates – made at the same time that Chairman Pai killed FCC authority to regulate rates. Chairman Pai’s position was that nobody should have rate authority over ISPs – which means nothing after the FCC walked away and created a regulatory vacuum. States are generally able to fill a vacuum, much like California was able to implement net neutrality after the FCC killed its own regulations on the issue.

There is a long list of reasons why ISPs hate this particular regulation. The first reason is practical. Ignore for a minute that somebody like Comcast might be able to afford this and consider instead a smaller independent fiber overbuilder. It costs on average around $1,000 to install a new customer on fiber just to build the fiber drop and install the needed electronics. It would take 50 months at a $20 monthly fee for an ISP to recover just the cost of the installation – and that still hasn’t paid a penny towards the cost of operating the business. If this law would require a small ISP to install 1,000 subsidized customers (not a big number), the ISP would have to spend $1 million (that it probably doesn’t have) and then be repaid at $20,000 per month. Anybody that knows the small ISP world knows that this scenario is untenable, and the law could sink a fledgling ISP and put them out of business. Small ISPs would have no choice but to ignore this law – the penalties for non-compliance would likely be less costly than the cost of compliance.

Localities have complained about broadband redlining for years. If New York makes ISPs wholly shoulder the cost burden to make broadband affordable, then the state will never see any more broadband investment in poor neighborhoods. ISPs will never come to areas with a substantial percentage of low-income households and the ISPs who are already in such neighborhoods will start figuring out ways to walk away from these neighborhoods. Put this law into place and in twenty years there will be true broadband deserts across New York with large neighborhoods that have no broadband options other than smartphones. Whoever wrote this law didn’t spend much energy thinking about the practical consequences.

The ISPs have an even larger concern with this law. If the State can set a rate for low-income broadband, then there is likely no reason that the State can’t also put a cap on broadband bills. What’s to stop the state from declaring that gigabit broadband can’t cost more than $50?

Even should a State decide to tackle the issue of rate regulation, it ought to do so in a deliberate and reasonable manner by weighing all sides of the rate regulation issue. Legislators are the worst possible group of folks to create this kind of regulation because they will always take the populist view without worrying about the consequences. If New York starts to regulate rates through ad hoc regulation as suggested by this bill, my advice to ISPs would be to never spend another penny in the state and take investments elsewhere. I’m trying to imagine what would happen in New York if Verizon and Charter decided to not invest another dollar. In ten years, the State might have the worst broadband networks in the country.

There is nothing good about this law because it piles the full burden of helping low-income homes on ISPs. Everybody in the industry, including the ISPs understand that the country would be better off if everybody is connected to the Internet. But digital inclusion efforts are going nowhere if ISPs are expected to solely fix the problem. The right solution will require some give by ISPs along with some subsidies from the government. There has to be a middle ground that makes sense, and we’re not going to find that middle ground through legislation like this.

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