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 The Phoenix Center does not advocate for (or against) any particular legislative or regulatory proposal The Phoenix Center does not advocate for (or against) any particular legislative or regulatory proposal Track record of publication in leading academic journals Track record of publication in leading academic journals All research available to the public on our web site, All research available to the public on our web site, We welcome rebuttals and debate We welcome rebuttals and debate Our researchers have over a decade of research into cable and telecom barriers to entry Our researchers have over a decade of research into cable and telecom barriers to entry

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

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

Phoenix Center Policy Paper No. 22: Cable Build-Out Rules 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 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 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 No Build-out rules for new local telephone entrants and all broadband providers “[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 (1997) “[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 (1997) FCC preempted state/local franchising regulation of cable modem services; decision upheld by Supreme Court in 2005 in Brand X decision FCC preempted state/local franchising regulation of cable modem services; decision upheld by Supreme Court in 2005 in Brand X decision

Build-Out Rules Simulations indicate that build-out rules deter entry in the vast majority of markets (80-90%), even under conservative assumptions 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, Policy Paper Nos. 22 and 24 (the latter forthcoming); Faulhaber & Hogendorn, Empirical evidence indicates that level-playing field laws, like Florida’s, deter entry 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 Monopolist profit is $100. Duopoly profit is $40. Entry cost is $30. Monopolist profit is $100. Duopoly profit is $40. Entry cost is $30. With monopoly, profit is $70 (= ). With monopoly, profit is $70 (= ). With duopoly, profit is $10 (= ) for each firm. With duopoly, profit is $10 (= ) for each firm. What if law makes entrants match incumbents entry costs? What if law makes entrants match incumbents entry costs? Monopolist spends an additional $11 on entry cost. Monopolist spends an additional $11 on entry cost. Entrant’s profits are -$1 (=40 – 41). Entrant’s profits are -$1 (=40 – 41). Monopolist’s profits are $59 (=100 – 30 – 11). Monopolist’s profits are $59 (=100 – 30 – 11). Symmetric regulation reinforces monopoly Symmetric regulation reinforces monopoly Hazlett & Ford, The Fallacy of Regulatory Symmetry (Business & Politics, 2001).

The link between video and broadband deployment 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) 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 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 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 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 ServiceMonthlyPercent Percent Wireline Telephone$5438%50% Mobile$3524% Internet$1410%13% Cable Television $4028%37% Source: Pew Internet & American Life Project survey October 2002 of 1,677 Americans. Phoenix Center Policy Paper No. 23

Census 2003, Subscription Rates IncomeTelephoneInternetDial-upCable/DSL 5000 To To To To To To To To To To To To To To and Over Phoenix Center Policy Paper No. 23

2005 GAO Study Phoenix Center Policy Paper No. 23

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 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 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” 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 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 (%):BroadbandOnly(b) (%): Broadband + Telephone(c) Homes Passed (%): Broadband + Video(d) Homes Passed (%): Broadband + Telephone + Video y < 20, ,000 < y <30, ,000 < y <40, ,000 < y <50, ,000 < y <60, ,000 < y <70, ,000 < y <80, ,000 < y <90, ,000 < y <100, ,000 < y <125, ,000 < y <150, y > 150, Phoenix Center Policy Paper No. 23

Phoenix Center Policy Paper No. 23: Texas

Phoenix Center Policy Paper No. 23: Pennsylvania

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, The Consumer Welfare Cost of Cable “Build-Out” Rules (July 2005) Phoenix Center Policy Paper No. 22, Competition After Unbundling: Entry, Industry Structure and Convergence (July 2005) Phoenix Center Policy Paper No. 21,

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, “In Delay There is No Plenty:” The Consumer Welfare Cost of Franchise Reform Delay (January 2006) Phoenix Center Policy Bulletin No. 13, Franchise Fee Revenues After Video Competition (November 2005) Phoenix Center Policy Bulletin No. 12,