Rural Broadband and the Future of Universal Service. Dennis Weller Chief Economist - Verizon OECD Workshop Porto 26 October 2004

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1 Rural Broadband and the Future of Universal Service Dennis Weller Chief Economist - Verizon OECD Workshop Porto 26 October 2004

2 About Verizon Largest wireline and wireless operator in the US Network Strategy: Wireline: Fiber to the premise 1 million homes passed by end of million more in 2005 Wireless: 3G broadband using EVDO 14 cities and major airports now Integration To deliver the greatest possible value to consumers Experiments for BB coverage in rural areas Trial in Grundy, Virginia Partnership between Verizon Avenue and Alvarion 2

3 Verizon Overview - Nationwide Presence Local telephone services in 29 states and the District of Columbia Services include voice and data transport, long distance services and internet access among others 3

4 FTTP Full Build & Overlay Architectures Small Businesses Office Parks Residential Copper Distribution FTTP Overlay Small Businesses FTTP Full Build SAI Splitter Hub Splitter Circuit Switch Copper Feeder OLT Connected Communities 4 x POTS Ethernet Enet Video 2 4 POTS 4

5 Verizon Fios Wireline Broadband Access Leapfrogs Cable Modem & DSL! 5

6 Verizon Wireless High-Speed Internet Access 6

7 VoiceWing Personal Account Manager 7

8 Verizon iobi Home IP Enabled Telephone Service 8

9 VerizonOne Concept 2-way Multimedia Communication 9

10 Service Control IM SMS Messaging VM Alert VM Retrieval iobi End User Portal Broadsoft Application Server Outlook Conferencing And Collaboration Web Sharing L1 Gateway EPG PSTN/VoIP Call Control Addr book Calendar Content Directories Internet ISCP MSC MGC SIP Proxy MSC VM SSP SSP TG 10

11 Traditional Approaches to Universal Service Averaging Access charges Universal service funds Funding Sector-specific contributions General taxation Distribution Supports specified services Tied to regulation Public demand E-government BT registration scheme Public procurement Public supply 11

12 Challenges for Existing Approaches Averaging Difficult to maintain as environment becomes more competitive Changes in market structure Major carriers reposition their businesses Regional carriers may focus on rural areas 12

13 Challenges for Existing Approaches Access charges Challenges from arbitrage, growth of IP Different model today for interconnection in IP space No obligation to interconnect Bilateral interconnection not required to achieve universal connectivity of IP networks Voluntary agreements among networks Peering or transit arrangements As world moves from circuit-switched to IP, small networks go from charging access to paying transit 13

14 Challenges for Existing Approaches Universal service mechanisms Funding Sector-specific taxation becomes difficult when you can t define the sector Distribution Who gets the money? What service is supported? If customer has broadband connection, there will be many providers of applications, including voice Policy concern focuses more on availability, price of broadband connection 14

15 Challenges for Existing Approaches Public Supply Concerns about incentives, transparency Institutional interest in public network Competition with private firms What happens when newer technology comes along? No such thing as a generic network OECD has focused on privatization Why go backward? Can policy goals be achieved using other tools? 15

16 Ideas for Market-Based Implementation of Traditional USF Auctions to select universal service provider Milgrom (1996), Weller (2000) Firms bid support amount required for each area Design accommodates competitive supply where it s economic Endogenous choice of sole provider or multiple providers, based on bids received Parameters of this choice reflect policy values established by government But this model is designed to assign traditional obligation to serve. Developments in market and technology call for new approach. 16

17 Ideas for Universal Service in a Broadband World Promotion of demand Market supply where possible Infrastructure competition where possible Policy should avoid trying to design the market Minimize regulatory impediments to investment Tradeoff between open network requirements and investment incentive Incentives for supply where necessary Infrastructure grants Who gets the money? What requirements? Funding from general revenues 17