The 1996 Telecommunications Act

Why are we telling this story? In part because the story is familiar. In 1897 Jewett, Connecticut talked the state legislature into letting Jewett build its own electric utility. It did so because it knew that electricity was not coming to Jewett anytime soon from the private sector. If Jewett wanted street lights and home lighting powered by electricity they would have to do it themselves. Jewett’s municipal electric plant exists to this day, along with almost 3000 others in America, founded on the same reason. Indeed, 25% of American electricity flows through municipal electric utilities, most of them conceived during the early roll-out of electrical wiring and power plants. Had the state legislature denied Jewett’s petition for public ownership of an electric utility, it would have denied Jewett an essential service, which under the circumstances would have been a betrayal.

The 1996 Telecommunications Act (the Act) does not prohibit municipal ownership of telecommunications facilities to fill gaps left by the private sector. But it has made such ownership difficult. The Act conspicuously exchanged an historical mandate for monopoly carriers to provide universal service at affordable rates for competition and investment in telephone, television, and radio communications. It did so at a time when these three services had already reached almost everyone through exclusively private networks, relieving to some degree the need for mandatory universal service. But the Act failed to anticipate the rapidity with which broadband moved from slow speed text access (33 kbps tops in 1996) to a necessity of life itself (25 mbps now the minimum FCC definition of broadband, growth by a factor of 1000). The smart phone, introduced in 2007, sold over 4 billion (yes, billion) in the next eleven years, shredding any previous record for race to the top of a new technology.

But broadband networks in the United States have not kept up. According to the FCC 35 million Americans have no access to broadband services of any sort. Tens of millions more must use forms of Digital Subscriber Line (DSL) or satellite links that the FCC no longer defines as broadband. We know the FCC understates figures for both the unserved and the underserved. The FCC claims that northwest Connecticut has 99% coverage of broadband and mobile service; the actual figures are 65% and 75%. Broadband is now as central to life in America as roads and electricity. To deny broadband and its benefits to so many people is betrayal.

So we are going to start the story. The story must begin with the origins of the 1996 Act and the history of universal service before it was passed. We cannot tell the ending yet. In our view the ending either requires public ownership or investment in broadband networks to realize both universal service and real competition in all American markets, or a persistent disadvantage to tens of millions of people and the nation’s competitive position in the world. Stay tuned.

What Came Before

In 1921 the United States made one of its better if paradoxical moves: through the Willis-Graham Act it authorized AT&T to swallow up any other telephone company it desired without interference from the monopoly police in the Justice Department. AT&T proceeded to own 79% of the market by 1927, a monopoly by any standard.  But it was a “natural monopoly,” made necessary by the triplex of (1) the enormous capital costs of infrastructure and (2) the requirement for common signaling protocols across all networks (3) for a service considered essential to commerce and life and hence demanding universal access to the service.  The 1934 Telecommunications Act formalized a federal regulatory agency, the Federal Communications Commission (FCC).  For the next fifty years AT&T systematically covered the entire country and connected every residence to affordable telephone service.  AT&T lost money on its residential service, but it made more than enough to compensate through long distance and business services, all through price and business mechanisms negotiated every year with state and federal regulatory commissions.  This was not a “free market”; it was a highly regulated market to insure full public access at affordable rates to a vital infrastructure.  But from about 1955 to 1984 AT&T was the largest employer in the world by head count and its stock became the anchor of every sensible personal and corporate pension plan as it was almost mandated to grow at the rate of the country with guaranteed profits.

The Forces for Universal Service and Bell Labs

We say “better if paradoxical moves” because the rest of the developed world nationalized telephone service, often yoking telecommunications with postal services.  They all lagged AT&T by decades in coverage.  Other countries also relied upon telephone technology developed by Bell Labs and other American firms after AT&T was forced to license its manifold technologies in 1956, from which Silicon Valley ensued.  Bell Labs itself produced a sequence of staggering inventions unrivaled in the history of technology–incredibly reliable telephones and networks, the cell phone network, digital telephony, the solar cell, radar, the modem, and digital communications generally lead a very long list.  Oh, we forgot the transistor, a candidate for the most important invention of the twentieth century.  The “natural monopoly” not only brought us close to universal service ahead of the rest of the world, it created much of the foundation communications technologies we find absolutely necessary for living today.

The Breakup of AT&T

Then in 1982 AT&T lost its long-term battle with the Justice Department.  In January of 1984 it was disassembled, into a long-lines piece, seven regional telephone companies, and a separate manufacturing arm which absorbed Bell Labs in the process.  The reshaped structure removed the internal subsidies that made universal service possible.  Real competition rose in the cream markets—business and long distance.  Prices were still negotiated with regulatory agencies, but the shoes got increasingly uncomfortable.  Over the next fifteen years what emerged from the 1982 judgment turned into a swirl of consolidations and rearrangements from which arose two dominant telephone carriers—AT&T and Verizon.  Two smaller companies snapped up small, independent telephone companies like PacMan, creating CenturyLink and Frontier as billion dollar companies. None competed with the other in any geographical region given the enormous costs of duplicating the copper-based last-mile infrastructure connecting central offices to homes and businesses.  We cannot say, of course, whether this was better or worse than what might have happened otherwise, but we did lose Bell Labs and a dominant communications manufacturing operation in the process, both now owned by a company in Finland.

The 1996 Telecommunications Act

Over the last two decades of the last century telephone services became ubiquitous, cable television passed almost every home in America, and radio stations were everywhere. Moreover, cable television companies were starting to offer telephone services over their network and telephone companies were contemplating getting into television to compete.  Such network convergence (among other things) brought our Congress to shape and then our President to sign the 1996 Telecommunication Act.  It was the first major amendment to the 1934 Act.  While covering lots of territory (the consolidated act covers 333 pages), one of its basic moves was to obliterate the previous mandate for universal service, replacing it with mandates for competition and investment.  Some parts of the Act’s rhetoric suggest that competition and investment will produce service for everyone, the purpose of government to unleash these holy free-market forces for the good of mankind.  Yet other parts of the Act’s rhetoric suggest the truth, that in a competitive market requiring massive investments in physical infrastructure universal service will inevitably be expensed for markets with negative returns. Rural America is just such a market.

What Happened?

Ironically, we had too much good, adaptable infrastructure to make this picture evolve in some orderly, manageable fashion in which course corrections could be made within the sloth-like patterns of public agencies.

The smart phone and Internet access have become so essential to our lives that we forget how fast they rose, from nothing to necessity.  Indeed, it is very hard to remember that when Congress took up the 1996 Act, in 1993, the fastest Internet access speed was 33 kbps, cell phones were the size of a butternut squash, and none of the following existed: HTML (mid-1993), Amazon (1994), Google (1998), Facebook (2004), Twitter (2006), the smart phone (2007), and smart phone apps (2008).   From Apple’s introduction of the iPhone to 2018, eleven years, more than 4 billion smart phones have been sold, more than 23 billions devices are now connected to the Internet, and daily text messages passed 8.5 billion a day in the United States.  Indeed, reading a novel written before 2008 feels like entering an ancient age—there are no smart phones, no texting, no tweets, no Instagrams, no restaurants with every patron’s smart phone placed next to the forks and orders placed on iPads.

The Past Is More Than Prologue

None of this happened without broadband networks.  But rather than build new networks, as were required for electricity and telephone service, each taking many decades to reach half the country, broadband could be delivered over existing cable television and telephone networks using special modems that allow digital data services to share lines with analog television and telephone signals.  Telephone line modems, called Digital Subscriber Line (DSL), were standardized in 1993 and were commercially available by 1997; Cable Modems followed a similar trajectory.  Each was greatly helped along by Moore’s Law that produced ever more complex signal processors at ever-decreasing costs, enabling modems to realize ever-increasing data rates.  (In 1965 Gordon Moore predicted that integrated circuits would double in capacity and halve in price every two years, a geometric progression with profound consequences.)  By 2000 these modems were overhauling our copper-wire infrastructure without stringing a lot of new wire. By 2010 most of the country had been covered in one way or another.  This would have been inconceivable without DSL and Cable Modems to repurpose ancient copper communications lines.   (To rub it in, the foundation technologies enabling both DSL and Cable modems arose largely from Bell Labs, with DSL itself an invention of BellCore, a fragment of Bell Labs left to the regional Bell operating companies.  However, DSL was standardized around technology developed by a tiny start-up out of Stanford University, which technology is now central to Cable Modems and 4G/5G mobile transmission.  So the World Turns.)

The Speed Bump and Video

Unfortunately, our tastes went from text to video.  Video is now 75% of Internet traffic.  Even in compressed form video takes way more bandwidth than text or image transmission. Adding pressure was the widespread dissemination of WiFi routers in homes, attached to their modems, which enable up to eight devices to share a single line.  (New ones have much more capacity.)   Early data rates, measured in low megabits per second, suddenly became more than limited.  In urban areas telephone companies adapted to the change by radically shortening the copper line with fiber to the node networks, realizing data rates with V.Fast DSL up to 50 mbps, or building out new fiber optic networks.  Cable television networks did a similar trick with its modems and network, now able to realize downstream data rates up to 400 mbps in some markets.

When Analogies Fail

We opened our story by comparing broadband to the early days of electricity.  But as with all analogies, this one breaks down at places. Electricity began at 120 volts and 60 Hz (the voltage actually crept up a few percentage points over time) and stayed there.  The power we got over the lines installed in 1919 could be the same today if the wire held up.  Broadband will not be so lazy.  The FCC definition of broadband has grown from 200 kbps in 1996 to 4 mbps in 2010 to 25 mbps in 2015.  It will keep growing.  The pace creates two serious threats: (1) the copper networks currently supplying broadband to at least 80% of the American population will not have sufficient capacity to keep up; and (2) many regions of the country, mostly in rural areas, will be left behind as the cost of upgrades and in the end an entirely new network bringing fiber optics rather than copper lines to the home will be left behind for a considerable period of time under market conditions laid out in the 1996 Act.

Where the Act Fails Us

The 1996 Telecommunications Act recognizes the inherent conflict between fully competitive infrastructure markets and universal service.  For example, the Act authorizes public ownership of radio to insure adequate access to information resources supplied over the air (and hence it formally authorizes NPR and PBS).  But it makes no such gesture relative to broadband service.  As noted above, Section 254 provides a fund to subsidize underserved communities, but its sums are miniscule relative to the need for broadband infrastructure, and declining as wire-line telephone connections decline.  The Act’s only suggested mechanism to encourage universal access to “broadband” is the removal of barriers to competition and investment. In short, the Act sees the need but fails to see the speed with which the need would materialize, and hence leaves us with what we have today, a country divided between those with adequate broadband service and those without.

Aren’t We Saved by Mobile Networks?

So far we have ignored the amazing deployment of mobile telephone networks.  While the basic hand-off technology for slipping from one mobile cell to another without call interruption was sketched out at Bell Labs in 1947, mobile phones awaited other developments to mature into a white-hot market. Moore’s law again contributes its share to the story (in 1980 an integrated circuit had a maximum transistor count around 10,000.  Now it is almost 20 billion, and every year Moore’s law has been declared dead it breaths again).  But the 1996 Act gets some credit.  The major carriers invested billions soon thereafter in fiber optic lines connecting all their offices together, creating within the Public Switched Telephone Network and the Internet an enormous (and still not fully used) internal capacity in what we call the “back-haul network.”  Towers sprouted up like weeds in spring and, voila, cell phone service became almost ubiquitous in a very short span of time.  Then the iPhone hit the market in 2007, and never looked back.

So why don’t we just connect everything up to mobile networks, eliminating the need for all those wires pushed through walls in our houses?  The simple answer combines capacity and costs, the former insufficient, the latter too much to bear.  The full answer is more complex (they always are it seems), but the simple answer will be enough here.  Today cell phones account for 50% of Internet traffic.  But 75% of cell phone traffic goes through a home or office WiFi network with wire-line connections to the outer world.  Therefore in the order of 85% of all Internet traffic today relies upon copper or fiber optic lines into premises, not mobile networks.  Yet we know that cell phone data rates collapse often because antennas congest with more than a certain number of simultaneous users.

The only way the mobile networks can increase capacity for existing cell phones is through “densification,” meaning increasing the number of antennas serving a given area; everything else (higher frequencies, beam forming, carrier aggregation) requires new cell phones and new antennas.  Verizon and AT&T have densification programs around small cell antennas in several areas of the country (including a handful of pole-mounted small cell antennas in Connecticut), but the number of such antennas required to cover the country number in the hundreds of thousands, all requiring new fiber optic wire to connect them back to a mobile Core Network.  Meanwhile the cell phone market has saturated, meaning revenue growth has subsided to what might be expected in a mature market.  Thus a rapid build of mobile networks just to catch up with existing demand probably offends the business calculus, too much capital cost for too little incremental revenue.

We should also mention that small cell antennas are not exactly arriving in communities with parades. They are ugly, and they radiate RF energy close to homes.  Some communities have already outlawed them.  Even those who are just suspicious have long procedures to obtain site approval.  As we observe in our section on 5G, mobile networks are not the answer.

The Problem Facing Existing Carriers

Our country’s telecommunications infrastructure was built almost entirely by private businesses.  The 1996 Act promotes the same solution for the dual problem of advanced communications and universal service. But when the Act moved away from internal subsidies created by legally charging some customers a lot so those areas losing money were compensated, it threw the baby out with the bathwater. Now every capital cost within carriers today must be justified on its own power to return revenue in some suitable proportion to produce a profit.  Markets for telephone, television, and the Internet are now largely saturated.  Should competition increase (the hope of the Act) prices will go down (the hope of the Act), reducing the territories carriers can afford to invest in when markets are mature (against the hope of the Act).  When around 2005 Verizon and AT&T decided to attack the broadband market seriously, with different technologies, they banked on their television package to draw enough incremental revenues from CATV companies to justify the costs. It did not work out.  Verizon stopped deploying its FIOS network in new territories in 2011, and the AT&T U-Verse program never reached anything like serious coverage (it is still not available in the wealthiest sections of San Francisco).  From their point of view they cannot justify new networks when there is no incremental revenue, and in some cases a reduction of revenue, over what they obtain from the existing network.  They now pour their billions of dollars in investment each year into mobile networks. The same is true for CATV companies, not in the sense that they divert capital to mobile networks, but in the sense they cannot see any incremental revenues from significant upgrades to its network, or expanding coverage to regions that were not profitable before.

When Analogies Succeed

The story of Jewett and its initiative to build its own electric plant rather than wait for private electric companies to wire its small circumference is now playing itself out for broadband around America.  More than 100 small communities have installed their own fiber optic networks and manage the same today.  Many more are in planning or construction stages.  Some larger communities such as Chattanooga, Tennessee, with a massive municipal electric utility, have fiberized their city to great benefit. Many of the small networks had state subsidies.  Indeed, the conditions for almost all municipal fiber optic networks today are the existence of a prior electric utility that already knows about poles and wiring and/or state subsidies.

Municipal Networks are Now Mandatory

In Connecticut we are impoverished on both ends of the broadband conundrum.  We do not have universal service, and the absence of real competition means no carrier is moving to the next generation network, fiber optics to the home.  To date no municipality has seen fit to follow Jewett to the broadband altar.  Efforts by Manchester, New Haven, West Harford, and the collection of rural communities represented by Northwest Connect have yet to reach a deal that looks like a real network.  Obstacles center around community commitments to spend the money and various legal impediments fostered by Connecticut law and opposition from our Public Utilities Regulatory Authority (PURA).  The battle forward is not technical, it is financial, legal, and in the end community willingness to pay something for the future of the state.

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