Telecom Regulation
Stuck in the ’90s
by scott wallsten
Kerry Roper/Okon Images

scott wallsten is a senior fellow at the Technology Policy Institute, as well as TPI’s president.

Published TK


Elon Musk recently blasted the federal government’s decision to deny a nearly billion-dollar subsidy for rural connectivity that had been previously awarded to his satellite broadband company, Starlink. No matter what you think about him, Musk’s outburst points to an uncomfortable reality: new technologies are rendering America’s policy for promoting and subsidizing broadband telecommunications outdated and counterproductive.

Both 5G fixed-wireless and low-earth orbit (LEO) telecom satellite technologies are widening access to broadband, upending debates over whether the broadband market is sufficiently competitive. Most notably, LEO satellite broadband service is available pretty much everywhere, challenging the conventional wisdom that some geographic areas are inherently expensive to serve and eliminating the primary justification for nearly all government broadband infrastructure subsidies.

These technological achievements represent a victory for champions of “facilities-based” competition — a market structure in which competition arises from providers each operating their own infrastructure. Yet rather than celebrating this milestone, Washington is not merely working to preserve the status quo, but expanding market interventions designed for the telecom industry of the 1990s. To ensure connectivity to all Americans while promoting innovation, it is time to truly reshape broadband policy.

This Is Not Your Father’s Broadband Market

For years, broadband access was predominantly wireline-centric — only wires were seen as capable of providing true broadband. Alternatives were always seen as subpar. Cellular wireless broadband, for instance, was deemed a second-best solution — enough of a competitor to help discipline prices charged by wireline providers, but inadequate for, say, streaming HD video on a big screen at home. Wireless internet service providers, for their part, served a niche demographic, but on a scale too limited to be of much competitive consequence. Satellite services, while universally accessible, were hamstrung by higher latency (the time it takes the signal to make a round trip between your computer and the satellite) because of the satellites’ high geosynchronous orbits.

Today, however, 5G cellular fixed-wireless and low-earth orbit satellites generate competitive pressure, eliminating the justification for subsidizing glass fiber cables to reach rural customers. Start with 5G, which may not have lived up to its early, grandiose promises but has quietly become a key part of the competitive broadband landscape as T-Mobile, Verizon and AT&T (and others who piggyback on the big three) rapidly expand coverage.

The numbers on new broadband subscribers tells the story. While wireline broadband subscriptions have plateaued, fixed-wireless subscriptions are on a consistent upward trajectory. In 2021, fixed-wireless accounted for 20 percent of net broadband additions, a figure that soared to 90 percent in 2022 and nearly 100 percent in 2023.

Meanwhile, the plummeting costs of building satellites and launching them into low-earth orbit has made low-latency, high-speed satellite broadband a reality. These satellite systems offer yet another robust form of competition to traditional providers. Unlike the traditional satellite providers, whose birds must sit in geosynchronous orbit some 22,000 miles above the earth, LEO “constellations” consisting of thousands of satellites zip around the planet at an altitude of roughly 1,200 miles. That makes a big difference in performance, even with signals traveling at the speed of light.

To be sure, not everyone can access these new services. It can be hard to know whether a given geographic address can get a solid 5G fixed-wireless signal until it’s tried, and not everyone can install the terminal necessary to get a LEO signal. But traditional broadband providers also can’t know exactly which houses their new competitors can serve, meaning both LEO and 5G fixed-wireless represent competitive threats for a larger portion of the market than might be assumed.

It is important to acknowledge current limitations. While LEO is particularly well-suited to providing service in rural areas, it does not yet have sufficient capacity to serve everyone lacking terrestrial broadband options. However, capacity is steadily increasing.

LEO service provides more than enough bandwidth for households to engage fully in all aspects of online life, both at home and at work. Starlink’s exceptionally high consumer satisfaction ratings suggest consumers agree.

Moreover, the technology itself is improving rapidly. According to Starlink, its second-generation satellite has about four times the capacity as the first generation. Additional innovations, like its so-called “space lasers,” help move data rapidly around the constellation as they hand off signals. The rapid growth in capacity is evidenced by Starlink’s decision to eliminate the waitlist for service throughout the country.

Another critique is that LEOs do not offer the bandwidth of fiber. That’s a fair point, and LEOs are not going to displace fiber where the latter is economical. Nevertheless, LEO service provides more than enough bandwidth for households to engage fully in all aspects of online life, both at home and at work. Starlink’s exceptionally high consumer satisfaction ratings suggest consumers agree.

And lest one worry about the unpredictable Musk having complete control of this new technology, others seem poised to beam service from the skies. Having recently launched prototype satellites and scheduled further deployments, Amazon’s Project Kuiper is gearing up to launch a competing LEO constellation. Other LEO entities like Eutelsat’s OneWeb are contemplating entering the broadband market, and the European Union is planning its own competing system, which could potentially offer services in the U.S. if American policymakers allow it.

But It’s Still Your Father’s Broadband Regulatory Regime

For decades, broadband policy was built around fiery debates over the adequacy of broadband competition and a widely shared belief that delivering broadband to remote regions was not economically viable without subsidies. Yet, despite game-changing improvements in technology, broadband policy remains frozen in time.

We see it, for example, when the FCC chairwoman states, as she did in September, 2023, that “almost half of us lack high-speed service with 100 megabit-per-second download speeds or can only get it from a single provider.” But in order to suggest there’s little effective competition, she ignores the looming presence of 5G fixed-wireless and LEO service.

We also see the lack of policy adaptation in persistent rural subsidy programs designed for an earlier era.

Stringing wires to some areas, particularly rural ones, is typically costlier than it is in more densely populated areas. Historically, the Ma Bell monopoly could cover these higher costs by charging nonrural customers more. But the breakup of the telephone monopoly made that model unsustainable, leading to the FCC’s Universal Service Fund and its “high cost” component, one of four programs composing the USF that is referred to as the High Cost Fund.

That was then. The High Cost Fund has since become a solution in search of a problem because there’s no longer such a thing as a “high cost” area — only areas that are prohibitively costly to serve with cables. The cost of providing satellite service is the same everywhere.

Nevertheless, the USF continues to exclude satellite service. Newer subsidy programs also exclude it, as evidenced by the FCC’s Musk-provoking decision to yank Starlink’s nearly billion-dollar rural subsidy and Congress’s and other agencies’ decisions to largely exclude satellite from the $50 billion-plus in broadband subsidies included in Covid-19-era legislation.

The economic rationale for the subsidies has vanished. Given its vast scale, deep entanglement with thousands of small phone service providers, and popularity among politicians who favor funds flowing into their districts — it’s imperative to plan a phase-out.

Now, policymakers appear either unwilling or unable to reform the High Cost Fund despite its questionable reason for being. This is not really a surprise: companies often receive subsidies indefinitely, regardless of whether they are still necessary to achieve the original policy goal.

Indeed, the High Cost Fund seems to have been a bust even before the rationale for it evaporated. Since the enactment of the 1996 Telecommunications Act, more than $100 billion has been funneled into rural telecom with little impact on bridging the rural digital divide. If these initiatives had been successful, the recent auctions used to assign rural subsidies to providers, not to mention the additional subsidies from Covid-19 legislation, would not have been necessary.

The Policy Changes We Need Now

The policy implications of these new technologies are profound. And it’s high time to rethink government programs designed to promote broadband.

First, we must radically overhaul rural broadband policies. Most crucially, this entails phasing out the High Cost Fund. The economic rationale for the subsidies has vanished. And while it would be impractical to dismantle the subsidies overnight — given its vast scale, deep entanglement with thousands of small phone service providers, and popularity among politicians who favor funds flowing into their districts without the need for a vote — it’s imperative to plan a phase-out.

Among the benefits would be alleviation of the USF’s broader funding crisis. The contribution base — the telecommunications revenues taxed to sustain the USF— is insufficient to cover its obligations. Attempts to stabilize the USF have largely focused on broadening the revenue base to be taxed, typically by taxing broadband and big tech revenues. Deep-sixing high-cost support component could slash the funding requirement by half.

While policies need to change, it’s crucial (for reasons of politics as well as efficiency and equity) not to leave low-income rural residents out in the cold. Winding down high-cost infrastructure subsidies could be paired with increased subsidies for low-income subscribers, including not just monthly service vouchers but one-time subsidies to assist with initial setup costs like satellite signal receivers.

Admittedly, it’s unlikely that Congress will amend the relevant laws or that the relevant agencies will change their regulations anytime soon. But there is still some hope that states can act independently to subsidize the use of LEOs to address their digital divides. States could designate localities with a “very high cost” threshold, where fiber technologies just can’t compete. To minimize waste and windfalls for providers, states should set their thresholds at levels at which technologies receive subsidies only if they pass a sensible cost-benefit analysis.

Second, our approach to space policy requires modernization. We need to ensure not just robust competition to Starlink in the LEO sector, but also that the sector accommodates opportunities for innovation likely to follow from the declining costs of building satellites and putting them in orbit. Policymakers remain mired in a 1960s-era mindset, where orbit assignments and spectrum usage are determined through cumbersome regulatory “beauty contests,” whose winners were, often as not, determined by lobbying.

Rethinking this approach, including devising incentives to encourage optimal spectrum usage and managing externalities like mitigating space debris, is essential. This task is daunting, especially given the international dimension of space use. Yet, as LEO’s significance grows, the status quo becomes increasingly untenable. It’s time for profound contemplation on how to refine and enhance it.

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The persistence of yesterday’s policies risks stifling the potential of the technologies that have radically changed the competitive landscape in telecommunications. The moment is ripe for action — not only to capitalize on the productivity of 5G and LEO but also to narrow the digital divide that corrodes social cohesion. Tinkering is not an option. We need to reimagine connectivity strategies in the face of rapid technological change.

main topic: Tech & Telecoms