Distance Is Not Dead or Cost Free

In 1997, Frances Cairncross wrote a book entitled The Death of Distance (Harvard Business School Press) that heralded the Internet’s ability to transcend and mitigate much of the financial and logistical challenges posed by geography. Certainly the Internet enhances productivity and opportunities, particularly for people in remote places. But what make distance less significant is the product of cost allocation and cost recovery policies and not some new transcendental notion that it has become easier, cheaper or more efficient to serve rural areas.

Professor Michael Katz angered some rural advocates when he articulated this concept, perhaps more bluntly: “The notion that we should be helping people who live in rural areas avoid the costs that they impose on society … is misguided from an efficiency point of view and an equity one.” See Howard Berkes, Stimulus Stirs Debate Over Rural Broadband Access, National Public Radio, Morning Edition (Feb. 19, 2009); available at: http://www.npr.org/templates/story/story.php?storyId=100739283.

Professor Katz is quite right that because rural areas have a diffuse, spread out population, the cost of installing a distribution infrastructure is higher than the cost of serving the same number of people located more close together. If government decides to bridge this cost differential—as it did expressly in the Telecommunications Act of 1996—one could infer that universal service has a comparatively high public policy priority. Professor Katz might favor government spending less on broadband and more on subsidizing infant immunizations, but note that the issue becomes one of whether and how to compensate for cost differentials, not that technology somehow has eliminated them.

Rural residents have qualified for a number of public policy initiatives aiming to defray the cost of living in remote locales. “Keeping them happy down on the farm” may have national security benefits, and perhaps the United States does not differ much from China insofar as the consequences of mass migration from rural to urban areas and the congestion costs that would generate.

From my perspective distance surely does matter, both in terms of my out of pocket costs and more broadly “opportunity costs,” i.e., the time, money, effort and foregone options resulting from my residency in a rural locale. While I can blog to my heart’s content and achieve parity with an urban blogger, being out of sight and not a frequent attendee at various Washington, D.C. political/social/educational events means that I am not going to be on decision makers’ radar screens for conference invitations, new employment and life time achievement awards to name a few.

In my case, rural residency came with the decision to accept an academic appointment. Perhaps I could have held out for an urban posting, but it did not turn out that way. Thanks to cost averaging decisions and “All You Can Eat” unmetered monthly Internet access subscriptions—itself another inefficient artifact of the Internet’s long past promotional phase—I can try to compensate for my location. But being “centrally located in the middle of nowhere” has costs that government cannot offset.

Universal Service Reform

An increasing number of players—including the incoming Administration—have expressed interest in reforming the process by which the federal government seeks to promote wider and more affordable access to telecommunications services. Currently wireline, wireless and now many Internet telephone subscribers contribute over $7 billion annually to universal service funding, most of which goes to incumbent wireline carriers. The process is quite flawed and vulnerable to arbitrage. For example, a rural wireline telephone company in Iowa offers “free” teleconferencing (previously “free” calls to European locations) just by calling into their switch. For wireless callers with “unlimited nights and weekends” the additional out of pocket cost is zero, even though the carrier making the inbound call incurs charges of several cents per minute instead of the thousands of one cent typically charged by so-called “terminating carriers.”

I have written extensively on the subject of universal service reform and suggest the following “best practices”:

• True technology neutrality coupled with a willingness to fund well articulated and community-supported projects rather than limit support to a fixed list of existing carrier services;

• Capping government project funding to a percentage of total cost, thereby requiring project advocates to seek financial support from other grantors, or from bank loans;

• Emphasizing one-time project funding rather than recurring discounts;

• Creating incentives for demand aggregation among government and private users, particularly for broadband and data services;

• Promoting innovation and creativity in projects, including technologies that provide greater efficiency and lower recurring costs;

• Encouraging competition among universal service providers by auctioning off subsidy access; and

• Blending government stewardship and vision with incentives for private stakeholders to pursue infrastructure investments.