July 11, 2018
This paper, commissioned by NTCA – The Rural Broadband Association and USTelecom – The Broadband Association, examines communications networks, road networks, and electric power networks as three key network infrastructure industries; and the resulting vulnerability in low-density rural areas with the highest need for targeted subsidies.
In establishing sound public policy (and rules implementing that policy) regarding broadband deployment in high cost and rural areas, it is useful to first consider the economics of investments. In particular, the economics of network investment in rural areas is germane. Networks in general exhibit economies of density; that is, costs per user (or usage unit) are lower in high density areas. As one moves to more rural areas, with any network, the costs per user become increasingly high, eventually leading to unsustainable business models to provide network services.
In this respect, there are similarities between networks in communications, electric power, roads, natural gas distribution, water distribution, and sewer networks. By the very nature of network economics, each industry exhibits economies of density and each reaches a point at which un-subsidized provision of service in low-density areas is not viable. The causes of higher costs in low-density areas are discussed in this paper using communications examples. In addition, the scope of low-density areas in the United States are considered.
The importance of subsidies to networks in low-density areas is described for each of the major U.S. network industries. The importance of subsidies depends in large part on whether there are substitute methods of providing similar services (e.g., wells for water, propane tanks instead of nature gas networks, septic systems instead of sewer networks).