Incentive to Invest in Ohio Broadband & The Carrier of Last Resort Obligation

Transcription

1 Incentive to Invest in Ohio Broadband & The Carrier of Last Resort Obligation Midwest Consumers for Choice and Competition in association with Technology for Ohio s Tomorrow April 2012

2 Midwest Consumers for Choice and Competition (MCCC) is a non profit organization of individual consumers interested in technology, broadband, and telecommunication issues with state projects throughout the Midwest region. MCCC promotes and supports access and broadband deployment, as well as innovative technology and economic job growth in the Midwest. Technology for Ohio s Tomorrow (TOT) is a state project of Midwest Consumers for Choice and Competition operating in Ohio. i

3 TABLE OF CONTENTS Executive Summary... 1 Background and Justification... 3 Method... 3 Ohio Telecom Industry Structure... 5 The Demise of Wireline: The Technology Nobody Wants... 7 Demand for Services: Direction Consumers Are Going... 9 A Dynamic Consumer Flight from Wireline to Wireless Broadband Demand The Magnitude of Capital Expenditure Capital Investment: Why Now? Evidence of Ohio Competition Spurred Investment Ohio Residential and Business Demand for Broadband Demand for Services How Do Ohio Residents Use Broadband? Demand for Services Ohio Business Usage of Broadband Investment Push is Now for Broadband Economic Benefits: The Evidence and Implications for Ohio Review of 2009 Study Findings Review of Recent Economic Impact Studies Broadband as Sub Component of ICT Specific Estimates of Broadband Impacts The Cost of Carrier of Last Resort Anecdotal Evidence Regulatory Policy Research Findings Some Say Regulations will Improve Benefits Implications Table of Tables Table 1 Ohio Telecom Competition, Table 2 Large Incumbent Local Exchange Carriers... 6 Table 3 Types of Carrier Competition, Ohio Table 4 Ohio Telecommunications Revenues in Ohio by Type of Service, Table 5 U.S. Capital Expenditures for Structures and Equipment, Table 6 Ranking of State by High Speed Connections Per Capita, Table 7 Ohio High Speed Line Geographic Competition, Table 8 Broadband Adoption by Industry Sector, Ohio Table 9 Broadband Adopter Internet Applications, Table 10 Business Use of Broadband, Table 11 Summary of Employment Impact Studies, Table 12 Broadband Penetration and Employment Growth by Sector, ii

4 Table of Figures Figure 1 Telecommunications Revenues in Ohio by Type of Service ($billion)... 7 Figure 2 Residential Customers, U.S.*... 8 Figure 3 Business Customers, U.S.* (Thousands)... 8 Figure 4 VoIP: Cable versus Non ILEC Providers... 9 Figure 5 Number of Telephone Competitors Facing the ILEC by Percent of ZIP Codes in Ohio Figure 6 Wireless Only Households by U.S. State Figure 7 Growth in Broadband Adoption by Geography, Figure 8 Online Activities: Ohio Residents Figure 9 Types of Usage of Broadband, Consumers iii

5 Executive Summary Reducing the carrier of last resort burden borne by Ohio's incumbent local exchange carriers would allow capital expenditures to flow to their highest and best use. Evidence indicates that by reducing the carrier of last resort burden (COLR), expanded investment in broadband infrastructure would be encouraged and benefit Ohio s economy. The authors provide evidence that a robust telephone service market exists, showing competition among many carriers and between many technologies. The end user demand for broadband is strong and development of a broadband infrastructure is believed to be of critical importance to economic growth. Economic theory and findings of applied research indicate that continued regulation of the telephone market undermines the advancement of optimal societal investment in broadband. Published articles are reviewed and conclusions drawn indicating that current carrier of last resort regulations are at odds with today s marketplace and technological momentum. The authors believe that carrier of last resort obligations are outdated and are imposed upon select market participants to the benefit of other, lesser or nonregulated market participants. Information of note includes: Competition In Ohio, telecoms provide 98 percent of housing units with telephones. There are as many as 826 companies selling a range of voice and data services to Ohio residences and businesses. Telephone service providers earn about $15 billion per year from Ohioans: Wireless service providers have the largest share of revenues with $4.4 billion per year. (2008) Competition for what we might think of as traditional landline phone service comes in the form of wireless cell phones, competitive local exchange carriers (CLECs) and the rising star, voice over Internet protocol (VoIP), all of which, for the most part, are unregulated. The number of wireless subscriber connections (327.6 million) has surpassed the population (315.5 million) in the United States. As of the end of 2009, one out of four households in the U.S. has only a wireless telephone, no traditional landline. Cincinnati Bell, with a subscriber base of 650,600, saw year over year losses in voice access lines stabilize at 6.9 percent in the June quarter As of December 2011, and for the first time in many years, AT&T had less than 1 million residential access lines. Their subscriber base of 921,000 represents a loss of 67 percent since the peak in AT&T estimates it has not had so few residential access lines since 1946, 65 years ago. 1

6 Strong Market Demand for Broadband: Equally Strong Capex The investment push is now for broadband. The U.S. consumer broadband market is expected to rise from 74.3 million subscriptions (63.2 percent penetration rate) in 2010 to 87.3 million in 2015 (71 percent). On the business side, two out of every three businesses in Ohio have adopted broadband. One in five firms earns revenues online. Among Ohio residents employed full or part time, ConnectOhio also found 14 percent work at home, via the Internet instead of commuting and 26 percent (about one out of every four workers) work at home outside of normal business hours, often using the Internet. On average, 25 cents of every dollar of revenue is spent on capital expenditures by the U.S. telecommunications industry as a whole. AT&T indicates they have invested $1.4 billion in Ohio in the last two years. 1 CenturyLink, another incumbent local exchange carrier (ILEC), testified investing over $24 million between 2009 and Benefits of Broadband Between 15,000 and 30,000 Ohio jobs are created or supported per year due to broadband investments. Another rule of thumb indicates investments of $1 million in broadband result in between 18 and 50 jobs either being created or supported. Even through this recent recession, the investments in broadband created 1.6 million new jobs. Industries with more computer specialist occupations and industries that use technology as a large portion of their inputs are those in which broadband expansion is associated with stronger employment growth. The emerging digital age is dependent upon the key resources of computing, digital storage and bandwidth playing off one another in a virtuous upward cycle where advances in one drive demand and innovations in the others. Today, IT investment accounts for a record 47.3 percent of all U.S. nonstructure capital investment. Industries are applying information and communication technologies to their individual needs, perhaps altering their existing production functions to generate further benefits to the economy due to the base foundation of broadband infrastructure. Implications of Carrier of Last Resort Regulations Investments made due to obligations associated with being the carrier of last resort become deadweight loss investments; that is, investments made by regulatory fiat, not market demand. 1 Industry correspondence 3/1/12 2

7 Research indicates that the original market conditions that existed when COLR regulations were imposed no longer exist, and that the regulatory burdens are hampering the carriers of last resort as they are forced to compete with un or lesser regulated enterprises. It is not in the public s best interest to have regulations that may distort or hamper any investment in this very beneficial technology. In short, the investment required by the COLR obligation would be much better spent on technologies demanded by the market. Should the government want to ensure that COLR services are still offered, then a competitively neutral and technology neutral COLR plan would be preferable. Background and Justification Ohio's regulatory induced telecom industry behavior may be driving greatly needed capital investment in the wrong direction. In markets that have very little or no competition, the government typically imposes regulations as a surrogate for competition. Despite recent significant increases in competition, Ohio telecoms and in particular incumbent local exchange carriers are still encumbered with regulations, in particular, those concerning carrier of last resort (COLR) obligations. Such regulations may be inappropriate; they are effectively a tax that precludes a more prudent use of scarce resources for appropriate, market driven, investment. This report seeks to educate decision makers as to the current conditions faced by the telecom industry. This report has a limited scope. We review research conducted on the costs of COLR obligations and the economic impact potential of broadband, a key component to Ohio s information infrastructure. Benefits of market driven capital investments in Ohio are deduced and provide policy makers with better decision making information. Method Kleinhenz & Associates was engaged by Technology for Ohio s Tomorrow to study how the regulatory burden of being the carrier of last resort may impact the capability of the carriers burdened with the COLR obligation to invest in the more popular and in demand broadband technology. This is accomplished by employing economic theory and information obtained from published literature and industry information. The authors describe current market conditions and provide implied benefits of updated regulations based upon previously published reports and data provided by the Ohio telecoms. The report is organized into four parts. The first section offers a description of the Ohio telephone market structure. Federal Communications Commission data are presented that show a high degree of competition as well as market driven investments exist. The second part offers evidence of the residential and business demand for broadband services. Data from ConnectOhio surveys are discussed and show support that business in Ohio depends more and more upon broadband. The third section describes the types and magnitudes of benefits that may be expected due to an increase in broadband investment in Ohio. The section expressly builds upon earlier work completed by Kleinhenz & Associates. A review of research studies regarding the impact of investment on the economy is included and, where appropriate, applied to the Ohio marketplace. A summary of impacts is presented showing 3

8 the magnitude of Ohio jobs created due to investment in broadband. The fourth section focuses on the studies that discuss the cost to competition associated with carrier of last resort policies. Thus the first three sections establish the case for market awarded benefits for meeting consumer demand while the fourth section defines and provides examples of the burdens of being a carrier of last resort. Finally, conclusions are offered as to the state of industry competition, benefits of telecom capital investments, and the burden of carrier of last resort. 4

9 Ohio Telecom Industry Structure This section is an overview of the number of providers, the size of the industry, types of customers served, changing market share and technological platforms. It is intended to show the degree of competitiveness within the telephone industry and how technology as well as consumer demand are changing the underlying industry. Ohio telephone service providers use a variety of technology platforms from which to provide telephone and other services. The predominant platforms include: Landline Cable VoIP (Voice over Internet Protocol) Cellular Satellite Fixed Wireless The Ohio Telecom Association reports (Table 1) there are as many as 826 companies selling a range of voice and data services to Ohio s 11.5 million residents and 900,000 businesses. 2 In Ohio, telecoms provide 98 percent of occupied housing units with telephone service. 3 Type of Carrier Table 1 Ohio Telecom Competition, Number of Competitors Number of Subscribers millions ILEC 42 4 CLEC Long Distance 364 Not reported Wireless (Cellular) Subscription Video 21 Not reported Broadband 88 5 End user VoIP 246 Not reported TOTAL 826 Six large incumbent local exchange carriers account for most of Ohio s regulated lines. There are 35 small incumbent local exchange carriers that serve approximately 5 percent of the regulated lines. These smaller incumbents range in size from 300 to 30,000 access lines. 5 2 Ohio Telecom Association, 2009, p.4. 3 FCC, Trends in Telephone Service, Table Ohio Telecom Association, 2009, p.4. 5 Ohio Telecom Association, 2009, p.6. 5

10 Table 2 Large Incumbent Local Exchange Carriers AT&T Ohio Cincinnati Bell Century Tel Windstream Ohio Windstream Western Reserve Frontier Source: Ohio Telecom Association, Website, 2011 The Ohio Telecom Association 6 data show there is competition in all facets of telephone service. The association records 88 competitors for the consumer broadband subscriptions and 96 competitors for traditional wireline service. Not all suppliers compete in all markets. Furthermore, there exist overlapping carriers providing more than one service. Table 3 Types of Carrier Competition, Ohio 2009 Type of Carrier Competitors Incumbent Local Exchange Carriers 42 Competitive Local Exchange Carriers 54 Long Distance Providers 364 Cellular Providers 11 Subscription Video 21 Broadband Providers 88 End user VoIP Service Providers 246 Source: Ohio Telecom Association, 2009 The Ohio telecommunications industry earned approximately $15.4 billion in 2008, the most recent year data was available. Revenues for the cellular wireless firms outstripped local exchange provider revenues by $1.2 billion in 2008 (Table 4). Between 2005 and 2008, wireless revenue and broadband revenue increased substantially relative to local, long distance and other service providers. [2006 Data was not reported by the Ohio Telecom Association] Table 4 Ohio Telecommunications Revenues in Ohio by Type of Service, Competitor $billion Local (ILEC and CLEC) $3.2 $3.3 $3.2 Long Distance $2.5 $2.5 $2.2 Wireless (Cellular) $3.3 $4.2 $4.4 Subscription Video $2.1 $2.4 $2.8 Internet and Broadband $1.5 $2.5 $2.8 TOTAL $12.6 $14.9 $ Ohio Telecom Association, Ohio Telecom Association,

11 Figure 1 Telecommunications Revenues in Ohio by Type of Service ($billion) $4.2 Local (ILEC and CLEC) $3.2 Long Distance Wireless (Cellular) $2.2 Subscription Video $ Internet and Broadband The Demise of Wireline: The Technology Nobody Wants The Ohio telecommunications market mirrors the national marketplace. Traditional access lines supplied by ILECs peaked nationwide in 2000 at 188 million. By 2008, those lines declined to 122 million, a reduction of 66 million customers or 35 percent. 8 This loss translates to an annual decline of between 3 and 8 percent per year. This loss is readily apparent in service revenues over this same time period as the ILECs revenues declined nationally by $22 billion to $86 billion. These losses occurred during a growing market. Other local service providers enjoyed revenue increases from $10 billion to over $21 billion. 9 Wireless service providers, by way of comparison, enjoyed a doubling of revenue from $63 billion in 2000 to over $128 billion in Competition of the traditional landline phone service exists in the form of competitive local exchange carriers and the rising star, voice over Internet protocol. This protocol allows for voice communications via broadband technology and offered by a wide array of telecom firms in Ohio. Lesser regulated cable companies are key competitors. The graph below shows the steady loss of customers experienced by the traditional phone companies, the ILECs. More locally, Cincinnati Bell, with a subscriber base of 650,600, saw year over year losses in voice access lines stabilize at 6.9 percent in the June quarter The same magnitude of losses was experienced by AT&T. 12 For example, as of December 2011, and for the first time in many years, AT&T had less than 1 million residential access lines. They have approximately 921,000. That is a loss of 67 percent since the peak in AT&T estimates they have not had so few access lines since 1946, or 65 years ago. The same story holds true for their business access lines. As of December 2011, AT&T had 525,000 business access lines. That is a loss of 61.5 percent since the peak in Federal Communications Commission, Trends in Telephone Service, 2010, p Federal Communications Commission, Trends in Telephone Service, 2010, Table Federal Communications Commission, Trends in Telephone Service, 2010, Table Standard & Poor s Industry Surveys Telecommunications: Wireline, September 2011, p AT&T s reply to Kleinhenz & Associates request for information, January 31,

12 The losses stem in part from cable providers such as Comcast Corp. and Time Warner Cable Inc. continuing to add voice customers as part of their triple play packages with Internet connections and video services , ,000 80,000 60,000 Figure 2 Residential Customers, U.S.* (Thousands) 40,000 20,000 ILECs NonILECs 0 *Switched access and VoIP subscriptions, FCC Local Telephone Competition: Status as of December 31, 2010, p ,000 50,000 40,000 30,000 Figure 3 Business Customers, U.S.* (Thousands) 20,000 10,000 ILECs NonILECs 0 *Switched access and VoIP subscriptions, FCC Local Telephone Competition: Status as of December 31, 2010, p Standard & Poor s Industry Surveys Telecommunications: Wireline, September 2011, p.4. 8

13 Cable firms in particular are enjoying great success providing residential and business consumers with voice service. Cable firms are not subject to carrier of last resort responsibilities or burdens. Their market share of VoIP has grown to over 50 percent of non ILEC providers in the U.S. Figure 4 VoIP: Cable versus Non ILEC Providers 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Coaxial Cable Other Technology *Switched access and VoIP subscriptions, FCC Local Telephone Competition: Status as of December 31, 2010, p.16. USB Investment Research determined the loss of primary residential lines has been 11.5 percent per year. Bernstein Research 14 explained that in this high fixed cost industry, loss of landlines compresses margins. Regarding the U.S. market as a whole, as access line losses have mounted, variable costs are shed and fixed costs remain. The remaining fixed costs are being spread across a smaller and smaller base of fixed lines. Average cost per access line has therefore soared. Demand for Services: Direction Consumers Are Going The Ohio Telecom Association s April 2009 report on Telecom Competition in Ohio 15 documents the trend of Ohio consumers moving away from traditional landlines operated and maintained by incumbent local exchange carriers. The leading contributing factor is competition within the market for providing non landline service to both business and household consumers. Competition is thriving in the Ohio telecom industry. As of December 2010, Ohio incumbent local exchange carriers faced competition in 100 percent of Ohio ZIP codes. As shown in Figure 5, there are at least five competitors in 87 percent of the ZIP codes. Only 8 percent of Ohio s ZIP codes have between one and three competitors facing the incumbent provider. This means that with the ILEC in the lowest 8 percent, consumers have a choice of between two and four 14 Bernstein Research, Ohio Telecom Association, 2009, pp

14 telephone service providers. In the remaining 92 percent of ZIP codes, Ohio consumers benefit from even more robust local telephone service competition. In the 8 percent of zip codes that have between one and three competitors facing the ILEC, Kleinhenz & Associates estimates there are 119,500 residents or 1.0 percent of Ohio s population. 16 Using census figures of 2.46 persons per Ohio household, this implies that all but 48,375 households live in regions with five or more competitors offering phone service. Figure 5 Number of Telephone Competitors Facing the ILEC by Percent of ZIP Codes in Ohio 100% 80% 60% 40% 20% 0% FCC, 12/31/ % The ILEC faces at least 5 competitors in 87% of Ohio zip codes. 5% 8% Ohio ILECs face at least some competition in all Ohio zip codes to 3 0 Source: Federal Communications Commission, Industry Analysis and Technology Division, Wireline Competition Bureau. Local Telephone Competition: Status as of December 31, 2010, published October 2011, Table 20, p.30. Other major findings from the 2009 Ohio Telecom report: The 42 incumbent local exchange carriers in Ohio have lost 1.2 million lines over the past three years and 3 million lines (43 percent) since peaking in 2001 to competition and alternative technologies. In 2008, ILECs lost 500,000 lines, or 11 percent. The number of broadband customers has more than doubled over the last three years, increasing from 1.9 million in 2005 to 5 million in Approximately 95 percent of homes in Ohio have access to broadband service, available from 88 competitors across the state, according to ConnectOhio and the FCC. As of December 2008, there were 9.1 million cell phone users in Ohio, up 21 percent since This, the biggest sector of the telecom market, is served by 11 competitors. The average Ohioan reports paying $39 per month for local phone service and calling features. Although basic rates vary across the state, 25 percent of the total cost is for taxes, surcharges and mandated fees. 0% 16 Source: Kleinhenz & Associates calculations based upon FCC form 477 ( State_Link/IAD/) and the 2010 U.S. Census. 10

15 The 54 competitive local exchange carriers in Ohio have acquired 20 percent of the market share for local telephone service, up from 15 percent in Local phone service is also offered by cable television companies using voice over Internet protocol technology. These companies are not classified as ILECs or CLECs and are largely not regulated at any level federal or state. There are an estimated 20 million cable telephone customers nationwide. A Dynamic Consumer Flight from Wireline to Wireless There has been rapid growth in wireless. According to the semi annual survey conducted by CTIA The Wireless Association, For the first time in history, the number of wireless subscriber connections (327.6 million) has surpassed the population (315.5 million) in the United States and its territories (Puerto Rico, Guam and the U.S. Virgin Islands), which means the wireless penetration rate in the U.S. is percent. 17 CTIA reported comparable data by the FCC in 2008 showing wireless subscribers of million, resulting in an annualized growth rate of 6.6 percent over the three year period. With the growth in suppliers and technologies, consumers have many choices. In Ohio consumers are choosing to pay more and to go wireless. Ohio wireless customers have grown from 4.7 million in 2001 to 9.1 million by As of 2009, an estimated 15 percent of Ohio homes had completely eliminated their landline service. Furthermore, 80 percent of all Ohio residents have a wireless phone and are willing to spend, on average, $85 per month for the service. This compares to the $49 per month consumers pay for regulated local phone service and long distance service. 18 These consumer purchases match up with the U.S. Bureau of Labor Statistic s estimates of consumer expenditures on telecom services. 19 Lastly, in Ohio, there are 3.4 million more wireless subscribers than landline subscribers. 20 Between 2001 and 2008, Ohio wireless subscribers have increased at a rate of 10 percent per year. 21 In their most recent report the FCC estimates that Ohio telecom industry revenues topped $15 billion in The wireless portion amounting to $4.4 billion overshadows the traditional ILEC and CLEC portion of $3.2 billion. As a point of reference, approximately 45 percent of AT&T s U.S. projected 2011 revenues will come from its wireless segment Ohio Telecom Association Website, October 11, 2011 press release. Survey done by CTIA Enterprise and Applications, Ohio Telecom Association, 2009, p According to the Bureau of Labor Statistics Consumer Expenditure Survey, households in the U.S. spend, on average, $1,127 (2008) on telecom services, as reported by FCC Trends in Telephone Service, p 3 3. This amounts to 2 percent of all consumer expenditures. Of the 2 percent (44 percent or $496) is spent on wireless telephone, (36 percent or $406 on land line) and (21 percent or $237) on Internet. The FCC reports, p. 3 5, for households subscribing to wireline services, the monthly average bill is $50. This contrasts to households subscribing to wireless services that pay on average $92 per month. 20 Ohio Telecom Association, 2009, p 8, million wireless users in Ohio vs. approximately 5.7 million traditional wireline users. 21 Ibid, p. 9. K&A calculation 22 Standard & Poor s Industry Surveys Telecommunications: Wireline, September 2011, p

16 The Center for Disease Control released a report in May 2010 that sheds light on the rapid and widespread adoption of wireless cell phones. As of the end of 2009, one out of four households in the U.S. had only a wireless telephone and no traditional landline. 23 Renters were far more likely to have only wireless phone service. Approximately 43 percent of renters had only cell phone service compared to 14 percent of homeowners. The poor are more likely to not have a landline and instead have only a wireless telephone. Just over 36 percent of those living in poverty reported having only wireless phone service compared to the nearly 20 percent of high income homes reporting only wireless service. Two percent of households had no telephone service of any kind. Figure 6 Wireless Only Households by U.S. State Source: Macher and Mayo, Blumberg and Luke, Macher and Mayo,

17 Broadband Demand The Federal Communications Commission reports that in 2008 there were 2.8 million Ohio residences with fixed broadband technology of some fashion. 25 Businesses account for another 1.1 million customers of high speed broadband. 26 Greater access to the Internet and broadband in particular is believed to provide social and economic benefits. It is argued that not only productivity increases along with job growth but that there are other public benefits resulting from the network of information exchanges. 27 To that end, broadband equipment is often placed in accordance with existing rights of way and for public access through Wi Fi in popular locations. For example, ATT has 30,000 Wi Fi hot spots in the United States. To meet the changing demand and technologies, the telecommunications industry is changing rapidly and competition is significant. Voice telephone technology is now digitized like any other video or data stream. The ones and zeros of the digital age can be carried in a variety of ways: traditional landlines, DSL, fiber cable, coaxial cable, wireless systems and blended systems. Each of the technologies may be optimal for a segment of the market, if not the whole market. The Magnitude of Capital Expenditure The telecom industry is capital intensive and expenditures made in the U.S. by the industry exceeded $62.2 billion in In its September 2010 report on Trends in Telephone Service, 29 the FCC finds that in 2008 wireless carriers invested 22 cents for each dollar of revenue collected from end users for structures and equipment. Wireline, resellers, satellite and other carriers invested 28 cents on the dollar. Overall capital expenditures amounted to 26 cents for each dollar of end user revenues. Table 5 U.S. Capital Expenditures for Structures and Equipment, ($ Millions) Telecom Carrier Structures Equipment Total Wireline $8,956 $24,369 $33,325 Wireless $8,094 $17,462 $25,556 Other Not reported Not Reported $3,396 Total $62, Federal Communications Commission, Trends in Telephone Service, 2010, Table Federal Communications Commission, Trends in Telephone Service, 2010, Table 2 5, Table These benefits are the subject of extensive research and discussed later in this report. 28 Federal Communications Commission, Trends in Telephone Service, 2009, table Federal Communications Commission, Trends in Telephone Service, 2009, p Federal Communications Commission, Trends in Telephone Service," 2009, table

18 Capital Investment: Why Now? The race to invest in broadband and wireless has intensified to keep up with consumer demand. Together the wireless and wireline portions of the telecommunications industry reinvest 26 cents for every dollar of revenue received. 31 This implies that in Ohio, approximately $4 billion is spent every year in capital upgrades, expansions and improvements by the telecom industry as a whole. They are not willingly investing in traditional switched access lines. The free market is not signaling these firms to invest in traditional local exchange access lines. They are investing in broadband. Nationwide, during the first half of 2011, telecom providers used cash to further roll out their successful fiber based services in support of broadband growth. In the first half of 2011, AT&T made capital investments totaling $9.4 billion, up from $7.9 billion a year earlier. According to the company, spending in the wireline segment was due to greater demand for Ethernet access and high speed data services. Back in September, Standard & Poor s expected capital spending by AT&T to be flat at around $20 billion in Estimates for 2012 are not available at this time. As provided under current FCC regulations, telephone, wireless, television and Internet providers are able to compete in any market against any other provider. Broadband providers are not required to give competitors wholesale access to their infrastructure so that competitors can resell services to consumers, as is done under the regulated wireline model. Consequently each broadband competitor wishing to stay in the market has to invest in its own infrastructure. Even with large growth rates, broadband is only in 54 percent of Ohio homes, implying there is much room for further industry investment. 33 In addition, as more of broadband s spectrum is filled, the need to expand the network capacity as a whole will arise in order to relieve network congestion and assure quality. DSL and cable are the two primary broadband technologies. Both rely on existing infrastructure to provide Internet services. DSL has 968,000 residential subscribers in Ohio amounting to 40 percent of the broadband residential market. 34 DSL shares the copper wiring of telephone service and cable shares a blend of fiber and coaxial cable (for TV service). The existing copper line and cable line system must be upgraded by private industry if it wishes to offer broadband. 35 For DSL, the provider must install aggregation equipment (DSLAM) that can send Internet data from the serviced area and forward it to the larger highways of the Internet. By installing a fiber connected street cabinet, the DSL provider can extend its service well beyond a three mile range from the central telephone company office. Faster downloading times are available the closer the user is to the central office and the sooner the user is hooked into a fiber line. The DSL provider clearly has incentive to provide early service to areas where there exist high concentrations of lines. Targeting these areas will spread the fixed cost among many users. For cable, the provider, often an existing cable television firm, must upgrade its networks by adding nodes and moving them closer to residences, replacing coaxial cable the closer they get to the residence, with fiber optic cable. These providers must also install routing, switching and amplifier 31 FCC, Trends in Telephone Service, 2010, Section 17, p Standard & Poor s Industry Surveys Telecommunications: Wireline, September 2011, p Ohio Telecom Association, 2008, p Ohio Telecom Association, Kolko,

19 equipment to improve data transmission. Just as with DSL, fixed costs and market competition force broadband providers to take advantage of economies of density. Evidence of Ohio Competition Spurred Investment High Speed Internet Connection Competition The most recent data available from the FCC reports that there are 1,562 firms providing high speed Internet connections within the U.S. 36 There are 104 high speed service providers in Ohio. 37 Ohio ranks eighth among the top 10 states for high speed connections, boasting 3.7 million connections. However, a ranking of high speed connections per capita reveals that Ohio is below the national average, having only 0.32 connections per capita versus the national average of 0.34 connections per capita. Table 6 Ranking of State by High Speed Connections Per Capita, 2008 Rank State Total Connections as (thousands) % of U.S. Population July 2008 Connections Per Capita 1 New Jersey 3,571 3% 8,682, Florida 6,882 7% 18,328, New York 7,087 7% 19,490, California 12,916 13% 36,756, Pennsylvania 4,287 4% 12,448, Illinois 4,314 4% 12,901, North Carolina 3,007 3% 9,222, Ohio 3,704 4% 11,485, Georgia 3,084 3% 9,685, Texas 7,537 7% 24,326, U.S. 102, ,621, Ohio Regional Competitiveness: ZIP Codes Using the most recent data available (2007) for high speed lines, there is a high degree of competition at the ZIP code level. The FCC report shows the number of holding companies having high speed 36 State_Link/IAD/hspd1208_tables.xls Table 10, reported for December 2008, published October of 2011, page State_Link/IAD/hspd1208_tables.xls Table 20. reported for December 2008, published October of 2011, page

20 subscribers by Ohio ZIP code as of June 2008 and only eight Ohio ZIP codes have less than three competitors with high speed lines in service. 38 Table 7 Ohio High Speed Line Geographic Competition, 2008 Number of Providers Number of ZIP Codes Percent of ZIP Codes 1 1 <1% 2 7 <1% % % % % % % % Totals % Ohio Residential and Business Demand for Broadband This section provides an overview of how consumers are using broadband. Implicit in this discussion is whether firms are investing enough. What is the demand for broadband? Is the competitive model of broadband meeting the demand? To gain insight on these questions, data collected by ConnectOhio is analyzed. Demand for Services How Do Ohio Residents Use Broadband? ConnectOhio in 2011 conducted a telephone survey of 800 residences and 800 firms. Their findings explain how crucial broadband is to economic growth. Currently, 66 percent of households subscribe to broadband within Ohio, a significant gain since 2008 when only 55 percent of households subscribed. On the business side, two out of every three businesses in Ohio have adopted broadband. One in five firms earns revenues online. Firms appear to be gaining efficiencies via broadband as they employ it for such tasks as videoconferencing, auditing, posting benefits information, etc. In 2011, 80 percent of households owned a computer, up slightly from the 76 percent reported in Across the 2008 and 2011 studies, more than 90 percent of Ohioans reported access to high speed broadband service. However, only 55 percent subscribed to it in 2008 as compared the more robust 66 percent in Given Ohio s population of 11.5 million and comprised of approximately 4.5 million 38 State_Link/IAD/hspd1207_tables.xls, published in

21 households, 39 and a non broadband adoption status by 34 percent of the population, approximately 1.5 million households, or about 4 million Ohioans, are without broadband. 40 The 2011 survey found that 34 percent of Ohioans subscribed to broadband in the mobile form. This was a large increase compared to the 14 percent reported in Across age groups broadband usage is fairly uniform. Its usage has climbed steadily over the past several years, currently ranging between 65 and 78 percent among the various age groups. The notable exception is the 65 and older group of Ohio citizens. This group has risen from only 26 percent using broadband in 2008 to only 37 percent using it in Figure 7 Growth in Broadband Adoption by Geography, % 70% 65% 60% 55% 50% Statewide Urban Suburban Rural 45% 40% While online activities vary, the 2008 ConnectOhio report shows that transactional activities such as purchases, banking and paying bills are the most frequent. Between 55 and 70 percent of Internet users at home accessed these activities. 42 The ConnectOhio residential survey reports that the percent of people performing online banking transactions increased from 55 percent in 2008 to 62 percent. Nearly nine in 10 survey respondents indicated that they conduct activities via broadband. 39 U.S. Census, Ohio QuickFacts. 40 Household and population estimates of broadband usage made by Kleinhenz & Associates. 41 ConnectOhio Residential Technology Assessment Results, ConnectOhio,

22 Figure 8 Online Activities: Ohio Residents 80% 70% 60% 70% 58% 55% 62% 50% 40% 30% 20% 10% 0% 2008 Purchase of a product 2008 Made travel arrangements 2008 Online banking 2011 Online banking There is a strong work to home linkage by Ohioans. More than four of 10 residents use the Internet to work from home, either during regular business hours or in the evening. Among Ohio residents employed full or part time, ConnectOhio also found 14 percent work at home via the Internet instead of commuting, and 26 percent (about one out of every four workers) work at home outside of normal business hours, often using the Internet. Demand for Services Ohio Business Usage of Broadband It appears there is room for greater penetration in the business sector. Indeed, 33 percent of all firms indicated they do not use broadband. The adoption curve also depends, in part, on the number of firms using the Internet. In fact, 12 percent of Ohio firms report not using a computer. Broadband, including DSL, is used by the majority of firms across all industries. Broadband is most intensely used in the professional/finance industry in which 74 percent of firms report subscribing. Interestingly at 72 percent usage, manufacturing firms appear to be high users of computers and broadband. Only 56 percent of health care firms reported using broadband. The current draft of the federal stimulus package identifies development of electronic medical records within the next five years as a goal. Broadband adoption will be critical for this industry. Table 8 Broadband Adoption by Industry Sector, Ohio Sector Average High Tech 69% 59% 64% Ag/Mining/Construction/Utility 47% 70% 59% Manufacturing 68% 72% 70% Wholesale Trade/Transport/Warehousing 59% 70% 65% Retail Recreation/Food/Lodging 54% 67% 61% Professional/Finance 71% 77% 74% Healthcare 58% 53% 56% Other Services 58% 66% 62% State Average 59% 67% 63% n=807 Source: ConnectOhio, 2008, 2010 Business Data 18

23 Figure 9 Types of Usage of Broadband, Consumers 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 85% Communicating through e mail or other ways of sending messages 74% 72% Exploring or participating in hobbies or personal interests Researching or purchasing goods or services 64% Reading online newspapers or other news sources 61% Online banking or paying bills 53% Searching for medical information, or communicating with healthcare professionals 42% 40% Searching or applying for jobs Taking online classes or conducting research for schoolwork 31% Interacting with government offices or elected officials Table 9 Broadband Adopter Internet Applications, 2008 Application Percent Online purchasing 77% Researching or booking business travel 71% Online banking 63% Online shipment tracking and control 62% Online marketing and advertising 57% Online selling or accepting orders 43% Online billing or bill payment 45% Online healthcare or insurance admin 39% Online customer support 38% Online training 31% Online employee benefits information 28% Bidding on contracts online 26% Accepting real time credit or debit card pmts 24% Online accounting and internal auditing 21% Online inventory tracking and control 15% Video conferencing 14% Blogging 11% Online manufacturing process control 4% Source: ConnectOhio,

24 Table 10 Business Use of Broadband, 2010 Measure Number of Ohio Businesses % of All Ohio Businesses Computer Use 237,000 88% Broadband Adoption 180,440 67% Have not Adopted Broadband 88,000 33% Earn Online Revenues 59,000 22% Employees Telework 59,000 22% Source: ConnectOhio, bizassessment.pdf and bizwhitepaper.pdf, 2010 data Broadband connected businesses bring in an average of $200,000 more in median annual revenues. 43 Ohio businesses pay an average of $67 per month for broadband services. 44 Investment Push is Now for Broadband The investment push is now for broadband. The U.S. consumer broadband market is expected to rise from 74.3 million subscriptions (63.2 percent penetration rate) in 2010 to 87.3 million in 2015 (71 percent), according to industry research firm IDC. Cable companies are the industry leaders in broadband connections, with a 55 percent share of the market at the end of The challenge for both telecom and cable companies is that penetration rates of their customers bases is relatively high and thus revenue growth needs to stem from faster connections. 45 There remains approximately 34 percent of residences and one third of businesses that have yet to subscribe. Competition for their business is intense. In addition to investing to gain new customers, competitors are forced to ensure good quality broadband service. In short, the customer wants a highspeed connection that will allow them to use their desired applications including those requiring high spectrum. Competition naturally allows or forces providers to differentiate themselves by offering broadband speeds and improved service to meet customer expectations. On average, 25 cents of every dollar of revenue is spent on capital expenditures by the U.S. telecommunications industry as a whole. 46 Testimony from an AT&T official indicates it has invested $1.8 billion in Ohio in just two years, between 2008 and CenturyLink, another ILEC, testified investing over $24 million between 2009 and ConnectOhio website, 2010 business data pdf sidebar docs/oh_bizassessment.pdf 45 Standard & Poors Industry Surveys Telecommunications: Wireline, September 2011, p FCC, Trends in Telephone Service, 2011, p Tom Pelto, President, AT&T Ohio, Proponent Testimony Senate Bill 271, Senate Energy and Public Utilities Committee, Wednesday, January 18, Vickie Norris, Director State Regulatory & Legislative Affairs, CenturyLink, Testimony in Support of S.B. 271 before the Senate Energy and Public Utilities Committee, Wednesday, January 18,

25 Economic Benefits: The Evidence and Implications for Ohio The consensus among economists over time is that investments in infrastructure namely communications and transportation have the most important impact on regional growth. The Federal Reserve Bank of Cleveland, in an economic review article by Randall Eberts in 1990, reported that the consensus among economists is that public infrastructure stimulates economic activity [and] may also attract households and firms which further contributes to an area's growth. 49 In this section of the report, key economic analyses that attempt to measure broadband s impact and benefit are reviewed. A brief synopsis of the 2009 Kleinhenz & Associates study is highlighted followed by a summary of the recent studies that provide perspective on the productivity impacts of broadband. Review of 2009 Study Findings In the 2009 study, The Evolution of Telecom and the Ohio Template for Reform: 2009, co authored with the Digital Policy Institute, Kleinhenz & Associates examined the job impact of investment in broadband. Findings from the then current studies in 2009 were correlated with the Ohio marketplace developments and showed a range of between 15,000 and 30,000 jobs per year are due to broadband investments. If investments of $1 million were made in broadband, 18 to 50 jobs would be created or supported. The estimates take into consideration broadband s productivity enhancing attributes and are not only limited to the value of hardware installment. (Time frames vary and data are not necessarily corresponding) Ohio has suffered population losses that make it difficult to apply studies that stake a claim to broadband s contribution to employment growth. Nevertheless, it can be argued that broadband investments in Ohio have curtailed net job losses. The results are approximations and may be applicable only during high growth periods for broadband. Applications are described below. Table 11 Summary of Employment Impact Studies, 2009 Study Benefits as Applied to Ohio Gaasbeck, ,000 jobs/yr between 2001 and 2005 EDA (communities w/broadband vs. none) 30,000 jobs/yr between 1999 and 2002 Crandall, 2007 (based on lines per capita) 290 to 440 jobs per year Atkinson, 2009 (Type II plus network effect) 19,920 jobs for a $400 million investment Hazlett (US multiplier impact $500 million) Between 309 and 9,100 jobs Crandall in his 2007 study asked Will the growth rate continue? 50 Crandall argued that it will take time for broadband benefits to be accurately measured. Clearly there are two levels of impact. The first is the direct capital investment required in terms of billions of dollars and millions of lines or wireless nodes. By themselves, these investments have spurred the economy and generated classic multiplier effects of jobs, income and GDP growth. However, there is predicted to be more. As with computers and the 49 Eberts, 1990, p Crandall, Robert, et al. The Effects of Broadband Deployment on Output and Employment: A Cross sectional Analysis of U.S. Data, Issues in Economic Policy, The Brookings Institution, Number 6, July

26 Internet, Crandall and others argue that broadband technologies are expected to ultimately alter productivity and change the way business works. Crandall points out that broadband is a sub sector of a larger economic sector labeled information communication technology (ICT). He references economist Stiroh, who in 2006 believed there would be a shift away from capital to complementary capital that will use ICT. Just when the production altering impacts might be felt and achieving a critical mass, the industry could then enjoy a type of network externality. Following a series of earlier studies, Jorgenson in 2007 in a capstone study, estimates that ICT contributed 59 percent of the growth in labor productivity from 1995 to 2000 and 33 percent from 2000 to Review of Recent Economic Impact Studies Broadband as Sub Component of ICT Recent studies have spotlighted the impact that broadband and the broader ICT sector has on productivity. Measuring the impact that the information communication technology sector has upon labor productivity and ultimately GDP is a current vein of economic research. According to Davidson and Swanson (2010), the emerging digital age is dependent upon the key resources of computing, digital storage and bandwidth. They play off one another in a virtuous upward cycle where advances in one drive demand and innovations in the others. 51 In this setting, broadband is but a single portion of the story of productivity. Today, IT investment accounts for a record 47.3 percent of all U.S. non structure capital investment. 52 U.S. capital expenditures on information and communications technology (ICT) since 2005 have totaled $2.2 trillion. In his 2010 study of factors of U.S. economic growth, Jorgenson concludes replication of established technologies through growth of capital and labour inputs, recently through massive investments in IT hardware and software, explains by far the largest proportion of U.S. economic growth. 53 In other words, industries are applying ICT technologies to their individual needs, and undoubtedly altering their existing production functions. An analysis of information technology s impact on productivity published in 2007 by Oliner et al. at the Federal Reserve confirms the central role for information technology in the productivity revival during and shows that IT played a significant, though smaller, role after In a 2008 paper updating their earlier work on labor productivity, Oliner et al relate that although the contribution from use of IT capital overall has moved down since the period , there remains a strong contribution to labor productivity from the IT producing sector during the 2000 to 2004 period Davidson and Swanson, 2010, p Davidson and Swanson, 2010, p.2 53 Jorgenson, 2010, p Oliner, Sichel, and Stiroh, 2007, p.i. 55 Oliner and Sichel, 2008, p