Wed, 08/18/2021
This post is a summary of Season 2, Episode 2 of The Nebraska Governance & Technology Center’s (NGTC) Podcast Series, Tech Refactored. In this episode, host NGTC Director Gus Hurwitz was joined by Ronald Rizzuto, Endowed Professor of International Executive Education and Professor of Finance at the Daniels College of Business at the University of Denver to discuss the history and state of the cable and telecommunications industry with a focus on how municipalities try to build out broadband services, why it often fails, and what it takes to succeed.
The story of Rizzuto’s involvement with the cable industry is an interesting one. When he initially came to DU in the eighties, it was with the intent of teaching finance. Denver was the capital of cable television at the time, but there was a lack of a literature base on the subject, so he began researching and consulting on telecommunications issues, as well as corporate finance. One of the reasons that Denver was a natural hub for telecommunications in the eighties was that at that time there was an explosion in microwave and early satellite interconnectivity in order to nationalize distribution networks and Denver is, of course, very high up in the mountains, making it a good place to situate receivers.
The early history of cable was very different from the early days of telephone in that you had a number of engineers who realized that they could wire up their towns and create cable networks - so the industry was characterized by a number of small operators who were building these networks, community by community from the ground up. To Ron’s mind, that same ethos has shaped telecommunications to this day, as it continues to be a very entrepreneurial industry - it has never had deep pockets or government support. “There were a lot of entrepreneurial renegades who got into the business. And that is really the tradition.”
Turning to the challenges of putting in a cable telecommunications system, one of the principle issues that companies that want to provide broadband access have faced, whether they be municipal cable companies who wanted to begin to provide high speed internet access, or other actors, are the upfront costs. In the case of municipal companies, that sometimes led to bond issues being brought before voters, or simply borrowing money from the preexisting side of their businesses. Once the ISP side of their operation began generating money, the thought went, then they could just take a portion of that revenue to pay back the internal “loan” that they received from existing parts of their businesses.
What Dr. Rizzuto’s research has shown is that, in the case of municipal networks or government-owned networks, those initiatives have generally not been successful in that “they don’t generate sufficient cash flow to operate on their own.” In other words, “they don’t pay all their bills.” This creates a situation where there effectively ends up being an ongoing subsidy from the existing side of the municipal telecom company’s service in order to support the losses being incurred by the ISP side of the operation.
The reason for that, according to Dr. Rizzuto’s research, is that these municipalities have generally underpriced their services; “that’s where you see the business decisions morph into political decisions.” This is a direct result of the fact that often municipal networks are created based on a belief that the prevailing cost to consumers charged by existing ISPs is too high. “So they go ahead and put in the network and they purposely keep rates low, but then they forget that they need to pay their bills.”
This is in contrast to other government run or government provided utilities; for example those that provide water or electrical services. Those, according to Dr. Rizzuto, tend to be able to support themselves because they operate as natural monopolies. Putting on his antitrust hat, Hurwitz noted that, in a situation where a utility is able to offset any shortfalls in its operations through tax revenue, then that effectively creates a cross-subsidization situation; this was the circumstance under which AT&T was broken up in the 1980s. Dr. Rizzuto agreed that, especially in situations where a utility is both regulating (the wider market) and competing (in that market), then you end up with a lot of cross-subsidy type situations; “it’s a messy world and it’s an area where you can make a lot of mistakes.”
Hurwitz notes that, in terms of operation of the Federal Communications Commission, it is dominated by lawyers and economists. What then is the contribution that experts in finance and business can add to the discussion surrounding the provision of broadband internet access? Rizzuto contends that, if you look at the way that broadband internet has been regulated, it has been treated as if it were a natural monopoly, when in reality it is a competitive environment. Therefore “we need to be careful that we don’t destroy the creativity and innovation that comes from” the functioning of the market by overregulating the industry.
According to Hurwitz, one of the thornier areas in the provision of telecommunications is the “universal service commitment,” that is “the requirement that unserved or economically unserviceable areas get service.” Rizzuto agrees with the importance of the universal service commitment, “you need to provide for universal service. (However,) in the early days of the telephone where we had the Universal Service Fund” we got phone service in a lot of places where it wouldn’t be; now we’re throwing money at a problem in the name of universal service. I think it’s a huge waste of resources, because we find that, even in areas where for-profit operators compete with government operators, you’re still seeing pockets of uncertain areas that are unserved, but neither of them are going to take that step without some sort of subsidy.”
Here Hurwitz brought up what is, to my mind, an underappreciated aspect of the digital divide, which is that in reality there are two separate digital divides - one urban, the other rural. The rural digital divide concerns remote areas - say a town in rural North Dakota - where the upfront costs of installing infrastructure to that area are substantial, making private sector investment unattractive. A second, less known digital divide concerns the provision of internet access to poor parts of cities. As Hurwitz explains, “providers have an incentive to build where the money is, and they know where they’re going to make the money (within a city) and where they are going to lose money.” Consequently, the solutions to solving both these digital divides are almost certainly different, as the rural digital divide might best be approached by subsidizing the upfront costs of extending service, while the urban digital divide might require a system of ongoing subsidization so that internet access is made affordable for low-income individuals.
Another interesting endeavor Rizzuto has been involved with is a program that brings Chinese telecommunications executives to the United States, to learn from the US’s experience in growing and managing its telecom systems. The existing trend within China was one of compartmentalization - one company provided phone, another provided video, etc. Now there is more comfort with business entities operating across services. And being China, there continues to be a substantial amount of government involvement in the industry in the form of government businesses that are operating as domestic providers, and companies that are competing abroad - most notably (and controversially) in the form of Huawei.
Lastly, Rizzuto has been involved for years in an active effort to recruit and maintain talented women in leadership roles within the telecommunications industry. Time Warner began pursuing that goal in the form of a dedicated curriculum for women who were managers of the company, which eventually evolved into an organization called “Women in Cable,” which now operates across the industry. The focus of the program eventually evolved away from operational education to more programming associated with leadership. Rizzuto detailed the program's success, citing several prominent leaders in the cable industry who were involved at some point, either as educators or participants.
Lastly, Hurwitz asked what have been the dominant changes within the telecommunications industry over the last several decades. For Rizzuto, the rise of broadband as being the critical ingredient in telecommunications has changed everything and created a much more competitive environment. Broadband means that different telecommunication technologies don’t have to operate independently; consumers have access to platforms like Netflix or Disney+ for their entertainment and are no longer “at the mercy of (their) local cable operator or satellite company.” And as the way that consumers receive their entertainment evolves, possibly in the direction of a la carte rather than broad subscription-based services, the contours of the telecommunications and content industries will almost certainly evolve substantially in the years to come.
Tags: Tech Refactored Review
