Getting Universal Service to Work

by Andy Oram

The notion of universal service in communications has great
staying power. Although the term "universal service" itself
has fallen into disfavor--I'll explore why in just a
minute--the commitment to the concept remains high, even in
our troubled economic and political times. Just try going to
Thomas legislative information site
and do a search for bills containing the word "broadband."
Most of these bills are striving for some form of universal
service, such as high-speed Internet in rural areas.

But a parallel political universe in universal service has
also arisen. A number of researchers in recent years, mostly
on the political right, have critiqued the long-standing
ideal of providing everybody with communications.

  • In the 1990s, Milton Mueller published a series of papers,
    followed by the book Universal Service: Competition,
    Interconnection and Monopoly in the Making of the American
    Telephone System, that presented a bold claim--and an
    economic analysis to back it up--that the universal
    service policies undertaken by the phone company from the
    very start did nothing to improve actual phone system

  • A policy analysis
    for the Cato Institute by Lawrence Gasman argues that the
    problems in providing phone coverage have been
    exaggerated, and that the policies intended to create
    universal service have been counterproductive because they
    prop up outmoded networks.

  • Economist Hal Varian has also stated that geographic
    subsidies should not be created toward the goal of
    universal service, because the availability of
    communications should be treated like the many other
    factors people use in choosing where to live and work. No
    one gets a parking garage subsidy from the government for
    choosing to live in a major city, so Varian asks why they
    should get a communications subsidy for choosing to live
    in an isolated rural area.

  • Most damaging of all, perhaps, are

    reports of fraud and abuse

    in the one explicit universal service program mandated by
    law in the United States, the E-rate program for schools
    and libraries. (The law also provided funds for rural
    health clinics, but that was spun off into a separate

These critiques offer serious food for thought and a chance
to re-engineer programs toward what's most effective. That
the spirit in which they are offered is in no sense
constructive does not reduce their importance. It would be
easy to argue that the attacks are part of an ideological,
corporation-friendly campaign to paint everything
governments try to do for their citizens as bureaucratic,
wasteful, and pointless. But approached with open eyes, the
critiques can lead us closer to universal service.

FCC Chair Michael Powell, consistent with his free-market
views, has cast aspersions on the universal service ideal,
most famously with his joking complaint about suffering from
a "Mercedes divide." But in other comments, he's suggested
that there's value in policies aimed at getting advanced
communications to people who lag behind.

The key lesson from surveying the available history is this:
universal service programs that enforce a narrow strategy,
and that distort economic realities to favor that strategy,
do indeed risk the kinds of failures claimed by political
opponents of universal service. Such programs can reward the
wrong things and set up an environment ripe for abuse and

On the other hand, flexible strategies that reward creative
thinking and keep everyone's focus on the prize can be
surprisingly effective. Let's look at the principles of
universal service and at some recent efforts to find out
what should continue and what should be discarded.

In defense of the universal service principle

Transit systems are routinely subsidized in countries around
the world--and the United States is no exception. While the
Federal, state, and local governments pour most of their
transit billions into automobile traffic (with airlines
getting handouts too since the September 11 attacks), there
is also substantial funding for buses and train lines.
Governments clearly see a social good in transportation.

And the reasons for the importance of transportation go
quite deep. Mobility is key to the modern employment market.
People who can travel easily can find work in new places and
still keep in touch with their families. Businesses benefit
from transportation too: they can open offices in other
cities and keep in close touch with suppliers and customers.

None of these actors could budget for the entire
infrastructure of modern transportation and factor it into
their career or business plans. Government support for a
robust universal transportation system enables economic
diversity and social unity.

Note that universal transportation doesn't try to be rigidly
egalitarian. No one says that traveling from the remote Alps
of Northern Italy to Rome should be as easy as going from
Milan to Rome. Geographic and demographic differences help
drive policy.

All the arguments for government-funded transit apply even
more strongly to communications, because it's so much easier
to move photons than people and because the uses to which
communications can be put are so much more varied than

Access to communications has impacts that no one can budget
for in advance. As recent examples, look at the life-style
changes wrought by the Web and by cell phones. Universal
access (or more accurately, near-universal access, where the
percentage of population using the system reaches a tipping
point) has even greater social effects than the sum of
individual accesses.

Universal service is not a luxury, as Chairman Powell
indicated with his "Mercedes divide" wisecrack. In an age
where people deal daily with large, impersonal institutions
(government agencies, insurance companies, multinational
retailers)--an age of global trade and development, where
money and goods travel around the world, and people of all
economic classes do as well--an age where people seek new
vendors and services more and more frequently, and where
information mutates so incessantly that no durable medium
can keep up to date--universal service is becoming a

Private enterprise and public entrepreneurism

A substantial body of research indicates that private
enterprise is inherently efficient. The people who wrote
that research appear to work at think tanks, however, not
private enterprises.

Anyone who has worked in a private enterprise knows what
really goes on there. In any enterprise of more than a few
dozen people, bureaucratic barriers and pockets of
unproductivity crop up and stay around for long periods of
time. A bumbling but politically astute manager can hire
incompetent staff and maintain a whole department of dead
weight, dragging down the efforts of others. Companies are
irrational entities: they refuse to acknowledge errors
promptly and pour good money after bad.

In short, all the failings attributed to government happen
in private enterprises too. These failings are a fixture of
human nature and organizational dynamics.

Grossly inefficient companies do get shoved out of the
market eventually by more efficient ones; in that way
private enterprise has an advantage over government in terms
of efficiency. But such processes take decades and just
restart the cycle, because each new company obeys the same
laws of human nature and organizational dynamics.

Technological innovation may be speeding up the cycle, but
if businesses were truly efficient, rises in labor
productivity would come much closer to the technological
and social changes that drive them.

Certain independent variables sometimes render government
services more expensive than private services. Most
significantly, government tends to pay good wages and
benefits, a humane approach to the workforce that private
industry could learn from. Governments also create numerous
regulations, such as those regarding procurement, that may
get in the way of fast action, but that also has something
to teach private industry about honest financial dealings.

Innovation, dynamism, and creativity can be found in
governments. Some governments present excellent models of
entrepreneurial activity in the form of communications
services structured as public utilities, a trend I
documented several years ago in my article

Echo of the TVA Comes Over Municipal Data Networks

The Example of Municipal Networks

The press has recently had a field day covering the trend
(which has been ripening for a long time) toward outsourcing
services from developed to underdeveloped countries. But few
writers point out that the whole phenomenon depends on the
availability of high-speed communications. What lessons can
developed countries learn from this? A tiny American
municipality such as
Glasgow, KY
cannot be blamed for wanting the same economic opportunities
as remote call centers in India or the Philippines. Thus the
movement for municipal networks.

Municipal networks show that government agencies can be
efficient, entrepreneurial, and innovative. The goal of such
networks are to provide every citizen in a town or city with
the option to join a high-speed network. The range of
solutions is vast.

Some networks are pure fiber; most are a mixture of fiber
and copper; many of the new ones involve wireless too. The
Wireless MAN or WiMAX standards (based on IEEE 802.16) will
probably make wireless even more of a factor. Municipal
wireless hotspots were

praised by a very highly placed government official

this past June.

A stray thought: people seem to be willing to pay for WiFi
equipment but not for WiFi service. Perhaps, then, a
value-added tax could be levied on wireless equipment in
order to fund universal wireless service.

Some networks offer Internet access on top of raw network
connectivity; most are limited to offering connectivity and
open up the network to bids from competing Internet service
providers. This promotes competition far more than the
oligarpolic provisions of the 1996 Telecommunications Act;
it creates an environment where entrepreneurial small
businesses have a chance.

Telephone companies fear municipal networks. On the surface
their anxiety appears misplaced, because the two types of
systems are not in competition. Most towns started municipal
networks only after trying and failing to get bids for
private cable or high-speed fiber networks. The private
companies flatly refused, submitted ridiculously
unaffordable bids, or failed to provide acceptable service.
Most municipal networks, in short, began as acts of

But now municipal networks are proving their value and
viability. So the telcos pull strings and get state
legislatures to pass laws prohibiting the networks, or
putting in place restrictions to make it difficult for such
networks to start up.

The Telecom Act says that "any entity" must be allowed to
compete in the communications marketplace. This would seem
on the face of it to protect municipal networks. But the
Supreme Court recently upheld the state laws by declaring
that "any entity" refers only to private companies.

Thus, the court accepts the telco's view of citizens as
helpless consumers who must simply wait for a telco to offer
them services under conditions chosen by the telco. And
perhaps the court has judged Congress's intent rightly. The
Telecom Act is widely understood to be a boondoggle for
large communications companies; new competitors barely have
a chance. (It's worth noting, though, that not all courts
have swallowed the telco line.)

And as the telcos go, so do the anti-regulators. While the
laws prohibiting municipal networks are an explicitly
burdensome form of regulation, they have never been
criticized by the supposedly anti-regulatory crowd.

The Cato Institute has not taken a stand on municipal
networks. But it has complained that

cable companies are effectively underregulated monopolies

and that

municipalities regulate content and other aspects of cable franchises

beyond the minimal considerations of public safety. These
arguments are an indictment of the current, obsolete cable
system. With a broadband network of video-width capability,
there would be no need for picking and choosing cable

The city and town employees I've talked to in my research of
municipal networks seem just as thoughtful, just as
resourceful, and just as rich in vision as innovators in the
private arena. These employees put their talents to the
benefit of their citizens rather than to making a profit,
which does not mean they're superior to private firms but
simply that they can carry out projects that private firms
don't want to risk or can't justify economically.

Municipal networks are not a total solution to universal
service. There are still rural residents too far from a
Point of Presence to benefit from those solutions; other
cutting-edge options such as satellite Internet may bridge
the gap for them. The digital divide is also exacerbated by
the widespread need for more education and hardware.
Finally, in many areas, private solutions serve most
people's needs, so government may do best by keeping its
hands off.

Thus, it is not only the actual histories of municipal
networks, but the general lessons we can draw from the
impetus behind them, that illuminate the path forward.

The Problems of the School/Library Fund

The E-Rate has provided the latest cautionary tale in the
history of government subsidies for communications
development. But as I pointed out in an article titled

An Expanding Universe for a Universal Service Program
the universal service fund is far bigger
than its failures. Tens of thousands of institutions
have received Internet access thanks to the fund.

Critics of government efforts call for the abolition of the
fund, citing mismanagement as their reason. Using the same
logic, one could call for the abolition of stock markets
worldwide, on the basis of the destructive criminality of
Enron, WorldCom, Parmalot, and other companies that dwarfs
the abuses of the universal service fund.

Nonetheless, we can learn a lot by seeing what went wrong
with the E-Rate. I analyze the failings as follows.

  • The FCC built assumptions based on existing, widespread
    models into its regulations, and thus required that new
    installations be "more of the same"; this benefited
    incumbent companies.

  • In particular, regulations prevented the use of funds for
    the purchase of external lines or wireless equipment,
    which would have been a low-cost, long-term solution for
    many schools and libraries.

  • Schools and libraries were not given practical goals, but
    simply instructed to spend as much of other people's money
    as they could. In other words, their goal was to spend the
    available money on easily obtainable equipment, not
    necessarily to make the best possible use of the
    money. They had no encouragement to be creative.

  • The law provided only telecom equipment and networking
    services. It did not consider other useful things one
    could ask for to achieve Internet access. Such as
    computers, for instance. Or trained teachers and staff.

The second point deserves a bit more attention, because its
causes and effects are complicated.

The FCC, of course, did not explicitly say, "We will pervert
the E-Rate to funnel money into incumbent phone companies
and to deny the schools and libraries control over their own
networks." Instead, the FCC imposed a complex and arbitrary
set of technical regulations that led to these results.

According to Dave Hughes, owner of
Old Colorado City Communications
and a long-term master of community networking using
wireless Internet, FCC regulations permitted money to be
spent on leasing lines and services, and on equipment used
on an institution's own right of way. Funds could not be
used to purchase equipment whose range crossed a right of
way, such as a public street or a piece of somebody else's

First of all, these regulations made wireless networks
impossible. They're too free and messy for those sorts of
regulations, as my next-door neighbor found out when I let
her know I was jacking in on her wireless LAN. A wireless
network can extend for miles, which is one of its great

Second, the regulations discouraged schools from investing
in their own copper or fiber, a "customer empowered network"
of the sort developed by
Internet2 or
which is fairly cheap to acquire because of left-over fiber
from the dot-com boom, and which would provide a lasting
infrastructure. Instead, the schools funneled their money
into services leased from local telephone companies, the
only expenditures covered by the FCC's interpretation of the
E-Rate. If Congress decides to take away the subsidy,
schools will be left with the choice of throwing more funds
at the leased lines every year or losing their Internet

In fact, schools want their local area networks to extend
outside their walls. They want to talk to other schools in
their districts, and Hughes has pushed them to provide
access to students and parents at their homes in
neighborhoods around the schools. Wireless extends the power
of the E-Rate--but the FCC treated that as a drawback rather
than an asset.

In 1996, wireless Internet was still a rather experimental,
fringe technology. Now it represents an obvious and gaping
failure in the FCC implementation of the school and library
fund. The option of buying fiber directly has also become
more affordable since the Telecom Act was passed, largely
because the WorldComs of the world strung too much fiber
during the dot-com boom and it's no going for fire-sale
prices. It's not too late to revise the provisions
surrounding the E-Rate.

General lessons

The key lesson of the school and library fund is that
government action should be structured around results. The
E-Rate was oriented instead toward equipment. Once the
school or library got its money, it simply spent through
this money until it got as much equipment as possible. The
process did not deal with the question of whether the
purchase represented the most effective solution to the
problem--in fact, it didn't try to define the problem.

As mentioned, other provisions of the law or its
implementation reinforced uncreative spending. The
excruciatingly spelled-out bidding process mirrored the way
schools and libraries had previously achieved Internet
connectivity and therefore led them to order more from their
current provider (usually a local incumbent Bell company).
And the "right of way" regulation ruled out the options that
would have been most cost-effective and powerful for many

Let's contrast this with the success stories I
mentioned for municipal networks. Success was achieved

  • Municipal employees started with a clear definition
    of the problem.

  • The problem was very broadly defined, with reasonable
    parameters but no artificial constraints (other than those
    imposed by enemies).

  • The employees were responsible for the budget, and
    therefore had strong incentives to use their creativity to
    keep costs down.

A lot of factors go into determining whether it's worth
spending a lot of government money on a project that runs
counter to market values. A well-established technology that
is likely to remain useful for a long time--such as
electrical wiring--is a better candidate for universal
service than a technology this is still subject to
disruptive new influences.

And once the vast majority of a population has something, it
might make sense to subsidize the remaining few percent that
need it. In contrast, we should question mass undertakings
that try to spread something that has only recently caught

Perhaps these considerations can illuminate the discussion
around a popular bipartisan bill for bringing broadband to
rural and "underserved" areas, designed by the same senators
Olympia Snowe and John Rockefeller who proposed the E-Rate
in the 1996 Telecom Act.

There is no question that the bill will, to some extent,
throw money at large telecommunications providers. Insofar
as it encourages the extension of old models to new areas,
it would just prop up obsolete networks.

However, the definition of telecommunications in the bill is
quite broad and includes wireless options. If it leads to
new networks, and--even better--the entry of new companies,
it may be a progressive force.

We need much more research into what has worked in
communications, and more education for others interested in
that solution. For instance, a non-profit organization
called the Center for Civic Networking has organized seminars
on municipal networks and written guides for IT staff and
city officials interested in trying them. What we need is a
community and culture of people devoted to universal
service. We should not be afraid to cross ideological lines
and combine elements of different models in the pursuit of
access for all.

What social changes would universal service in high-bandwidth networking lead to?