Expanding the Digital Divide : Network Management Regulations and the Size of Providers

One goal of the American Recovery and Reinvestment Act of 2009 (“ARRA”) is to provide all Americans with access to affordable broadband services, particularly to those Americans living in rural markets where demand and cost conditions do not favor network deployment. At the same time, there is growing support for regulations that may effectively force network operators to “invest their way out” of congestion rather than manage traffic to improve network efficiency and quality. In this BULLETIN, we demonstrate that such rules are likely to affect disproportionately networks located in rural areas or smaller networks in urban markets given the cost disadvantages faced by such firms. Since these markets are a central target of both the ARRA’s stimulus funding and required National Broadband Plan, the imposition of strong “network management” provisions are likely to result in lower quality service and less availability in rural areas and potentially reduce competition in urban areas, as well as to reduce the effectiveness of stimulus grants and other subsidies. Further, we present some evidence indicating an elastic response of subsidy levels to increases in costs resulting from such regulations; specifically, a 1% increase in deployment costs arising from regulation increases the subsidy required for ubiquitous coverage by nearly 2%. Accordingly, policymakers seeking to expand quickly and efficiently broadband availability in rural markets should carefully and explicitly compare the benefits and costs from network management regulatory mandates, with a particular eye on disproportionate effects across market types