About the Phoenix Center

1. Testimony before the Florida House Committee on Utilities and TelecommunicationsThomas M. KoutskyCo-Founder and Resident ScholarPhoenix CenterMarch 23, 2006

2. About the Phoenix Center “Everyone is entitled to his own opinion, but not his own facts.” Sen. Daniel Patrick Moynihan • The Phoenix Center does not advocate for (or against) any particular legislative or regulatory proposal • Track record of publication in leading academic journals • All research available to the public on our web site, www.phoenix-center.org • We welcome rebuttals and debate • Our researchers have over a decade of research into cable and telecom barriers to entry

3. Organization of Presentation • Facilities-based entry is difficult, costly and risky • Only a few players at best • If you want entry—take steps to lower cost of entry and do not artificially limit the addressable market • Build-Out requirements deter entry • Franchising and the “Digital Divide”

4. Do you want Facilities-based Entry? • Increase Gross Profits • Reduce Entry Costs But not in ways harmful to consumers! Phoenix Center Policy Paper No. 21

5. Phoenix Center Policy Paper No. 22:Cable Build-Out Rules • An example of an area where public policy is raising the cost of entry—and a place where policymakers can act to reduce entry costs • Build-out requirements deter entry by raising entry costs and reducing profits • No Build-out rules for new local telephone entrants and all broadband providers • “[B]uild-out requirements are of central importance to competitive entry because these requirements impact the threshold question of whether a potential competitor will enter the local exchange market at all.” FCC No. 97-346 (1997) • FCC preempted state/local franchising regulation of cable modem services; decision upheld by Supreme Court in 2005 in Brand X decision

6. Build-Out Rules • Simulations indicate that build-out rules deter entry in the vast majority of markets (80-90%), even under conservative assumptions • Policy Paper Nos. 22 and 24 (the latter forthcoming); Faulhaber & Hogendorn, 2000. • Empirical evidence indicates that level-playing field laws, like Florida’s, deter entry Hazlett & Ford, The Fallacy of Regulatory Symmetry, Business and Politics, 2001) Phoenix Center Policy Paper No. 22

7. The Asymmetry of Symmetry • Monopolist profit is $100. Duopoly profit is $40. Entry cost is $30. • With monopoly, profit is $70 (= 100 - 30). • With duopoly, profit is $10 (=40 - 30) for each firm. • What if law makes entrants match incumbents entry costs? • Monopolist spends an additional $11 on entry cost. • Entrant’s profits are -$1 (=40 – 41). • Monopolist’s profits are $59 (=100 – 30 – 11). • Symmetric regulation reinforces monopoly Hazlett & Ford, The Fallacy of Regulatory Symmetry (Business & Politics, 2001).

8. The link between video and broadband deployment • Networks being constructed today support voice, video and data services—increasing the cost of providing one service (video) increases the cost of providing another service (broadband) • Federal policy goal of promoting open-entry for broadband services • The increased cost is important because video is a large portion of consumer spending on communications services • The impact is felt particularly hard in lower income neighborhoods, because in these areas, video revenues are particularly important to the business case for deployment Phoenix Center Policy Paper No. 23

9. Pew Survey Phoenix Center Policy Paper No. 23

10. Census 2003, Subscription Rates Phoenix Center Policy Paper No. 23

11. 2005 GAO Study Phoenix Center Policy Paper No. 23

12. Implications • The business case for deploying an integrated voice, video and broadband network to low-income households depends upon the ability to sell video service • Regulatory requirements that increase the cost of video deployment effectively can create a type of broadband “red-lining” effect • Open video entry policies are part of the solution to a “Digital Divide” • Stated another way: if you want to avoid a “Digital Divide,” policy should be directed at figuring out how to get video programming on broadband networks Phoenix Center Policy Paper No. 23

13. Phoenix Center Policy Paper No. 23

14. Phoenix Center Policy Paper No. 23: Texas

15. Phoenix Center Policy Paper No. 23: Pennsylvania

16. Bibliography: Policy PapersThe Impact of Video Service Regulation on the Construction of Broadband Networks to Low-Income Households (September 2005)Phoenix Center Policy Paper No. 23,http://www.phoenix-center.org/pcpp/PCPP23Final.pdfThe Consumer Welfare Cost of Cable “Build-Out” Rules(July 2005)Phoenix Center Policy Paper No. 22, http://www.phoenix-center.org/pcpp/PCPP22Final.pdf Competition After Unbundling: Entry, Industry Structure and Convergence (July 2005)Phoenix Center Policy Paper No. 21, http://www.phoenix-center.org/pcpp/PCPP21Final.pdf

17. Bibliography: Policy BulletinsA La Carte and “Family Tiers” as a Response to a Market Defect in the Multichannel Video Programming Market (February 2006)Phoenix Center Policy Bulletin No. 14, http://www.phoenix-center.org/PolicyBulletin/PCPB14Final.pdf “In Delay There is No Plenty:” The Consumer Welfare Cost of Franchise Reform Delay (January 2006)Phoenix Center Policy Bulletin No. 13,http://www.phoenix-center.org/PolicyBulletin/PCPB13Final.pdf Franchise Fee Revenues After Video Competition (November 2005)Phoenix Center Policy Bulletin No. 12, http://www.phoenix-center.org/PolicyBulletin/PCPB12Final.pdf