Executive Summary
This is the second study conducted by NECA to estimate the cost of providing high-speed Internet service, defined for purposes of this study as 1.544 mbps downstream, to customers served by rural telephone companies. The first one focused on the cost of upgrading rural lines to broadband capability. Results of that "last mile" study showed that it would cost almost $10.9 billion to upgrade 3.3 million rural lines that have not been upgraded thus far. Almost half of the bill was for lines that would be uneconomic to upgrade using current technology because they are either too remote or situated in difficult terrain.
This study focuses on the cost of transporting Internet traffic from an Internet Service Provider (ISP) operating in a rural telephone company's territory to an Internet Backbone Provider (IBP) - the "middle mile." The basic conclusion is that high-speed Internet service is uneconomic in many rural telephone company territories. Revenue shortfalls will not disappear as the market grows, they will actually increase because operating margins remain negative at higher levels of demand. This sobering conclusion suggests that high-speed Internet service may not be sustainable in many rural areas based on pure economics.
As in the previous study, the assumption is that an ISP operating in a rural area uses Digital Subscriber Line (DSL) technology to connect to its customers. This assumption is based on the responses from rural telephone companies to the first broadband study questionnaire. It is also cited in an April 2000 study jointly produced by the United States Department of Agriculture (USDA), the National Telecommunications and Information Administration (NTIA) and the Rural Utilities Service (RUS). The study concluded that currently only digital subscriber line technology holds the prospect of delivering broadband beyond the rural town limit. In the near future, broadband over cable will not reach the farmers, ranchers, and miners who are vital to a healthy rural economy.
Study Highlights
- Lack of market size and long distances to Internet backbone nodes make high-speed Internet services uneconomic in many rural areas.
- Assuming current technology and location of Internet nodes, estimated shortfalls actually increase with higher market penetration.
- Revenue shortfalls rise from $9.7 million per year at a 0.5% penetration rate to $33.6 million per year at a 5% penetration rate, to $49.8 million at a 10% penetration rate, to $63.8 million per year at a 15% penetration rate.
To calculate an ISP's transport costs to an IBP's node, NECA assumed that a typical ISP collocates at a telephone company switch. NECA then collected vertical and horizontal coordinates for 6,635 switches owned by more than 1,100 rural telephone companies, 11,049 switches of other telephone companies, and 270 Internet nodes owned by 34 national IBPs. From this information, NECA calculated transport distances. NECA then chose a collocation switch that minimizes ISP transportation costs. NECA computed transport costs using NECA and Regional Bell Operating Companies' (RBOCs) tariff rates and AT&T discounted rates.
The results of the study show that 55% of rural telephone company switches are more than 70 miles away from an IBP node, 10% are more than 200 miles away. Using very conservative pricing and network design assumptions, the cost per line for transporting high-speed traffic to these nodes ranges from $17 per line to $8,754 per line at a 0.5% level of market penetration. The average cost per line drops as market penetration increases because of economies of scale in transporting traffic. At a 0.5% penetration rate the average transport cost per line is $251 per month, at 5% penetration it is $53 per month, at 10% penetration it is $41, and at 15% penetration it is $36 per month. Penetration rates chosen cover a range of likely market penetration levels over the next three years.
The transportation cost between the ISP and the IBP is only part of the cost incurred by an ISP that offers high-speed service to customers. The total cost of the circuit also includes the DSL charge for the high-speed line that connects the end user to the ISP. NECA's average discounted rate for DSL is $27.50 per month. Even at a 15% penetration rate, the total cost for an average high-speed circuit is $63.50 per month, well above the $50 per month retail rate for this service in urban areas. This simple comparison using averages for cost and revenue does not hide major pockets of profitable customers in rural telephone company territories. In general this service loses money in most of these areas. If offered ubiquitously, the greatest losses would be in Alaska, where transport distances range above 1100 miles.
Assuming ISP advertising revenue offsets operating costs, and that IBPs do not move their nodes closer to rural areas, total ISP losses across all rural areas computed in this study actually increase at higher market penetration rates despite declining transport costs per line, from $9.7 million per year at the current 0.5% penetration rate to $33.6 million per year at a 5% penetration rate, to $49.8 million at a 10% penetration rate, to $63.8 million per year at a 15% penetration rate.
While this study is limited to rural telephone company territories that participate in NECA's tariff rates, it does give a panoramic view of conditions in rural areas. These companies represent more than 49% of the lines served by all rural telephone companies as defined by the Federal Communications Commission. They serve more than 30% of all lines that would be classified as rural within all incumbent telephone company serving areas. Preliminary survey data from ISPs serving rural telephone company territories also show that the study's transport cost estimates are, if anything, conservative.
Ordering information
To order a copy of the study, send check [only] payable to:
NECA
80 South Jefferson Road
Whippany, NJ 07981
Attn: Middle Mile Broadband Study
Room S-3062
Price: $395.00
Note: Once payment is received, NECA will forward the study to your attention.
Questions or comments should be directed to Judy Terzian at (800) 228-8597 x8105 or jterzia@neca.org.
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