Blair Levin: FCC Small Cell Draft Order Would Exacerbate the Digital Divide

Earlier this week, CLIC advisor Blair Levin sent CLIC and NATOA leadership a letter detailing his concerns with the FCC’s draft small cell order, an order that preempts local authority while purporting to advance broadband deployment. Blair’s letter describes why the draft order will have the opposite impact and is likely to exacerbate the digital divide while tying the hands of local governments to build collaboration with the private sector. Excerpts of Blair’s analysis are below, and the full letter is here.

Blair Levin :

This is in response to your request for my view of the FCC’s pending order, proposing to cap the fees that state and local governments may charge for small cell attachments. According to the FCC’s draft order, these price-caps will save the industry $2B in costs to operate in metropolitan areas—which will translate into $2.5B in new wireless investment, primarily in rural areas. This letter summarizes my thoughts on aspects of the draft order.

[On Wall Street and in Washington, DC], I’ve interacted with numerous investors, carriers, and localities, and that experience leads to my concerns with the FCC’s argument:

First, focusing on state and local government fees and process is a distraction from the real obstacles to accelerated and ubiquitous deployment of next generation mobile serviceswhich are that broadband deployment economics are very challenging and have to be addressed at all levels of government and through creative collaboration with the private sector. Fees for access to public property represent only one of many, many costs of doing business a carrier will encounter. A focus on reducing or eliminating one (relatively marginal) cost of doing business does not solve the challenging economics of broadband deployment and serves only to obscure the true challenges….

Second, local governments have a strong recent track record of endeavoring to enable and facilitate broadband deployment, as the Google Fiber experience conclusively demonstrated. Vilifying them based on fees for use of public property is not only a distraction, but also unfair. Indeed, rather than acknowledging that carriers have a proven ability to negotiate advantageous fees with localities, the FCC’s draft order infantilizes carriers by preempting state and local government, presumably on the theory that carriers cannot protect themselves in negotiations with states and localities. This is absurd….. Tying the hands of localities and states is self-defeating – it stops them from using creative partnering strategies (as they have successfully done in cities like San Jose, CA and Lincoln, NE) to find ways to improve broadband outcomes…. Thus, despite the FCC’s rhetoric, the proposal will likely exacerbate, rather than alleviate, the digital divide.

Third, the FCC’s draft order is based on a fallacy that no credible investor would adopt and no credible economist endorse: that reducing or eliminating costs for small cell mounting on public property in lucrative areas of the country (thus reducing carriers’ operating costs), will lead to increased capital expenditures in less lucrative areas– thus supposedly making investment more attractive in rural areas.

That simply is not how investment decisions are made…. My experience on Wall Street is that neither analysts nor investors regard this FCC action as likely to lead to increased deployment in non-economically attractive areas, which most on Wall Street would consider an irrational act… In short, while the FCC may ignore reality, the carriers and Wall Street understand that increasing profitability in Market A will not make Market B more attractive for investment. Market B will still be an area that is unprofitable or otherwise unattractive for investment, and the new requirement that Market A subsidize carriers by reducing fees will not benefit Market B under these circumstances….

Finally, let me note something I discuss at length in the attached speeches: the draft order presents a framework in which industry gets all the benefits (reduced fees to access state and local property) with no obligations to reinvest the resulting profits in rural broadband —even though the purported rationale for the reduced fees is that they will lead to new investment. At the same time, states and localities will be forced by federal mandate to bear all the costs and receive no guaranteed benefits.

In short, my response to your request is that I am deeply troubled by the FCC’s draft order, the options it ignored, and the fallacious logic on which it rests. And I’m particularly concerned about the prospect of unelected federal officials in Washington DC mandating how, and at what price, state and local elected officials can manage their own property—all for the benefit of a select group of companies that are under no obligations to reinvest these mandated public subsidies in new deployment.