Dennis WellerChief Economist - VerizonOECD WorkshopPorto26 October 2004

Rural Broadband and the Rural Broadband and the Future of Universal ServiceFuture of Universal Service

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About Verizon

Largest wireline and wireless operator in the US

Network Strategy:Wireline: Fiber to the premise

1 million homes passed by end of 20042 million more in 2005

Wireless: 3G broadband using EVDO14 cities and major airports now

IntegrationTo deliver the greatest possible value to consumers

Experiments for BB coverage in rural areasTrial in Grundy, Virginia

Partnership between Verizon Avenue and Alvarion

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Verizon Overview - Nationwide Presence

• Local telephone services in 29 states and the District of Columbia

• Services include voice and data transport, long distance services and internet access among others

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FTTP Full Build & Overlay Architectures

Office Parks

SAI

Small Businesses

Residential

CircuitSwitch

CopperFeeder

CopperDistribution

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FTTP Overlay

SplitterHub

OLT

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4 x POTSEthernetVideo

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Connected Communities

Splitter

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Small Businesses FTTP Full Build

2 – 4 POTSEnetVideo

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Verizon FiosWireline Broadband Access

Leapfrogs Cable Modem & DSL!

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Verizon WirelessHigh-Speed Internet Access

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VoiceWing Personal Account Manager

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Verizon iobi HomeIP Enabled Telephone Service

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VerizonOne Concept2-way Multimedia Communication

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Service Control

ISCP™ISCP™

VMVM

Outlook

PSTN/VoIPCall Control

iobiEnd UserPortal

Addr bookCalendarContent

Directories

ConferencingAnd

CollaborationWeb Sharing

IMSMS

MessagingVM Alert

VM Retrieval

BroadsoftApplication

Server

MGC SIP Proxy

TGMSCMSC

MSCMSC

SSPSSP

SSPSSP

Internet

L1 GatewayEPG

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Traditional Approachesto Universal Service

Averaging

Access charges

Universal service fundsFunding

Sector-specific contributionsGeneral taxation

DistributionSupports specified servicesTied to regulation

Public demandE-governmentBT registration schemePublic procurement

Public supply

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Challenges for Existing Approaches

AveragingDifficult to maintain as environment becomes more competitive

Changes in market structureMajor carriers reposition their businessesRegional carriers may focus on rural areas

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Challenges for Existing Approaches

Access chargesChallenges from arbitrage, growth of IP

Different model today for interconnection in IP spaceNo obligation to interconnectBilateral interconnection not required to achieve universal connectivity of IP networksVoluntary agreements among networks

Peering or transit arrangements

As world moves from circuit-switched to IP, small networks go from charging access to paying transit

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Challenges for Existing Approaches

Universal service mechanisms

FundingSector-specific taxation becomes difficult when you can’t define the sector

DistributionWho gets the money?What service is supported?If customer has broadband connection, there will be many providers of applications, including voicePolicy concern focuses more on availability, price of broadband connection

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Challenges for Existing Approaches

Public Supply

Concerns about incentives, transparencyInstitutional interest in public networkCompetition with private firmsWhat happens when newer technology comes along?No such thing as a generic network

OECD has focused on privatizationWhy go backward?Can policy goals be achieved using other tools?

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Ideas for Market-Based Implementation of Traditional USF

Auctions to select universal service providerMilgrom (1996), Weller (2000)

Firms bid support amount required for each area

Design accommodates competitive supply where it’s economic

Endogenous choice of sole provider or multiple providers, based on bids receivedParameters of this choice reflect policy values established by government

But this model is designed to assign traditional obligation to serve. Developments in market and technology call for new approach.

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Ideas for Universal Service in a Broadband World

Promotion of demand

Market supply where possibleInfrastructure competition where possiblePolicy should avoid trying to design the marketMinimize regulatory impediments to investmentTradeoff between open network requirementsand investment incentive

Incentives for supply where necessaryInfrastructure grantsWho gets the money?What requirements?

Funding from general revenues