Tuesday, May 20, 2008

More telco competition

Given our VZ woes, I wondered why even with competition between cable and telephone service is so bad and perhaps the answer lies in the fact that there isn't enough competition. Local goverments seem to allow cable and telephone to operate using a franchise method that effectively gives the companies a local monopoly over its customers. Laying cables and as well as building up infrastructre for network communications is a capital intensive project which can be risky for public companies with an eye toward the next quarterly earnings. The bust in the telecom bubble where companies which did nothing but build infrastructure using the "field of dreams" model (if we build it they will come) and went bankrupt in the process has no doubt made companies even more averse to building up capacity in infrastructure.

Here is a proposal which may sound radical:
1. Have local, state and federal governments build the infrastrcture the costs shared by some formula financed by floating bonds to the market. The bonds should be able to receive investment grade rating based on the taxing capacity of the government.
2. Because government projects have a reputation for not being delivered on time, plan on rolling out fully functioning network infrastructures at a small and local level (e.g. county or town level) at fixed intervals, say every 5 years. This network is then auctioned off to pay down the debt on the bonds. The buyer of the networks is granted a fixed time to sell the services of the network (DSL, phone, TV) to the public -- again like a local monopoly.
3. Keep rolling out and auctioning off the network and paying down the debt. A parallel bond offering can also be made say, 10 years later to build another parallel network using the same model. This allows the newer network to use the latest technologies as well as build in redundancy in the networks as well as allows more competition over time.
4. Legacy networks can be scrapped or rebuilt and since this system is more or less self financing (assuming the proceeds from the auction can pay down the debt).
5. Companies that are willing to invest in new technologies to accompany a new network can be given preference in the auction (although this will result in some perverse incentives I'm sure).

This model is a little bit like building new roads and then selling the rights to collect tolls (for a limited time). The money collected from selling the rights can be used to build new roads.

Some problems:
1. Who maintains the network after it is sold?
2. There will be an incentive for the successful buyer of the network to charge a lot up front in the beginning because down the road a newer network will eventually challenge its dominance. This might be ameliorated by the current existing infrastructure but is not guaranteed.

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