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In the New Deal of the 1930s the RuralElectrification Administration used federal subsi-dies to extend electricity to rural and isolatedcommunities across the country. By subsidizingthe significant capital investment needed to runwires and build infrastructure, REA supportbrought electricity to households that might oth-erwise have waited many years for such service.Today, similar arguments are being made forsubsidizing new technologies, such as broad-band Internet service. Some people are promot-ing the equivalent of an “REA for broadband” toensure that rural and low-income communitiesgain access to high-speed communications con-nections. However, the REA analogy is not onlymisplaced, it is harmful. The wires over whichbroadband service can be transmitted are alreadyin place—owned by telephone, cable, and evenelectricity providers. Upgrades are needed to pro-vide broadband, but not the massive investmentthat is required to run a new line to every cus-tomer’s home. And wireless transmission fromboth satellite and land-based systems has justbegun. Whereas electricity has traditionally beenprovided by a single distributor, broadbandInternet service has many potential distributorsthat use a variety of technologies.Tax credits or subsidies to promote broad-band deployment would distort competitionbetween those technologies, enriching incum-bents and thwarting the technologies of tomor-row. For an industry in which the technologies oftoday were unheard of just a few years ago, noth-ing could threaten progress more. And for thoseconsumers who are waiting for prices to fall orservice to extend to their communities, newtechnologies and competition will offer the bestsolution.Lost in this debate, moreover, is the fact thataccess to the information superhighway does notrequire broadband. While broadband is superior,it is not necessary for access.The first question, then, is whether low-income, rural, and other households are gainingaccess to the Internet at all. The second questionis whether those households—and for that mat-ter, all Americans—are gaining broadbandInternet access. To both questions, the answersare decidedly positive. In light of this, broadbandtax credits or subsidies appear to be an unwise,unnecessary, and expensive approach to what isquickly becoming a nonproblem.
Broadband Deployment and the Digital Divide 
A Primer 
by Wayne A. Leighton
 _____________________________________________________________________________________________________
Wayne A. Leighton, now an economist at the Federal CommunicationsCommission, previously served asa senior economist for the Banking Committee of the U.S. Senate. The viewsexpressed in thisarticle are those of the author and do not necessarily represent the viewsof the U.S. government or the FCC.
Executive Summary
No. 410August 7, 2001
 
Introduction
Proposals in Congress
One of the hottest debates on Capitol Hillis on the availability of advanced, high-speedInternet service, or what is frequently called“broadband.” Within the first month of the107th Congress, three bills had been intro-duced to promote broadband deploymentthrough tax credits. In the previous Congress18 bills were put forth to promote broad-band deployment.
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These proposals may begrouped into three fairly distinct categories:(1) tax credits and subsidies, (2) regulation,for example, requiring cable providers toopen their networks to competing Internetservice providers (ISPs), and (3) deregulation,for example, eliminating resale andunbundling requirements for the incumbentlocal exchange carriers (ILECs).Whereas all three approaches are designedto promote broadband Internet access, theywould do so in different ways. That resultsfrom the fact that two distinct types of serviceare needed to gain access to the Internet. First,a transport provider is needed to provide thephysical connection through which electronictransmissions flow. Telephone companies,cable companies, and wireless providers offersuch service. Second, an ISP is needed to sup-ply a link to the consumer from the transportprovider’s physical connection to the Internet.America Online and Earthlink are two exam-ples of ISPs. Whereas regulatory and deregula-tory actions affect both transport providersand ISPs, the broadband tax credits consid-ered by Congress focus specifically on trans-port providers. Congress and the press havefocused most of their attention on tax credits,which would affect transport providers. Forthis reason, and because transport providersare probably the most critical link in broad-band deployment, the focus of this report ison the firms and technologies that provide thephysical connection to the Internet.
What Exactly Is Broadband?
In the Federal Communications Commis-sion’s 1999 report on broadband service,known as the First Report,
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the agencydefined “broadband” as services “having thecapability of supporting, in both theprovider-to-customer (downstream) and thecustomer-to-provider (upstream) directions,a speed (in technical terms, ‘bandwidth’) inexcess of 200 kilobits per second (Kbps) inthe last mile.”
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In the FCC’s Second Report,
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released in August 2000, the agency declinedaltogether to use the term “broadband”because of “its now common and impreciseusage.”
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The agency instead used the term“high-speed” to describe services that trans-mit data in excess of 200 Kbps in one direc-tion and “advanced services” to indicate ser-vices that transmit data at these speeds inboth directions.
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The FCC’s avoidance of the term “broad-band” shows clearly how difficult it is todefine this rapidly changing technology. Theagency recognizes this when it states: “Ourdefinition of advanced telecommunicationcapability will evolve over time. Futurereports will reconsider it in light of changingconditions in both demand and supply.”
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That which is considered “broadband” or“advanced service” today may be unaccept-ably slow—the technology of the informationhave-nots—in the near future.Because the term “broadband” is oftenused to describe both high-speed andadvanced services—indeed, the GeneralAccounting Office uses the term to describeboth types of service
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 —I will use the term todescribe both types of service herein as well,with the recognition that the more precise def-initions given earlier are necessary for moretechnical discussions. The key point is thatthese services represent a second generation ofInternet access and data transmission speed.As will be discussed later, the first genera-tion of Internet access was—and still is—sup-plied by unmodified telephone lines provid-ing narrowband “dial-up” service. Access tothese services has increased dramatically overthe last few years at the same time that broad-band has emerged on the market. But asbroadband service remains only a small part
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That which isconsidered“broadband” or“advanced ser-vice” today maybe unacceptablyslow in the nearfuture.
 
of the total market for Internet access, someobservers worry that it will reach an unac-ceptably small number of fortunate citizens.This concern is remarkably familiar: it wasexpressed in the earliest stages of dial-up ser-vice, too. Indeed, compared to the nationalaverage, some demographic groups havelower penetration rates for Internet access.This difference in penetration rates has pro-duced what some label as a “digital divide” inU.S. society.
What Exactly Is the Digital Divide?
The term “digital divide” refers, in itsmost simple form, to the division betweeninformation “haves” and have-nots. To beamong the “haves,” one must have Internetaccess, a computer or other tool to commu-nicate on the Internet, and a basic knowledgeof how to use it. The Department ofCommerce, which has issued four reports onInternet access, has most recently posited theproblem as follows:The tremendous growth in house-hold computer and Internet use hasoccurred across all demographicgroups, including income and edu-cation levels, races, locations, andhousehold types. Nevertheless, someAmericans are still connecting at farlower rates than others, creating a“digital divide” (i.e., a difference inrates of access to computers and theInternet) among different demo-graphic groups.
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But before policymakers do anythingabout the digital divide—indeed, before theyeven
decide 
if they should do anything at allabout it—they must answer some importantquestions. First, what is the difference in thepenetration rates between demographicgroups? Is it dramatic? Is this differenceincreasing or decreasing over time?Second, what factors—public policies,technological advances, and so on—wouldtend to raise penetration rates over time?Third, what specific effect would publicpolicies such as tax credits have on Internetaccess in general and broadband Internetaccess in particular? What benefits wouldthey bring, and at what cost? Might othersolutions produce more benefits?This study addresses those questions. Itrecognizes a difference in the penetration ratesacross groups while noting the incrediblegrowth of access for
all 
groups. This growth isfound to reduce drastically the lag between thehaves and have-nots in acquiring the toolsneeded to participate in the new economy. Fornow, the issue appears to be connectivity, notspeed. Of course, as consumers’ needs changeand they begin to demand faster speeds andricher content, the market will change withthem. Indeed, it is doing so already. The latestadvances give even more reason to believe thatan increasing number of Americans—includ-ing low-income and rural Americans—willhave cheaper access to better services in thenear future.Still, as the Internet becomes ubiquitous, itmay be accompanied by ever more tax breaks,subsidies, and other regulatory proposals. Andsome legislation may be necessary, so that therules of the new economy, like those of the oldeconomy, are well-defined. But broadband taxcredits are likely to produce significantlygreater costs than benefits. These costsinclude a real burden on taxpayers and, per-haps much more notably, an even heavier bur-den on the competitive process in which bothexisting and upstart firms attempt to providenew and better broadband services to a grow-ing pool of customers. It is this competitiveprocess that offers the most promise of serv-ing those customers who heretofore were tooremote to receive such service or could notafford its high price.
The Role of theGovernment: CurrentFederal Policies
The Telecom Act of 1996
In section 706 of the Telecommuni-cations Act of 1996, Congress directed the
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Broadband taxcredits are likelyto produce signif-icantly greatercosts than bene-fits.
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