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July 24 1998 3:30 AM

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The biggest thing standing between rural communities and Internet service is a new federal subsidy.

Last month, the Federal Communications Commission dialed in a $1.275 billion subsidy to help schools, libraries, and rural health care providers purchase Internet service. The program, which will help pay for Internet access and internal data wiring at the educational and health facilities, resurrects a two century old debate in the political economy: What services should the federal government subsidize?

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Under the rubric of "universal service," the feds already require business and urban phone customers to subsidize rural customers to the tune of $1.7 billion. Some states mandate phone discounts for the poor and make up the difference by boosting other users' bills. In the name of universal service, the federal Rural Electrification Administration spends $33 million subsidizing electric power for upcountry customers. And since its inception, the government has subsidized postal service to rural addresses at the expense of urban customers.

Universal service's original proponents maintain these services are so essential to modern civilization that it would be unconscionable to allow the market to price them beyond the reach of the less affluent. In that spirit, the government currently believes the Internet--which just a few years ago was considered a luxury--is now a necessity.

The merits of universal telephone and postal service aside, there are several strong arguments against an Internet subsidy:

1) You can live and learn quite handsomely without access to the Internet.

2) Many of the poorer rural communities that have applied for the subsidy lack the high speed phone lines that make the Internet worthwhile, keeping them Internet have-nots.

3) Where fast rural lines are available, schools and libraries can scarcely afford textbooks and periodicals, let alone new computers and training for Web surfing.

4) However well-meaning the new subsidy, technology is moving so fast that the old regulatory apparatus--based on permanent scarcity and obstacles of distance--don't apply to the Internet.

If the federal government is serious about making Internet access affordable to schools and libraries, it should disconnect this program.

The Internet "e-rate" subsidies, as they're known, were authorized under the 1996 Telecommunications Act and are funded with new taxes on long-distance telephone companies, the size of each company's contribution depending on its market share. AT&T and MCI have protested the tax and pledged to pass the cost on to consumers: MCI charges 5 percent on all out of state long-distance calls, and AT&T charges a flat rate. The FCC has received 30,000 e-rate applications and expects to start handing out funds this summer.

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In places like rural Alabama, Mississippi, Louisiana, New Mexico, and Arizona, where there are no high speed Internet lines, schools might be willing to settle for POT (plain old telephone) connections to the Internet at 56 kps. But few Internet service providers serve rural America, because the current number of consumers is too small for them to make money. For these communities, the FCC's e-rate department recommends dial-up services like AOL that offer 800 access at a pricey 10 cents a minute premium. If you connect 12 hours a day and six days a week to the Internet via AOL's 800 line, you'll pay $22,727.40 a year (assuming an AOL service rate of $21.95 a month).

A library with the maximum allowable e-rate subsidy of 90 percent would still find itself paying a monthly Internet bill of $186. That might not sound like a lot of money, but it's $186 many strapped local libraries don't have. And if they did have it, they'd spend it on periodicals, new books, or capital improvements. As previously mentioned, the e-rate discount won't cover any portion of the hardware bill either, leaving the local community responsible for PCs, modems, and training for teachers and supervisors.

The e-rate plan also mistakenly imagines that high speed, affordable Internet service will never reach rural America without government help. Perhaps the e-raters think technology is still crawling along as it did when Theodore Vail cut his monopoly deal. Instead, the cost of computer gear is falling precipitously, and affordable bandwidth--the measure of data transmission--is growing at an exponential rate. (Click for a graph that illustrates the growth in bandwidth.)

The Greenlee County, Ariz., public library illustrates the money and technology woes of rural institutions. The three libraries in Greenlee (population 8,000) operate five PCs, one of which is dedicated to public access--word processing, CD-ROM access, and the like. Greenlee librarians are the only ones who can access the Internet, and they do it sparingly, over the libraries' one phone line to a free Arizona State Library connection. How much could Greenlee's libraries afford to pay to bring greater Internet access? "Anything that costs more than 5 cents is prohibitive," says Head Librarian Rebecca Oliver. Next year's library budget of less than $100,000 must cover four staffers' salaries and other expenses.

Today, nobody disputes the argument that Vail's telephone monopoly stifled technological innovation. The first round of telecommunications deregulation in the '70s that opened long-distance service to competition benefited consumers and spurred innovation. Likewise, since the 1982 court order that dismantled the AT&T monopoly, the market has produced new and affordable technologies that have revolutionized telephone service. Do we really want to ghettoize rural Internet service as a welfare operation when the best telecommunications policy seems to be to let the market work instead? Cable and satellite TV didn't require subsidies to serve rural customers. Why should the Internet?

Already, technologies are emerging that reduce Internet access costs and increase bandwidth for rural users. DirecPC and other companies now provide Internet access via satellites that boast download access speeds of up to seven times that of POT connections. The cost is $200 for the satellite dish hardware and $29.95 a month for service. Several companies, such as @Home and Time Warner, are marketing high speed Internet access over cable TV lines, with a national rollout of the service only a couple of years away. Currently, cable lines run past 97 percent of U.S. homes, and many small communities have a cable TV provider in their central districts where schools and libraries are. One company has even experimented with transmitting data signals over common electric power lines--and at speeds of up to 1 megabit a second, which is 150 percent faster than even DirecPC. If this technology proves successful, it would make much of the telephone-based part of the Internet obsolete almost overnight.

If the last two decades of deregulation have proved anything, it is that subsidies are easier to avoid than they are to repeal. Also, subsidies reallocate resources that would be better spent elsewhere. As bandwidth continues to grow exponentially and the price of hardware continues to fall, rural schools, institutions, businesses, and individuals will become a lucrative market. The e-rate might look like the answer to rural and poor America's technology problems, but it isn't. Good things come to those who wait.

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