Report Information

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Report Description:
This report uses Insight’s primary market research study to examine the changing needs of the rural telecom consumer. It examines the changes in service supply and demand in small town America (one to five access lines per square mile). Since carriers are not under regulatory obligations to deliver most of the new “enhanced” Internet services, will carriers just ignore the rural markets?

In this study, we examine the regulatory and business issues in light of the efforts to deliver access to advanced communications services to all Americans. We look at the impact of the Internet on rural access usage, and the consolidation and divestiture of rural exchanges by traditional local exchange carriers.

Report Excerpt:

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Background

When the 1996 Telecom Act was passed, Congress was explicit that telecom service in rural areas be comparable to what was available in urban areas, including access to advanced telecommunications and information services. At this early stage of broadband deployment, rural customers do not have equal access at reasonable rates despite measures by the FCC to insure universal service.

Some of the reasons for the discrepancy are well-known:

• Higher rate of poverty and lower income and education levels are strong indicators of lower computer and Internet usage.
  
  
• Poorer quality of plant which limits telcos' capability of providing high-speed service. Some of the poorest quality plant in the country is located in rural areas.
  
  
• Lower population density per square mile, reducing providers' economies of scale.
  
  
• Lower proportion of business telecom customers in rural service areas, resulting in less revenue for the provider.

Yet, this is not the whole story. Rural America still represents a viable market for broadband service because:

• Farmers are actually ahead of the general home-user population in PC usage. Forty percent of farms now have a computer, and Internet usage on farms was up to nearly 30 percent in 1999.
  
  
• Internet connection rates of schools in rural areas are higher than in cities, according to the US Dept. of Education.
  
  
• Many rural local exchange carriers (RLECs) have high-quality plant that is frequently rated by state commissions as among the best in their states.
  
  
• Telecom competition is increasing in rural areas as more businesses, especially e-commerce companies, locate their headquarters and warehouses there to take advantage of the low cost of land and labor.
  
  
• Rural consumers tend to be aware if their neighbors have superior phone capabilities and service. If a rural telco moves into the area and begins to offer high-quality local service, customers will leave the urban incumbent local exchange carrier (ILEC) in droves. These customers, though, will show great loyalty to local carriers who provide them with high-quality service.

Scope of Report

This report includes a discussion of the rural plant and looks at the challenges faced by telcos covering rural areas. In addition, the various sources of funding for infrastructure are described. For decades the US government has funded the expansion of telephone companies' plant into rural areas. Recently, they have extended their focus and funding to include networks capable of providing Internet and broadband access. The RBOCs, however, are not eligible to obtain low-cost financing through RUS or any of the cooperatives, and thus they have often tended not to spend as much money on upgrading their rural facilities as the smaller rural telcos.

For our study we review those portions of the Telecom Act with the greatest impact on rural telecom. The impact of changes in universal service, advanced services, and high-cost support are discussed. Without the support of these subsidy programs for rural telephony, local phone bills would have been on average 72 percent higher per subscriber than they are today. The deregulation of these funds brought about by the 1996 Telecom Act makes many of these subsidies extremely vulnerable to the pressures of competition yet it is not possible for the FCC to retain all of the traditional support mechanisms in their present forms indefinitely. These changes may make it more likely that rural consumers will not be able to get advanced telecom services anytime soon. Our primary research showed that more than ten percent fewer non-metro households were using the Internet at home than metro households.

To understand rural America better, a description of rural consumers is provided in a section on demographics. Their effect on telecom issues is the topic of Insight's proprietary study of over 1,000 consumers. The primary market research study for this report was conducted by Bruskin Audits & Surveys Worldwide. The study used a random digit dialing probability sample of all the telephone households in the continental US, resulting in an equal probability of selecting each and every household, even if the number is unlisted. Data from the study were weighted to ensure that the sample chosen represented a reliable and accurate representation of the total US population. The Insight study included approximately an equal number of male and female adults, all 18 years of age and over.

Table of Contents:

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Chapter I
EXECUTIVE SUMMARY
1.1 Have or Have Not
1.2 Changing Look of Rural America
1.3 Scope of the Report

Chapter II
DEMOGRAPHICS
2.1 Change in Rural America
2.2 Rural Demographics and Changing Structure of Towns
2.2.1 Employment
2.2.1.1 Types of Jobs in Rural Areas
2.2.1.2 Work Off the Farm
2.2.2 Characteristics of Rural Households
2.2.2.1 Ethnicity
2.2.2.2 Housing and Transportation
2.2.2.3 Poverty
2.3 Telecommunications Demographics
2.3.1 Population Density
2.3.2 Revenue from Telco Customers: Economies of Density
2.3.3 Telephone, Computer, and Internet Usage

Chapter III
BROADBAND SERVICES IN RURAL REGIONS
3.1 The Rural Plant
3.1.1 Carrier Switches and Loops
3.1.2 Broadband Infrastructure in Rural America
3.1.2.1 Requirement for Advanced Services
3.1.2.2 Requirement for Comparable Service
3.1.2.3 Problems with Upgrading Rural Plants
3.2 The Challenge of Internet Connectivity
3.2.1 Extended Local Calling and Rural Area Networks
3.3 Broadband Technologies in Rural Regions
3.3.1 DSL
3.3.2 Cable
3.3.3 Fixed Wireless
3.3.4 Broadband Satellite
3.4 Telco Competition in Rural Areas
3.4.1 Urban ILECs versus Rural LECs
3.4.2 Internet Service Providers
3.4.3 Satellite Systems Targeting Rural Customers
3.5 Two Studies of Rural Broadband Services
3.5.1 NECA Survey of Broadband Services
3.5.2 Report on Rural Internet Connectivity
3.5.2.1 Iowa
3.5.2.2 Texas
3.5.2.3 Louisiana and West Virginia
3.5.2.4 Factors Preventing Connectivity

Chapter IV
FUNDING FOR RURAL TELECOM
4.1 Federal Funding of Telecom
4.1.1 Department of Agriculture
4.1.1.1 Cooperative Extension Service
4.1.1.2 Rural Utilities Service
4.1.2 Federal Communications Commission
4.1.2.1 The High-Cost Fund
4.1.2.2 Universal Service Fund
4.1.3 Departments of Commerce, Housing and Urban Development, and Education
4.1.4 Pending Federal Funding
4.2 State and City Funding
4.3 Alternative Sources of Funding

Chapter V
REGULATORY ISSUES ARISING FROM THE TELECOM ACT
5.1 1996 Telecom Act
5.1.1 Section 251: Exemption of Rural Carriers from Interconnection
5.1.2 Section 253: Removal of Barriers to Entry
5.1.3 Section 254: Universal Service
5.1.3.1 Sources of Funding for Universal Service
5.1.3.2 Calculating the Cost of Universal Service
5.1.3.3 Rural Task Force
5.1.3.4 Schools, Libraries, and Rural Health Care
5.1.3.5 Rural Health Care
5.1.4 Section 706: Advanced Services
5.1.4.1 Findings of the Second Report

Chapter VI
RURAL BROADBAND APPLICATIONS
6.1 Introduction
6.2 Agriculture
6.2.1 New Source of Knowledge
6.2.2 High-Tech Tools
6.3 E-Commerce
6.3.1 New Distribution Channel
6.3.2 Commodity Trading
6.3.3 Location of E-Commerce Businesses
6.4 Call Centers
6.5 Small Businesses
6.5.1 Broadband Applications Used by Small Businesses
6.6 Manufacturing
6.7 Health Care
6.7.1 Two Telemedicine Programs

Chapter VII
INSIGHT'S CONSUMER STUDY
7.1 Objective of the Consumer Study
7.2 Survey Methodology
7.3 Survey Findings and Analysis
7.3.1 Switching Behaviors and Reasons
7.3.2 Telephone Service Expenditures
7.3.3 Local versus Long Distance Company Preference
7.3.4 Telephone Service Feature Usage
7.3.5 Working at Home Phenomenon
7.3.6 General Interest in Current Technologies
7.3.7 Connected to the Internet at Home
7.3.8 Demographics on Metro versus Non-Metro Respondents
7.4 Summary

Appendix A
DEFINITIONS OF RURAL AND URBAN
A.1 Census Bureau's Definitions
A.1.1 Census Bureau's Definition of “Rural”
A.1.2 Census Bureau's Definition of “Urbanized Area”
A.1.3 Census Bureau's and OMB's Definition of “Metropolitan Area”
A.2 Alternative Definitions
A.2.1 Rural/Urban Continuum
A.2.2 Urban Influence Codes
A.2.3 Goldsmith Modification
A.2.4 County Typology Codes
A.2.5 Census Tracts

Appedix B
QUESTIONS ASKED IN MARKET SURVEY
List of Questions

Appendix C
GLOSSARY
List of Terms

TABLE OF FIGURES

Chapter I
I-1 Switched Long Distance Provider in Past Two Years, 2000
I-2 Metro and Non-Metro Use of Telephone Features Available from Carrier, 2000

Chapter II
II-1 Sources of Income for Average Farm Operator Household, 1995
II-2 Percent of US Households with Internet Access, by Ethnicity and Location, 1998
II-3 US Rural and Urban Households with Telephones, 1998
II-4 Percent of Households with Computers, by Race, 1998
II-5 How E-Mail is Used in Urban and Rural Regions, 1998
II-6 Percentage of Schools with Internet Access, by Region, 1994-1999

Chapter III
III-1 Average Number of Lines per Switch and Loops per Sheath Mile in Rural Study Areas, 1993
III-2 Growth of Residential High-Speed Access Technologies, 1999-2004
III-3 Percentage of Towns of Varying Sizes Which Have Cable Access or Receive DSL Service from RBOCs (2000)
III-4 Number of Households Passed by High-Speed Cable Service, 1998-2005 (Millions)

Chapter VI
VI-1 Non-Metro US Counties Dependent on Manufacturing, 1989
VI-2 Number of US Telemedicine Programs, 1993-1998

Chapter VII
VII-1 Switched Long Distance Provider in Past Two Years, 2000
VII-2 Amount Spent on Residential Local Calls in a Typical Month, 2000
VII-3 Preferred Carrier for Long Distance and Local Telephone Service, 2000
VII-4 Telephone Features Currently Used in the Home, 2000
VII-5 Percentage Of Respondents Who Own These Technologies, 2000
VII-6 Demographics of Survey Respondents, 2000

TABLE OF TABLES

Chapter II
II-1 Employment and Employment Change by Industry, 1986-2006
II-2 Employment Off the Farm, by Level of Education, 1994
II-3 Other Income Measures in Rural and Non-Rural Telco Service Areas, 1999
II-4 Racial Composition of Residents Living in Rural and Non-Rural Telco Service Areas, 1999
II-5 Rural Education by Ethnicity, 1999
II-6 Household Income in Rural and Non-Rural Telco Service Areas, 1999
II-7 Percent of Population of States Located in Rural and Non-Rural Telco Service Areas, 1999
II-8 Population Density in Rural and Non-Rural Telco Service Areas, 1999
II-9 Percent of Population Subscribing to High-Speed Services by Population Density

Chapter III
III-1 Rural Carrier Loops, 1999
III-2 Cost to Upgrade Rural Study Area Lines, 1999
III-3 Network Capabilities of NECA's Access Survey Respondents, 1999

Chapter V
V-1 Amount of E-Rate Discounts Available, 1997

Chapter VI
VI-1 Small Business Use of the Internet, 1998 and 2000

Chapter VII
VII-1 Telephone Features Currently Used in the Home, 2000
VII-2 Phone Features Planning To Buy, 2000
VII-3 Percentage Of Respondents Who Own These Technologies, 2000
VII-4 Items the Household Currently Owns or Uses, 2000
VII-5 Respondents' Ethnicity, 2000

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