Heads up, Arizona, part four: The cost of telecommunications infrastructure to 2032

Providing all Arizonans with the gold standard in telecommunications could cost $24-25.2 billion, but what is the dollar value of state-of-the art infrastructure to rival that of world leaders? That could well be priceless. The importance of infrastructure was a key theme that resonated throughout the recent report, "Infrastructure Needs and Funding Alternatives for Arizona: 2008-2032," commissioned by the Arizona Investment Council (AIC) and prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business. But just how much are taxpayers willing to pay and what will they be getting in return? Knowledge@W. P. Carey examines this question in part four of our five-part series on Arizona's infrastructure needs.

Providing all Arizonans with the gold standard in telecommunications could cost $24-25.2 billion, but what is the dollar value of state-of-the art infrastructure to rival that of world leaders? That could well be priceless.

The importance of infrastructure was a key theme that resonated throughout the recent report, "Infrastructure Needs and Funding Alternatives for Arizona: 2008-2032." But just how much are taxpayers willing to pay and what will they be getting in return?

What $25 billion could buy

"Access to a high quality telecommunication infrastructure is vitally important for the economy in Arizona and its residents' quality of life," write the report's authors. Yet Arizona's current ability to support a future where businesses and residents are attracted to the state for its high-speed telecommunications infrastructure may be limited. While access to broadband connections is widespread in the state, it's not ubiquitous.

"Approximately 3 percent of Arizonans lack access to broadband services," said Matthew Croucher, Seidman research economist and one of the authors of the report. Hooking up those Arizonans who are currently unserved would cost between $1 and 2.2 billion. "It doesn't sound like a huge amount of money," said Tim James, Seidman's director of research and consulting and the report's lead researcher, "but remember that the cost is spread across just 3 percent of the state's population, so that's a big number."

The question of who bears the cost of hooking up unserved populations echoes throughout the report where high costs are spread over relatively small populations. "If you want to go live at the bottom of the canyon or the top of a mountain, where you don't have broadband access, that's your choice," James said. "Why should I as a resident of Maricopa County pay for your service?" James didn't offer an answer to the question but instead suggested that "it's a debate that needs to be had in Arizona."

Yet even an extension of broadband service to currently unserved Arizonans wouldn't change the fact that Arizona — like the U.S. as a whole — lags far behind other countries in the prevalence of high-speed access. In terms of average download speeds among OECD countries, the U.S. ranks 14th. Japan, France, and Korea occupy the top spots.

"There's a debate over who invented the Internet," James joked, "but I'm pretty sure its original home is the United States. Yet we're in danger of falling way behind the pack in terms of delivering something that is gold standard, state of the art." The "gold standard" that the report's authors consider is fiber to the home (FTTH). According to the report, optical fiber is the primary technology used in the U.S. to transmit data across the country, within states, and even to individual neighborhoods.

Yet in terms of connecting the lines that run through neighborhoods (known as "middle mile" lines) to individual homes, fiber is not commonly used — though it is the fastest option. That gold standard is what the state would get for its $25 billion. "An investment of $24-25.2 billion sounds huge," James said, "but remember what we're going to get here: we're going to have a system which is on par with the Japanese, the French, and the Koreans."

Financing options

As attractive as extending access to Arizona's unserved populations or building a statewide fiber-to-the-home network might be, the question of who will finance it is a big one. The commercial sector — for-profit broadband providers who serve residents in highly-populated areas — don't serve far-flung populations because there aren't enough people there to bear the high cost of extending the service infrastructure.

Commercial providers may not be willing to invest in an expensive statewide fiber-to-the-home network, either. "We may well need the public and private sectors to act in concert to ensure our social and business well-being," write the reports' authors. The authors suggest a number of options for funding a state-of-the-art telecommunications infrastructure in Arizona:

• Anchor tenancy, where the government agrees to use a single provider for all its telecommunications needs and, in return, the provider extends service to areas that would otherwise not receive it;
• Public-sector provision, which means that the public sector builds, operates, and maintains the telecommunications infrastructure;
• Creation of a telecommunication infrastructure bank, akin to the Water Infrastructure Financing Authority, which would provide municipalities and private companies access to low-cost loans to finance telecommunications infrastructure;
• Establishment of a broadband universal service fund, which would give providers a source of funds to use when providing broadband services to areas that wouldn't normally be considered financially viable;
• Reduction of right-of-way costs would streamline the overall burden on telecommunications providers and reduce the overall cost of network extension;
• Alteration of building codes to mandate the inclusion of fiber lines in new builds and remodels;
• Re-alignment of tax incentives to "level the playing field" for telecommunications providers so that they receive the same tax treatment as firms in other infrastructure-intensive sectors; and
• Public grants to private companies for extending service to areas that would not be financially viable without that public support.

The value of high quality infrastructure

$25 billion is clearly a lot of money. Yet the value of that kind of investment in a state-of-the-art telecommunications infrastructure could be huge, say the report's authors. From e-commerce to telemedicine, government services and education, access to high-speed telecommunications networks has become an important fixture for businesses and residences across the U.S. — and Arizona is no different.

In our services-dominated sector, James said, the ability to communicate between multiple offices — often overseas — is a critical factor in a business's location decision. And businesses — from manufacturers to retailers — increasingly want to save on inventory costs.

"One way to do that is to tie everybody up in a very carefully coordinated communication system," James said. "So that when somebody buys a bagel at the local deli, the order gets sent down the telephone line with the message 'extra bagel bought today compared to what we were expecting, order some to arrive tomorrow,' so the deli never runs out of bagels, but they've never got a huge stock either."

While a high quality telecommunications infrastructure can attract employers to the state, the opposite is also true. "Not having a state-of-the-art telecommunications infrastructure is a detractor for businesses and residents when deciding if they should locate in Arizona," said James. So heads up, Arizona, while the cost of building a state-of-the-art telecommunications infrastructure is high, the cost of doing nothing may be even higher.

Bottom Line:

• Providing all Arizonans with fiber-to-the-home, considered the gold standard in telecommunications, would cost between $24 and 25.2 billion.
• A state-of-the-art telecommunications infrastructure would be a significant attractor for businesses and residents looking to locate in Arizona.
• Yet Arizona's current ability to support a future where businesses and residents are attracted to the state for its high-speed telecommunications infrastructure may be limited.
• The public and private sectors may need to join forces to provide the kind of state-of-the-art telecommunications network that would keep Arizona's economy competitive in the coming decades.

This is the fourth of five stories on Arizona's infrastructure needs over the next 25 years, based on a recent report, commissioned by the Arizona Investment Council (AIC) and prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business.