Rural development ; Rural areas ; Telecommunication ; Technology

Brian Staihr

English

Research Papers in Economics

May 2000
In an age when farmers can trade futures while standing in a
wheat field, and small-town doctors can download x-rays from
hospitals hundreds of miles away, the potential for rural
America to benefit from advances in telecommunications seems
limitless. As Internet technology evolves, consumers will contin-
ue to enjoy more access to information and new ways of doing
business. And as the telecom industry becomes less regulated,
consumers are positioned to enjoy the fruits of new competi-
tion. But as this “telecom revolution” unfolds, will people on
Main Street enjoy the same benefits as their urban and
suburban counterparts?
In the coming year, the Center for the Study of Rural
America will publish a series of articles on telecommunications
in rural America. These articles will appear in the Main Street
Economist and elsewhere. This month we provide an overview
of several key telecom issues facing rural regions that range from
high-speed data services to e-commerce to telemedicine—issues
that are critical if Main Street is to keep pace as information
technology changes the way America does business.
CENTER FOR THE STUDY OF RURAL AMERICA
Federal Reserve Bank of Kansas City
Rural America’s Stake in
the Digital Economy
Brian Staihr
Senior Economist
Center for the Study of Rural America
The Main Street 
Economist
Commentary on the rural economy
May Newsletter 2000  5/16/00  5:32 PM  Page 2The Main Street Economist May 2000
Key rural telecom issues
In the near future, enhanced connec-
tivity and information infrastructure will
prove crucial to the health of the rural
economy. Telecommunications will be crit-
ical not only for rural development—
attracting and retaining residents and
businesses—but for basic sustainability in
an ever-changing economic environment.
In coming months, the Center for the
Study of Rural America will examine:
• The outlook for rural, high-speed
data. Are advances in telecommuni-
cations creating a “digital divide” or
building a “digital bridge” between
urban and rural America?
• The effect of e-commerce on the
rural economy. Will e-commerce
help rural enterprises to thrive, or
will they fall victim to new methods
of by-passing the middle man?
• Government support for telemedi-
cine and distance learning. Is rural
America receiving its share, and are
these subsidies going to the rural
areas most in need?
• The growth of competition.
Competition brings innovation, cost-
based prices, customer choices. Will
rural America enjoy the same com-
petitive benefits as urban residents?
• Alternative technologies such as
wireless. Will satellites and
microwave replace wires?
High-speed data services
The phenomenal growth in the use of
data applications—Internet access,
telecommuting, e-commerce, distance
learning, etc.—has led consumers to
demand devices that move data faster than
ever before. Generally referred to as broad-
band, these high-speed data mechanisms
currently serve over two million residential
customers across the United States.1
Industry forecasts predict this number will
grow to 16.6 million by 2004.
But broadband deployment represents
something of a conundrum for rural poli-
cymakers. High-speed data has the poten-
tial to make rural areas less isolated, and
high-speed applications such as telemedi-
cine can significantly improve rural quality-
of-life. But rural areas present real
challenges for the telephone and cable TV
companies that will provide the high-speed
data services. For example, there are physi-
cal barriers to deployment, customers are
few and widely dispersed, and rural areas
seldom represent the most attractive
markets. It is no mystery why less than
1 percent of towns with less than 2,500
people currently have any broadband
deployment at all (Chart 1). 
There are generally three ways to
deploy high-speed data on a
market-wide basis. Digital
subscriber line, or DSL, uses
the telephone network. Cable
modems use the cable televi-
sion network. And certain
wireless approaches use satellite
or microwave technology.
Each technology has advan-
tages, but each also has limita-
tions that might deter
companies from offering serv-
ices in rural or remote areas.
For DSL, the key advan-
tage is that it uses the existing
telephone infrastructure, an
infrastructure that is virtually
ubiquitous, even in many remote areas.
The disadvantages for rural customers are
that many customers live too far from the
telephone company’s office to receive the
service, and that the telephone company
must achieve a “critical mass” of customers
to offset the cost of deploying additional
equipment in the central office.
For cable modems, the advantages
include extremely high speed (even faster
than DSL) and the fact that the service
uses the existing cable network. Disad-
vantages include the same “critical mass”
issue facing DSL and a cable network that
must be upgraded. Moreover, the cable tel-
evision network is not ubiquitous, particu-
larly in remote areas.
In the case of wireless options, satellite
technologies may ultimately represent the
best method for reaching remote areas that
lack a critical mass of customers. Currently
only two providers (Tachyon and DirecPC)
offer satellite-based data of any kind, but
availability is limited and in many cases the
speed that is offered does not qualify as
broadband. Several other commercial satel-
lite providers plan to introduce service by
2002–03, but all potential providers face
the obstacle of significant up-front invest-
ment. Cost estimates for satellite systems
range from $4 billion to over $10 billion
for global systems.2
A future issue of the Main Street
Economist will examine the issue of access
to high-speed data in rural regions. Spe-
cifically, what barriers (technological or
market-driven) might prohibit high-speed
deployment in rural America? And what is
the overall outlook for rural broadband
services?
The effect of e-commerce
on rural America and agriculture
The amazing growth of the Internet
for commercial use has revolutionized U.S.
economic activity. Some sources estimate
that by 2003 e-commerce will account for
over $3.2 trillion dollars of U.S. economic
activity annually, or the equivalent of
- 2 -
0
10
20
30
40
50
60
70
80
90
Percent
Over
500,000
100,000—
500,000
25,000—
100,000
2,500—
25,000
Under
2,500
Chart 1
Communities with Broadband
By Population
May Newsletter 2000  5/16/00  5:32 PM  Page 329 percent of all domestic sales and pur-
chases.3 Rural America, and agriculture in
particular, may be a latecomer to this online
activity, but it will not be left behind.
E-commerce in agriculture is expected to
flourish; estimates place the value of
e-commerce for agriculture in the range of
$70 billion by 2003, with greater growth
in the years that follow. All market partici-
pants—from the largest agribusiness giants
to the smallest family-owned orchards—are
expected to join the online parade. 
In general, all e-commerce falls into
three separate but related activities:
• Providing information (the “Internet-
as-channel,” a new mechanism for
advertising and marketing services
and products).
• Bringing together buyers and sellers
(making a market), through bulletin
boards, online exchanges, retail web
sites, etc.
• Completing the purchase, or execut-
ing the transaction.
Each of these activities already takes
place in the agriculture industry over the
Internet. A search on any standard search
engine reveals hundreds of thousands of
sites offering information. Products such as
fertilizer, chemicals, seeds, equipment,
produce, and livestock are all advertised and
sold on line. Financing will soon follow.
On-line auctions currently offer buyers and
sellers a single mechanism for executing
transactions, arranging shipping, transfer-
ring funds, and providing delivery of every-
thing from fungicides to balers. 
But what will be the overall effect of this
e-commerce on agribusiness? If growers
choose to contact equipment suppliers
directly, will online information and order-
ing replace the function of local distributors?
Will product differentiation occur in what
were previously considered commodity
markets? Will the creation of supply chains
be facilitated or inhibited by the lower trans-
action costs associated with the Internet?
And how will these effects on agriculture
filter through the rural economy as a whole?
The Main Street Economist will examine
these trends in e-commerce and agriculture.
We will also discuss the nonagriculture-
related effects of e-commerce on rural
America: the establishment of rural call
centers, increased telecommuting as a factor
in demographic shifts, and other related
issues.
The state of competition
in rural America
A primary reason Congress passed the
1996 Telecommunications Act was to dereg-
ulate the industry and increase competition.
Following the breakup of the Bell/AT&T
system in 1984, long-distance service devel-
oped into a competitive market, as did wire-
less service. But local telephone service
remained a regulated monopoly. The 1996
Telecom Act laid the groundwork for local
companies to open their markets to com-
petitors. The intent of the act was to offer
customers the benefits associated with com-
petition: innovation, cost-based prices,
increased customer choices, and efficient
production. But, particularly in rural areas,
competition for basic local phone service
still faces a significant obstacle: a technology
designed for a single provider.
Traditionally, the market for local
phone service has been viewed as a natural
monopoly because of the way the telephone
network is built. A physical connection
must exist between the phone company’s
computer, or switch, and every customer’s
home or business. This physical connection,
often referred to as “the last mile,” is owned
by the telephone company. In a truly com-
petitive market a new entrant would need to
place a duplicate physical connection from a
separate switch to every customer’s premise.
Clearly, a single provider is more desirable in
terms of the most efficient use of resources. 
In rural areas, this obstacle is even
greater because the cost of providing this last
mile depends on the distance between the
customer and the switch—the further the
distance, the higher the cost. But on a per-
customer basis, if a portion of this last mile
is shared among several customers the cost is
lower. In many rural areas, customers are
located far from the switch, are small in
number, and are widely dispersed (which
prohibits sharing). So not only would a
duplicate network be inefficient, it would
generally be cost-prohibitive due to the
physical distribution of customers.
The 1996 Telecom Act established a
framework for two types of competition to
circumvent this problem of the last mile.
The first approach allows a competitor to
lease a portion of the existing network (such
as the last mile) from the incumbent tele-
phone company. The competitor then offers
its own services to customers using that
leased portion of the network. The second
approach allows a competitor to re-sell the
existing telephone company’s service. In
general, leasing offers more advantages to
the customer—leasing allows a competitor
to offer the customer different services,
while re-selling merely provides a customer
with a new point of contact. But in rural
areas, both leasing and re-selling face serious
hurdles—leasing may be financially infeasi-
ble due to a complex system of cross-subsi-
dies among telecom services, and re-selling
may be unprofitable because there are few
potential customers.
Future articles in the Main Street
Economist and elsewhere will explore this
competition issue in rural America. We will
examine whether these two approaches to
competition for basic phone service have
overcome this technological barrier of the
last mile, and whether rural and urban resi-
dents have the same competitive choices.
Government support for
healthcare and education
Two of the most important issues
regarding quality-of-life in rural America are
access to healthcare and access to education.
Historically, rural regions have lagged
behind urban areas in standards of service
and access to new developments in both
areas. Telecom advances promise to help
close this gap and mitigate the negative
effects of remoteness, distance, and shifting
demographics. In education, distance learn-
ing can offer resources and opportunities
that were unavailable in rural areas only a
The Main Street Economist May 2000
- 3 -
May Newsletter 2000  5/16/00  5:32 PM  Page 4The Main Street Economist May 2000
- 4 -
few years ago. In healthcare, advances in
telemedicine include long-distance video-
conferencing with specialists, rapid trans-
mission of images or data, and increased
access to patient information or medical
education materials on the Internet.
In passing the 1996 Telecom Act,
Congress laid the foundation to provide
financial assistance to healthcare providers
and to schools and libraries in rural
America. The first mechanism for accom-
plishing this was the E-rate, which pro-
vided funds for schools and libraries in the
form of discounts on various telecom serv-
ices, including Internet access, internal
connections (LANs/WANs4), and high-
speed connections. In many cases these dis-
counts offered relief of up to 90 percent of
the purchase price. Although the E-rate is
not limited to rural schools, the FCC
specifically targeted schools in rural, high-
cost areas to receive the highest discounts.
The other mechanism was a system of dis-
counts to rural healthcare providers to
ensure that prices paid for advanced serv-
ices were the same as those paid by health-
care providers in urban and suburban areas.
These healthcare discounts are available to
local health departments or agencies, as
well as caregiving institutions, and may be
applied to almost all telecom services.
Since the act’s passage, millions of
dollars have been distributed through both
mechanisms. The first distribution of
E-rate discounts accounted for more than
$1.6 billion, with rural schools and
libraries receiving 33 percent of the funds,
or $526 million (Chart 2). The second
distribution provided $1.7 billion, with
rural areas receiving 28 percent
or $468 million. The support
for rural healthcare providers is
much smaller in scope, offering
just over $2 million to over
300 rural healthcare providers
in 1999.
In coming months, the
Center for the Study of Rural
America will take an in-depth
look at exactly where these
funds are going, which rural
communities have benefited
from this support, and which
have not. We will examine
whether the communities with
the greatest need and the most to gain
from these programs are taking full advan-
tage of the discounts.
Wireless technology
Recent regulatory developments have
placed the wireless industry in a unique
position to serve rural America. In 1999,
Kansas was the first state to grant a wireless
provider, Sprint PCS, classification as an
ETC (eligible telecommunications carrier).
ETC status allows the wireless provider
(subject to certain conditions) to receive
dollars from a statewide fund to offset the
cost of serving high-cost rural areas. This
fund is known as the universal service
fund. ETC status also makes the provider
eligible for support from the federal univer-
sal service high-cost fund. Regulators have
not yet determined if a wireless service
must replace the wireline service in order to
receive funding, or whether both types of
provider could receive dollars for serving
the same high-cost rural areas.
In either case, the potential now exists
for public funds to assist in the deployment
of rural wireless service. This adds a new
layer of complexity to the outlook for com-
petition in rural areas, and could also affect
the availability of advanced services. Over
the course of the next year, the Center for
the Study of Rural America will track these
regulatory developments and assess their
impact on wireless technologies as a viable
alternative for rural residents.
Conclusion
There is no doubt that advances in
telecommunications and data technology
have revolutionized the way the world does
business. But will the benefits flow equally
to everyone? For the people of Main Street,
economic sustainability and future devel-
opment will depend on whether the
telecom revolution creates a digital divide
or a digital bridge between rural and
nonrural America.
1 Broadband is defined by the FCC as the capability of
supporting speeds at least 200 kilobits/second in both
directions. 
2 As for microwave, the technology (known as MMDS
or LMDS) involves transforming what was originally a
one-way wireless video transmission service into a two-
way data service. This conversion is currently under-
way in many areas, and LMDS or MMDS licenses
have been granted throughout much of the country.
However, it is likely that providers will initially focus
on urban areas with high concentrations of customers.
The acronym MMDS stands for Multichannel /
Multipoint Distribution System. The acronym LMDS
stands for Local Multipoint Distribution Service. 
3 Computer Economics, Inc., Carlsbad CA
4 Local Area Networks or Wide Area Networks
Center Staff
Mark Drabenstott
Vice President & Director
mark.drabenstott@kc.frb.org
Alan Barkema
Vice President & Economist
alan.d.barkema@kc.frb.org
Brian Staihr
Senior Economist
brian.k.staihr@kc.frb.org
Kendall McDaniel
Associate Economist
kendall.l.mcdaniel@kc.frb.org
Nancy Novack
Research Associate
nancy.l.novack@kc.frb.org
www.kc.frb.org
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
1998—99 1999—2000
Nonrural
Rural
Chart 2
E-Rate Discounts for
Rural and Nonrural Schools and Libraries
(millions of dollars)
May Newsletter 2000  5/22/00  11:57 AM  Page 1

Rural America's stake in the digital economy

http://www.kansascityfed.org/Publicat/mse/MSE_0500.pdf

Rural America's stake in the digital economy

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