April 27, 2010, Testimony: Connecting Main Street to the World: Federal Efforts to Expand Small Business Internet Access

Testimony of Susan Walthall
Acting Chief Counsel for Advocacy
U.S. Small Business Administration

U.S. Senate Committee on Small Business and Entrepreneurship

Date:April 27, 2010
Time: 10:00 A.M.
Location: Room 428-A
Russell Senate Office Building
Washington, D.C.

Topic: Connecting Main Street to the World: Federal Efforts to Expand Small Business Internet Access

Chair Landrieu, Ranking Member Snowe, and members of the Committee, good morning and thank you for the opportunity to appear before you today. My name is Susan Walthall and I am the Acting Chief Counsel for the Office of Advocacy at the U.S. Small Business Administration (SBA). Congress established the Office of Advocacy in 1976 to represent the views of small entities before federal agencies and Congress. Advocacy is tasked with ensuring federal agencies’ compliance with the Regulatory Flexibility Act (RFA). As Advocacy is an independent office, the views expressed in this testimony do not necessarily reflect the position of the Administration or the SBA. Our office conducts research on important small business issues and echoes the concerns of small businesses on these issues.

Advocacy has been and continues to be active on a number of small business broadband issues. We have filed comment letters on the guidelines for the Broadband Technologies Opportunities Program (BTOP) and the Broadband Initiative Program (BIP), the FCC’s consultative role, and the national rural broadband strategy.(1) In addition, we have advocated for increased access to spectrum by small businesses through the FCC’s designated entity program,(2) special access reform,(3) and a competitive regulatory approach to the U.S. telecommunications industry.(4)

I would like to commend Congress and our federal partners for their work to expand broadband access and to increase broadband adoption by small business customers throughout this country. Advocacy was pleased to see the Commission’s focus on competition in Chapter 4 of the National Broadband Plan, as well as the detailed recommendations for economic opportunity and entrepreneurship in Chapter 13.(5) We hope that the FCC will continue to consider the small business impacts in its ongoing and future rulemakings related to the National Broadband Plan.

In addition, my office was pleased with the National Telecommunications and Information Administration’s (NTIA) efforts to include small and socially and economically disadvantaged businesses (SDBs) in the Recovery Act’s broadband programs. Advocacy participated in a number of interagency coordination meetings to ensure that small businesses had a meaningful opportunity to participate in these funding programs. We assisted NTIA with a letter to the SBA Administrator, in an attempt to raise the threshold defining small business. We were pleased to hear that several businesses chose to partner with SDBs on these projects.(6)

My testimony today will focus on three key areas. First, I will highlight the importance of small businesses as economic drivers and customers of advanced telecommunications services. Second, I will explain the challenges faced by small business providers. Finally, I will discuss the study that my office is conducting on broadband and small business, as directed by this committee under the Broadband Data Improvement Act of 2008.(7)

Small Business and Broadband

Small business is a key driver of our economy. Recent data show that small businesses make up 99.7 percent of all U.S. employer businesses, and employ just over half of all private sector employees. These small entities have generated 64 percent of net new jobs over the past 15 years, and have created half of the non-farm gross domestic product.(8)

Small business is also a key driver in our innovation economy, producing 13 times more patents per employee than large patenting firms. These patents tend to be cited more frequently than those of large firms. Finally, small businesses make up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in 2007.(9)

While these data demonstrate the importance of small businesses to the economy, there exists the potential for even greater small business contributions to economic growth and job creation. Broadband is a transformative technology that allows small businesses throughout the U.S. to access customers throughout the world. We need to ensure that they have affordable access to adequate speeds of broadband so they can take advantage of the expanded markets and opportunities to innovate. The best way to achieve this goal is by fostering a competitive regulatory environment that reduces price and expands service. Ultimately, with access to affordable broadband technology, small businesses in rural and low-income areas can not only improve their efficiency, but can also access advanced applications and services, all while introducing their products to new markets around the globe.

Small Business Broadband Providers

Small businesses are not merely customers of advanced technology; many have made significant investments in our telecommunications infrastructure and have focused on serving rural and other underserved areas. We need small broadband providers across all platforms to continue to invest in building out their networks, to find ways to collaborate with local community partners, and to tailor their services to meet the specific needs of their communities.

A small group from my office visited the offices of MetroCast, a small independent cable operator in St Mary’s County in rural Maryland. The group discussed the technological difficulties they were facing in connecting two service areas separated by inaccessible terrain, and showed us the communities they served. Metrocast, like most small telecommunications providers, is flexible in its offerings and very responsive to the needs and circumstances of the environment it operates in.

While the National Plan focuses on the provision of broadband to small business customers, it is critical that the Commission also recognize the unique barriers that exist for small broadband providers. Many of these small providers bring special value to the marketplace. First, they support Congress’ goals set forth in the Telecommunications Act of 1996 by offering competitive services and pricing.(10), (11)Second, they fulfill the National Plan’s focus on expanding service to unserved and underserved areas. Finally, their presence in local communities has a value in and of itself, providing high tech jobs and strengthening local economies.(12)

The National Broadband Plan addresses several key issues of relevance to small business telecommunication providers’ ability to participate and compete. These include special access and acquisition of spectrum.

Under the Telecommunications Act of 1996, the FCC is required to “promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.” Following the “Pricing Flexibility Order” in 1999, which instituted deregulated prices for dedicated access services in metropolitan statistical areas, and the amending of price-cap rules under the “CALLS decision,” small carriers have continuously reported increased rates for special access. They have also suggested that the current price of special access specifically demonstrates a lack of competition in the market, because incumbents have been able to raise prices without losing customers. The combination of high prices and few alternatives creates a difficult burden for small carriers trying to conduct business in the telecommunications market.(13)

Advocacy is committed to working with the FCC to ensure that small entities have access to acquiring spectrum. To ensure this access, Advocacy urges the FCC to consider amending its designated entity (DE) rules, which allow smaller companies that qualify as DEs to compete in spectrum auctions with the use of “bidding credits.” As Advocacy has noted in previous comment letters, the 2006 revision to these rules has encumbered small business participation in FCC spectrum auctions.(14) While it seems uncertain what opportunities are left for DEs to meaningfully participate in future spectrum auctions, it is important that we revise these rules so that Congress’s intent in creating Section 309(j) of the Communications Act is not diluted.

Advocacy hopes that the Commission will address these issues. Competition between broadband providers will help to spur the development of advanced technologies and services in the marketplace, while reducing prices.

Advocacy also urges the FCC to consider how its future rulemakings will impact small broadband providers. Our office has found that small businesses face a 60 percent higher burden of federal regulatory costs than do their larger counterparts.(15) As the National Broadband Plan is implemented, it is important that the Commission identify how small broadband providers will be affected by changes to FCC rules and policy, and examine what alternatives can achieve the same goals while mitigating any added regulatory burdens.

Advocacy Broadband Study

While a number of studies have examined broadband access and adoption rates among residential users, no research has focused on how small businesses are using broadband, or what their specific technological needs are.(16) In response to this lack of data, the Broadband Data Improvement Act of 2008 directed Advocacy to conduct a study to evaluate broadband availability for small businesses.(17)Senators Landrieu, Snowe, and Kerry were all instrumental in supporting this legislation and spearheading this study. The law requested that Advocacy examine telecommunications service options available to small businesses with respect to price and speed, and to evaluate the economic impact of such availability. I am pleased to report that the study is under way.

The study, due this fall, will provide valuable information on the menu of broadband options currently available to small businesses, and provide Congress with a snapshot of the status quo, before BTOP and BIP. Advocacy intends the study to provide a baseline against which the success of the broadband grant and loan programs can be evaluated. Results of the study will geographically highlight small businesses that are in unserved and underserved areas, and quantify just how limited their service choices are and how this affects the price of broadband. These detailed data, by matching service availability with small business location, will further serve to verify and guide efforts to increase the ability of small service providers to enter the market and offer innovative and competitive new products to these regions. Advocacy looks forward to sharing the results of our study with the Committee.

The National Broadband Plan represents an unprecedented effort to provide universal broadband access in the United States. Small broadband providers will be essential in ensuring that universal access becomes a reality for all Americans. Meanwhile, small business broadband consumers will be among the most strategically placed beneficiaries of increased access and speed, and the lower prices that come with increased competition. In this respect, greater broadband access will serve as an input to the remarkable engine of job creation and economic growth that is American small business. SBA’s Office of Advocacy stands ready to work with Congress, the FCC, the Department of Commerce, the Department of Agriculture, and others to ensure that the needs of small businesses are considered as we work to achieve the goal of universal broadband access. Thank you for allowing me to present these views, I would be happy to answer any questions.

ENDNOTES

1. Comments of the Office of AdvocacyFiled with both the FCC and the NTIA, GN Docket No. 09-40, NTIA/RUS Docket No. 090309298-9299-01 (filed April 13, 2010), comments of the Office of Advocacy filed with NTIA, NTIA/RUS Docket No. 090309298-9299-01 (filed April 13, 2010). All Advocacy comments cited here can be found at www.sba.gov/advo/laws/comments/telecommunications.html and are listed from 2001 on in Appendix A.

2. Comments of the Office of Advocacy, WT Docket No. 06-150, PS Docket No. 06-229 (filed May 21, 2007).

3. Comments of the Office of Advocacy, WC Docket No. 05-25 (filed Aug. 8, 2007).

4. Comments of the Office of Advocacy, WC Docket No. 07-97 (filed July 25, 2008).

5. Connecting America: the National Broadband Plan, www.broadband.gov/plan/ .

6. Preliminary numbers from NTIA on Phase 1 of the Recovery Act grants show that 31 projects had SDB partners and that at least 8 small businesses received awards totaling over $73 million.

7. 122 Stat. 4096 Public law 110-385- October 10, 2008.

8. U.S. Small Administration, Office of Advocacy, Frequently Asked Questions (Sept 2009), available at http://web.sba.gov/faqs/faqindex.cfm?areaID=24.

9. Id, see also CHI Research Inc., Small Serial Innovators: the Small Firm Contribution to Technical Change, study funded by the Office of Advocacy, SBA, under contract No. SBAHQ-01-C-0149 published Feb 27, 2003, http://www.sba.gov/advo/research/rs225tot.pdf.

10. In the wake of the 1996 Act and the FCC regulations that ensued, thousands of Internet Service Providers (ISPs) sprung up and started providing a slew of new generation services to the communities in which they operated. They were responding to the incentive structure put forth by the 1996 Act, which allowed the incumbents access to interlata services under the condition that they “unbundled” the local loop to allow for intralata competition. Unbundled Network Elements (UNEs) allowed ISPs to provide local competition. A significant portion stopped operating; about 7,000 ISPs went out of business as result of the decisions taken in FCC rulings. See Advocacy’s letter, Appropriate Framework for Broadband Access to the Internet over Wireline Facilities (CC Dkt. No. 02-33), available at http://www.sba.gov/advo/laws/comments/fcc02_0827.pdf.

11. Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C. §§ 151.

12. According to the U.S. Bureau of the Census, 98 percent of telecommunication providers are small (NAICS 517) and of all 4,914 internet service providers and web search portals (NAICS 5181), 4,834 are small businesses (98 percent). For the category comprising all Other Information Services (NAICS 51919), 97 percent are small businesses. This is based on data year 2006, the most recent data available.

13. Comments of the Office of Advocacy, WC Docket No. 05-25 (filed Aug. 8, 2007)

14. Comments of the Office of Advocacy, WT Docket No. 06-150 (filed May 21, 2007).

15. Crain, Mark, The Impacts of Regulatory Costs on Small Firms, study funded by the Office of Advocacy, U.S. Small Business Administration, contract No. SBAHQ-03-M-0522, released in September 2005 http://www.sba.gov/advo/research/rs264tot.pdf.

16. The Office of Advocacy has funded two research projects based on a dataset gathered using the same survey instrument. In March 2004, the study, A Survey of Small Businesses Telecommunications Use and Spending was released, http://www.sba.gov/advo/research/rs236tot.pdf; and in December 2005, Broadband Use by Rural Small Businesses was released, http://www.sba.gov/advo/research/rs269tot.pdf.

17. Public Law 110-385 Section 105 requested that Advocacy conduct a study to evaluate the options available to small business in terms of telecommunication services with respect to price and speed; and to evaluate the economic impact of such availability.