Do High Call Termination Rates Deter Broadband Deployment?

In this paper, we attempt to shed light on an important policy question: Does the current way by which providers compensate each other for the exchange of voice over Internet Protocol (VoIP), wireless, local, and long distance calls inhibit broadband deployment? This question is timely, as the Federal Communications Commission is presently considering a comprehensive intercarrier compensation reform proposal that would establish lower and more uniform rates for the transport and termination of all forms of traffic, regardless of point-of-origin and technology. Supporters of the proposal have argued that broadband deployment would be advanced if the FCC were to adopt this proposal, while detractors assert that broadband deployment would be demonstrably hurt. In this paper, we find evidence that compared to the current Byzantine intercarrier compensation system, a lower, more uniform compensation rate can promote and spur broadband deployment, especially in rural and less densely populated areas where current call termination rates are very high, by reducing arbitrage opportunities that distort investment decisions. As such, comprehensive intercarrier compensation reform would appear to make a significant contribution towards the development of a true national broadband strategy.