Advances in telecommunications technology have the potential to provide new and improved services to people no matter where they live. For example, students in rural areas of Iowa are being taught Russian, music, and calculus by teachers in distant urban centers through two-way video communications. North Carolina has begun to link rural and urban hospitals to provide rural sites with access to medical specialists via video. A telephone company in Nebraska has created jobs in a small rural town by establishing a nationwide telemarketing business. Modern telecommunications can thus be used both to improve the delivery of services and to promote economic development. In figure 1.1, a technician at a hospital in Des Moines is transmitting an echocardiogram to be read by a specialist at the University of Iowa hospitals in Iowa City, Iowa—100 miles away. Using advanced telecommunications instead of sending a tape by a 2-hour courier trip results in a quicker diagnosis and more timely treatment for the patient. While services such as two-way video are offered in some places in the United States today, they are not widely available because the current telecommunications infrastructure, notably the telephone system, was not designed to provide them. Billions of dollars worth of infrastructure improvements would be needed in order to quickly transmit data and high-quality video images throughout the nation. Some state governments are currently looking for ways to accelerate this investment and ensure that services will be affordable and widely available to their residents. The experiences of the states that have begun this process can provide critical information to federal policymakers and to other states as they revise their telecommunications policies and seek to develop a modern telecommunications infrastructure. Historically, private investors have financed the building of the United States’ telephone system, the most widely available form of telecommunications infrastructure. This system now provides services to over 93 million American households. As of 1994, about 94 percent of American households had access to basic telephone services. Telephone companies are already improving their infrastructure to be able to provide advanced telecommunications services. This investment is occurring mainly in business districts and more densely populated residential areas. Profit incentives are not high for companies to provide such service in rural areas, where there are fewer businesses and the cost of delivering services is usually higher, unless financial support is available or cost averaging is applied. It is likely that private investment in advanced telecommunications will be slower in rural areas as well. Recent studies by the Department of Commerce and Office of Technology Assessment found that the use of telecommunications can be particularly beneficial to rural areas, where the population density is low. However, the distances between people in rural areas also increase the cost of providing these services. Some industry observers expect increased competition to lead to lower prices and more choices in telephone service. Others point out, however, that competition is less likely to develop in rural areas and that customers in these areas may be faced with higher prices because without subsidies or cost averaging, the prices for telecommunications services will likely reflect the higher cost of providing service there. Advanced telecommunications services can be provided, in part, by upgrading the current telephone system’s infrastructure to increase the capacity, or “bandwidth” of the telephone lines and switches. These upgrades include powerful new computer switches, complex software, and fiber optic cables that combine to form a high capacity, “broadband” telecommunications infrastructure. The technologies that can be used for upgrades are diverse. For instance, replacing existing copper telephone lines with new fiber optic lines can dramatically increase capacity, enabling the lines to carry many thousands of times more data. In addition to telephone lines, other kinds of technologies—including satellites, cellular telephones, and cable television systems—can transmit information as part of the telecommunications infrastructure. Besides the infrastructure needed to move information over distances, advanced telecommunications depend on two other elements—on-site equipment and switches that have been upgraded to handle larger amounts of information. Figure 1.2 illustrates these components of a network. The equipment at the originating site turns the information generated by the user, such as sounds, words, and pictures, into a form that can be transmitted. The switches route the transmission to its destination through cables or some other transmission channel. Once the transmission arrives at its destination, other types of on-site equipment convert the transmission back into the same usable form of sounds, words, or pictures. The President recently signed legislation reforming federal telecommunications law. This new law envisions a telecommunications industry in which a variety of companies—local telephone, long-distance, cable television, and wireless—can offer similar services and compete with one another. For example, the new law allows competition for local telephone services. While promoting deregulation, this law seeks to preserve and advance the concept of “universal service”—affordable and widely available telephone service. Universal service has been a federal goal since the enactment of the Communications Act of 1934, and federal and state governments have supported this goal through a series of subsidies and other types of assistance. The effect of this policy has been to make telephone service more affordable for residential customers and rural users. The new law provides for the establishment of a joint federal-state board to make recommendations to the Federal Communications Commission on the steps necessary to preserve and advance the goal of universal service. At the state level, officials have discussed the value of advanced telecommunications services in national forums such as the National Governors’ Association and the National Conference of State Legislators. They envision using advanced telecommunications to provide education, health care, and other public services more effectively and more equitably (see fig. 1.3). They also believe these services will make their states more attractive to new and expanding businesses and allow their rural residents to participate more fully in state government. As a result, leaders in state governments are looking for ways to accelerate the development of the telecommunications infrastructure. Three states with significant rural populations—Iowa, Nebraska and North Carolina—have been cited as leaders in the development of statewide advanced telecommunications services. Recognizing that decisions about private investment for improving the telecommunications infrastructure are driven by market circumstances, officials in these states have worked with the private sector and with potential users to encourage private investment and ensure the availability of service in less densely populated rural areas. Table 1.1 shows the demographics of these three states relative to the nation as a whole. Iowa is a midsized agricultural state with a population of about 2.8 million. The state has a large number of midsized towns—ranging from 8,000 to 10,000 people—which are fairly equally distributed in the eastern two-thirds of the state. The state also has about 100,000 farms. Of Iowa’s 99 counties, 88 are considered rural. Iowa’s primary goals for a statewide telecommunications network were improving educational services and equalizing educational resources, such as the course offerings available at urban and rural educational facilities. Iowa selected a system based on high-capacity fiber optic technology and SONET software that was capable of transmitting voice, data, and two-way interactive video. This technology provides high-quality pictures that let students and teachers see each other clearly. Nebraska is a predominantly agricultural state with a scattered population. Sixty percent of the state’s 1.6 million residents are located in four major cities; the rest live in small and midsized communities that are often distant from each other. The western parts of the state are sparsely populated. Of the state’s 93 counties, 88 are considered rural, and 10 of the 25 counties with the smallest populations in the nation are located in Nebraska. Nebraska’s first priority for its network was providing high-speed data services, such as Internet connections, at prices that the state’s small, rural schools and organizations could afford. The frame-relay technology that the state selected, streamlines data transmissions and allows data to travel more quickly and cost-effectively than other alternatives. The state has also created a video network that community organizations can use for meetings, hearings, and training sessions, using leased T-1 lines. The “compressed” video technology selected for the network reduces the bandwidth needed to send pictures and the cost of transmission. However, the resulting video images are often seen as jerky or blurred. About half of North Carolina’s 7 million residents live in midsized towns found along a central corridor stretching east from the state’s largest city, Charlotte, to the Atlantic coastline. This area includes the generally affluent Raleigh-Durham metropolitan area and Research Triangle Park, one of the nation’s leading centers for medical, electronic, and industrial research. The western part of the state is mountainous and forested, and many of the state’s least populated counties are found in this area. The coastal region also includes isolated towns. Of North Carolina’s 100 counties, 75 are considered rural. The primary objectives for North Carolina’s network were improving education and making North Carolina’s businesses more competitive. The state selected state-of-the-art technology: a high-capacity fiber optic network and advanced ATM switches that can connect a very large number of users and support very fast interactive video transmission to multiple users simultaneously. The costs of this advanced system were considered acceptable because state and private-sector officials believed that it would have a longer useful life than a system built with older technologies. The Chairman and Ranking Minority Member of the Senate Committee on Agriculture, Nutrition, and Forestry asked us to provide information on selected states that have started developing their telecommunications infrastructure, specifically (1) how these states encouraged private investment in improving their telecommunications infrastructure, (2) how they provided for increased and affordable access to advanced telecommunications services, and (3) what lessons their experiences could provide for others. To respond to this request, we conducted case studies of three states—Iowa, Nebraska, and North Carolina—that (1) include rural populations that constitute at least one-third of the state’s total population and (2) have made significant progress in deploying statewide advanced telecommunications systems.