News

Making Sure the Stimulus Works

3/14/2009 2:00 AM Eastern

I’m going to go out on a limb and predict that the $7 billion-plus of government money dedicated to improving broadband in the U.S. will not radically improve broadband-penetration rates in the country. In fact, after reading the provisions pertaining to broadband in the American Recovery and Reinvestment Act, one could make the argument that increasing actual penetration of broadband in the U.S. is not the goal, but more of a hopeful byproduct.

The logic for those hoping the stimulus actually does increase penetration largely assumes that by increasing availability of broadband, service providers will be tapping into pent-up demand, therefore the raw number of subscribers will increase and penetration levels will rise naturally. Before the results are in, there’s the more immediate concern for the broadband industry over how to dole out all that cash to service providers who are willing to offer broadband in areas that have heretofore been deemed unworthy by traditional economic analysis.

Much of the disbursement of funds will be dependent on determining what areas are “unserved” or “underserved.” There’s plenty of argument going on over the exact definition of that right now. But for expediency, let’s assume unserved means areas where consumers are unable to get any broadband connection greater than 500 Kilobites per second and underserved means those unable to get anything beyond 3 Megabits per second. Am I generous with my latter definition? Perhaps, but I’m thinking of future applications. Let’s leave actual throughput questions for later, as well.

In technology terms, that’s effectively no wireline broadband and perhaps only low-tier wireless. Who doesn’t have wireline broadband? Likely it’s those living in the most rural markets. But if we take the admittedly unscientific surveys from those representing rural service providers, it soon becomes clear that there is a clear difference between rural and urban/suburban availability.

Among telcos, rural providers are doing a decent job of getting broadband out to their largely rural constituents. In the National Telecommunications Cooperative Association annual survey, 83% of customers served by members could get service at 768 Kbps to 1.5 Mbps. That makes them “underserved,” but clearly not “unserved.” Compare that number to Verizon, which has publicly stated that about 20% of its local wireline territory can’t get broadband, and Qwest, which says it’s at 15% unserved.

The opposite picture emerges for MSOs, with smaller operators having the highest “unserved” base. The American Cable Association, also representative of rural service providers, estimates that the total “unserved” customers in its members’ service territories is somewhere between the low teens and 30%, while Comcast numbers indicate near ubiquitous availability.

The rub here is that almost one-third of these funds are being filtered through the U.S. Department of Agriculture’s RUS fund and are geared to smaller providers. Good news for cable operators, assuming they’re already part of the Rural Utilities Service funding process.

But what becomes of the larger pool of National Telecommunications and Information Administration money? The one that totals $4.7 billion and is due to be distributed by next September? After the first meeting of the minds last week, there were even more questions and virtually no real answers.

Fulfilling the goal of filling out the U.S. broadband footprint may necessarily mean giving a sizeable portion of that funding to Verizon Communications, AT&T and Qwest Communications International, which happen to cover about 90% of U.S. households. To be sure, we believe small cable MSOs, as well as some municipalities and even some wireless providers will get to “dip their beaks” in the money trough. By sheer number of households served, though, the big telcos mentioned above are likely to end up with a big pile of money.

In a time when the federal government is throwing money at banks like a newly minted lottery winner at the Ferrari dealership, perhaps it won’t be shocking to see three profitable companies getting funding. I’m betting it fans a few political brushfires.

More important, the entire industry needs to take a collective breath before doling out more than $7 billion and ask the essential question: Is this doing what it was intended to do? An opportunity to fill out the broadband footprint in a country with the physical size of the U.S. doesn’t come around often. It clearly is a laudable goal and one that should be within our sites in the next decade. However, the consequences of making the wrong decisions will be lasting and difficult to reverse.

March