Broadband Stimulus or More Telco Shenanigans? (February 3, 2009)

Summary – Congress should condition any funds for companies to deploy broadband communications on: 1) the utilization of the lowest cost technology that can consistently produce at least 2 Mbps and 2) the prohibition of direct or affiliated ownership (i.e., more than 20%) of such companies by any in-region telephone or cable companies.


As Congress rushes to fund up to $9 Billion for broadband infrastructure as part of the stimulus package, the draft legislation needs modification to address the root problems of broadband service.

In particular, broadband communications is much slower and more expensive in the United States than in other developed countries. Additionally, broadband adoption here is highly dependent on socioeconomic status (e.g., less than 10% by households with income less than $25,000 subscribe to broadband). And broadband availability in rural areas is less than one half of that in urban and suburban areas.

Moreover, if broadband were defined as providing more than 2Mbps downstream capacity, the U.S. would only have about 40 million broadband users.

This dismal showing is the result of either: 1) inadequate technology, 2) the costs of the available technology exceeding the expected revenue, 3) the unavailability of capital to deploy the available technology, 4) the lack of incentive of the incumbent providers or 5) some combination thereof.

Of course, we know that a high-speed broadband IP infrastructure can offer voice, data and streaming video. This broadband infrastructure can be either wire line or wireless (and wireless can offer mobility as well).

In turn, the incumbent providers view the broadband market from their existing strategic position. For example, the incumbent Telcos and Cable Cos are pursuing dedicated broadband pipes into the home or office in order to be able to offer multiple video channels and multiple bundled services. However, this vision requires billions in capital deployment for any meaningful coverage, and it depends on high population density and limited competition to be viable. From a consumer perspective, this approach will lead to a high-priced duopoly – each of which will offer many channels that they do not want.

On the other hand, broadband IP wireless technology is available today in the form of WiMax, or fourth generation wireless technology. This technology is much less costly than the alternatives. For example, the government of Australia found that it would cost about $1B to bring wireless broadband to the Outback, while fiber would cost about $4 B. As an aside, the shenanigans of the incumbent telco in Australia (headed by a former U.S. Telco CEO) to derail this initiative are enlightening.

In the United States, a new entrant by the name Clearwire is beginning to roll out the WiMax technology in metro areas. Others are beginning to serve rural areas. The technology is an anywhere, anytime service that provides users only what they actually want, when they want it, and even supports video streaming to mobile devices. It will be followed in a few years by LTE which is the fourth generation technology selected by the incumbent cellular providers for high-speed broadband connectivity.

Despite this new and exciting technology, the deployment of wireless broadband infrastructure to meet customer requirements faces considerable obstacles. However, these obstacles are not necessarily related to the cost of the technology versus the expected revenue, or even the availability of capital. Rather, they derive from the repeated practices of incumbent providers to impose their strategic vision on the industry and its consumers.

After all AT&T and Verizon dominant the telecom landscape, yet offer a very small percentage of the high-speed broadband connections at 2 Mbps. Similarly, the Cable Cos are more interested in expanding the services on their existing plant than expanding coverage or adopting new technology.

In light of the existing industry structure and incentives, Congress should condition any funds for companies to deploy broadband communications on: 1) the utilization of the lowest cost technology that can consistently produce at least 2 Mbps and 2) the prohibition of direct or affiliated ownership (i.e., more than 20%) of such companies by any in-region Telco or Cable Co. For example, if the Telcos holding 700 MHz licenses seek government funding for broadband deployment within their territories, they would have to spin off the 700 MHz licenses to their shareholders in order to qualify for government funding.

The good news is that with the proper incentives for new entrants together with government regulation of the abusive practices by the dominant incumbent providers, high-speed broadband penetration should double in the United States within the next five years. And that should help the economy function more effectively.