Windstream fights to change broadband stimulus rules

“I was so damn disappointed with it,” Jeff Gardner, Windstream’s chief executive officer, said of the rules governing the federal broadband stimulus program. “We spent months working on this. We spent millions of dollars getting ready. We knew in every county, every exchange, how much additional money we’d need to invest to make the economics work for us. For $15 million, we could have increased [broadband] addressability in Arkansas by like 10%.”

Windstream (NYSE:WIN) is among the companies that did not apply for the first of three stimulus funding rounds due to the strings attached in terms of network neutrality, customer information and other requirements. The mostly-rural carrier is now lobbying Washington to change those rules or risk shutting out the companies that can stretch stimulus dollars the furthest.

“Qwest, Windstream, Frontier, CenturyLink – we’re going to get the most bang for the money,” Gardner said in an exclusive interview last week. Of those four, only Frontier has applied for funding in the first round, and that proposal is limited to West Virginia. “If it was easy to throw up a tower out there and provide broadband in rural America, we would have done it by now. The economics are very challenging, and we’ve got networks out there that can be extended.”

Windstream ultimately opted not to apply for first-round funding in part because of its open-network and disclosure requirements.

“There was some very vague language around open networks and privacy issues with respect to your own customers – not only the new ones but the ones you have today,” Gardner said. “The marketing guys were terrified you might have to release, like, customer penetration levels for all the broadband customers in your markets; that’s very valuable stuff. We can’t put our whole business model at risk and be beholden to those kind of restrictions for that opportunity. We have public shareholders we’ve got to care about. When our board looks at that -- we have a company here generating $1.7 billion in cash flow a year. We’d put ourselves at great risk to get an incremental couple hundred million dollars to reach these customers. It’s a tradeoff we can’t make.”

The first round attracted bids for four times the available funds. But by including requirements that would be deemed prohibitively risky by many of the industry’s most stable broadband providers, the government encouraged riskier applicants to step in, Gardner said.

“[The rules] encouraged companies that had high leverage and relatively nascent business plans to file,” he said. “Some of the public companies that filed, with the high leverage they have, what do they have to lose? If you’re leveraged at six or seven times your cash flow, and your business model’s in trouble and you’re having trouble raising private capital, what do you have to lose? Obama originally said he wanted to make sure people were accountable for that money. That’s why we’ve been talking to senators, saying, ‘Have some oversight. Don’t just give money to some company that has six times leverage that’s just going to piss it away.’”

Windstream’s fight to change the rules in its favor comes as the program’s administrators appear to be resistant to such moves, insisting, for example, that incumbent providers will have a hard time blocking stimulus projects in their territories. Meanwhile, the Federal Communications Commission is signaling increasing commitment to net neutrality in general. The FCC’s chairman today voiced plans to enact new rules barring Internet service providers from unfairly discriminating against certain kinds of content. Incumbent providers such as Arkansas-based Windstream say the concept, while currently vague, appears to clash with the basic economics of broadband.

“In the best example [of net neutrality], you shouldn’t be able to charge a high-bandwidth user more than a low-bandwidth user,” Gardner said. “Where else in the world does that work?”

“People out in California say [telecom carriers] shouldn’t have any say over what goes over their networks,” he added. “We want our customers to be able to get what they want. We also know that, to provide a level of service they expect, there’s got to be a way for us to get a return on our investment. These networks aren’t free.”

Despite being surprised at the inclusion of prohibitive requirements in the original broadband stimulus rules, Gardener is hopeful that the rules can be changed.

“I think it’s going to work,” he said. “The troubling thing with this is, you won’t know for two or three years [how effective the program was].”