CARRIERS TO GOVERNMENT: DON'T TREAD ON US

While Bell company lobbyists work to gain regulatory reforms designed to stimulate facilities investment and reduce government influence over their businesses, some in Washington say it's time for the government to get more involved in broadband.

Participating in a panel discussion at The Yankee Group's Telecom Forum last week, Keith Kayes, Democratic staff director for the Senate Commerce Committee, said it's possible the government eventually will need to subsidize broadband buildout. “You can't just look at [the Bell companies] and deregulate them in the hope that they will invest in facilities,” Kayes said. “The government has always subsidized telecom providers.”

Government intervention also has been bandied about by TechNet, the influential equipment vendor coalition. Rick Roscitt, chairman and CEO of TechNet member ADC Telecommunications, again suggested last week that the federal government authorize 30-year low-interest bonds as part of an effort to get investor capital flowing back into telecom. Such a strategy would finance deployments of broadband services to underserved rural areas and provide financing for competitive carriers committed to building their own facilities.

“That would provide the long-term source of capital these companies need to compete over their own facilities,” he said.

TechNet has called on the Bush administration to declare a national broadband policy and commit to bringing 100 Mb/s connectivity to 100 million homes nationwide by 2010.

Broadband penetration levels in the U.S. remain woefully low compared with other countries. According to various surveys, just 11% of America's households currently have broadband, and only a handful of carriers have penetration rates in the high teens. By comparison, South Korean operators — backed by a government-mandated DSL expansion program — claim penetration rates of 26%, according to the DSL Forum.

One of the first government efforts to increase broadband penetration came from Commerce Committee Chairman Sen. Ernest Hollings, D-S.C. But Hollings' bill — which contained a subsidy component — was recently shelved as time ran out during the current session. Should Senate majority swing to the Republicans, Hollings would cede control of the Commerce Committee to Sen. John McCain, R-Ariz, an avowed opponent of the broadband bill.

The idea of the government underwriting — and perhaps directing — the effort to bring broadband to the masses isn't new. The information superhighway often is compared to the interstate highway system conceived by the Eisenhower administration in the 1950s. Both had enormous potential to transform America, and both represent a similarly massive undertaking that some believe only the government can pull off.

In addition to TechNet's initiative, others have suggested the government divert revenues generated by the telephone excise tax — which is expected to generate about $6 billion this year — to fund broadband deployments.

However, government intervention in broadband probably isn't going to happen under the current administration, said Scott Cleland, president and CEO of Precursor Group. “This administration has very little interest in subsidies. For starters, it would be contrary to Republican philosophy. Plus, the surplus has swung to a deficit, and the country is in a wartime environment,” Cleland said. “It's just not going to be in the budget.”

And unlike the 1950s when rapid trucking industry expansion choked America's concrete arteries, there are no analogous killer applications currently clogging broadband pipes that would justify the government throwing its weight — and cash — behind building capacity, said Ford Cavallari, senior vice president and head of the broadband and media practice at Adventis. If government wanted to goose broadband deployment, it would subsidize application development, he said.

“The speed value proposition is not one that anyone other than the early adopters are interested in,” Cavallari said. “There have to be enough applications so that Joe Middle Class wants 1.5 megabits coming out of his modem as much as he does 110 volts coming out of his wall socket. We're not there yet. We're not even close.”

Wanda Montano, vice president of regulatory affairs for competitive carrier US LEC, suggested that the problem lies in socio-economic pressures, which has pushed many to misunderstand the fundamental value of computers. In one Charlotte, N.C., elementary school, 90% of the children had never seen a computer, she said.

“If you're trying to solve basic needs like food, clothing and shelter, you're not going to care all that much about computers and the Internet,” she said.

Price is also an issue because at $50 per month, broadband doesn't fit into many budgets. Moreover, far too many families that can afford high-speed connections have been unable to justify the leap from $20 per month for dial-up service.

And don't expect carriers to go below that price point anytime soon, said Kevin Beebe, communications group president for rural local exchange carrier Alltel.

“At $40 to $50 a month, we're just covering our costs. There are no large margins being made on broadband access today,” he said. Nevertheless, Alltel wouldn't be interested in subsidies that would allow it to lower prices because they would create “artificial economics” that couldn't be sustained over the long term, Beebe said, adding, “The marketplace needs to develop on its own.”

Link Hoewing, assistant vice president for Internet and technology policy for Verizon, agreed, but he didn't completely rule out a future role for the government. Current regulatory policy is making it difficult for carriers to finance network improvements and makes those efforts more costly, he said.

“We haven't pushed fiber out into the neighborhoods yet, and I think that's where the network is going, the kind of multi-media, high-capacity network that TechNet wants to see,” Hoewing said. “If we get the policies right first, you're going to see buildouts begin again.”

Less government may, in fact, provide the stimulus. According to a study by Corning, fiber buildouts would increase by 35% over the next four years if the FCC made current un-bundling rules less onerous for incumbent carriers. Without that relief, the study claims fiber penetration would increase by just 4% over the same period.

“Let's get the policies right, and then two to three years down the road, if the market fails to get broadband out to real rural areas, then maybe you need to look at [government intervention],” Hoewing said.

Hollings' broadband bill would be a step in the opposite direction and do more harm than good, said Dan Phythyon, senior vice president for law and policy at the United States Telecom Association. According to Phythyon, the bill would impose new regulations upon carriers that accepted government handouts.

“It's a double whammy,” Phythyon said. “The first and best use of government resources is to remove regulations that are barriers to investment.”