Cover Story: The $7.2 Billion Question

The much-ballyhooed broadband stimulus program, known officially as the Broadband Technologies Opportunities Program, is, at $7.2 billion, one of the largest federal funding initiatives ever to hit the cable industry.

And though the program is still in its early stages — funding isn't expected to be available until next year — a fundamental question has emerged over one of the primary tenets of the initiative: No one is sure who the money is supposed to help.

So far, the broadband stimulus has been characterized as a job-creation vehicle, an educational tool, an engine for economic growth, a rural program and an urban initiative. And cable operators, who stand to get a large chunk of this funding if they so choose, are worried that the government may use the program to prop up competitors and even let them encroach on their existing, more heavily populated territories.

According to the American Recovery and Reinvestment Act (the $800 billion federal economic-stimulus program from whence the broadband stimulus came), the purposes of the program are to, among other things, “provide broadband education, awareness, training, access, equipment, and support to schools, libraries, medical and healthcare providers, community colleges and other institutions of higher education,” and “to facilitate greater use of broadband service by low-income, unemployed, aged, and otherwise vulnerable populations; as well as “improve access to, and use of, broadband service by public safety agencies; and stimulate the demand for broadband, economic growth, and job creation.” (See table.)

For their part, the two agencies earmarked to administer the funds — the National Telecommunications and Information Administration (in charge of $4.7 billion of the funding) and the U.S. Department of Agriculture's Rural Utility Service (handling $2.5 billion) — have been soliciting comments from all interested parties attempting to nail down definitions for two terms that will drive the program forward: unserved and underserved.

NTIA spokesman Mark Tolbert said that making those definitions and removing the uncertainty inherent in such a large program is a top priority, adding that NTIA staff is working closely with other agencies, reviewing comments and working on issuing its first Notice of Funding Availability, which would start the application process, by the summer. He added that the agency is mandated to complete the program — meaning all the finding will be dispersed — by Sept. 30, 2010.

“We're going to meet that deadline with room to spare,” Tolbert said.

“The agencies implementing the broadband programs in the Recovery Act face a difficult task,” said bill co-sponsor and U.S. Rep. Henry Waxman (D-Calif.) in his opening statement to the Subcomittee on Communications, Technology and the Internet during its April 2 broadband hearings. “They must act decisively and make hard decisions on the rules of the programs, and they must do so in a manner that is fair, open, and transparent to the taxpayers. Nobody wants taxpayer money funding a digital bridge to nowhere.”

“The question is, what is the problem they are trying to solve” with the stimulus, asked Leichtman Research principal analyst Bruce Leichtman. “Is the problem that 7% of the country does not have broadband? Or is the problem that the U.S. is 14th in the world in broadband penetration? The first step should be just figuring out what the problem is.”

While the government hopes that the ball can start rolling on funding in a few months, there is a question as to whether the people that would be served by this initiative want broadband at all.

There is no doubt that demand for broadband is growing — according to the Pew Research Center's Internet and American Life Project, about 55% of U.S. adults had a broadband connection in their home as of April 2008, up from 47% a year earlier. According to Pew, about 38% of people living in rural areas have broadband in their homes, up from 31% in 2007. In contrast, 57% of urban residents and 60% of suburban residents had broadband connections at home.

And the market for dial-up service — the main target of the unserved — is dwindling. According to Pew, about 10% of users access the Internet via a dial-up connection, down slightly from 2007.

But if one goal of the program is to bring broadband to far-flung locales, one question might be can they afford it? Or more to the point, do they really want it? For those dial-up users — who are also disproportionately female and skew older — the biggest barriers to broadband service have been price, availability and relevance, according to Pew. The independent think tank estimated that dial-up users are about half as likely as broadband users to say that information technology helps their personal productivity.

Pew Research associate director of research John Horrigan, who wrote the Internet study, said that among non-Internet users, primarily elderly people, the resistance also is high.

“What is it going to take to get an older person into the broadband column? Is it going to take six months or 10 months? I don't know. That kind of technology adoption can take time for people.”

Horrigan added that in some areas, availability isn't as big a problem as computer literacy.

“But the return on that investment is going to take longer to pay off,” he said.

Leichtman agreed, adding that urban areas may be where the program can do more good. Some of the money could be used to help purchase computers and subsidize broadband service for low-income families.

“For 20% to 25% of America, a computer is a major expense,” Leichtman said.

This wouldn't be the first attempt by the federal government to bring broadband to the hinterlands. In 2002, the Agriculture Department embarked on a loan program called the Rural Broadband Access program, offering low-interest loans to companies to extend broadband networks to more rural areas. But that program has not been without controversy — it was determined that about 12% of the loans through that $1.2 billion program ($144 million) went to companies in densely populated areas.

For cable operators, the broadband stimulus is a bit of a double-edged sword. While most small operators say they will likely apply for funding, they are equally wary that the federal money may find its way into the hands of competitors.

“Obviously, if the money is there, we'll go and get it,” said Mediacom Communications senior vice president and general counsel Joseph Young. “But one of our primary concerns is that we've seen other RUS [Rural Utilities Service] money go to overbuilders.”

Art Brodsky, communications director for Public Knowledge, a Washington, D.C., public-interest group, had a simple answer for competitive concerns: So what?

“The idea is to increase consumer choice and suppliers and prices. That's how you create economic activity,” Brodsky said, adding that introducing new players may be the only way to jump-start deployment in some areas.

“Don't complain if somebody comes in and wants to provide service when you aren't,” Brodsky said.

Massillon Cable president Robert Gessner said the fear isn't that competitors will use the money to finance an ultra-rural overbuild, but that they will use the money to fund a push into an incumbent's main service territory, to keep it afloat.

“There is a bit of a concern that the deck is stacked against cable operators when it's RUS money, that somehow that money is earmarked for phone companies or electric utilities, that they will get preferential treatment,” Gessner said. “These are our tax dollars too.”

Gessner said that he wasn't sure whether Massillon would apply for funding, adding that his service territory is surrounded by Time Warner Cable to the north, east and west and the Amish community to the south, so the options are slightly limited. But there are a few projects that may be worth considering that Massillon will continue to investigate. Another pitfall to consider, aside from pricing and competition and need, is the fact that any company that ultimately wins federal funding may find itself with an unwanted business partner — the government.

“If we have legitimate projects and we undertake them with stimulus dollars, are we gaining a partner we didn't want to have?” Gessner asked. “If we say we're independent business people and we don't want government money, are we leaving that much more money available for competitors who couldn't be in the business and wouldn't be in the business if it weren't for the government giving them free capital?”

Business sustainability is a big issue with most rural cable operators and one that could mean that people in extremely remote areas — those who appear to be the prime targets of the stimulus — won't get service whether there is federal funding or not.

“It's a relatively small number of subs in our markets that are not served and the primary reason is that it just costs too much to get our plant out to them,” Mediacom's Young said.

Mediacom is one of the larger rural cable operators — it has about 1.3 million subscribers, mainly in Iowa and other parts of the Midwest. But it does have some rural systems in California that would need government help to extend broadband.

Still, Young said that no matter how much funding is available, certain areas will not be connected because recurring costs such as maintenance, technical support and equipment outpace any additional revenue that might be gained.

“If you've got a 10-square-mile area with 50 farms on it, nobody is going to be able to make a business out of that,” Young said. “Even if you paid the cost to wire all of those guys, I'm not going to make enough on a monthly basis to make it worth my while. I think what they are going to find is that most applicants are not looking to go out to the really, truly, worst underserved areas. They're going to leverage what they've already got in the area.”

Mid-Hudson Cablevision president James Reynolds put it even more succinctly. “Most people don't understand that deploying a broadband network doesn't just stop with running some wires,” Reynolds said. “Broadband networks change as users come on. They get congested and you have to add equipment, you have to break up nodes as they get congested. You have to be constantly maintaining and upgrading the network as it grows. You also have to supply technical support — people don't just get a broadband connection and live happily ever after.”

On top of those investments are additional recurring costs for pole rental, power and system electronics, he said.

“I don't think that is taken fully into account by somebody who is looking at fully universal coverage,” Reynolds said. “You want to get it out as deeply into the market as you can, but there is a threshold beyond which it becomes economically unviable.”

Reynolds knows all about rural broadband initiatives — he was New York state's first applicant for a Rural Broadband Access loan, securing about $5.3 million to extend his fiber network to 7,000 homes in several small communities surrounding Albany, Greene and Columbia counties in 2007. Mid-Hudson has about 20,000 subscribers in total.

Reynolds said the program was a success — he spent about $24 million to build out the network in his area — and a little more than a year later, service penetration rivals that of his more populated areas. Based on that success, Reynolds said Mid-Hudson is likely to apply for stimulus funding, but that it will likely partner with a wireless service provider.

Economics are the main reason for taking on a partner, Reynolds said. While the earlier buildout was to areas with 20 to 25 homes per mile, the remaining unserved areas in his footprint are in locales with 10 to 15 homes per mile, butting up against the threshold for making the endeavor cost-effective.

If Mid-Hudson does win a grant, Reynolds said, it would likely use it to build wireless towers, lease space on existing towers or to build the backhaul network to carry the traffic of an existing wireless provider. But he added that the economics of even that minimally invasive method would have to be carefully weighed.

As the government moves through the process of developing and implementing its latest broadband initiative, everyone involved should remind themselves of a few things, said Brodsky, a long-time Washington observer.

“This is a stimulus, it is not the wiring of America,” he said. “To the extent that you, A, create jobs by constructing or extending networks and, B, you spur economic development by the use of these networks, then I think you have accomplished your objectives.”

According to the American Recovery and Reinvestment Act (the $800 billion federal economic stimulus program from whence the broadband stimulus came) the purposes of the program are: