The case for a broadband bailout
By Eric Auchard
LONDON (Reuters) – With world economies fast running out of steam, it may seem an unlikely time for cash-strapped governments to discover universal broadband access as an urgent national funding priority.
Yet in this financial plague year, the Great Broadband Bailout of 2009 is rocketing up the political agenda as the global economic crisis deepens further.
Massive programs to save the banking sector are failing, so far, to revive business confidence. Instead, governments must stimulate the real economy, creating jobs and income that get the working world moving.
Building faster, more pervasive internet networks creates jobs and opens new avenues for business. It joins traditional ways of priming the economy like ditch-digging and pothole-fixing to save roads and bridges or newer efforts to invest in green energy, health care or education.
The classic complaint against government job creation is that monetary policy is a quicker, more direct way to put money in consumers’ hands. But as interest rates rush to zero percent, policymakers are desperate for alternatives.
The U.S. Congress is negotiating final terms of President Barack Obama‘s $800 billion stimulus plan. It includes $6-7 billion to expand broadband networks in rural and other unserved areas and up to $30 billion in tax credits for builders of superfast 100 million bit-a-second networks.
Two weeks ago, Britain’s Labor government said it wanted to make universal broadband access a reality by 2012. Two-thirds of UK households now have broadband. That broader mandate looks designed to frame debate over an eventual stimulus package that goes beyond existing bank bailout measures.
A plan could include funding to push mobile broadband into hard-to-reach rural areas and tax credits for expanding construction of superfast fiber optic cables that would speed up existing broadband networks.
Countries from Australia to Portugal to Finland are investing public monies to build faster networks.
Why now? Because jobs, business and future investments in growth will not happen without networks that efficiently deliver the growing range of text, audio and video services that consumers and businesses demand. Alternative forms of broadband access, including mobile phone networks, only go part of the way to soak up demand for these data-intensive features.
REVIVING BROADBAND INVESTMENT
The communications industry has plowed billions into broadband networks to date, but is strapped to do more. Layoffs have been announced at most major broadband carriers.
Private network operators may be more amenable to government aid following a year in which broadband subscriber growth fell 9.1 percent worldwide after five straight years of healthy growth, according to data from market research firm iSuppli.
Limited government backing at this juncture can provide incentives to private investors to co-invest. Newly government-backed banks could even kick-start the process by freeing up loans for these new infrastructure projects.
An economist at the Communications Workers of America, a union supporting the Obama plan, estimates that each $1 million invested in broadband creates 20 jobs, directly, in terms of construction, installation or network services, or indirectly, from jobs created from money spent by employing broadband workers. A $7 billion grant could mean 140,000 new jobs.
Of course, injecting public money into private industry, even with the best of intentions, is likely to cause its own headaches. No one is talking about outright nationalization, or renationalisation in some cases. Arguments in favor of government intervention depend on speed if they are to have any effect in this economic cycle.
The biggest beneficiaries are likely to be the incumbent carriers — AT&T (T.N) and Verizon (VZ.N) in the United States and BT Group (BT.L) in Britain. Inevitably, there will be issues over who gains rights to broadband network capacity constructed with government funds, especially if tax credits or subsidies are targeted at incumbents.
Rival operators will demand open access to networks built with government funding. Compromises must be reached to avert legal delays. The question of how to structure further financing will have to consider whether private companies pay the money back out of future profits, or work out some sort of regulatory trade-off for shouldering risks at this time.
Brokerage Sanford C. Bernstein has described a more ambitious scenario that could involve the government creating a parallel network by buying up the broadband assets of credit-strapped cable TV and phone provider Virgin Media (VMED.O), the second largest broadband supplier in the UK, then laying new fiber lines.
The argument for bailing out the broadband industry does not rest just on the pressing need to put people to work. New broadband construction is ditch-digging with a purpose. Economists no longer debate whether broadband investments spur follow-on employment and new business prospects. The question now is how much and how soon?
– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –