Opinion

The Great Debate

The case for a broadband bailout

February 13, 2009

ericauchard1- Eric Auchard is a Reuters columnist. The opinions expressed are his own –

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. –

Comments
8 comments so far | RSS Comments RSS

As founder and former Chairman and CEO of Eurofiber (Fibercorp), I must agree but with caution. We spent fortunes building backbones just 9 years ago. The economic model and usefulness of FTTH (fiber to the home)is not clear.
If you argue for a modern ‘New Deal’, think about the energy infrastructure of the future. Integrating electric car batteries into the grid will be a major challenge, investment and pays itself off rapidly by reducing dependence on oil imports. If government has to invest to get the economy going, make sure the return on investment is great. In energy it will be huge.

 

There is still some question whether Americans want broadband enough to pay taxes so someone else can have it. Rural broadband, because it serves relatively few customers, can’t be profitable unless it costs little to operate and maintain, even if deployment may be subsidized, and urban broadband is available from multiple vendors already.

Caution is the prudent course. One of the technolgies touted in the past — Broadband over Power Lines — has had relatively poor acceptance in field trials, poses radio interference problems that have resulted in complaints in the US to the FCC (and in the UK to OFCOM)and even had the FCC sued for iregularities in its deployment Rulemaking. Enthusiasm must be tempered by sober engineering and financial planning.

Posted by Cortland Richmond | Report as abusive
 

I respectfully disagree with those who urge ‘caution’ and ‘prudence’ in these circumstances. It is vitally important that massive sums be spent, as quickly as possible, on infrastructure and other worthwhile projects, not to avoid or end the horrific downdraft we are experiencing at world scale, but to mitigate some of its most vicious effects as the write-downs thus far avoided are inevitably incurred.
The extension of broadband is to state the obvious roughly analogous to the extension of telephone service to remote and rural areas in the 1930s. It is not cost effective at the scale of the individual installation, but the overall extension of the system to near universality makes the investment ultimately sensible.
Many other areas that are also ‘uneconomic’ by some analyses such as high-speed rail, ought also be vigorously pursued. The need for spending on the real economy is enormous and competition between needs is in fact minimal in my judgement.
The resulting debt burden and inflationary pressures from the sum total of stimulative expenditures is problematic, granted, but those costs were incurred when this debacle was constructed over many years by many parties at a global level — it’s simply that that bill is now coming due. Better these investments than the ‘investments’ made in marble countertops and the like in homes that were the ‘one safe investment that could never depreciate’. Now “there* was an area for prudence — but it’s rather late now.
It ought be done as efficiently as practical, but let’s not let the perfect or the near-perfect be the enemy of the possible. Time to act, not to hesitate.

Posted by Not Silent Not Bob | Report as abusive
 

I also agree, but with caution. Steer this funding towards the WiMax wireless broadband initiative championed by Intel/Clearwire/Google. This will provide jobs and for consumers provide a level playing field versus the presently entrenched big-two wireless incumbents.

Posted by Keith | Report as abusive
 

In Thomas Friedman’s book, “The World is Flat,” he did a good job of explaining the second order effect of web technology, ubiquitous PCs, and a global fiber optic network on globalization and trade. While some would argue that globalization has hurt some, it has also created wealth for many people. I think we need to have some faith in expanding broadband access to the internet and digital information/entertainment, and know that if “we build it, they will come.” Meaning, put the fiber optic/Wi Fi/boadband networks in place and the jobs will come, probably in ways that we cannot foresee today.

Posted by Student of Recent History | Report as abusive
 

I live in southwestern Missouri, in a rural area bordering a metroplitan area. DSL is within 3/4 of a mile of my home; cable internet is available for a stout sum of $55 a month by itself. So I have dialup internet service, which is increasingly insufficient. I would like to take distance learning courses to upgrade my skills, but dialup service isn’t typically compatible. Viewing video via the internet is simply not possible with dialup, and most internet radio stations are not listenable.

I see broadband as fundamentally being a consumer issue that has been shamefully politicized. I’ve paid my phone utility bills for years, and apparently that has helped to furnish fiber optic cabling and high-speed services to folks other than myself. I feel privelaged just to have a landline with Caller I.D.

In addition to simply having access to broadband, it needs to be affordable: the cost for cable internet or satellite internet is more than what I sometimes pay for electricity to my all-electric home. In my opinion, I think the phone companies will have to be compelled by the US government to expand their broadband availabilities to rural areas, not unlike the rural electrification initiatives of the mid-20th Century.

Posted by Dennis D. | Report as abusive
 

Bailout for broadband, promising opportunities of business is missing one problem. Current crisis involves people spending less, because they are losing jobs. Unemployed people are no longer customers for many companies as they lack buying power.

So this author seems to defend bailout of supply, when demand is being reduced. Wouldn’t it be better to bailout people, by giving them a job in the government, so they start consuming and become customers again?

How would you pay for such jobs? Nationalize banks, and the profit of banks would add the extra income government desperately needs to pay for stimulus plan.

Otherwise, stimulus should be paid with either higher taxes or debt.

Higher taxes by people who are less capable of paying would eventually lead to less government revenue and higher unrest.

If government comes for debt in dollars, devaluating pound to promote exports would also revaluate debt. And if pound goes up, UK will have to rely on internal market and exports will be dead.

Posted by Pablo | Report as abusive
 

First off, I work for an ISP (Comcast). My thoughts are that the government investing in a larger broadband network will pay off in the future. Increased communications ability always increases commerce and income for all of society.

Posted by Brian Bigelow | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •