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What’s the outlook for broadband and Internet?

ASK THIS | February 03, 2009

The congressional stimulus packages could go either way, writes consumer advocate Bruce Kushnick. They could mark a new, promising beginning—or they could be a new boondoggle for AT&T, Verizon and rural phone companies.

(One in  a continuing series of questions for the new administration from a wide range of experts.)

By Bruce Kushnick

  1. Do the proposed Internet and broadband legislation bills fix the structural problems? Will networks be open and ubiquitous?
  1. If legislators want shovel-ready projects, why don’t they focus on smaller firms, including independent ISPs and entrepreneurs who would bring broadband and other telecom services to low-income people and areas that are not served now?
  1. As legislation progresses, will reporters keep an eye on whether it is moving toward an excellent new beginning for telecom and broadband, or, on the other hand, if it is mostly rewarding large firms that have a very poor record?

As I write this, Congress is debating a new economic stimulus package. Infrastructure initiatives, such as the upgrading of roads and bridges, are on the top of the list. The Internet and broadband are included, and thousands of individuals and are trying for a piece of the action.

The arguments – more jobs, better productivity, etc. – may be well intentioned, but there are some unasked questions regarding broadband. Who should pay for it and who should built it? Are underlying structural issues of telecommunications and broadband infrastructure being addressed, or is Congress about to approve a new boondoggle for AT&T, Verizon and rural phone companies?

The legislation could go either way. It’s vital that the press understand the history, the terminology, and the cast of characters in Amrican broadband and Internet development.  The U.S. used to be first in broadband, now it’s fifteenth. It needn’t stay that low.

In the telecom world over the last few months, everyone has been buzzing with proposals. One is from a group called Educause calling for raising $100 billion. Another is from Free Press, which wants a $40 billion program, paid for by increasing the Universal Service Fund on phone bills. Even Business Week chimed in with a $20 billion -$30 billion proposal.

Some, like ITIF (the Information and Technology Innovation Foundation), want to give AT&T and Verizon $30 billion in tax credits, among other projects.

In a previous article, I laid out some proposals to move the telecom agenda forward with the goal of achieving nationwide, universal, very high speed broadband. These bills do not address those issues.

President Obama has made many statements about the Internet and broadband. In a December 2008 speech, he even brought back the old information superhighway theme:

"As we renew our schools and highways, we’ll also renew our information superhighway. It is unacceptable that the United States ranks 15th in the world in broadband adoption. Here, in the country that invented the Internet, every child should have the chance to get online, and they’ll get that chance when I’m President – because that’s how we’ll strengthen America’s competitiveness in the world.

"In addition to connecting our libraries and schools to the Internet, we must also ensure that our hospitals are connected to each other through the Internet. That is why the economic recovery plan I’m proposing will help modernize our health care system – and that won’t just save jobs, it will save lives. We will make sure that every doctor’s office and hospital in this country is using cutting edge technology and electronic medical records so that we can cut red tape, prevent medical mistakes, and help save billions of dollars each year."

We all hope the economy turns around and that broadband is deployed. While proposed items of legislation touch on broadband and Internet, they do not fix the current closed market structure. By my reading it is hard to tell whether they are a corporate boondoggle or a blessing to some customers.

Right now about $825 billion has been proposed in the “American Recovery and Reinvestment Act of 2009.” The House bill, HR1, supplies only $6 billion to build out broadband. Spending for that in the Senate bill, S336, is about $9 billion. And much of this money is in the form of tax credits, meaning lowering the company’s tax payments.

We can understand all of this in the context that every conceivable industry wants a handout; broadband and the internet, while interesting and potentially helpful to the economy, is simply part of a long list of items that should be dealt with.

There are signs that America may, in the end, get played, with bills that end up rewarding AT&T and Verizon with extra tax savings. A recent New York Times article stated that Verizon alone could receive $1.6 billion in tax credits.

My belief is that the phone companies have already been paid to deploy high-speed Internet and, for the most part, didn’t do it. AT&T and Verizon, combined, have about 2.6 million fiber-based lines that are capable of delivering cable at somewhat high speed. AT&T’s plan, in particular, is a totally inferior service as it is still based on using old copper wiring that can’t handle high speeds. 

Should AT&T and Verizon get money or tax credits to do what they were already paid to do? Examining some of the 25-year statistics on capital expenditures, it’s clear that in the period 2000 to 2008,  the companies have spent a lot less money on new construction (averaging 14%-18%) as compared to revenue than they did from 1984 through 2000, (averaging 20-25%). AT&T just announced a $3 billion dollar cut in capital expenses in 2009 as well, along with a cut of 12,000 staffers. This means AT&T could have actually been building all this time but chose to spend elsewhere. As far as cash is concerned, AT&T had over $34 billion dollars in “cash”, with revenues now of $124 billion. Do we really need to give highly profitable companies more money?

Over the last 5 years, AT&T and Verizon worked to lessen any obligations to roll out new services. In Wisconsin, as in other places, there were no buildout requirements that couldn’t be simply walked away from

There is also the issue of rural phone companies, which serve 10% to 15% of the population. Right now the rural carriers make extremely high profits but no one is examining their books (despite regulations subjecting them to examination). They are all heavily subsidized through something called the high-cost fund. In one case, a small Texas firm, Border to Border, got $150,000 from the government for each phone line it serviced. (Click here for a description of the blank check for rural carriers.)

Terms aren’t clearly defined in the House and Senate bills.  The words ‘broadband’ and  ‘Internet’ are at times used interchangeably or as “broadband Internet.” Clarity is needed. Going back to the information superhighway concept, think of a road and highway system – and you’re in a car. The road is infrastructure. You and the car are not part of the road; you travel on the road. Broadband is also part of the road but also separate. If you are on a good highway and can drive fast, that can be likened to fiber optic, high-speed broadband. If you’re on a dirt road – copper wiring might be considered a dirt road – you’ll have slow going.

Internet travels over the wiring. It is not the wiring itself; it is not the tower. Broadband is the speed at which you can use the Internet, it is not the Internet, it is not exactly infrastructure – it is a capability over the infrastructure to use the Internet at faster and faster speeds.

Under the Telecom Act of 1996, Internet competition was mandated. But by 2009, virtually all of the competitive clauses were rewritten by the FCC. The FCC redefined a wire with broadband as an ‘interstate information service’, which does not have the obligations of a wire that has “common carriage” obligations and is thus open to all competitors. It’s like saying that since Verizon owns the road, no one but Verizon controls the highway.

There are terms like “open access” or “non-discrimination” and “network interconnection” in the Senate and House bills – but nevertheless, it is impossible to determine if the new networks will be open to competition.  

In the Senate bill, S336, the term “broadband internet” is not mentioned, “Internet” is not mentioned, except that Web sites will be required to have some information, and there is no mention of the words “Net Neutrality” or “open access.” The House bill calls for operating “basic and advanced broadband service networks on an open access basis” but doesn’t spell out what open access means. In both versions of the bill, the actual definitions are left up to the FCC and possibly the National Telecommunications and Information Administration, a presidential advisory group.

Words like “open access” or “non-discrimination” may even be stripped out of future versions of the bills as the lobbyists attack. To be clear, these bills do not open previously closed networks like FiOS or U-Verse, and have not added new understanding of net neutrality. They are a starting place, and an unclear one at that.

 “In thinking of broadband in the economic stimulus package, don't confuse a piece of puzzle with the puzzle," said Blair Levin, the Obama Administration’s point person on broadband in a Business Week interview. “Don't look at an inning of the baseball game as the baseball game. The Obama broadband agenda is not being done solely in the economic recovery package."

If America’s goal is to build an open, ubiquitous, very high-speed broadband, then these may not be the right bills. As written, they may simply expand the phone companies’ monopoly. America needs open roads, not closed ones.

If one goal is to put people to work, it might be smarter to examine history and realize that the entire boom years of the Internet, which helped to deploy broadband, were created by thousands of small entrepreneurial Internet providers, who, using nothing more than regular copper wiring, and giving a customer a modem, put people on the Net. From 1995 to1999, the growth of telecommunications in general reached increases of 115% to 653% in lines and services above the actual growth of households.These were among the largest boom years in telecom history. It can be argued that if the goal is expansion of Internet and current broadband, opening the current networks to thousands of small companies is a model that should be used.

Money given to small, innovative companies will be spent immediately at the local level in thousands of areas around the U.S. One interesting take on this is from a small, independent Wireless ISP, Lariat, whose clients are previously unserved customers in Wyoming.

Municipalities and community services that want to get customers online and have broadband should also be considered as the best viable bang for the buck.

On the other hand, if the past provides a lesson, it is that incentives for the phone companies go into a black hole. And there never will be true oversight because these companies are masters of creating workable fictions of where all the money went.

Finally, I’d start hiring independent auditors to track what happened to the $280 billion dollars that Verizon and other telecoms have already collected and have law firms go after the money. That would put auditors to work immediately and could create a financial surplus to create an infrastructure that is open, ubiquitous, and very high speed.

As it stands, broadband and Internet are currently a footnote in this stimulus package. The legislation that results may or may not help the telecoms. We still are a long way from fixing what’s broken. It’s possible there will be a worthwhile first step but that’s not at all clear.


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