Why the Stimulus Bill Discounts Broadband

Barack Obama made sophisticated use of technology during his run for the White House. And throughout his campaign, the BlackBerry (RIMM)-addicted candidate stressed the transformative power of technology, making a high-profile promise to provide high-speed Internet access to all Americans.

But when the House unveiled a preliminary version of the economic stimulus plan, crafted with some input from President Obama's advisers, the amount of money allocated for broadband Internet development was much lower than experts had anticipated. In the $825 billion proposal, only $6 billion was aimed at broadband, far short of the $12 billion to $30 billion that industry experts estimate it would cost to wire the nation. The House bill allocated the same amount of money to weatherizing the homes of low- and moderate-income people.

The stimulus proposal still has to make its way through the Senate and may be changed substantially before it's signed by the President. But many in the tech industry are contemplating some tough questions: Why did broadband get slighted? Will the technology get more government funding in the future? And does the debate over broadband foreshadow how the technology community will be treated in the future by the Obama Administration?

More Money in the Future?

Blair Levin, a former senior official at the Federal Communications Commission, was a top technology policy adviser on the Obama transition team. In an interview with BusinessWeek, he says that more money could be allocated to broadband in the future. "Did we leave the door open to additional money?" asked Levin. "I think the answer is the door is open and should be open."

Levin and other technology leaders say there are several reasons that broadband got less money than expected in the stimulus bill. For starters, there is no track record of the federal government funding broadband networks. That made it harder to garner support for a larger subsidy in a Congress trying to accommodate numerous claims from more established constituencies. "When it comes to building roads, that is a clear government project," says Levin. "Building rural broadband is clear, too. But with other parts of broadband there is not a consensus."

There's also an information gap. There are no clear, comprehensive data on which regions need broadband investment, which fueled concerns that it would be difficult to spend money quickly and wisely. "We were concerned that the money would be used effectively and appropriately," says Levin. "You have to have the strategy before you determine where the money is sent."

Then there were economic questions. While most economists acknowledge that communications boosts the productivity of the economy over time, there are concerns about the job-creation potential of broadband investment in the near term—the primary objective of the stimulus package. Some economists have noted that compared with some other infrastructure projects, such as road or bridge construction, broadband construction would not generate as many jobs. It takes many more people to build a four-lane highway than to dig a trench and lay a fiber-optic cable. Other economists have pointed out that a lot of the equipment that goes into the network is manufactured overseas—further diluting the employment gains in the U.S. economy. Many telecom components such as computer chips are also manufactured in other countries.

Delayed Multiplier Effect

Even a report by the Information Technology & Innovation Foundation, a research institute in Washington designed to promote the tech industry, seems to supports this theory. The January 2009 report estimated that a $10 billion investment in building broadband networks would directly create only 64,000 jobs. Those jobs would then indirectly spur the creation of another 166,000 jobs from companies that supply and service the communications carriers and equipment makers. The really big gains would come years later when the so-called multiplier effect kicks in, as broadband technology enables the creation of new services and businesses such as e-commerce or telemedicine.

It all underscores the point that there may be an inherent conflict between the short-term goals of the stimulus and the long-range goal of upgrading America's technology infrastructure. "Serious technology upgrades require more than a three-year window and more resources," says Richard Whitt, Washington telecom and media counsel for Google (GOOG). "It may be this is not the right platform for creating a 21st century infrastructure."

Tech advocates are furiously lobbying the Senate for more money and other incentives for broadband. Policymakers involved in some Senate committees are considering amendments that could provide up to $9 billion in broadband grants and tax credits. Senator Jay Rockefeller (D-W.Va.), chairman of the Commerce Committee and senior Finance Committee member, is supporting a proposal that would provide credits of 10% to 20% for broadband investments. Rebecca Arbogast, a principal at investment bank Stifel, Nicolaus (SF), says broadband may end up with as much as $8 billion in grants and subsidies.

Wary of Tax Credits

The leading broadband providers, such as AT&T (T), Verizon Communications (VZ), and Comcast (CMCSA), are in favor of tax credits being included in the final version of the stimulus bill. However, one senior-level Democratic staffer who has spoken with the Obama transition team says the President is wary of tax credits. "They were really down on tax credits," says the aide. "They saw it as corporate welfare. Even if you wrote strings about investments, their books were so complicated that you weren't confident it would markedly change their behavior."

Another hope is that broadband could see some spill-over money from the other technology components of the recovery package. The stimulus included $32 billion in proposed spending to fund a so-called "smart electricity grid" and $20 billion for health information technology.

William Lehr, an economist and researcher at Massachusetts Institute of Technology's Communications Futures Program, says smart grid and health-care modernization both hinge on broadband technology lines. "You can't take advantage of a lot of these things without information technology," he says. "It's the spice necessary to make the whole meal work."

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