To Spread Broadband, $7.2 Billion Isn't Enough

The government wants to wire every U.S. household for high-speed Internet access. But the actual costs of doing so could run far higher

Access to telecommunications networks for all Americans has been the centerpiece of U.S. information policy for 75 years. Now the U.S. government is endeavoring to equip every citizen with broadband Internet access. But the $7.2 billion Congress has allocated for the plan may not stretch as far as lawmakers envision.

The economic stimulus package, officially known as the American Recovery & Reinvestment Act of 2009, directs the Federal Communications Commission to construct a "national broadband plan" and provides $7.2 billion to the Agriculture Dept. and Commerce Dept. for grants and loans for broadband deployment and related projects.

In doing so, Congress kicked off a race for government broadband money and a debate over how to achieve universal broadband access. Ironically, the money will likely be gone before the broadband policy is in place.

Part of what's slowing the process of rolling out broadband networks to remote rural and unwired urban areas are debates over how fast the networks should be, how much it will cost to provide universal broadband service, and who will pay for it.

A Leap in Data Capacity

Broadband connections allow the fast flow of information that permits people to send e-mail, shop online, and retrieve information from the Web at high speeds. Broadband Internet access also lets PC users exchange videos, music, and other large digital files. To get an idea of the leap in data capacity we're talking about, standard phone system voice calls transmit data at the rate of about 10,000 bits per second. But digital videos require bandwidths of about 2 million bits per second. Applications such as online "distance learning" classes need even more.

Some companies and consumer groups have advised the FCC to set a goal for national broadband speeds of 10 million to 20 million bits per second. Meeting that goal will require network speeds 20 to 100 times faster than is typical in today's networks, which were designed for voice or one-way video distribution. Upgrading, extending, and adding to today's networks will require enormous capital expenditures.

The problem is, nobody really knows how much capital will be needed. The broadband goal isn't yet defined, and the U.S. doesn't have an accurate count of how many households lack Internet connections or are "underserved" by slower networks.

Part of the government's stimulus money will go toward defining this "broadband gap." Closing the gap could be more expensive than the country expects, however, and will depend on several technical and geographic factors.

A More Realistic Estimate

Many estimates say that about 40 million U.S. households may be unserved or underserved by broadband networks and that providing those homes with broadband connections will cost about $1,500 per household. That comes to $60 billion at minimum, since this math excludes the money consumers will need to spend to acquire PCs and other computer gear.

The $60 billion estimate also excludes the cost of bringing users who are in areas served by slow broadband connections up to the emerging national standard. Our best estimate of the minimum capital requirement is about $120 billion. This assumes substantial provision of wireless Internet service to rural homes and elsewhere, which is contingent on making available more radio spectrum.

It's clear the $7.2 billion stimulus package funding won't go very far, even if all the money is used for network investment. And that won't likely happen, since the Recovery Act says the money also needs to be used for things such as consumer education and maps that show which areas are least served.

Some public interest groups urge more government funding and call attention to efforts of state, local, and foreign governments to build networks with tax funds. But the fiscal realities are discouraging.

The huge federal deficit will continue to reflect the demands of health-care reform and perhaps more stimulus. And we estimate from public data that the states are facing deficits of about $350 billion during the next two years.

Christina Romer, chairwoman of the President's Council of Economic Advisers, says the current recovery must be led by private investment. So, too, should progress toward universal broadband access.

High Tax Trouble

Verizon (VZ) and AT&T (T) alone accounted for more than $37 billion in capital expenditures last year and plan similar amounts of investment in coming years. These expenditures are increasingly used to underwrite broadband expansions. How much these and other companies will spend depends on government tax and regulatory policies toward incumbent telco, cable, and wireless broadband providers.

The overarching question is whether these policies will encourage or discourage broadband investment.

Taxes paid by telco, cable, and wireless providers are too high by any reasonable standard. These companies send more than 12% of their revenue to state and local governments to meet assorted tax obligations, according to policy research firm Heartland Institute. That's twice the average rate for other retail services. Add the 12% Federal Universal Service Surcharge on interstate communications revenues, and it's evident that nearly a quarter of some providers' revenue may be diverted to fund government spending.

Given the high propensity of these firms to invest out of operating cash flow, lower taxes could give a huge boost to capital budgets while also reducing rates for consumers.

So would an FCC finding that reverting to price controls and other monopoly-type regulations on competitive broadband providers isn't consistent with the nation's broadband ambitions. Investors have made clear that the kind of government intervention favored by Google (GOOG) and others would chill investment in broadband networks.

The cost to provide universal broadband access will be very high. Governments can't afford to finance the transition. Nor can they force the private sector to do so.

Instead, the federal, state, and local governments should create an environment that will attract financial investors and induce company managers to use cash to develop high-speed networks. High taxes, intrusive price regulation, and competition from government-financed networks are inconsistent with a rational broadband policy rooted in private investment.

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