Big Telcos Drag Their Heels on Broadband Stimulus

As Washington prepares to dole out some $8 billion to promote the spread of broadband access, don't expect Big Telco to rush to the front of the line.

Some of the largest U.S. telecom operators, including AT&T (T), Verizon Communications (VZ), and Qwest Communications International (Q), are dragging their heels on asking for federal money. Some may sit out early funding rounds entirely or ultimately ask for only a sliver of the total.

Telecom giants are concerned that once finalized, the program will include burdensome regulations that will force them to open their equipment to rivals or otherwise hamper their ability to manage broadband networks, according to three people familiar with the thinking of the big service providers.

BusinessWeek Obtains Letter

That sentiment was captured in a Mar. 16 letter sent by industry group USTelecom to the Commerce and Agriculture Depts. and the Federal Communications Commission. In the letter, which was obtained by BusinessWeek, the group urged government officials to not let the broadband stimulus get mired down in contentious policy debates. "The agencies should not try to impose other requirements on grantees as part of this process," wrote USTelecom CEO Walter McCormick.

Executives at AT&T, the largest U.S. phone company, "are now examining the bill and the rules being established… with a view toward any ways it might advance AT&T's already significant investment in broadband deployment," AT&T spokeswoman Claudia Jones said in a prepared statement. Adds Verizon Communications spokesman David Fish: "We don't know for sure which entities will qualify. At this point, we're watching and learning like most everyone else."

Many within the telecom industry have taken a cautious stance toward a new Administration that has demonstrated through policy statements and appointments that it's more likely than its predecessor to use regulation to promote telecommunications competition. "They don't want to go back and revisit the core victories they gained in the last Administration," says Rebecca Arbogast, principal with investment firm Stifel Nicolaus & Co. (SF). "Whether or not they get money, they will work hard to shape the definitions so it is as mild and restrictive as possible."

Lobbying Behind the Scenes

In the past eight years, the communications industry won a handful of important legal and policy battles that lightened regulation of their operations. Now, the industry is continuing to lobby lawmakers behind the scenes and through testifying before various congressional panels.

The reluctance of some Internet service providers to sign on to the broadband stimulus could undermine the effectiveness of a program whose aim is to bring high-speed Internet access to areas of the country that have little or no fast-Web connectedness. A lack of participation by the country's largest, most experienced service providers could slow broadband expansion and interfere with the Administration's aim to create jobs. Plus, a program dominated by dozens or hundreds of smaller telecom players could end up being harder to manage.

Mark Seifert, senior adviser to the Assistant Secretary of Commerce, says the government is ready for a wide range of companies to apply for funding, and expects large players to participate. "Big companies say a lot of things for a lot of reasons," he says. "I don't believe any company interested in maintaining its competitive edge will turn its back on this program."

Qwest Still on the Fence

That is, if they can take part in the first place. Denver-based Qwest Communications serves 14 states in the Western region, including many states with large rural areas, such as Wyoming and the Dakotas. Right now, Qwest says it provides broadband service to 85% of its service area. To provide service to 95% of its footprint, or an additional 2 million homes and businesses, Qwest says it would take about $3 billion.

Qwest executives say they support the program in theory, though haven't said for certain whether they'll apply. Qwest has yet to determine whether it will qualify for part of the broadband funds being distributed by the Agriculture Dept. The Ag Dept.'s Rural Utilities Service (RUS) will hand out $2.5 billion, while the Commerce Dept.'s National Telecommunications & Information Administration will dole out $4.7 billion. Under existing RUS rules, Qwest says companies serving more than 2% of the country cannot apply. "We want to see the guidelines for the grants," Qwest spokesman Tom McMahon says. The Agriculture Dept. did not respond to a request for comment.

Much of the industry's stance on the stimulus will hinge on how to interpret rules concerning access to broadband networks. Telecom providers generally oppose regulations that would force them to open their networks to use by other providers or impede their ability to determine prices and mete out bandwidth.

Funding Could Be Ignored

The legislation stipulates that grant recipients follow "nondiscrimination and network interconnection obligations" as defined by the FCC. Those obligations must adhere to the four principles contained in the FCC's 2005 Internet policy statement—that consumers can gain access to lawful Internet content of their choice; run applications and services of their choice; and connect to the Internet with legal devices of their choice. In addition, consumers are entitled to competition among network providers as well as application, service, and content providers.

Many of the large communications companies say they already follow the FCC policy statement. However, two sources familiar with the thinking of the telecom companies say the carriers may not apply for the stimulus if the FCC says the obligations extend beyond those four principles—say, by interfering with their day-to-day operation of networks. "We would be concerned if something new came up, or something different from the four principles," says one source. "If they say we're going to tell you how to manage your network, then we have some issues with that."

Moreover, telco providers are also fearful that the "interconnection obligations" contained in the stimulus language may require broadband providers to allow rivals to interconnect with their networks. In 2005, the FCC stated that providers of wire-line broadband service, including cable modems and DSL service, were deemed information service providers who were not subject to the common-carrier regulations of federal law. Providers of phone service, by contrast, are subject to those regulations, which require transport businesses operating under license from the government to design their systems to interconnect with other networks.

Afraid of Government Intervention

The FCC needs to act quickly to define these obligations. All broadband awards must be made before the end of fiscal 2010, which concludes at the end of September of that year. The Commerce Dept. expects the final rules to be published by the end of April. "How it will be applied we will see in the coming weeks," says FCC spokesman Mark Wigfield. "We are gathering a lot of information from the public." After that, it will start taking applications for the first of three rounds of grant funds. Initial monies could be handed out as early as June. "We'd be in a lot of trouble if we did not get checks out the door this year," says Seifert.

Even if the federal government does not expand the scope of regulation in the grant program, some analysts think the broadband giants still may not sign on to the plan in a substantive way. Sure, they may eventually apply for modest grants to help expand existing broadband plans or help states and cities to roll out municipal broadband networks. But they'll balk at funding that opens the door to more government intervention. "They don't think they have any reason to jump into anything unknown," Arbogast says. "They are pursuing a defensive strategy as much as an opportunistic strategy. I don't see them participating real broadly."