Will the Stimulus Cash Flow to ISPs?

There’s a mountain of cash available to stimulate the deployment of broadband, but as the government allocates the money, it will have to make a tough choice between handing it to established monopolies or supporting innovative upstarts.

The question now for the government is will the money go to companies like Comcast, nation’s largest ISP/ VoIP provider/cable company or to companies in rural areas where there is only one small, local Internet provider, if any?

This week, the National
Telecommunications and Information Administration
(NTIA) and the U.S. Department of Agriculture (USDA) are holding public meetings to discuss broadband
stimulus
. The meetings run from March 16 through March 24.

Of the $7.2 billion allocated for broadband in the stimulus package, $4.7 billion is to be administered by the NTIA, a division of the Commerce Department, with the Department of Agriculture’s Rural Utilities Service (RUS) overseeing the remaining $2.5 billion.

The news comes at a time when analysts say that the biggest companies now dominate residential broadband in the U.S. Bruce Leichtman, president and principal analyst for Leichtman Research Group, Inc. (LRG) reported that the twenty largest cable and telephone providers in the US now own about 94 percent of the market.

Broadband growth is slowing as providers saturate the market. “With increased market penetration, growth inevitably had to slow, but there was still room for 5.4 million more broadband subscribers in 2008,” wrote Leichtman. Of that growth, he estimates that Comcast gained 1.336 million new customers last year, nearly one-quarter of the total.

However, these companies plan to invest less and grow less in the future. Economic conditions would lead to slower growth in broadband even if the Internet providers were not planning to cut investment, which they are planning as they approach market saturation. Comcast, Verizon and Cablevision have all stated in annual reports their intent to reduce investments in new and core services.

Who innovates?

David Isenberg, producer of the upcoming Freedom to Connect conference, said that small companies deserve a chance because the established players in this business did not earn market share, they were granted it.

“Many large ISPs (the phone and cable companies) got to be that way not through entrepreneurial excellence or good customer service or the deployment of the most advanced technologies,” he told InternetNews.com. “They got to be that way because they inherited an asset that was built 30 years ago in the case of cable and 100 years ago in the case of the phone companies.”

With VoIP, the cable companies have used their plant to roll out a new service that is far more expensive for new companies to offer. Under those circumstances, he said, the FCC could have leveled the playing field for new entrants like Vonage but chose not to.

Next page: proposals from both sides

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However, Dave Burstein, editor of Fast Net News said in an e-mail to InternetNews.com that these companies have deployed advanced technologies within their networks.

“Inside the companies, VoIP is a standard technique,” he wrote. “Every phone company in the world does VoIP, internally in their network and invisible to the user. Most international destinations (by number, possibly by volume) go through VoIP providers.”

If the goal of the stimulus is job creation, the money should go to small companies, argued Isenberg. “I was just watching President Obama on TV. He was talking about how small businesses create most of the new jobs and do more innovation. I’m not sure why it would be different for ISPs,” he said.

But Burstein argued that the cable providers will soon have much larger coverage areas, thanks to wireless, and may therefore reach more remote areas. “Cox has a huge (unpublicized) build underway, while the other cable companies are waiting for the Sprint Clearwire networks to be ready.”

Last month, the competitors pitched their proposal. Rick Harnish, president of the Wireless Internet Service Providers Association, said in a statement that only the competitors truly serve small rural communities and urged that they get the money.

“Small, local wireless broadband providers already have the expertise and the experience to provide broadband Internet access to rural and hard-to-reach areas,” he wrote. “The American Recovery and Reinvestment Act must dedicate a meaningful portion of these new funds to better meeting the needs of consumers in rural, unserved and underserved areas.”

The incumbents replied on Tuesday. “Value-producing projects that can be implemented quickly should receive the highest priority,” the National Cable and Telecommunications Association (NCTA) wrote in a report entitled Moving the Needle on Broadband: Stimulus Strategies to Spur the Adoption of Broadband in America.

The report noted three categories of broadband need: unserved populations of nine million to 10 million people; an additional 35 million households, many of which are low income and have less than a high school education, which have access to broadband but have not adopted it; and underserved areas that have low population density and poor access to broadband.

Thus, the incumbents and the competitors disagree on where the money should go. The competitors propose that money be spent only on new networks in the most remote areas, and the incumbents want some of the money to be spent to pay for broadband for the poor in areas that they already serve.

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