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  • Stimulating Competitive Disadvantages in Broadband

    By now it’s obvious that the government’s “stimulus” spending spree has failed to achieve its intended results—just as critics of Keynesian economic theory predicted. Compounding the policy blunder is the failure of officials to properly vet some of the costly public works projects.

    Case in point is the $7.2 billion broadband deployment scheme: Federal officials failed to determine whether targeted communities actually lack Internet service options. In a number of cases, in fact, the government subsidies will put existing private service providers at a competitive disadvantage.

    Some $2.2 billion has already been allocated by the Departments of Commerce (DOC) and Agriculture (DOA) to enhance broadband services in “unserved” and “underserved” areas. (The balance of funding is scheduled to be awarded by September 30.) But according to a newly released report by the Government Accountability Office (GAO), program officials “lack detailed data on the availability of broadband service throughout the country, making it difficult to determine whether a proposed service area is unserved or underserved.”

    Up to $350 million of the broadband funding is earmarked for developing a nationwide map of broadband service availability. However, the mapping project will not be finalized until at least 2011. And, given the dynamics of the broadband market, with customers constantly moving between various technologies, the map will likely be obsolete by the time it is completed.

    In processing grant applications, both DOC and DOA solicited public comments on the availability of service to determine whether a subsidized project would constitute an “overbuild.” But according to GAO investigators, the process was “cumbersome,” and the resulting analysis “inconclusive” at times. During its review, in fact, the GAO found several instances of projects that compete with existing providers.

    That helps to clarify why Texas, with some 161 existing providers of high-speed broadband service, was granted a whopping $184 million in deployment subsidies—more than any other state in the first round of funding. Kansas, with 96 existing service providers, was granted more than $121 million, while Pennsylvania received $135 million despite a total of 87 services providers statewide.

    It turns out that the program rules allow up to 25 percent of a government-financed deployment project to compete with an existing service provider. Consequently, the subsidized projects could very well squeeze out the jobs and investment that stimulus funds are intended to promote. GAO investigators noted that “funding projects … where there may already be existing providers could potentially discourage further private investment in the area and undermine the viability of both the incumbents’ investment and the broadband stimulus project.”

    This disregard for the private sector is all too reminiscent of the municipal broadband craze that swept the country earlier this decade. Dozens of local governments hatched plans to build and operate broadband networks or develop broadband infrastructure for wholesale lease to commercial service providers. But as they lacked the expertise and flexibility of the private sector, the results weren’t pretty. Many of the projects were never completed, while others saddled taxpayers with unwelcome debt.

    Proponents contend that the broadband subsidies will stimulate economic growth, create jobs, and alleviate computer illiteracy. But that won’t happen if, in the process, the subsidized services undermine private sector investment. If public officials are so intent on promoting broadband, the far better alternative is to reduce the tax and regulatory barriers that inhibit universal deployment.

    Posted in Economics [slideshow_deploy]

    One Response to Stimulating Competitive Disadvantages in Broadband

    1. Ron McMillan, Texas says:

      Your article on the broadband stimulus mess is right on target. As is often typical of government they got the cart before the horse…if in fact a horse is even needed in the case of broadband deployment. After the first and second round grants were announced the State completed its broadband mapping study (funded by stimulus money) and the results make the $184 million in stimulus grants even more ludicrous than it first appeared: of 7.4 million householdsin Texas only about 44,000 do not have access to high speed internet service from either a wired or wireless provider.

      It is interesting to note that of the money awarded in Texas, over $100 million of it went to one entity: Valley Telephone Cooperative in South Texas. They got $55 million in grants and $56 million in loans. The government's action ignors the presence of several private sector providers that are proving both wired and wireless broadband in the area where Valley Telephone will build their competing network. Verizon, T-Mobile, AT&T, Time Warner Cable and Sprint all over broadband in the area.

      The incremental cost for a home that will be passed by Valley Telephone's new network that doesn't otherwise have broadband access from one of these companies…or in the case of wireless…several of the companies…is going to be in the high 5 figures. The government's program ignored the wireless providers entirely (even though most Texans get high speed Internet access from a wireless company per the data compiled and published by the Texas PUC) and blindly stumbled forward with the grants and loans. They also ignored the fact that there are companies that can provide broadband via satellite throughout the state such as Hughes.Net and Wild Blue.

      It is grossly unfair for the government to essentially provide free capital so someone can set up a business to compete with the private sector. I think business owners on "main street" Amercia would scream if the government build a competing clothing store, hamburger cafe, coffe shop, etc.. There should be the same outrage with the Administrations rediculous broadband stimulus program.

      The program is not likely to create any new jobs and, at best, will probably just cause a shift from the private sector to these new quasi-government companies.

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