Is the Stimulus Fair to Incumbent Service Providers?

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Last month, the National Cable & Telecommunications Association (NCTA) released research that said the Rural Utilities Service (RUS) funding of broadband projects under the American Recovery and Reinvestment Act of 2009 was "duplicative" and "resulted in an extremely high cost to reach a small number of unserved households."

The crux of the study, which was conducted for the NCTA by Jeffrey Eisenach and Kevin Caves of Navigant Economics, looked at the $2.5 billion given to RUS by the stimulus. The other $4.7 billion, given to the National Telecommunications and Information Administration (NTIA), apparently was not assessed. The findings are outlined in some detail in the release.

Jonathan Ellis, writing this week at ArgusLeader.com - a site that covers Brandon and Dell Rapids, S.D. - sums up the NCTA's position with a quote from Eisenach, an adjunct professor at the George Washington University School of Law:

[Grant winners] were successful in getting Uncle Sam to subsidize them and make it cheaper to compete against their cable company competitors.

There is another side to the story, however. Ellis, in a separate story last week at USA Today, quotes a rural telephone company CEO:

But Larry Sevier, CEO of Rural Telephone Service in Kansas, says the federal government was smart in allowing award recipients to create networks in some more-populated areas that already have service. The law allows the Rural Utilities Service to fund projects as long as 75% of the area lacks sufficient access to high-speed broadband to support rural economic development.

Whether or not the NCTA has a point can't be assessed without a deep dive into the details. A couple things should be noted. First and foremost, this is a study financed by an organization that has a horse in the race. That doesn't mean the facts it presents - or even the interpretation of those facts - are wrong. It simply means that an extra grain or two of salt should be used in considering their assessment.

Secondly, the basic underlying premise - that the projects were largely unnecessary - flies in the face of historical context. The telecommunications industry has spent decades trying to avoid providing services to the most rural areas. A company's first priority is to its owners, not the public. That's our system, and if it is properly executed - if both sides are adequately protected - it works marvelously well.

The revenues that are generated from wired services shrink as an area's density declines, and it soon becomes a losing proposition from an ROI point of view. It is the job of telecom companies to do anything that is within the law to avoid spending money in such situations, since poor revenue generation is not in the best interest of the owners, whether the company is public or private. Cellular services are much less exacting - building a cell tower is less expensive than laying cable - but the services are slower. Satellite services are the least expensive, but also the least effective. It is impractical to telework using satellite or cellular services and other services, such as telehealth and tele-education, are severely limited.

All that said, the study presents interesting percentages on the competitors in the three sample areas it assessed. It would be interesting to see how Navigant put together the coverage statistics. In some cases, companies are allowed to play statistical tricks to count a home as being passed by cable or DSL when it really is not. I am not claiming that this is happening in this case, but it certainly is something that should be checked.

In the final analysis, it should be pointed out that the stimulus was created to help ease the recession and bring telecommunications services to rural and underserved citizens. If extreme inequities along the lines of what Navigant and the NCTA are claiming exist - if companies are getting a free ride with little upside for the public - they should be rectified. The focus should always remain, however, on what benefits the people, not the cable and telephone companies.