Broadband Stimulus Provides Unique Opportunity

The Basics
Unless you've been away on vacation from the world's economic challenges, chances are you're aware of the ambitious legislation passed by the newly empowered congressional majority and newly seated Obama administration. The American Recovery and Reinvestment Act (ARRA) will provide funding for wide ranging industries, consumers and state & local governments with the primary intention of stimulating job and economic growth. The combined tax and investment initiatives provide for $787B dollars of 'stimulus' funds covering initiatives ranging from digitizing health records to improving broadband coverage.

As interesting as many of these stimulus initiatives are, the Broadband stimulus component of the ARRA is most relevant to Occam customers. The funds allocated for broadband initiatives include:

Table 1 – Broadband Stimulus Components

There is no shortage of analysts, equipment suppliers and industry observers offering advice on how the Broadband Stimulus funds should be spent. And while Occam Networks advocates these initiatives for the betterment of US broadband infrastructure, careful examination of the macro telecommunications environment also reveals that the stimulus funds provide a unique opportunity for rural communications providers that should not be overlooked.

Telecommunication Dynamics
The facts are well known but worth highlighting. Access line counts have been eroding steadily in the US for the last 8 years. Rural broadband lags urban broadband by 15% (as of October 2007). Service provider competition – and therefore service provider choice – is typically greater in urban cities versus rural cities. Overall, traditional voice service revenues are eroding while broadband and mobile data revenues are increasing.

Table 2 – Average Monthly Household
Telecommunications Expenditures by Type of Provider¹

Interestingly, consumers have not signaled significant changes to their television spending habits during the current economic malaise. Neilsen's reports that "...TV-related expenses have been spared significant cuts at this point."² One could make the case that during the challenging economic times, people spend more time at home sacrificing discretionary spending away from home before cutting spending within the home.

Suffice it to say that today's wireline telecommunications provider faces challenges independent of the current economic conditions. For years. the traditional phone company has watched voice service revenues decline while watching new service requirements continue to grow. Consumer demands have resulted in new broadband investment requirements with no promise of guaranteed rates of return. Nonetheless, traditional phone companies have embraces broadband revenues as a replacement to secondary phone lines, advanced CLASS features and in some cases, program subsidies.

The Hidden Opportunity
A number of studies have shown the gap between urban and rural broadband. Unfortunately, the chart shown in Figure 1 only tells part of the story. While the number of rural households with high-speed connections is significantly smaller than urban households, the reliance on broadband in rural communities is disproportionately higher. Ask any commodities farmer or telecommuting employee and they'll tell you operating in the digital age without broadband from a rural community is a competitive disadvantage. And unlike urban consumers, finding Wi-Fi hotspots, Internet kiosks or mobile broadband may not be an option.

Figure 1 – Rural versus Urban Broadband Disparity³

The ARRA act and more specifically, the broadband stimulus components will not provide a saving grace to the every telecommunications provider in the US. However, many consumers will benefit as a result of broadband investments in communities that may have gone unfulfilled without stimulus dollars. But treating the stimulus as an opportunity to grow broadband coverage a number of percentage points only partially addresses the challenges seen in rural communities.

Rural service providers have the opportunity to use broadband stimulus funds to not only provide coverage to unserved or underserved communities, they can also leverage those dollars to begin a new way of thinking about their role in the telecommunications landscape. In fact, there is an opportunity to redefine themselves as 'Broadband Communications Providers' as opposed to 'Telecommunications Providers'.

It can be argued that this evolution towards a Broadband Communications provider is happening irrespective of the ARRA. There are numerous examples of traditional telecommunications providers evolving in this direction. One look at the SureWest website (www.surewest.com) illustrates their focus to deliver 'the ultimate entertainment experience'. Clearly, their focus is on delivering broadband based entertainment services such as HDTV, video on demand and the nation's fastest high speed Internet access.

The allocated ARRA broadband funds are intended to stimulate sustainable job growth while contributing towards the improved health of local, state and national economies. As sated earlier, these funds will undoubtedly fund specific projects that meet these requirements in the short term. But is this growth sustainable? Will the short term benefits be offset by longer term uncertainty? After all, the challenges seen in the telecommunications industry are not a result of failed investment banks or depressed real estate.

The answers to these questions can be positive. If recipients of ARRA funds leverage this opportunity to begin, progress or complete the transition to becoming Broadband Communications Providers, their role in rural communities will change to that of an enabler. They can enable the digitization of the medical industry. They can enable green initiatives around the country by enabling a broader availability of telecommutng. They can enable the betterment of the nation's public education system through distance learning. They can enable entrepreneurship in non-traditional geographic settings. The possibilities are countless.

Conclusion
Like any opportunity, success will be determined by the willingness of the participants to take a chance. Expanding broadband coverage or increasing broadband speeds is but a means to an end. The end result this opportunity enables is to help redefine the landscape of rural communications. Communications providers that apply for and are awarded grants, loans or loan guarantees allocated under the ARRA may decide to leverage existing funds for the purpose of extending their broadband service portfolio. They may also uncover new revenue generating opportunities that help sustain longer term funding for advanced services such as video on demand or business Ethernet. Not leveraging this hidden opportunity to become a next generation communications provider may limit the long term effectiveness of the ARRA.

Footnotes:
¹ http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-284932A1.pdf
² http://blog.nielsen.com/nielsenwire/media_entertainment/economy-affecting-overall-consumer-spending-but-tv-related-spending-relatively-spared/
³ http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-284932A1.pdf