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Political, Economic 'Bloodbath' Awaits FCC's Broadband Plan

Ken Sweet
FoxBusiness.com
18 March 2010

The national broadband plan unveiled by the Federal Communications Commission this week is reminding some of the healthcare debate that has overwhelmed the country’s politics this year – and many expect the plan will face a similar uphill battle.

The FCC's plan is massive, spanning nearly 400 pages, detailing a multitude of goals and ideas the FCC has to get high-speed Internet access available to nearly all American homes by 2020 - and even faster Internet speeds in urban areas, schools, hospitals and government buildings.

But like health care, the plan faces battles on multiple fronts from multiple interests, from the cable and broadcast companies, big versus smaller rural telecommunications firms, and Internet content providers versus traditional media, among others.

“The FCC’s plan is going to be political bloodbath,” said Todd Daubert, a telecommunications lawyer and partner with the firm Kelley Drye & Warren.

The FCC estimates in its report that 200 million Americans subscribe to high-speed Internet access, up from just 8 million in 2000. However, 100 million homes remain unconnected to broadband -- for economic reasons or consumer hesitancy -- and 14 million are estimated to have no access at all to the infrastructure necessary to bring high-speed Internet into their homes.

The FCC's biggest push is to get the last Americans who don’t have the infrastructure to get broadband in 10 years, while make the product cheaper for everyone through mass dissemination of the necessary technology.

“Until recently, not having broadband was an inconvenience,” the FCC said in its report. "Now, broadband is essential to opportunity and citizenship,” citing the move by companies to put job applications and education online and political discussions going on in Web forums.

High-speed Internet is available in remote parts of the nation, notably through satellite Internet, which are decent for getting modestly fast access into American homes, said Ted Bissell, a telecommunications consultant with New York-based firm PA Consulting. But Satellite tends to be expensive -- $80 to $100 month -- and issues with latency make applications like Internet phone and games impossible. DSL, which comes through traditional telephone wires, is considered too slow for use as the Internet continues to add more multimedia features.

“The FCC essentially said none of the rural technologies, as they currently stand, will be good enough to implement nationwide,” Bissell said.

Instead, the FCC is pushing for the use of emerging wireless Internet technologies for rural and remote parts of the nation, the notable one being LTE, also known as 4G. The FCC proposes converting a portion of existing infrastructure programs called the Universal Service Fund, which is money used to bring voice service to remote areas, to a “Mobility Fund” that will subsidise carriers to build out 3G coverage in remote areas that will work as a footprint toward LTE/4G coverage. While LTE/4G can hypothetically reach the speeds proposed by the FCC of 100 megabits a second, the technology is a ways away from that.

There are some concerns of the FCC’s explicit push of LTE over a competing wireless broadband technology called WiMax, which has strong support from companies like Intel Corp. (INTC: 22.245, 0.235, 1.07%). Intel, in a statement, said it supports the FCC's plan but did not mention the agency's focus on the competing technology of LTE.

“Personally, I think the FCC should stay out of a wireless technological platform battle,” Daubert said. "Technology will figure its own way, without the need for the FCC to say this wireless standard is better than another one."

And on the issue of wireless broadband access, one industry the FCC has focused on in particular is the broadcast television companies. In order to free up digital spectrum space for data-heavy mobile devices, the FCC has proposed re-allotting spectrum users to free 500 MHz of space. The broadcast television stations are expected to give up 120 MHz of spectrum as their portion of the plan.

“FCC is telling everyone in the industry explicitly, ‘Hey, things are changing, we need to look more closely on how efficient spectrum is used,’" Bissell said.

Nearly everyone, including the broadcast companies, has applauded the decision to conduct a broad reexamination of spectrum usage, particularly in the urban areas. However, broadcast television relinquished the analog spectrum space when the nation converted to digital broadcast signals.  Having the broadcast companies give up additional spectrum space for mobile data companies, which could compete directly with broadcast through online content, may be unpalatable for stations.

“If the broadcasters start negotiating about giving up spectrum, why would they give it up to their competitors?” said Lance Ulanoff, editor-in-chief of PCMag.com.

To make it more attractive to broadcasters and other spectrum users, the FCC has requested that Congress allow the agency to hold “incentive auctions,” where spectrum would be reallocated, but the original owner would receive a portion of the proceeds of the auctions. Previous spectrum auctions, particularly in the highly sought-after 700MHz band, have generally been lucrative for the FCC and other license holders. Verizon (VZ: 30.58, 0.2, 0.66%) paid $9.63 billion for spectrum space in 2008 auctions while AT&T (T: 26.34, 0.13, 0.5%) paid $6.64 billion.

With such prices commanded for spectrum space, Morningstar analyst Mike Model said that companies like Verizon and AT&T are going to be the ones to benefit, because they have the cash to purchase the spectrum licenses.

“The big wireless companies are essentially getting what they wanted in the first place,” Model said.

There’s also a possible loophole in the Universal Service Fund proposal that makes it even more lucrative for big wireless companies. While the FCC says in Chapter 8 of its plan that funding for rural or high-cost areas will be platform agnostic, it also says that  the Connect America Fund, which is for wireline broadband infrastructure, and the Mobility Fund will be granted to one carrier in a geographic region.

“While it may provide accessibly by subsidizing one carrier in a region to build out wireless broadband, it’s certainly not going to create any competitive pricing pressure for them,” Daubert said.

Model said he expects smaller and more rural wireless companies such as Frontier Wireless (FTR: 7.4633, -0.0167, -0.22%), Windstream (WIN: 11.2101, 0.2301, 2.1%) and CenturyTel (CTL: 35.11, 0.22, 0.63%) have the most to lose with such proposals.

“These companies have high cash flow right now but aren’t providing the services that the FCC may deem necessary with this plan,” he said. “The FCC is going to say ‘you’re extremely profitable but you’re not investing in broadband now, why should we subsidise your operations going forward.”

On top of all of this, plans such as the spectrum auctions, and possibly the change in the USF structure, may require Congressional authorisation, Daubert said, making several of the FCC’s broader proposals susceptible to the political process.

The issue of accessibility doesn’t correlate with the issue of affordability, Ulanoff and others pointed out. Since broadband became popular in 2000, the average price of broadband services has remained remarkably stubborn at $30-$50/month for service. While speeds have increased, pricing has not – mainly because US. telecommunications remains a geographical monopoly or duopoly in several parts of the nation.

If pricing doesn't decrease as the technology rolls out, expect Democrats or rural Republicans to push for pricing programs, or even price caps - although the latter would be fought vigorously.

"Consumers are going to have to share some of this plan to roll out broadband everywhere," Ulanoff said. "How much is still a question."

You can read the article in full here.

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