Ovum Analysis --

US broadband stimulus stipulations

Kamalini Ganguly, analyst at Ovum

FCC nominations and confirmations bring new leadership and direction

In a flurry of activity in June, the US regulator, the Federal Communications Commission (FCC), gained a new chairman, Julius Genachowski, confirmed a second term for Commissioner Robert McDowell and is set to gain two more Commissioners, Meredith Baker and Mignon Clyburn. The FCC will finally have a full house to carry out the requirements of the Recovery Act broadband stimulus plan.

Stimulus funds part of longer-term broadband strategy

Terms determining award criteria have been defined broadly so as not to exclude any broadband technology: ‘broadband’ (768kbps downstream and 200kbps upstream), ‘underserved’ and ‘unserved’ areas (50% and 90% of households without broadband, respectively). The low baseline definition is disappointing, but the door was left open to change these definitions for future rounds, and even in this phase priority will be given to projects that will offer higher bandwidth.

The first round of funds is a sizeable $4 billion (more than 50% of the total $7.2 billion), with applications to close by 14 August and awards starting in November 2009. The Chairman noted that the stimulus funds are only the start of a longer-term national broadband strategy, so carriers and vendors that miss out on the Recovery Act can take heart – although no details are available on who would fund the longer-term plan and how much that is likely to be. Since the awards will come in early winter, little (if any) deployment activity or revenue accrual for vendors will happen before 2010.

Focus on rural projects including backhaul

One interesting development is that backhaul has been explicitly included in a separate category for funding. Categories include both ‘Last Mile’ (up to $1.2 billion from the Rural Utilities Service – RUS) and ‘Middle Mile’ (up to $800 million from the RUS) projects. The focus is likely to be more on rural areas, as almost all of the RUS funds allocated by the Recovery Act ($2.4 out of $2.5 billion) will be awarded, while only $1.6 billion of the $4.7 billion allocated to the National Telecommunications and Information Administration (NTIA) has been included in this round. The RUS will fund projects where the coverage area will be at least 75% rural, unserved and underserved, while NTIA will fund all other projects. The backhaul issue appears to be urgent in rural areas. A report on rural broadband published in May by Michael Copps, the acting FCC Chairman at the time, noted that rural broadband networks are typically located far from Internet backbone nodes (55% of rural telephone companies are located more than 70 miles from a node and 10% more than 200 miles away, according to NECA). Building or boosting capacity of dedicated backhaul and transport networks for rural ISPs will therefore be almost as much of a priority as the access portion.

‘Technology neutral’ selection process, but we expect some fiber rollouts

The awards will be ‘technology neutral’, so other selection criteria will be more at play. Of course, technology will be a factor in determining financial and technical feasibility. We believe that there will be at least some fiber rollouts, possibly not to many individual homes at this stage, but to anchor institutions close to homes or to nodes that can serve several homes. Michael Copps’s report notes that educational applications, telework, telepresence, interactive online gaming are all industries that will contribute to employment growth in rural areas, one of the major objectives of the stimulus. The qualification criteria, some explicitly mentioned in the report, should therefore include low-latency, future-proof, high-bandwidth networks that these industries will require. In addition, he notes that equipment will need to be disaster-proof (against Hurricane Katrina-type events that can cut off rural areas) and secure. Of course, digging trenches in order to lay fiber also creates instant jobs.

Projects have to allow for access by more than one provider, which brings in unbundling issues, similar to government-funded next-generation projects elsewhere in the world. This provision, along with net neutrality, is a disincentive for carriers and it remains to be seen how many carriers, even rural, will be able to justify a business case for rolling out fiber networks. This provision will likely also influence the choice of technology, whether PON or point-to-point.