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Friday, May 15, 2009

Broadband Stimulus as the "Next Telecom Boom"? ...We Hope Not

StimulatingBroadband.com 05/15/09 An unidentified (except apparently to clients) author over on Gerson Lehman Group's blog last week posted an analysis story with the title Broadband Stimulus: The Next Telecom Boom.

While agreeing with several of the story's key points, we can only respond to the title saying: The Stimulus Act is going to trigger another telecom boom?

Dear god, we hope not.

The "broadband stimulus" provisions of the American Recovery and Renewal Act of 2009 (ARRA), with their $7.2 billion in federal appropriations, have generated keen interest in industry, and in communities around the nation.

Is this level of interest in broadband stimulus really about to trigger another "telecom boom", akin to that of the 1997-2001 era?


If a consensus in government or industry holds that the federal broadband stimulus provisions will over-inflate equities markets, drive speculative frenzy, or trigger a boom that leads to an inevitable bust, we need to collectively reboot the program and our consensus view straight away.

The Dot.com - Telecom Boom and Bust
Those of us that had a hand in the positive aspects of that era -- branded by Om Malik in his definitive history of the period as the time of Broadbandits -- have a responsibility to better police our industry, to better check our own exuberance this time around. What would have been good business models for several new fiber-rich carriers in each geographic market (for the metro new builds), and nationally (for the backbone new entrants) turned into an economic train wreck when too many carriers crowded the market.

Much of the capacity that we built is in the ground today as dark and lit optical fiber, in data center capacity, and in submarine cables. That is real infrastructure. It creates real jobs, real wealth, and real American competitiveness. Could we have avoided however the catastrophic collapse of the web and competitive telecom industries? Could government, industry, and the capital markets done something to prevent the resultant loss of hundreds of thousands of jobs, and the destruction of upwards of an estimated $10 trillion in wealth?

Several economists have equated the Internet / telecom boom and bust cycle of the past decade with that of one of the underlying industries of American's rise to the leading global economic power: the railroads. A detailed study examining the telecom boom as a result of both regulatory restructuring, via the Federal Telecom Act of 1996, and speculative behavior of Wall Street was published in 2003 by economists Couper, Hejkal and Wolman writing for the Federal Reserve Bank of Richmond (download .PDF). Following their analysis of the telecom sector's market capitalization for the period, they mention the telecom / railroad analogy as potentially reflecting a perennial problem facing the construction of national networked infrastructures.

Government Blows Up the Bubble
Daniel Gross, formerly of the New America Foundation, in his The Fiber-Optic Network Bubble: Back to the Future, published in 2002 makes the same point, with even more historical parallels.

Gross wrote, "Indeed, similar infrastructure manias surrounded the telegraph in the 1850s, the railroads in the 1880s and 1890s, and telephony in the 1890s and 1900s. To be sure, the circumstances surrounding these bubbles differed. But their stories bear striking similarities." In his subsequent book, Pop!: Why Bubbles are great for the Economy (2007), Gross argues that the creative destruction of boom and bust cycles leave behind vital infrastructures that indeed fuel the economy even in times of moderate growth.

Telling for our present purposes, Gross makes the point that the role of government in the boom-bust creative cycle is omnipresent.
"Rather than simply helping to clean up the mess it leaves behind, government has been present at the creation of virtually every bubble," says the New America Foundation in summary of Gross' work. "Public policy—through subsidies and tariffs, tax breaks and land grants—has always played an important role in encouraging investors to succumb to irrational exuberance."

Lessons Learned

Boston telecom attorney Alan D. Mandl, who has practiced through each telecom developmental cycle since before divestiture in 1984, gives us keen observations as we enter an new phase of telecom development. He observes that while 80% of a project cost may be covered by a NTIA grant, the agency recognizes the need for assessing both the long-term feasibility of an investment, and the ability of a recipient to encourage the sustainable adoption of broadband services.

“Hopefully NTIA scrutiny of grant applications and funded projects will give due consideration to these factors and guard against stranded expenditures," commented Mandl. "Because operation and maintenance costs are not funded by grants, those costs must be estimated in assessing the feasibility of an investment. Adequate due diligence must be required from grant applicants, states, and the NTIA before grants are awarded. Parties providing private funding tied to the long-term success of a project also must conduct adequate due diligence. Based upon past experience, project-specific due diligence is of critical importance.”

"It also is very important that before federal and state funds are committed to broadband expansion projects, state public service commissions and the Federal Communications Commission take proactive steps to assure that federal grant money and any state funding of investment are not wasted."

"For example, excessive make ready charges or delays could cause an increase in project costs as well as implementation delays. Private investors in broadband projects also need to conduct due diligence on the market," concluded Attorney Mandl, a former Massachusetts Assistant Attorney General.

Capital Market Discipline
What can government and the private sector do correctly now to avoid the boom-to-bust train wreck as President Obama calls us to a new commitment to nationwide broadband?

Broadband networks slated to be built in unserved rural areas, and underserved urban precints with federal and state capital subsidies are different. They are neither purely "civil works" referenced in non-broadband sections of ARRA, nor investor owned facilities. They will be public-private hybrids which, by definition, are are not being built today without government subsidies.

The responsibility for building sustainable businesses with broadband stimulus monies therefore, needs to be shared by government, by the telecom industry sector, and by American capital markets. The latter sector, which raises private capital from private investors, will always provide the majority of broadband capital expenditures (capex) in the American economy at any given time.

Broadband networks slated to be built in unserved rural areas, and underserved urban precincts with federal and state capital subsidies are sui generis. They are neither purely "civil works" referenced in non-broadband sections of ARRA, nor investor owned facilities. They will be public-private hybrids which, by definition, are not being built today without government subsidies.

The responsibility for building sustainable businesses with broadband stimulus monies therefore, needs to be shared by government, by the telecom industry sector, and by American capital markets. The latter sector, which raises private capital from private investors, will always provide the majority of broadband capital expenditures (capex) in the American economy at any given time.

Securities analysts and market researchers should guide all of us involved in this new cycle of investment with due diligence investigations of the actual businesses proposed for broadband stimulus funding. StimulatingBroadband.com
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