Broadband Stimulus: How Much?

Editor's note: The following is an excerpt, published with permission, from Andrew Schmitt's newsletter, The Weekly Sample.

The final version of the USA stimulus package includes $7.5B for broadband deployment. This is a lot of money, but exactly how much?

Verizon spends roughly $1200 to wire up a home [for FTTP]. $7.5 billion should be enough money to wire 6 million homes for fiber, or roughly 5 percent of US households. The bill explicitly targets rural and underserved areas and adding 6 million rural fiber households would be a dramatic step as there are only 25 million rural residences (20 percent) or so. Let's look at exactly how $7.5 billion will be spent.

  • $350M will be spent to map broadband usage.That's about $3 a home. Seems excessive when all this data is already in the hands of a few people. What we are really getting is a new government agency that won't go away long after the stimulus has been spent.
  • $2.5B for the Department of Agriculture (the USDA -- The guys who certify your milk) Rural Utility Service Broadband program. This is an existing program started in 2002 which to date has loaned out a total of $1.2 billion. This same agency is now charged with spending twice that, except this time instead of loaning it they'll be giving it away.
  • $4 billion to establish a brand-spanking-new government agency within the Dept. of Commerce's National Telecommunications and Information Administration (NTIA). Not trusting of the farmers in the USDA the Congress decided to create another agency. The $4.5 billion are for grants, and all of the money must be spent by the Fall of 2010 -- 18 months from now.
There are no firm restrictions on speeds though the agency is directed to give priority to more advanced deployments. This is something the cablecos fought to remove.

In our opinion, most of the $7B marked for deployment will be used to roll out ADSL2+ services to areas that lack broadband. This is certainly a noble goal but FTTH is what we should be spending taxpayer dollars on.

This money should have been allocated for the specific purpose of installing fiber to rural homes and businesses which would then be leased to service providers. Instead, we will have service providers using the money, matching it with 20 percent of their own, and then ending up with infrastructure they can operate at their will.

The sheer size of the broadband stimulus will impact only a handful of companies and result in significant upside. Rural carriers are big winners as these grants will expand capex by 5x. With grant money, a carrier can wire up 50,000 homes where before only 10,000 could be reached as they only need to provide 20 percent of the funding. We are about to witness a 24 month megaboom in broadband construction with deployment rates, running 5x the historical trend or higher in rural areas.

We expect that roughly 12 million to 15 million homes will be added to the broadband grid, mostly ADSL2+ with some GPON-based FTTH as well. The rural carriers will spend this money efficiently. What is unknown is to what degree the large telcos and cable companies will find a way to tap these funds.

To read the rest of this newsletter issue, click here.

— Andrew Schmitt, Nyquist Capital

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