1

Several Studies Show Internet Usage Exploding

Nemertes Research:“In sum, we believe that the environment

necessary for a Moore’s-law increase in application utilization exists today.

3 Megs to 384 Megs in 10 years (Moore’s Law)

Jupiter Research: “[A]verage households will need 57–72 Mbps

of bandwidth by 2009 and ‘tech savvy’ households would consume nearly 100 Mbps.

2

Demand: Technology Futures Predicts Need for 100 Mbps in 4-5 Years.

3

SUPPLY:U.S. Investment in Broadband Is Not Keeping up with Exploding Demand.

Nemertes Research:“North America is behind

the rest of the world in terms of access line investment.”

“[Internet] usage could outstrip network capacity both in North America and worldwide as early as 2010.”

Telegeography:“Internet traffic

increased by 75 percent in 2006, while capacity grew by only 47 percent.”

4

Nemertes Research: The investment gap is in the last mile.

01234567

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Optical Switching

Core Switching

Access Capacity ("last mile")

5

U.S. Broadband International Rank:Broadband subscribers per population

1999: 3d 2003: 15th 2000: 5th 2004: 18th 2001: 7th 2005: 19th

2002: 11th 2006: 20th

Source: ITU ICT “Eye”.

6

International Comparison: Speed and Price(Source: ITIF)

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

United States

Australia

France

Sweden

South Korea

Japan

Average Speed Price per Month 7

A Market-based Approach AloneDoes Not Provide Sufficient Investment Incentives

Gartner Consulting: “In order for market demand alone to drive ubiquitous deployment of broadband service, providers and investors require strong evidence of demand…. one of the weaknesses of this logic is the view that broadband is an optional service.”

Rob Atkinson, ITIF: “there are significant externalities from high-speed broadband . . . if left to themselves, market forces alone will lead to less investment in broadband than is societally optimal.” 8

9

State Governors: Stepping UpSome Examples:

California: grant programs, access to rights-of-way, tax credits, consumer education.

Georgia: Rural broadband grants (BRIDGE)Idaho: Matching grant program and tax creditsKentucky: Rural grant and loan program (KIA);

mapping (ConnectKentucky)Maine: 0.25% fee on intrastate service to fund

rural broadband and cellular service (ConnectME)

Minnesota: public-private partnership (Get Broadband!)

10

State Governors: Stepping UpMore Examples:

New York: initiating competitive rural broadband grant program, recently awarded 9 new grants.

North Carolina: broadband grant program and mapping (E-NC)

Ohio: extending the reach of the Broadband Ohio Network (“middle mile”)

Vermont: issuing moral obligation bondsVirginia: tobacco settlement money used for

regional broadband networks.11

Other Nations: Three Primary Broadband Strategies:

Financing Fear (Competition)

12

Federal Government Mandates

Japan: All 3 StrategiesJapan’s strategy has evolved from “e-Japan” (2001)

to “u-Japan” (2004). Japan government owns 34% of NTT, ordered it to

deploy fiber whether or not it shows a profit. Required local loop unbundling at a low price.Subsidies, 0%-interest loans, accelerated

depreciation, government-backed loans.Subsidies cover one-third the cost of FTTH in rural

areas.NTT has invested more than $200 BILLION in

optical fiber.

13

The 1996 Telecom Act Has Been a Great Success: Mandated unbundling of local loop in 1999.Among lowest broadband prices: $20/mo. for 20

Mbps (using ADSL2+)Unbundling created competitors (Iliad/Free; Neuf

Cegetel)December 2007: new rules to encourage fiber to new

buildings.France Telecom deploying fiber to Paris and 1

million households (out of 20 million) by end of 2008Iliad and Neuf Cegetel now deploying their own

fiber.14

In France!

Sweden: Early AdopterThe first European nation to have a broadband policy

(1999); now close to 100% of homes have BB available.

Government provided $820 M to stimulate infrastructure (grants and tax credits) from 2001 to 2007. ($30 Billion if extrapolated to the U.S.)

Ordered its electric utility to build a backbone network to all 290 municipalities.

An additional $500 M is recommended in April 2008 to build fiber to rural areas; Gov’t funding limited to 50% of the cost.

Open Access model

15

Canada: What Hath Broadband Wrought?

Adopted a national broadband plan in 2001Decided to treat broadband as infrastructureFunded 3 separate national programs:

National Satellite InitiativeStrategic Infrastructure FundBroadband for Rural and Northern Development

(BRAND)Canada has been at or near the top of all countries

in broadband since 2001. Canada has about the same “urbanicity” as the U.S.

and a smaller economy per capita than the U.S.

16

Countries with smaller GDP per capita than the U.S. have better BB Penetration.

17

Countries with more rural population than the U.S. have better BB Penetration.

18

Federal Government Funding of “Last Mile” BB is a Necessity

The deregulatory policies of the last 10 years have not worked; U.S. is falling further behind other nations.

The marketplace will not provide sufficient investment in broadband facilities because the costs of deploying broadband are greater than the microeconomic returns to the companies.

There are significant “macroeconomic” benefits to the public of broadband infrastructure (health care, tele-work, education, etc.) that the private sector does not value.

19

“The Coming Exaflood,” Brett Swanson, Wall St. Journal, Jan. 20, 2007

"Without many tens of billions of dollars worth of new fiber optic networks, thousands of new business plans in communications, medicine, education, security, remote sensing, computing, the military and every mundane task that could soon move to the Internet will be frustrated. All the innovations on the edge will die."

20

Existing Broadband Programs are Insufficient.

The Existing Universal Service Fund is not designed for broadband deployment.Broadband funding will compete with other USF Dollars.The amount of money being discussed ($300 M) is much

too small – will take over 300 years to wire all homes (assuming $1000 cost per home).

The Rural Utility Service (RUS) loan program does not address “uneconomic” rural areas.Most funding is provided through loans that must be re-

paid; but economics of rural areas make it impossible to earn enough to repay the loan.

Most applications are denied.

21

Key Recommendation:Create a brand new

Universal Broadband Fund (UBF) to subsidize the construction of local broadband connections to

every home and business.

22

Verizon estimates it costs about $800 to pass each home with FiOS.

Tim Nulty says Vermont spends about $250 per home in the city and $1100 per home in rural areas.

U.S. has a total of 115M homes; 18M will be passed by FiOS, leaving 97M homes remaining

$1000 per home X 97M homes = $97 Billion

How Much Investment is Necessary to Pass Each Home? (Public and Private)

23

About $100 Billion

Where Should this Investment Come From?

Public/Private Partnership:Network Builder/Owner should provide a minimum of

one-third of the cost in each local market ($33 Billion)Federal Government = 1/3 ($33 Billion)State governments = 1/3 ($33 Billion)

Grants should be awarded through a competitive bid market-by-market. Bidders can bid down the amount of government funding they need.

Over 4 years, Federal and state governments should each be prepared to appropriate up to $8 billion per year (maximum).

24

How would the funding be distributed?Federal funding administered by the Department of

Commerce.Federal funds distributed to each state after the state

raises its 1/3 share of the funding.The state then awards the fed/state grant money to the

network builder/owner on a market-by-market basis.The network builder/owner can be private sector

(telephone company, cable company) or public entity (e.g. municipality)

Network builder must deploy minimum of 100 Mbps, scalable to 1 Gbps to every home and business.

25

If the U.S. can spend $70 Billion/year on transportation, it can spend $8 Billion on

Broadband infrastructure for 4 years.

TOTAL FEDERAL BUDGET OUTLAYS – 2006 $ 2,660.0 BTOTAL FEDERAL DEFICIT - 2006 $ 248.2 B (9.3%)Transportation $ 70.2 B (2.6 %)Health $ 63.9 B (2.4%)Community Development $ 54.5 B (2.0%)Science, Space and Technology $ 23.6 B (0.9%)Proposed Federal Spending on Big Broadband $ 8.0 B (0.3%)

Question #1: Does the Federal Government have the money?

26

Question #2: Do We Need Fiber?

Fiber is preferred because its capacity can be upgraded easily by changing the electronics.

Fiber is not an interim technology; lasts for decades.

In Vermont experience, some costs are cheaper in rural areas (real estate) and take rate is higher.

In very remote rural areas, wireless may be a reasonable alternative, but extending fiber as far as possible will make wireless easier for the last mile.

27

Question #3: What about Wi-Max?Excitement about the new Clearwire-Sprint-Google-

Comcast-TimeWarner-Brighthouse deal to deploy a nationwide Wi-Max network, using a wholesale model.

But:

28

Bernstein Research: “Sprint's huge swath of 2.5 GHz spectrum is ideal for delivering high bandwidth, but there are questions about its efficacy in penetrating walls and windows.”

CommsDay:"Australia's first WiMAX operator has closed its network, with the CEO labeling the technology as a 'disaster' that 'failed miserably’.”

Question #4: What will happen to the Universal Service Fund?

In the short run, nothing. The USF serves important goals, and the UBF would supplement, not replace the USF.

Small telcos could compete for UBF funding and would likely win many grants.

In the long run, the size of the $7 Billion USF should decline. Fiber is a less costly technology, and the costs of running a telephone network using fiber should be smaller than today’s costs, so the amount of USF subsidy should decline over time. 29

Question #5: What Public Interest Obligations Should be Attached to UBF Funds?

Affordability: Grant winners should not be permitted to charge exorbitant rates.

Net Neutrality: Penalties should be imposed on any network operator that blocks, degrades or discriminates against any traffic.

Unbundling/Wholesale: Each state should decide whether or not to require unbundling and wholesale access based on local economics.

30

Conclusion: America Needs a National Broadband Policy with Federal

FundingThe U.S. is falling behind other nations and our

own consumers’ needs for big broadband.We cannot simply play catch-up; we must look

ahead (“skate where the puck is going to be”)A four-year broadband investment program can

solve our broadband needs for decades because fiber capacity is scalable upwards

A nationwide investment in broadband will more than pay for itself in greater economic growth, improved education, health care and tax revenue

31