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Obama's Broadband Plan


News January 7, 2009, 5:00PM EST

Obama's Broadband Plan

Tax breaks for companies that increase Internet speed or create new networks are likely to go to existing large players

The Obama Administration has pledged support for universal broadband, or making speedy Internet service available to all Americans. But the ideas under consideration by the President-elect's transition team are likely to fall short of the radical changes some activists have sought.

At the core of the $20 billion to $30 billion effort under discussion by Obama's advisers are tax breaks for companies that extend the availability of broadband or, in regions where it already exists, boost the speed of service, several people involved in the discussions tell BusinessWeek. Companies that build broadband networks in areas with no service could receive as much as 60% of their investment back in tax credits. Companies that increase the speed of existing networks could get tax credits of as much as 40%. The tax incentives also could be structured to promote high broadband speeds, according to Jeffrey Campbell, director of technology and communications policy for network equipment maker Cisco Systems (CSCO). For example, some analysts say the government could give 20% tax credits for 20-megabit-per-second service and 40% credits for 100-megabit service.

As currently conceived, the incentives would be available to any company. However, those most likely to benefit would be existing broadband providers such as AT&T (T), Verizon Communications (VZ), and Comcast (CMCSA), because they have the capital to make investments, and it costs less to extend their networks than it does to build new ones. The new Administration appears unlikely to push forcefully for more competition in broadband, an idea that activist groups such as Free Press and Public Knowledge say is essential if the U.S. wants to catch up to broadband leaders such as Korea. "Broadband is a natural duopoly," counters Robert D. Atkinson, president of the Information Technology & Innovation Foundation, a nonpartisan think tank. Proposals to create a third competitor to take on the telecom and cable companies in most markets, he says, are "misguided."

Bonds in the Offing? The Obama transition team is still working on the broadband plan, and details could change. One issue that has not been resolved is whether the federal government will help companies issue bonds to finance broadband buildouts. Such a program could help companies such as Clearwire (CLWR), a struggling Kirkland (Wash.) startup that wants to roll out wireless broadband service across the country. Blair Levin, point person for broadband on the transition team, declined to comment for this story.

Levin and his team are working on proposals to stimulate demand for broadband service. Schools, libraries, and health-care organizations could get tax breaks or grants for expanding the range of services they offer online. One of Obama's talking points during the Presidential campaign was that wider use of digital health records could improve the industry's productivity and cut costs.

In addition to the tax credits under discussion, the federal government may also provide grants to states for the construction of broadband networks in regions that never get coverage. States probably would use the money to hire private companies to build networks in remote areas. The Agriculture Dept. already has a Rural Development Broadband Program, which has connected nearly 600,000 households in 40 states since 2002.

The broadband push is an important part of the Obama Administration's broader stimulus plan because it addresses several goals. Besides creating immediate jobs in construction and allowing more people to use the Internet, the effort could raise the country's broadband standing internationally. Once ranked fourth in the world by the Organization for Economic Cooperation & Development, the U.S. has fallen to 15th among developed countries in broadband penetration, well behind nations such as Denmark, the Netherlands, and Norway. "Broadband is the key to America's economic future," says S. Derek Turner, research director at Free Press. "Broadband is a great way to create thousands of new jobs, but we have to do it in the right way."

Although details of the Obama plan have not been announced, telecom and cable companies are in favor of the government's support for universal broadband. "It's a worthy goal," says Thomas J. Tauke, executive vice-president at Verizon Communications. The existing broadband companies say it's crucial that Washington doesn't hurt the ongoing investments in Internet infrastructure. Many outfits, for example, don't think the government should make direct investments in broadband networks that could compete against the telecom and cable players' services.

But Turner at Free Press is skeptical that a broadband program relying heavily on tax credits is the best approach. The risk, he says, is that the country will fail to encourage competition, and the money spent will go largely to the telecom and cable companies that already dominate the business. "There's no point to doing all this if all we're doing is writing the incumbent [players] a blank check," he says.

With Pete Engardio and Peter Elstrom in New York.
Hesseldahl is a reporter for BusinessWeek.com.


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