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September 21, 2012

Fixed Network Investment, Not Just 'Rural' Investment, Now is the Issue

By Gary Kim, Contributing Editor

The entire fixed network business, not just the “rural” or “high cost” providers, now face the threat of failure as users abandon the services that historically have funded those networks, while the new replacement services are themselves at some risk of disintermediation as well.

That is a fundamental reality regulators and practitioners must confront today, as well as in the future when new rules might be crafted to regulate IP-based services and networks.

To the extent that all U.S. broadband networks rely on private capital to invest in new broadband facilities, the question of financial return for such investments is fundamental.

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If the financial return, and the risk, of broadband facilities investment do not roughly match or exceed what is available from alternative investments, those investments will not be made, and it won't matter much how much people scream about what they can't get.

In that regard, it is fair to note that many investors no longer consider telecom an especially desirable investment. It is rare these days to find a venture capitalist willing to consider backing a new telecom equipment supplier, for example. To the extent that interest remains, it is centered on mobile and mobile applications.

And there are reasons for that investor caution. Any perusal of industry statistics or quarterly or annual financial reports, at least in developed markets, will show stress around the traditional revenue sources most communications or video suppliers rely on.

In fact, Bernstein analyst Craig Moffett argues that, over the last decade, the returns on invested capital in communications networks in U.S. markets have been anemic, at best. He argues that economic value creation has been, in aggregate, barely positive.

Wireline networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade. Wireless networks had a meager return of 0.3 percent. Cable garnered a 2.5 percent return. Satellite networks had the best return on invested capital at 5.5 percent. Others, including AT&T, Comcast, Dish, Sprint and Verizon (News - Alert), have negative returns, Moffett argues.

In fact, the very existence of the universal service fund and high cost subsidies shows clearly that in rural areas, it never has been a “profitable” endeavor to run a telephone company without subsidies and access fee payments. Even with such subsidies, one might still reasonably argue that only firms with lower overhead can afford to serve such areas and potential customers, using a fixed network.

The point is that asking private investors to risk capital in businesses facing serious demand issues and rival product substitutes will be challenging. That, in fact, is precisely the problem the European Community is having to entice service providers to invest in high-speed broadband across the continent.

The issue is not whether universal service and access to broadband facilities is desirable, but how best to accomplish that goal. It might not always be the optimal solution to require the use of one specific approach or network, rather than looking at the full range of potential suppliers.

But that will require a bit more flexibility than traditionally has been the case in the common carrier telecom regulatory approach. Want to learn more about the latest in communications and technology? Then be sure to attend ITEXPO West 2012, taking place Oct. 2-5, in Austin, TX. Stay in touch with everything happening at ITEXPO (News - Alert). Follow us on Twitter.

Edited by Brooke Neuman
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