Unfair Advantage?: Some phone, cable companies consider government-subsidized broadband a threat

When Congress included $7.2 billion for broadband in last year's stimulus bill, its goal was to bring high-speed Internet connections and information-age jobs to parts of the country desperate for both things.

Now as the government awards the money, some phone and cable companies complain that not all of it is being used to get broadband to places that lack it. Instead, these companies say, much of the money will finance new networks in places where they already offer service.

From the Blue Ridge Mountains to the Great Plains, some local phone and cable companies fear that they will have to compete with government-subsidized broadband systems, paid for largely with stimulus dollars. If these taxpayer-financed networks siphon off customers with lower prices, private companies warn that they could be less likely to upgrade their own lines, endangering jobs and undermining the goals of the stimulus plan.

"It is extremely unfair that the government comes in and uses big government money to harm existing private businesses," said Gary Shorman, the president of Eagle Communications, a Kansas cable company with about 16,000 customers.

Eagle is bracing for competition in its hometown from Rural Telephone Service Co., a phone company awarded $101 million in stimulus grants and loans to set up broadband to rural Kansas. Shorman's prediction: "This hurts our company."

Yet government officials handing out the awards and the backers of the projects being financed insist that the money is being well spent. They contend that the stimulus dollars should be used to expand high-speed Internet access not only to places where it is totally unavailable, but also in regions where what is available is not good enough.

Many existing systems, they note, lack the capacity to meet mushrooming demand for bandwidth. The new stimulus-financed networks will provide far more robust connections -- many with speeds of up to 100 megabits or even 10 gigabits per second to schools, libraries and other "anchor institutions." That's roughly 20 to 2,000 times faster than the DSL and cable wires linking most American homes today.

"It's a little disappointing that companies that aren't adequately serving these areas are trying to undercut those of us who are trying to step in and get the service where it's needed," said Lawrence Strickling, the head of the National Telecommunications and Information Administration, the arm of the Commerce Department handing out much of the stimulus money.

The NTIA and the Agriculture Department's Rural Utilities Service have given out more than $2 billion in stimulus grants and loans, and now are sorting through piles of applications for the remainder of the money. The money is going for high-speed networks, computer centers and broadband adoption programs, and the recipients include government agencies, rural cooperatives and private companies.

In North Carolina, Davidson and Davie counties are among the 37 counties that will benefit from $28.2 million in federal stimulus money. That money is geared toward building a 480-mile fiber-optic network for the N.C. Research and Education Network.

Of the 140 awards made so far, 108 will help pay for broadband networks. And about 70 percent of them cover areas already served at least in part by existing broadband providers, according to a U.S. Telecom Association analysis of data that existing carriers have filed with the government.

One such project is the North Georgia Network Cooperative, a coalition of county economic development authorities, a state university and two electric co-ops. It got a $33.5 million NTIA grant to build a 260-mile fiber-optic ring across 12 Georgia counties in the Appalachian foothills.

The system will form the backbone of a so-called "middle-mile" network that will provide connections as fast as 10 gigabits per second to schools, government offices and other "anchor" institutions, as well as telecommunications carriers that want to serve their own customers. It will also reach as many as 20,000 homes.

Some of those homes can get service now from Windstream Corp., a rural phone company with 3 million customers in 21 states.

Windstream says it has invested $5 million in network upgrades across the area covered by the Georgia project over the past three years.

The stimulus-financed project undermines the economics of those investments, said Michael Rhoda, Windstream's senior vice president of government affairs. In particular, he points to low-density areas where Windstream will now have to share a limited pool of customers with a subsidized competitor.

Windstream offers broadband to 89 percent of its 3 million customers, with typical connection speeds ranging from 3 megabits to 12 megabits per second and 1-gigabit connections available to high-volume users.

The stimulus money, Rhoda believes, should be targeted at places where it is uneconomic for private companies to provide broadband -- "the last 11 percent," in Windstream's case. Windstream has in fact applied for $238 million in stimulus money to reach many of those customers.

FairPoint Communications Inc., a phone company based in Charlotte, N.C., with operations in 18 states, has voiced similar concerns about a $25.4 million NTIA grant to build three interconnected fiber rings in Maine.

The so-called Three Ring Binder project is backed by the state government, the state university system and small telecommunications companies. The 1,100-mile network will also be "middle mile" -- bringing 1-gigabit connections to University of Maine campuses and other anchor institutions and Internet service providers that need bandwidth.

Yet FairPoint, which bought the phone lines in Maine, New Hampshire and Vermont for $2.3 billion from Verizon Communications Inc. two years ago, insists that the project would duplicate much of its system.

According to FairPoint's president, Peter Nixon, FairPoint has built more than 400 miles of fiber and invested more than $100 million in broadband since it bought the Verizon network. About 75 percent of FairPoint's customer base has access to broadband, primarily DSL with speeds ranging from 7 megabits to 30 megabits per second.

FairPoint complained to Maine legislators, but recently called a truce. It has reached a deal that will enable it and other phone companies to expand broadband with fees collected from users of the new fiber network.

Still, FairPoint argues that the Three Ring Binder distorts the market. "We support broadband expansion," Nixon said. "We support competition. All we are asking for is a level playing field."

Government officials say that such arguments reflect a fundamental misunderstanding of the stimulus program.

The $101 million Kansas project, for instance, will deliver connection speeds of up to 1 gigabit to businesses and up to 100 megabits to as many as 23,000 homes. Although the network will cover the population center of Hays, Kansas, where both Rural Telephone and Eagle Communications already offer broadband, that accounts for just eight of the 4,600 square miles to be reached. Much of the area has no broadband at all, said Larry Sevier, Rural Telephone's chief executive.

The goal is to "close the digital divide between Hays and the outlying areas," said Jonathan Adelstein, the head of the Rural Utilities Service, which awarded the money.

Meanwhile, in Maine, FairPoint is struggling. The company wrestled with service problems when it bought the Verizon network, which needed major upgrades. It also took on more than $2 billion in debt to buy the system, which ultimately helped push the company into bankruptcy protection.

That has left FairPoint unable to get broadband to wide swaths of rural Maine, said Dwight Allison, the chief executive of Maine Fiber Co., which was created to build and operate the stimulus-financed network. The project, he says, represents a serious competitive threat to a company that "feels its monopoly is being attacked."

One irony of the phone and cable company complaints, Strickling argues, is that these companies could benefit from the new government-financed networks. These networks must be open to other carriers that want to lease bandwidth, which could enable existing carriers to reach new customers.

Strickling adds that although basic residential broadband may already be available in some places getting stimulus money, the program is designed not only to bring access to homes. It also aims to ensure that hospitals, schools, businesses and other community institutions have the ultra-fast connections needed for cutting-edge applications such as real-time video chats with doctors and educators.

Indeed, Bruce Abraham, the executive director of the Lumpkin County Development Authority, a partner in the Georgia cooperative, has pinned his hopes for economic development on the stimulus. A lack of affordable high-speed connections, he contends, has made it difficult to attract new businesses to an area dependent on low-wage manufacturing jobs that are disappearing.

The new network, he says, could change all that.

"We have a failing economy," Abraham said. "We have no railways, no highways here in the mountains.... Broadband is the best infrastructure solution to get better-paying jobs here."