| Save Half on Broadband Subsidies: Don't Pay Retail for a Million Lines |
| Sunday, 18 October 2009 23:46 |
 If the government buys 500,000 broadband connections through the USF Lifeline program, they can and should get a “wholesale” price. The carriers would sacrifice some margin but will still be very profitable because of the volume. Broadband is a high fixed cost, low marginal cost business. That means additional customers, such as those added through a lifeline subsidy for the poor, have high margins.
Plugging in some numbers, there's a sensible compromise around the point where a subsidy would serve twice as many homes. Consider if a regular broadband price is $20/month (AT&T & Verizon's current low end price) and a goal for the customer to pay $5/month on top of their phone bill. That would require a $15/month subsidy at full retail, which would be extremely profitable for the company. If instead the government negotiated a price of $13.50 (not far from the $15/month AT&T and Verizon charged not long ago,) the subsidy would be $7.50/month and would help twice as many families. Because many of these are families that otherwise would not buy broadband, the company would also do well even at the reduced price. If the right price for broadband is $30 (around the current midrange telco price,) perhaps the family would be asked for $10, the government subsidize $10, and the company provide a 33% discount for the “wholesale” purchase.These suggestions are based on the actual costs to serve each customer. Once the basic facilities in place, the additional cost for each customer is between $5-$12/month on any large network. That figure is based on my cost analysis of bandwidth, support, equipment over 36-48 months, electricity, setup and repair labor, etc. but not marketing/customer acquisition. It corresponds to Wall Street estimates of U.S. cable modem margins at 70-80%, and the $15 price that AT&T & Verizon happily charged for several years while telling Wall Street broadband was a very profitable service. This belongs top of mind in the broadband plan, because there's informal consensus a long run subsidy for the poor makes sense. If so, we need to look at how to do that at minimal public expense, and not recreate the waste in some current programs. (A USTA speaker estimated the USF subsidies could be halved while maintaining the actual goal of the program.) Things are close to a horse-trading stage in the final plan. Jules is a dealmaker by background. I'd speculate Blair shares that spirit. There's already $300M in the USF discussion and I believe a great deal of momentum behind the idea of subsidies. Randall at AT&T, Mark Dankberg at Viasat/WildBlue, and especially the cable companies are begging favors worth $billions from the feds. The controversial $billion tax break Time Warner received for the cable spin-off is enough to discount Lifeline broadband for a decade. The Comcast-NBCU deal probably needs similar. Competition is limited in broadband with only two high-speed players likely the next decade. Jules and the rest in Washington are trying to avoid regulation so they need to find other tools. They want affordable broadband; the carriers want literally $tens of billions per year in favors. Let's make a deal. |