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 With the financial industry receiving a $700 billion bailout package, a number of other industries are turning around and wondering why they shouldn't be the next group to be rescued. As Congress considers an infrastructure stimulus package, a number of telecom and media academics and policy makers have begun discussing whether that roads and bridges package should also include funding to build out the infrastructure of the future: Ultra Broadband, or UBB, a super-high capacity next-generation Internet service.
The prospect of a $10 billion government infusion into the telecom sector was discussed at the annual Columbia Institute of Tele-Information's annual summit on communications and media policy. CITI's project director for telecom finance, Dan Reingold, outlined a proposal to have $10 billion invested in broadband service companies, with taxpayers receiving an aggregated 10% stake in return. Reingold, a former telecom analyst at Credit Suisse Group, Merrill Lynch & Co. and Morgan Stanley, says the plan would in the near term generate jobs and help bolster the faltering economy, and in the long term it would boost the U.S.'s competitive position globally. However, the prospect for such an investment raises questions about winners and losers. Would the capital infusion go to phone and cable broadband incumbents, or rivals such as Clearwire Corp.? "The last thing they [incumbents] want is for rivals to get this infusion," says Simon Flannery, analyst at Morgan Stanley. "It's all about planning for financing and returns." Verizon Communications executive Kathryn Brown put it even more strongly: "The government has other things to do with it multitrillion debts than to provide capital to the telecom sector. We are already investing, we don't need government money." But Brown's comments raise questions about how Verizon would fair in a telecom services environment that includes an equity infusion by the Treasury Department. At worst, the equity infusion would go to Verizon's rivals, leading market participants to allocate their money where the government has picked a winner. Clearwire, which has incumbent cable company investors, said in May that it needed billions more to roll out its broadband services that would compete with the phone and cable incumbents. Would they get some of it? Another option: The equity infusion could go to smaller incumbents such as CenturyTel, Frontier, Windstream and Embarq, as part of a strategy that would seek to provide additional broadband investment into rural markets. Democrats in Congress looking to breach the digital divide could ally together with rural conservatives to make this kind of equity investment a reality. A Barack Obama administration would likely go further to assist incumbent rivals through an equity infusion than a John McCain government. At best for Verizon Communications Inc. and rival AT&T Inc., it would be divided up among broadband service companies (including them) or to broadband infrastructure businesses. But even these options would not necessarily be a positive result for the phone and cable broadband companies. In any event, a massive equity infusion into the broadband sector would certainly shake things up. - Ron Orol Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World. Categories Deal Video
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