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A Plan of Firsts

March 23rd, 2010 by Mark Wigfield - Spokesman, Omnibus Broadband Initiative.

Omnibus Broadband Initiative Executive Director Blair Levin gave a speech entitled “A Plan of Firsts” as part of a panel convened by the Georgetown Center for Business and Public Policy at the National Press Club to discuss early reactions to the National Broadband Plan.

Ours is a plan of firsts.

Our Plan marks the first time the federal government did an in-depth survey of non-adopters of broadband, to understand what influences that choice, a prerequisite to increasing adoption rates.

Our Plan marks the first time the federal government did a cost model to determine the net present value private investment gap for communities not served by broadband, a pre-requisite for moving universal service to support broadband.

[Read the full speech here.]

3 Responses to “A Plan of Firsts”

  1. Guest says:

    Our Plan marks the first time the federal government did a cost model to determine the net present value private investment gap for communities not served by broadband, a pre-requisite for moving universal service to support broadband.

  2. FAIL BOT 2000 says:

    "Our Plan marks the first time the federal government did an in-depth survey of non-adopters of broadband, to understand what influences that choice, a prerequisite to increasing adoption rates."

    Nope. Census/NTIA beat you to it by about a month. But nice try.

    Also, shame on you for appearing on this wildly one-sided pro-industry panel. But I guess we should expect that from the guy who hired industry-funded TPI's Scott Walsten to write the competition sections of the national broadband plan.

    Thanks for the AT&T-Verizon wireless duopoly! Great Job Team!

  3. Guest says:

    Speaking of theoretical exercises, a few suggestions have been made that the FCC consider regulatory unbundling in the National Broadband Plan (NBP). The supporters cite the Telecom Act of 1996 and similar mechanisms in other countries which are deemed examples.

    The biggest issue has always been that any business that depends on regulation for its very survival is too risky. In this specific instance, it is possible the courts or maybe a future FCC would overturn or alter the rules, potentially putting the business in financial distress. As investors will tell you, regulatory certainty is important for making investment decisions. Conversely, the price of regulatory uncertainty may be too large to attract private capital.

    We constructed a very simple thought experiment to test the notion of how returns would be impacted by the risk that a business would be obliterated by regulatory change. Consider a project that earns $100 a year at 30% FCF margins for a period of 20 years. Assume the initial cost of the project is $230 – the reason we pick that number is the IRR on those cash flows over the 20-year life is 11.25%, traditionally the rate of return used by the FCC for rate-of-return phone companies. Further, if you assume 50% of the project is capitalized with debt at a cost of 8.0%, the equity receives a return of 14.5%.

    Now, assume some probability (lets call this p, which ranges between 0 and 1) that the business shut down in any given year because regulations change. We apply this probability to arrive at an adjusted FCF, which in a given year is the expected FCF. For the mathematically inclined, the expected FCF in year N is FCF * (1-p)N.

    Assuming there is a 1 in 10 chance that in any given year that regulations will change and therefore cause the business to shut down (i.e. p = 10%), the IRR for the same project falls to 0.13%. If you kept the debt-equity mix and debt cost unchanged, return on equity ends up being -7.7%! The impact on equity is larger than on overall returns due to the effect of debt, use of which is typical in the telecom industry. As expected, the situation gets dramatically worse as the odds that regulation will change increase. Assuming the real odds are anything close to 1 in 10, the upshot is that it will be practically impossible to attract private capital with those returns.

    Lets consider the odds that regulation changes. Regulation could change because of the courts, which have previously thrown out some line sharing regulation; a change in the Presidency, which would cause a change in the FCC (which has also occurred causing a change in line sharing rules); or Congress could block regulations As a consequence, the chances of one of those things happening in the next decade are significant; far higher than 1 in 10. The precedent of such changes will only deter private investors.

    Another way to think about the incremental cost of such risk is to consider the cost of insuring against the regulatory change would obliterate your business model. Either way, while a CLEC-like construct would make perfect sense in a world where regulation never changes, it is unlikely private investors would consistently provide capital without an astronomical return available to compensate for regulatory risk.

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