I took a look at testimony provided by Assistant Secretary of Commerce Larry Strickland to the House Committee on Energy and Commerce as part of its hearing on broadband stimulus. Mr. Strickland made strong arguments for why broadband adoption is necessary, citing the National Telecommunications and Information Administration’s success in meeting deadlines set by Congress for disbursing funds to broadband programs as authorized in the American Recovery and Reinvestment Act.

According to Mr. Strickland, 12,000 community anchor institutions (schools, libraries) have been wired for access to the Internet. Approximately 86,000 miles of broadband network has been deployed or upgraded, and stimulus funding has generated approximately 520,000 new Internet subscribers.

I expected the feel good stuff from NTIA, but, as the committee’s background report implies, does $ 7 billion spent intervening in the broadband access market trump a decade worth of investment by private sector players in the broadband space?

The committee determined that between 2002 and 2011 private broadband providers invested on average $65 billion a year in network facilities. By 2010, 95% of Americans had access to broadband services while two-thirds of households had broadband in the home. Pew Research put out a study confirming the House committee’s determination as to broadband in the home. Sure an additional 520,000 broadband consumers accessing service sounds good, but that number is marginal when 200 million households already have broadband in the home.

The committee is correct when it says that private sector players have incentive to be efficient and minimize waste; it’s their capital, specifically the investors’ capital, that they are playing with and maximizing shareholder wealth requires controlling costs while trying to provide a superior quality of service.

There is nothing that can be done now about stimulus finds that have already been disbursed other than continuing oversight on projects that are not yet complete. What this hearing should do is send a signal to municipalities that wish to proceed with deploying their own networks seeded with funds directly from tax receipts or via bonds guaranteed by future tax receipts. The general intent of this market intervention was to ensure that the unserved and underserved got access to broadband services; access that is priced competitively.

If municipalities want to ensure against waste, they should build only backbone networks where services are not being provided and allow private broadband access providers to deploy last mile facilities; government builds the road while private providers build the driveway.

Otherwise, to avoid the waste identified by the committee, government should stay out of the market making business.

Highways, airports, roads, bridges, harbors. All are part of the conduit that moves American commerce, getting goods and services from consumer to producer. They are part of the commonwealth, owned by municipalities, states, and the federal government. When commenters talk about building or renovating America’s infrastructure, these are typically the components they are referring to.

The financing of these components is usually done with tax revenue or revenue or bond issues paid back with tax revenues. Accounting wise, a municipality may have a specific fund established which accounts for the revenues dedicated to and expenditures resulting from an infrastructure project.

Broadband facilities tend to be mentioned in the same breath as the infrastructure components mentioned above. Broadband facilities, the “information superhighway”, carry digitized voice and data between our cell phones, lap tops, and tablets. Broadband facilities are described as the on ramp to electronic commerce, much like the on ramp to Interstate 20 at Joseph E. Lowery and Oak Street in the West End of Atlanta.

That’s about where the similarities end.

Unlike airports, highways, bridges and toll roads, the vast majority of broadband facilities are owned by private entities; Comcast, Verizon, Time Warner, and AT&T, to name a few. The vast majority of the capital used to build and deploy central offices, nodes, other packet switches, and cable is provided either from equity shareholders or creditors. Broadband providers go into the markets to buy the capital needed to meet the demand for facilities. The private versus public ownership of these facilities creates a dependence on the private sector for the financing. Price paid for capital, not government mandate, determines whether capital will be available to meet the consumer demand for broadband facilities.

Sometimes the consumer demand comes from geographical areas that make a business model very expensive to finance; specifically rural and insular areas. Terrain and climate raise challenges to broadband providers because in addition to the physical deployment of facilities, a business case must be made about the probability that consumers in rural and insular areas will be able to pay the higher than average cost of receiving broadband services. The price mechanism may preclude broadband providers from buying the investment capital needed to make the investment. The rational investor or underwriter may not buy into a rural or insular broadband business model.

Enter the irrational. Enter the Federal Communications Commission.

Driven by its interpretation of universal service as provided in the Communications Act, the FCC has over the past few decades implemented a universal service and inter-carrier compensation scheme designed to subsidize delivery of telecommunications services to the poor, underserved rural markets, and health care providers in underserved areas. Business customers were basically overcharged in order to subsidize residential customers. Interexchange companies paid originating and terminating fees to local exchange companies with these funds placed into a pot where LECs would receive a cut after certifying the expenses claimed were for providing telecommunications services.

The FCC, threw its Connect America Fund, has essentially modified the model so that funds go to broadband services versus the legacy plain old telephone service network prior universal service finds financed. To date, the FCC is still trying to get broadband companies to bite on the remaining $180 million in subsidies available during the first phase of CAF. Broadband providers leaving money on the table should be a red flag that something is wrong with this model.

What’s wrong with this model is that it does not take into account that the infrastructure belongs to private entities, entities that could borrow at near zero rates, but who do not finance infrastructure projects in unserved, rural, or insular areas because a strong business case cannot be made for it. The FCC and the Congress throw money at them anyway, hoping that the initiative will get broadband to the homes. In a free market, capitalist society where the method of production and delivery is held in private hands, this 1930s view of stimulation cannot work. What is needed is something more direct especially if government is to participate in stimulating broadband demand.

While it is good to see Mr. Genachowski and his Gang of Four act like supply-siders, what is needed for broadband deployment is a combination of demand stimulation and a “private equity” mindset on the part of government, in this case, the FCC.

First, Congress should get rid of language describing the methods of implementing universal service. Rather than extorting money from IXCs to fund universal service, Congress, via the FCC, should issue poor consumers vouchers to be used with the broadband provider of their choice. This voucher could reflect the difference between the average monthly amount paid for broadband in the consumer’s market area and what they pay for telephone service.

Second, Congress should establish a broadband infrastructure bank to be administered by the U.S. Department of Commerce. The infrastructure bank would be funded from general tax revenues and would lend funds to broadband providers who present innovative business plans for providing service in insular, rural, and urban unserved and under-served areas. Funds would be paid back to the infrastructure bank at some rate below prime. The infrastructure bank could also issue debt giving investors another avenue for hedging other investments. Profits would either be returned to the Treasury, reinvested in the voucher program, or go on to support broadband in schools and libraries.

The current universal service program is open to abuse, such as skewing most funding toward carriers that do not need the funds. It introduces additional government regulation for the purpose of financing broadband deployment by private actors when those actors could go into the markets and get financing themselves; financing based on the showing of a good business model. By requiring the showing of a good business model, broadband providers would be required to develop innovative technologies to provide service. Innovation will beget financing which begets the value added to a service, value that consumers will identify and demand.

The apps economy is about infrastructure and if Congress wants to see this vibrant industry develop, an industry that, according to testimony before Congress by TechNet CEO Rey Ramsey, has created 466,000 jobs as of the end of 2011, then the focus should be on infrastructure. Here is how Mr. Ramsey put it:

“To sustain and grow this economic activity, Congress should focus on the broader issues of infrastructure and access. We need a national infrastructure that promotes access to spectrum, broadband adoption, working capital, and human capital. And we need to ensure that everyone – from academia to minority communities to vets – have easy access to apps.”

What this means then that if apps development is to continue being an integral part of American commercial activity, we need the Federal Communications Commission and the National Telecommunications and Information Administration to implement policy that frees up more of the spectrum that the federal government is not using.

With only 16% of all spectrum being used for commercial purposes, and the demand for wireless broadband increasing with every new app deployed, the federal government needs to further streamline its policy on spectrum auctions and license transfers.

It’s going to take ten years to prepare government-held spectrum for commercial use once commercial use is approved. This means making decisions now on how much spectrum is going to be released by particular agencies.

Spectrum that is laying fallow in the hands of some carriers needs to be moved into the hands of carriers ready to put spectrum to use now. This is not the time for the FCC to practice wishful thinking when it comes to which carriers the agency believes should be able to get spectrum and which carriers should not. If app developers see dwindling opportunities to push their apps as a result of a spectrum crunch here in the U.S., they will take development abroad. Can the U.S. afford the loss of employment opportunities if this were to happen?

Federal Communications Commission Chairman Julius Genachowski and Commissioner Robert McDowell today spoke before the House Sub-Committee on Financial Services and General Government, defending their budget for Fiscal Year 2013. Chairman Genachowski explained that then budget reflected a two percent increase over last year’s budget, and that there was no intent on increasing the number of employees at the agency.

As I later told a colleague, these guys could have merely entered their testimony into the record, and skidaddled back to The Portals after making opening remarks. Bottom line, neither commissioner telegraphed any scary or earth shattering policy pronouncements.

Both expressed their commitment to promoting broadband adoption and deployment. Chairman Genachowski also reiterated the benefits and uniqueness of the forthcoming incentive auctions approved earlier by Congress and scheduled for later this year.

Mr. McDowell warned the sub-committee that over-engineering spectrum auctions historically results in “harmful, unintended consequences”.

I’m glad Mr. McDowell raised that point.

Scale. Scale. Scale. Jamal Simmons hits it on the nail head in his blog post on The Podium last Friday. If the national broadband plan to get broadband into unserved households is to have a chance, it means that consumers will need reliable access. Reliability encourages adoption, and greater adoption means a more valuable network for both the consumer and producer. Allowing AT&T and Verizon to bid was the correct move by Congress.