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Monday, February 21, 2011
$100M Broadband Gamble
By Winthrop Quigley
Copyright © 2011 Albuquerque Journal Journal Staff Writer
The notorious and controversial economic stimulus package that Congress authorized in 2009 contained $7.2 billion in grants and loans, including more than $100 million destined for New Mexico, to extend high-speed Internet connections throughout rural America.
Politicians and advocates have promised the investment would create jobs, but it is no slam dunk, said Terry Brunner, the Agriculture Department's rural development director for New Mexico. "There is no 100 percent certainty in economics," Brunner said. "There are all sorts of theories about the jobs that infrastructure creates. Anecdotally, an increase in Internet access helps businesses sell more products."
Economic studies and history strongly suggest job creation is likely, but jobs or no jobs, it has been federal policy since the 1930s to subsidize the infrastructure rural residents require to live mainstream American lives, and broadband service has become essential to education, business and health care.
"This stuff does make a difference," said Public Regulation Commissioner Jason Marks. "It's not a boondoggle."
Marks cautioned, though, that this kind of infrastructure investment has to be carefully monitored if society is to avoid paying too much for each job created. "A lot of times it becomes an excuse to throw money at providers in rural areas and serve political ends," Marks said. "You're not getting the most value for your money."
The Federal Communications Commission defines broadband as any Internet service that can provide transmission at a minimum of 200 kilobits per second, but broadband services such as digital subscriber lines and cable run much faster than that. Dial-up Internet connections run at 56 kbps, but according to the Agriculture Department's Economic Research Service, rural dial-up connections commonly run at 14 kbps.
Studies show that communities with broadband service gain jobs, communities without it don't attract new businesses, and private companies generally can't earn the returns they need to install broadband infrastructure in rural America.
Broadband employment bumps
The Rural Policy Research Institute, based at the University of Missouri, reported that every percentage-point increase in the rate of broadband penetration into a community increased employment in that community from 0.2 percent to 0.3 percent per year. The Information Technology and Innovation Foundation in an October 2009 analysis said a one-year, $10 billion investment in broadband in the United States would create or retain 498,000 jobs.
A 2006 study by researchers from Massachusetts Institute of Technology and Carnegie Mellon University found that between 1998 and 2002 "communities in which mass-market broadband was available by December 1999 experienced more rapid growth in employment, in the number of businesses overall, and in businesses in IT-intensive sectors, relative to comparable communities without broadband at that time." Broadband added about 1 percent to 1.4 percent to the job growth rate, .5 percent to 1.2 percent to the growth rate in business establishments, and property values increased more than 6 percent in 2000 in ZIP codes where broadband was available by 1999.
The Rural Policy Research Institute reported: "Benefits include innovations in transactions between businesses, lower costs, telecommuting, and on-line access to customers and potential employees. Rural consumers, in particular, benefit from online access to goods and services that are not readily available in their communities."
Even so, rural areas have significantly less broadband service than urban areas. The national broadband market expanded fivefold between 2001 and 2006, but, according to the Brookings Institution, a third of rural households can't subscribe to a broadband service at any price.
Limited broadband penetration
A 2008 survey conducted by the Pew Internet and American Life project found that broadband services are not available where 24 percent of rural Americans live. A Commerce Department study based on an October 2009 survey said that 65.9 percent of urban households subscribed to broadband compared to 51 percent of rural households.
Terry Brunner said phone companies have been known to quote a $50,000 charge to extend broadband service to a remote residence. Companies that face spending $100,000 on infrastructure that will service 10 households can't justify the investment, he said.
Brunner also acknowledged that some taxpayers question why they have to subsidize broadband service at all. "We could have private water companies, private highways and other private infrastructure," he said. "That's one way to approach it."
"It takes federal grants to do this because there isn't enough potential demand for the services to deliver the return on investment that private companies are seeking," Marks said. "The private market has shown they are not going to bring broadband to rural areas that we've decided we ought to have."
If the faster Internet service delivered by broadband does create jobs in New Mexico, Siriusware Inc. may be a model of how it can happen.
Siriusware, founded 21 years ago, makes point-of-sale software used by ski areas, amusement parks and other destinations. Albuquerque's museum and zoo use Siriusware software. The company has 230 clients worldwide.
Siriusware has its headquarters near Taos Plaza where 17 people work. The company employs another 34 people who live all over the country and go to work — telecommute — over the Internet. They write software wherever they happen to be and deliver it to Taos on the Internet. The company's telephone system runs on the Internet. Customers are supported over the Internet. Software is sold and installed over the Internet.
'We're the poster child'
Siriusware has a 3-megabit-per-second connection that it buys from Qwest for $600 a month. The company, which hired 13 new people in 2000, needs 10 Mbps to meet its existing needs and to upgrade its phone system, said CEO Mark Danemann. That would cost $1,600 a month, more than the company can afford.
"We're the poster child for the kind of business you want in a small community. We're severely limited by lack of bandwidth," Danemann said. "If we don't get the bandwidth we need, we can't keep the business in Taos."
Siriusware expects to get the bandwidth it needs for $150 a month from Kit Carson Electric Cooperative.
Kit Carson received $45 million in grants and $19 million in loans from the stimulus act to build a broadband network in northern New Mexico to serve 20,500 households, 3,600 businesses, 183 institutions like schools and medical facilities, and two pueblos. The network will span 2,400 miles. A 1 Mbps connection will cost about $20 a month. Customers in Taos can get that speed today using a Qwest digital subscriber line and paying Kit Carson an Internet access charge for a total of about $53 a month. The same service can cost less than $30 in Downtown Albuquerque.
The University of New Mexico branch campus in Taos, public schools in Kit Carson's service area, Sacred Heart Hospital in Taos, medical clinics, government offices, public safety agencies will all get high-speed Internet connections.
Grants across N.M.
In all, nine companies and San Ildefonso Pueblo have received broadband grants and loans to provide service everywhere from the bootheel to the northeastern plains of New Mexico.
Brunner won't guarantee broadband service will create new jobs, but he said the anecdotal evidence that it has is starting to come in. He knows of an organic seed company in southeastern New Mexico that has been taking Internet orders internationally over a dial-up connection has seen business improve enough with the broadband service that it expects to hire two to four more people.
Farmers say the information they can get about markets, weather and technology makes them better farmers, Brunner said. Farm businesses can find more favorable terms and prices when they purchase inputs. On-line sales occur faster and more efficiently and reach more customers.
"We've got comments from auto dealers," said Toney Anaya, former head of the state Office of Recovery and Reinvestment, which administers distribution of some federal stimulus money. "Any more to order parts, new cars, to get training manuals, the manufacturers put everything on the Internet. Anything to operate the company, including bookkeeping, downloading information, uploading their balance sheets, everything is Internet-based."
The Agriculture Department says that broadband in medical facilities reduces transportation time and expenses, allows more effective emergency treatment, reduces missed work time, increases local laboratory and pharmacy utilization, and lets small rural hospitals outsource some procedures. A study of 24 rural hospital found the annual cost of not having broadband was $370,000 per hospital.
History of support
Congress authorized federal spending on rural broadband in the 2001 and 2008 farm bills, continuing a long history of public support for rural infrastructure programs.
Only 10 percent of Americans living in rural areas had electricity in the 1930s. The Rural Electric Administration was created in 1935 to use federal resources and taxpayer dollars to light up rural America. When the power got turned on, farmers began buying electrical appliances from local stores. They could refrigerate crops and thereby increase sales. Utility revenues increased, too, because farmers used more electricity per household than city dwellers did. New equipment run by electricity increased farm production.
Ever since, it has been federal policy to assure that infrastructure urbanities take for granted, things like roads, clean water, hospitals and mail service, is available in rural America to the extent possible. Marks said these projects make economic sense over the long run. "Interstate highways across the Dakotas weren't cost effective to start with either," he said.
"In my mind, we're giving tools to the community, and we'll see how they harness those tools," said Kit Carson CEO Luis A. Reyes Jr. "It's hard to quantify how that would help someone in Rio Rancho. At the same time, when the state of New Mexico does an economic development ribbon cutting and I see Hewlett Packard building a support center in Rio Rancho, I think that's great, but how does that help someone in Taos? All of those projects are tied to incentives. They're getting something all of us paid into. It cuts both ways."