January 29, 2009 / 4:40 PM / 11 years ago

Broadband stimulus unlikely to boost telecom profits

NEW YORK (Reuters) - The U.S. government’s Internet stimulus package may help create jobs and bring faster Web connections to rural America, but it isn’t expected to boost profits for the telecommunications industry.

Potential benefits to phone companies and equipment vendors such as Ciena Corp, Cisco Systems Inc, Tellabs Inc and Juniper Networks Inc are likely to be overshadowed by the recession’s deep impact on technology spending, analysts say.

Conditions on “net neutrality” — aimed at preventing Internet service providers from giving preference to certain content over others — may also discourage some phone companies such as AT&T Inc and Verizon Communications Inc from taking part in the government plan.

U.S. lawmakers are debating bills this week to bring broadband service to rural areas and to allow tax credits and grants for phone companies delivering higher-speed advanced Internet service.

Analysts and telecommunications executives say the $6 billon to $9 billion packages being discussed appear too little to bolster spending in the industry, which is suffering a sharp cutback in consumer and corporate spending.

“It’s certainly material, but $6 billion is not going to change the broadband footprint of the United States,” said Craig Moffett, analyst at Bernstein Research. “What it may do is it may bring much needed broadband investment to rural areas.”


Incentives for companies to spend more on building out Internet communications could help create thousands of jobs in maintenance and engineering, especially in areas too sparsely populated to attract infrastructure spending.

Higher speed Internet services could also spark new business opportunities by allowing, for example, more consumers to browse online stores or enabling doctors to consult patients in rural areas over video conferencing systems.

“The broader your base is, the more ways you can figure out how to monetize the network,” said Shirley Bloomfield, vice president of federal relations for Qwest Communications International Inc, which operates in rural areas including Colorado and Wyoming and is seen as a benefactor of the stimulus plan.

The United States lags behind many developed countries in Internet speeds, partly due to a sparsely populated interior that makes next-generation infrastructure build-outs expensive.

The median Internet speed is somewhere between 2 to 5 megabits per second in the U.S., analysts say, compared to above 50 megabits in Japan and low double-digits in European countries including Finland, France and Sweden.

Discussions over President Barack Obama’s Internet stimulus package comes as top U.S. phone companies AT&T and Verizon announced this week that they plan to cut back on capital spending in 2009.

AT&T, among the country’s highest spenders with a capital expenditure budget of $20 billion in 2008, said on Wednesday it would trim spending by 10 percent to 15 percent this year.

“It’s certainly something that would be an incremental positive. But it would hardly move the needle at the end of the day,” Chris King, an analyst at Stifel Nicolaus, said of the package.

Ciena shares have fallen over 60 percent in the past six months on worries about slower spending. Even shares of Cisco, considered relatively resilient to the U.S. recession, has seen its shares fall about 25 percent.


Analysts and executives were particularly wary of the “network neutrality” clause that may be included in the government’s plans.

Net neutrality stipulates that all content — be it websites or services — be treated equally by the owners of the networks, such as Comcast Corp or Verizon, to name two of the largest.

Google Inc (GOOG.O) and other content companies fear that networks could use their power to block or discriminate against certain applications and content by favoring some traffic over others.

But the phone and cable companies say they need to be able to manage ever-growing Internet traffic for the good of all users, particularly since they are the ones spending billions of dollars to upgrade and maintain networks.

If service providers aren’t happy with the conditions that come with the government’s plans, they could decide not to participate, which would mean no additional jobs or spending on network equipment.

“While a giant simplification, we raise the concern that new regulation and laws could lead service providers to threaten to ‘take their ball and go home’ thus reducing network spending if the situation is not to their liking,” Morgan Keegan analyst Simon Leopold said in a recent report.

Verizon Chief Executive Ivan Seidenberg made his company’s position clear on Tuesday in a conference call with analysts.

“We have made a lot of investments in broadband, and what we don’t want to see is additional government regulation on any new broadband that would have any sort of backward looking impact on the company,” he said.

(Additional reporting by Kim Dixon in Washington)

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