I wrote a piece on Wednesday about the way that funding has created a boom in the Solar Power market. In particular, the incentives provided by the Federal Government that are ending next year. The question is why are these so successful and the ones provided for growing our broadband footprint such a failure?
The answer is simple. The grants and low cost loans don’t reduce the costs of the major ISPs. So, it does not affect their spending patterns at all.
Look at the credits used to fund the Solar industry. The firms that provide free solar systems to the owner and sell the owner power at a lower cost are a great deal for the firms. They get all the capital savings provided. The incentives essentially lowered the cost of deploying the systems greatly and these firms could provide great returns to High Net Worth investors who provided capital. At one point, the incentives made the cost of capital negative and essentially it made money to give these systems away.
In comparison, a grant/loan program makes the assumption that the limit is available low cost capital. Just to run some numbers, Verizon told us that each connected home in FiOS was about $1500. Costs are probably lower today, but let’s run with $1500. So a village of 1000 homes (about 4,000 people) would cost about $1.5M to install. So, the capital costs are not what is driving the decision making. Neither is availability. Verizon and AT&T spend $10s of Billions in capital each year. In the grand scheme of budgeting, our little village is no cost at all.
So, why does money go elsewhere within the network? It all boils down to Return on Investment (ROI). That $1.5M spend might take 5 years to pay back. Other places in the network will pay back sooner and at a higher amount. On top of that, the telcos have lots of places to spend money. They have business and wireless services to think about. They want to get more into applications and content. So, they direct their dollars to these other places and no amount of low cost capital is going to drive a major ISP to use it. They know that there is increased regulation that comes with that capital. Between the increased oversight and the small amounts we are talking about there is just no desire to deploy capital in unserved areas.
What would work is a set of incentives that move the needle. Something like a tax break for having no unserved areas or a write off for every new 1,000 homes passed with fiber. This would make the expenditure cost less than it does today and might make the spending have a better ROI. Until it does have a better ROI, the major carriers are not spending.
There are other alternatives to that type of funding, but we do need to look at this as an incentive and whether the incentive matters. Until then, the industry will continue to ignore the cries for broader deployment.
Have a great weekend!
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