Role in stimulus of end-user equipment and subscription subsidies

[Hume Vance]

Much of the stimulus is aimed at infrastructure build-out to provide
the possibility of broadband connection where little or none exists
today. Dave Burstein argues for example that it is therefore
preferential to use stimulus money for infrastructure build-out than
to subsidize equipment purchases for end-users.

The presumption is that end-user equipment is produced outside the US.
This is for the most part true, but it’s misleading to draw the
conclusion that this means Americans don’t participate in the
production and distribution of such equipment. The phenomenon of the
‘smiley curve’ that describes the profitability of various stages of
design, production and marketing of electronic products, suggests that
it is a mistake to assume that importation of electronic products
benefits foreign workers, and not US workers.

James Fallows describes in the July, 2007 Atlantic how US companies
benefit from many products manufactured in China. US intellectual
property goes into the front end (design, including chips, form
factors, etc.) and the back end (marketing and distribution) of these
products. Both of these activities garner relatively high margins; the
low margin business is the actual manufacturing that occurs in the
middle of this process, hence the smiley face.

http://www.theatlantic.com/doc/200707/shenzhen/7

Current broadband penetration is on the order of 55% of households.
The portion of households passed by broadband service is much higher;
cable passes over 90%, and DSL about 80%. (See for example

http://www.ntia.doc.gov/reports/2008/NetworkedNationBroadbandinAmerica2007.pdf).

These figures suggest that a program to facilitate access to broadband
among currently unconnected households could do so very effectively
and inexpensively by subsidizing equipment and/or service to these
households.

That is, the goal of the BTOP program is to find “…the most effective
and efficient mechanisms for ensuring broadband access by all people
of the United States,” as stated in the description of the national
broadband plan that the NTIA is charged with developing. If the
meaning of “broadband access” includes the concept not just of the
physical possibility of connection but also of affordability, then it
may be that a way to reach many households is through equipment and/or
service subsidies as mentioned above.

No doubt there are regions that will benefit from broadband
infrastructure build-out. In other regions, broadband rates should
possibly be increased beyond what the Telcos and MSOs are planning to
provide. Possibly a high minimum connection rate should be
established. In other countries like South Korea and Japan, for
example, current residential offerings are in the range of 100Mbps.
And there’s no question that build-out of infrastructure employs large
numbers of Americans. But it seems to me that equipment and service
subsidies should also be included prominently in the discussion of how
best to meet the goals of the ARRA.