To the extent that all U.S. broadband networks rely on private capital to invest in new broadband facilities, the question of financial return for such investments is fundamental. After all, telcos, cable companies, satellite and wireless providers go to private markets for the funding to build their broadband networks, and those investors have lots of choices.

Not everybody will like it, but modern, high-speed networks can be built and sustained only if service providers can earn enough money to make the investments. If there is no path to profit for a 1-Gbps network, it won’t be built. Decades ago, some might have argued a “government-owned” approach would be better, but that is no longer possible, whatever one thinks of the idea.


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If the financial return, and the risk, of broadband facilities investment do not roughly match or exceed what is available from alternative investments, those investments will not be made, and it won’t matter much how much people scream about what they can’t get.


In that regard, it is fair to note that many investors no longer consider telecom an especially desirable investment. It is rare these days to find a venture capitalist willing to consider backing a new telecom equipment supplier, for example. To the extent that interest remains, it is centered on mobile and mobile applications.


And there are reasons for thatinvestor caution. Any perusal of industry statistics or quarterly or annual financial reports, at least in developed markets, will show stress around the traditional revenue sources most communications or video suppliers rely on.


Growth rates are down, subscriber trends are negative in many cases, profit margins are lower than has been the case historically, and there is more competition and a shift of value elsewhere in the Internet, broadband and wireless ecosystems.


In fact, Bernstein analyst Craig Moffett argues that, over the last decade, the returns on invested capital in communications networks in U.S. markets have been anemic, at best. He argues that economic value creation has been, in aggregate, barely positive.


Wireline networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade. Wireless networks had a meager return of 0.3 percent. Cable garnered a 2.5 percent return. Satellite networks had the best return on invested capital at 5.5 percent. Others, including AT&T, Comcast, Dish,Sprint and Verizon, have negative returns, Moffett argues.


Changing end user demand, more competition and new technological possibilities all contribute to the more-difficult business case. People don’t want fixed-line voice service as much as they used to. They can communicate in other ways.

There are more competitors, and a greater variety of ways to compete. Some will not remember, but until 1996 it was illegal for more than one company to provide local telephone service in any market.

Also, the Internet and private IP networks enable virtually any service that can be provided over a regulated communications link. To be sure, much of that revenue is being moved over to wireless networks. But that doesn’t help the economics of the fixed network business.

In other words, revenue is being “sucked out” of the telecom business. That makes investment decisions all the more complicated.


Whether or not a provider of goods and services can remain in business is not a consumer’s problem, of course. But the apparent difficulty of making money in the fixed-line service provider business is a key concern for service providers, and no mere matter of wanting to protect the margins and gross revenue of an existing business. At some level, survival is an issue.



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