Written Testimony of Windstream President and CEO Jeff Gardner

 

 

Thank you, Senator Pryor and the Senate Commerce Committee, for the invitation to speak at the hearing today.  I also would like to extend an Arkansas welcome to Commissioners Copps and Adelstein.

 

My name is Jeff Gardner.  I am the President and CEO of Windstream Corporation, a wireline telecommunications company that provides voice, broadband, and entertainment services to primarily rural communities in Arkansas and 15 other states.  The company, which is headquartered here in Little Rock, has approximately 3.2 million access lines.

 

Windstream has been an active participant in developing federal broadband policy.  For example, Windstream supports the U.S. Senate Commerce Committee’s broadband mapping efforts.  We worked closely with Senate staff to encourage broadband subscription mapping at a census tract level, and we are pleased to see that census tract mapping is included in the latest version of the bill.  Using census tracts as a common denominator, broadband maps will provide greater insight into the relationship between broadband adoption rates and other socioeconomic factors tracked by the U.S. Census Bureau.

 

We at Windstream share Senator Pryor’s desire to ensure all Arkansans – and all Americans for that matter – can fully participate in the digital world.  Deployment of broadband service is a strategic imperative for our company.  In 2006 alone, we grew the number of our broadband customers by 46 percent to more than 656,000 customers, and as of second quarter this year, we have approximately 753,000 broadband customers nationwide.

 

We are continuing to upgrade our networks and increase the percentage of our customers with broadband access.  This year alone we expect to spend between $350 and $380 million on capital expenditures, of which a significant portion is devoted to broadband.  Now more than 80 percent of our voice customers can purchase wired broadband service from us, and as the Internet becomes more important to our customers, they are using a rapidly increasing amount of bandwidth.  Our subscribers’ bandwidth usage doubled over the last year.

 

Windstream’s broadband investments extend to Arkansas.  Windstream is the third largest ILEC in the state.  We serve predominantly rural areas, from Elaine in the Delta to Wilmot in southeast Arkansas, but also some larger exchanges, such as Harrison.  Harrison actually was our company’s first exchange to offer DSL.

 

In Arkansas, we offer broadband at speeds of 1.5 Mbps, 3 Mbps, and 6 Mbps.  Prices of these services may range from $19.99 to $29.99, when a customer bundles broadband service with voice or digital TV.

 

Windstream also has CLEC operations in central and northwest Arkansas.  As a CLEC, we provide critical communications services, including broadband data services, to Arkansas hospitals and the state government.

 

Windstream will continue to offer DSL deeper in our markets and at faster speeds.  In Arkansas and other states, we are upgrading our network to enable us to introduce broadband speeds of 10 to 12 Mbps, and we expect to complete this effort late this year or early next year.

 

But these build-out efforts are only one piece of ensuring all individuals can fully participate in the digital world.  Broadband subscribership rates depend not only on a consumer’s geographic access to broadband, but also on a consumer’s economic access to and awareness of the benefits of broadband.  Consumer economic factors include both the affordability of broadband service and the ability to purchase a personal computer.  Pulling a variety of different levers is necessary to increase broadband adoption rates broadly and effectively.

 

I believe that many are overly focused on pulling one lever: obtaining federal funds to help offset the cost of constructing their broadband networks.  However, there are three notable problems with advocating this solution in isolation.

 

First, if the goal is 100 percent terrestrial broadband deployment and subscription at affordable rates, achievement of this goal will require the federal government to spend considerable resources to offset the high cost of network build out.  Windstream, like other broadband service providers, has found that its costs increase exponentially as we attempt to provide broadband access to our remaining unserved customers.

 

As we reach into our unserved areas, we face a number of challenges: We may need to shorten the, often significant, distance between potential customers and the closest DSLAM, the point where a digital subscriber line is connected to the Internet. We also may need to lease transport from other carriers to connect our facilities, which in some cases can be very isolated, to the national Internet backbone.  The potential number of broadband customers may not sustain these additional investments.

 

Here’s a rough sketch of our predicted capital costs for deploying broadband service to the rest of our customers: It will cost Windstream a considerable sum to provide broadband service to an additional 5% of our customer base.  To provide broadband to the next 5% slice of our customers, we expect it will cost us approximately two times that amount.  For 5% more, approximately four times that amount.  Deploying broadband to the next 5% of our unserved customers, in other words, will cost us approximately twice as much as what it cost us to deploy to the last 5% of our unserved customers.  And as these customers demand higher speeds, our expenses increase still further as we upgrade our networks to support greater bandwidth.

 

Sponsoring universal build out of terrestrial broadband networks would undoubtedly cost many billions of dollars.  Providing exclusive attention to ensuring universal terrestrial broadband deployment – as opposed to increasing subscribership where broadband is already available – may drain federal resources that could be focused on other factors that might have a greater impact on our nation’s adoption rates.

 

For some consumers, it may make more sense to invest in other technological solutions, which may be more affordable.  Diverse technologies – such as satellite broadband – are providing new paths around geographic obstacles. 

 

Second, focusing solely on broadband build-out costs overlooks the significance of the accompanying operating costs.  Yet any successful broadband deployment strategy must properly account for both capital and operating expenditures.

 

Just because a functioning broadband network is built, does not automatically mean that it would make economic sense for a provider to operate that network.  Indeed, in many areas, including some of our smaller exchanges in Arkansas, we have determined that we would not likely obtain enough broadband subscribers at affordable rates under current conditions to cover our incremental operating costs.  So in order to keep broadband service affordable, providers likely will need additional funding to help cover ongoing operating expenses.

 

Third, even if sufficient funding could be devoted to creating a fully operational broadband network throughout the United States, it still does not mean all Americans would be able to purchase broadband service.  A deployment-focused solution, without more, assumes “if you build it, they will come.”

 

But clearly that is not the case.  Overall broadband adoption, in part, is a function of geographic access, but as I noted before, it also is a function of economic access and consumer awareness of the benefits of advanced technologies.  Many recent press reports on the fate of municipal wireless networks have observed that multiple factors ultimately are responsible for consumers’ broadband adoption rates.

 

So where does this assessment leave us?  For Windstream, this analysis has made us look more carefully at the other levers that may be pulled to increase broadband adoption rates.  While we aggressively deploy new facilities, we continue to think about new and innovative ways in which we can increase broadband adoption where we have already deployed the service. 

 

Public-private partnerships, such as Connect Arkansas, may further promote low-income consumers’ broadband usage.  Windstream was an active participant in the Arkansas Broadband Initiative, which led to the development of Connect Arkansas.  We anticipate that Connect Arkansas will be able to leverage resources of a wide variety of stakeholders to bring more Arkansans online.  We have witnessed the importance of cross-sector partnerships as a longtime board member of ConnectKentucky.

 

In particular, our experience has underscored the importance of a non-geographic factor that contributes to broadband adoption rates: affordability.  The gap between those consumers who are online and offline more and more is defined by their economic, rather than geographic, conditions.

 

Focusing on affordability is important and in many cases actually may be the basis for more economically efficient policies to increase broadband adoption rates.  As such, in addition to dedicating funds to aid deployment in unserved areas, policymakers should (a) devote funding to provide support for low-income consumers’ broadband access and (b) allocate funds to increase computer ownership.

 

With respect to making broadband service more affordable, the federal government should strongly consider the use of general revenues, instead of universal service funds, to subsidize broadband service for low-income consumers.  But if policymakers conclude it is appropriate to use universal service funds, they should consider extending Lifeline/Link-Up to assist low-income consumers’ purchase of broadband services.

 

Addressing economic access to broadband will help a significant percentage of Arkansas consumers that remain offline.  According to the U.S. Census Bureau, only 12 percent of Arkansas residents that live in households earning less than $15,000 per year use the Internet at home.[1]

 

In addition, Windstream recommends that the federal government consider providing some funding for low-income individuals’ personal computer ownership.  If consumers cannot afford a computer, they will not be able to use broadband in their homes – no matter how reasonably priced that broadband service may be.

 

Among the 50 states and the District of Columbia, Arkansas ranks last, 50th, in the percentage of households with a personal computer.[2]   And personal PC ownership, like Internet usage, is highly correlated with household income: 83 percent of households in Arkansas earning less than $15,000 per year do not own a computer, compared to 38 percent of all households nationally.[3]

 

At Windstream, we are experimenting with ways in which we can help more of our customers afford household computers.  For example, this month we launched a pilot program to offer discounted computers to qualified new broadband customers who purchase broadband service from our company.

 

Although there is much private industry can do, the private sector on its own cannot resolve issues around low-income consumers’ ability to afford computers.  Policymakers should give serious consideration to what role the government can play in addressing computer affordability.

 

Going forward we’re going to need to wade into the details of how these various proposals could best be implemented.  Windstream is committed to devoting resources to these ideas, and we look forward to partnering with the federal government to develop new and innovative ways to boost broadband adoption in Arkansas and throughout the United States.

 

Thank you for allowing my company and me to participate in this hearing.

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