Four words buried in a provision to help subsidize high-speed Internet service contained in the latest Senate version of the economic stimulus legislation could mean hundreds of millions of dollars a year in tax credits for Verizon Communications, according to telecommunications analysts.
Indeed, John Hodulik, an analyst with UBS Securities, said the provision might give Verizon $1.6 billion in credits in the next two years, even if it does not hire one more person than it currently plans to do.
At issue is the part of the stimulus package meant to bring fast Internet connections to rural and low-income areas. The House bill that passed Wednesday provided $6 billion in grants to broadband projects. The latest Senate bill increases those grants to $9 billion.
Most significantly, the bill before the Senate also includes tax credits for investment in broadband services to low-income neighborhoods, rural areas and places that don’t have any providers of high-speed Internet service.
Companies would get a 20 percent tax credit on investments made on “current-generation” broadband — with speeds of at least 5 megabits per second — in “unserved areas” and 10 percent for investment in low-income and rural areas.
“Next-generation broadband” service — at least 100 megabits per second — also gets a 20 percent credit for unserved, low-income and rural areas. But further down in the bill sits a significantly expanded definition of what sort of customers can be served by a company that qualifies for the tax credit:
A qualified subscriber, with respect to next generation broadband services, means any nonresidential subscriber maintaining a permanent place of business in a rural, underserved, or unserved area, or any residential subscriber.
Jessica Zufolo, an analyst with Medley Global Advisors, said that last phrase–”or any residential subscriber” — means that a company could receive the tax credit for service to any home, whether or not it is in a rural, low-income, or unserved area.
Moreover, right now Verizon’s FiOS service, which runs fiber optic cables to customers’ homes, is by far the largest provider of Internet service that meets the 100 megabits-per-second hurdle.
“On first blush it appears that this will be very beneficial to Verizon,” Ms. Zufolo said.
AT&T and the smaller phone companies generally don’t have technology that meets the 100 megabit-per-second threshold, she said. New technology known as Docsis 3.0 will allow Comcast and some other cable operators to qualify for the credit.
“This is an incentive to get cable companies to deploy Docsis faster,” she said.
Verizon has said it hopes to expand FiOS to three million more customers this year, and another three million in 2010. Mr. Hodulik, the UBS analyst, said he estimates that Verizon will spend $4 billion a year on capital expenses to build out FiOS. And thus it might well qualify for as much as $800 million a year in tax credits, even if it doesn’t change its plans. Mr. Hodulik, however, said that the tax credits might well encourage the company to accelerate its plans and run FiOS past more homes over the next two years.
Even if the tax credits are not given for service to all residential homes, Verizon still stands to be a big winner, according to an analysis by David Burstein, the editor of DSL Prime, an industry newsletter. Many of the homes that Verizon is set to wire for FiOS over the next few years are in neighborhoods in New York, Washington and other cities that qualify as low-income areas. Moreover, he estimated that Verizon might benefit from some of the grants meant to subsidize the expansion of wireless data services.
A Verizon spokesman declined to comment on the potential tax credit. On a conference call with investors on Tuesday, Dennis F. Strigl, Verizon’s president, said the company preferred to see the stimulus in the form of tax credits than grants, particularly if the grants include additional requirements. (He didn’t mention the network neutrality rules by name.) Mr. Strigl:
What we like are things like depreciation and tax policy. What we probably don’t like are grants that have a lot of government conditions on them. So given those two benchmarks so far the dialogue has been pretty good and we will continue to comment on that. I think as you look at our company 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.
The changes to the broadband part of the Senate stimulus bill were spearheaded by Senator John D. Rockefeller IV, the West Virginia Democrat who is the chairman of the Senate Commerce Committee. Mr. Rockefeller has long advocated for expanded broadband service to rural areas. Verizon is the dominant phone company in his state.
The Senate proposal also would not ban Verizon, or any other company benefiting from the credit, from discriminating against certain uses of their Internet service, a principle often called network neutrality. Recipients of those grants would be required to follow network neutrality principles outlined by the Federal Communications Commission.
Barack Obama campaigned for president on a pledge to enforce network neutrality, but telecommunications companies object to the idea as an unneeded restriction on their business and would impose a potentially less stringent test that the recipients meet “nondiscrimination” rules created by the commission. Those tax credits don’t impose any requirements for network neutrality or nondiscrimination.