Monthly Archives: October 2020

The Need for Development Capital

Somebody asked me the other day what one critical element is missing from the rural broadband landscape. My response was developmental capital – money that does the early leg work to turn conceptual projects into shovel-ready projects. Communities and small carriers everywhere struggle with the lack of easy funding aimed at identifying projects and getting them ready to seek funding.

Communities everywhere decry the fact that nobody is investing in new broadband in their community. More times than not, this is due to having nobody willing to spend the development costs needed to define a viable broadband project. There are a few key elements that are needed for any new telecom project. First is feasibility engineering that is done in enough detail to understand the cost of a network needed in a community. Next is market research to understand the potential market demand for buying broadband and other products. Also needed us a financial business model that looks to see if a project can be successful and meet investor requirements. The final part of the development effort is finding the funding needed to make a project work, be that grants, equity, bank loans, or municipal bonds. These development steps are not inexpensive, and it can easily cost as much as several hundred thousand dollars to create a project that can be considered as shovel-ready.

There was a time in the past when this role was played by big banks. Cities or carriers could borrow the money for the developmental costs of a new telecom or other infrastructure projects. But over time this changed. For several reasons banks lost interest in funding infrastructure – not just telecom networks but everything else like roads, electric grids, you name it. The municipal world took up this slack by moving almost all municipal funding to bonds. But in doing so, it became harder to fund the development stages. Assuming a community is credit-worthy, it’s relatively easy to raise bond money to build a new telecom network or a highway – but it’s hard to fund the development work to make such projects shovel-ready to go for bonding.

This had even bigger consequences for commercial companies. Big companies like AT&T or Verizon self-fund project development. They internally fund the engineering effort to consider new projects. The ones that pencil in with good results get built and bad ones are scrapped.

Communities always ask me why nobody comes and builds fiber in their community. They look at me with puzzlement when I tell them that it’s the lack of development capital for ISPs. Small and medium ISPs don’t have a budget for project development where they can spend a few hundred thousand just to see if they should build in a new community. Most small ISPs simply chase low-hanging fruit where it’s easy to identify a profitable opportunity rather than to look at half a dozen projects to identify the most profitable one.

There are a few funding sources that cover part of the cost of development. There are foundations grants or government grants from agencies like the EDA that will fund feasibility studies to look at some of the aspects of project development. Local communities sometimes directly fund feasibility studies to look at some aspects of project development. But funding a feasibility is generall half or less of the total effort required to turn a concept into a shovel-ready project.

Lack of development funding doesn’t just affect broadband projects, but almost all infrastructure. Where it might take $150,000 or more to enable a broadband project, the cost of building new roads, dams, or other infrastructure can cost a lot more. Without an easy way to pay for the project development costs, I’ve seen communities do ridiculous things like pay for the engineering for a big road project over five or ten years to be able to afford it out of annual tax revenues.

I groaned earlier this year when I read that a few states offered to provide funding from CAREs Act monies for shovel-ready broadband projects. By that, they meant projects that could start spending money immediately since some of the pandemic-related funding has to be spent by the end of this year. They quickly found what anybody who works on broadband projects already knew – there were practically no shovel-ready projects sitting around that could launch immediately. At best there are projects at some stage along the project development timeline.

I’ve wracked my brain for years trying to find a workable solution to the lack of development capital. Some grants will pay for the most obvious parts of project development such as funding an engineering estimate of the cost of building broadband. But I’ve never seen any grants that fund the whole project development process.

Are Cable Companies a Broadband Monopoly?

One of the products my consulting firm offers are statistically valid surveys, and conducting surveys has let us get a close look in many communities at the mix between cable broadband and telco DSL. In the last few years, the percentage of DSL subscribers in towns with a good cable company network has plummeted.

It’s not unusual to see DSL market penetration in bigger towns of 10% or less, meaning in most cases that the cable company has essentially won the competitive battle. In most of these towns, we rarely see many DSL customers getting speeds faster than 15 Mbps on the DSL connection, and often a lot less.

We still occasionally see a town with a higher DSL penetration, often due to a telco like AT&T that upgraded the market to offer 50 Mbps DSL that uses two copper lines. But even in these markets, the cable companies have won most of the customers.

The primary reason we see people keeping DSL is price. We often find people paying $35 to $45 for a DSL connection who can’t or won’t upgrade to a more expensive cable modem connection. Many of these folks will hang on to the low-price connection until the day when the telco inevitably retires the telephone copper.

It’s obvious to me that the cable companies are already monopolies in most markets. Any company in any other sector that captured 85% to 95% market share would be deemed a monopoly. I think the cable companies now meet the simple market share test.

Another way to identify monopolies is by noting examples of monopoly behavior. Economists have created a list of changes that are typical monopoly behavior. For example:

  • Price Gouging. Monopolies raise prices over time when there are no competitors to keep them in check. Wall Street has been encouraging the big cable companies to aggressively raise broadband prices. All of the big ISPs have started the process of annually raising rates.
  • Poor Service. Customer service tends to worsen from monopolies because they have no incentive to do better. The big ISPs were already rated as being the worst among all industries at customer service, and there is no reason to think it will ever get any better.
  • Monopsony Power. This term refers to the tendency of monopolies to exploit their purchasing power by forcing low prices on their supply chain. Perhaps the best example of this is Comcast swallowing up the programmers that supply cable TV content.

The reason it’s important to always refer to the big cable companies as monopolies is that we have laws that can kick-in to curb monopoly abuses. However, it likely takes widespread recognition that the cable companies are monopolies to have any hope of awakening monopoly remedies.

The government has a wide range of possible ways to regulate and/or curb monopoly abuses:

  • Governments can fund or support competitors. In this country that likely means having grant programs to support those who would build networks to compete against the cable companies. There are no grants I know of that will fund a competitor to a cable HFC network.
  • The remedy that monopolies hate the most is price regulation. We don’t have to harken back very far into the past to a time when the FCC enforced price regulations over cable companies.
  • One of the most natural ways to regulate monopolies is to enforce some kind of rate of return regulation. Capping monopoly profits will hold down rates.
  • Both the FCC and the Federal Trade Commission have the authority to fine companies for monopoly abuses. These companies are so large that it’s hard to hurt them through penalties, but it is an arrow in the regulatory quiver.
  • Another interesting solution is divestiture – like was imposed on AT&T in 1984. Companies like Comcast are now conglomerations of multiple businesses including broadband networks, entertainment and content creation, and side businesses like cellular, smart home, and numerous other sidelines. Breaking these giant companies into pieces has some merit.

The FCC has gone out of its way to declare that it no longer has any authority over broadband, and thus little or no control over the big cable companies. But this could be changed quickly by by changing the law, and a new Telecom Act could push the FCC back into its original role as a broadband regulator. If the monopoly abuses grow too great, this can also end up at the Justice Department, which had a major role in the divestiture of AT&T.