Quantifying Grant Matching

Today’s blog is a math lesson, and I know that may turn off some readers immediately. But this is important math for anybody planning on funding a broadband project with a grant. The point of today’s blog is that somebody receiving a 75% grant must come up with more than 25% to match the grant.

The easiest way to illustrate this is with an example. Let’s say that somebody pursues a $10 million grant with one of the federal programs where the grant will cover 75% of a project. I’ve seen a few folks do the mental math and assume that means they must come up with $2.5 million as matching. That’s not enough money for several reasons.

First, grants don’t cover all assets. Most grants cover network assets and assets needed to connect to customers. But grants typically don’t cover vehicles, computers, furniture, test equipment, and any other assets needed to launch a new ISP or a new market. Grants also aren’t going to cover major software costs like upgrades to billing systems or marketing software – costs that an ISP will incur, but which are not eligible for grants.

There are also nuances of grants that you need to pay attention to. For instance, I know of several state grant programs that won’t cover assets like buying land to place huts.

Grants also cover only minimal amounts of expenses, but they don’t cover any of the costs of operating the business until the time that revenues are sufficient to cover expenses. Grants often cover the cost of preparing the grant, and some grants give some funding for the overhead costs of tracking future grant paperwork – but many don’t even cover this.

But grants don’t cover the big expenses of launching a new market. For a $10 million grant, that probably means hiring a few new technicians and customer service reps. A new market will certainly need a sales and marketing program. Grants won’t cover additional bandwidth or maintenance agreements on the new technology. Getting into a new market often means fees to consultants, lawyers, and accountants. And it means all of other operating costs like higher power bills, new cellphones, pole attachments, number portability, regulatory filings, higher fuel costs, and increases in insurance. Grants also are not going to cover the cost of financing – with the biggest expense usually being interest.

The amount of the uncovered costs will largely be a function of how long it takes to launch a new market and connect customers. Connect customers quickly, and the operating loss might be small. Get stuck with supply chain issues that delay construction after you’ve already hired a few new employees, and losses could be significant.

What might that look like in practice? The following example is based upon an actual projection for one of my clients:

Grant Eligible Assets                                       $10.0 M

Grant                                                                $  7.5 M

Unfunded Assets                                            $  2.5 M

Ineligible Assets                                             $  0.5 M

Operating Losses Until Breakeven              $  0.9 M

Total Project Costs                                        $11.4 M

Out of Pocket Costs                                      $  3.9 M

In this case, the $3.9 million is a lot more than the $2.5 million that might be the first guess of the out-of-pocket costs. My simple advice is: do the math!

Can Courts Mandate Better Broadband?

There was an interesting legal decision at the end of April 2021 that I didn’t notice at the time. State District Court Judge Matthew Wilson in New Mexico ordered school officials to take steps to provide the needed devices and the broadband connection for students who are forced to attend school remotely. This ruling was made during the deepest part of the pandemic when most schools in New Mexico were shut down.

His ruling was based upon complaints that The New Mexico Public Education Department was not complying with a court decision in the case of Yazzie/Martinez v. the State of New Mexico made in 2018 by Judge Sarah Singleton that ruled that the education clause of the New Mexico State Constitution meant that all New Mexico school students were entitled to have access to programs and services that gave them an equal chance to learn and thrive.

The 2021 decision required public education officials to provide computers and high-speed Internet access to students with no broadband access. This is the only case I know where a court has said students have a right to good broadband.

I think most of the people reading this blog would agree that we ought to have a goal of getting broadband to every school student. Several recent studies have shown that students without home broadband and computers significantly lag behind other students – and these studies were made before the pandemic.

The State hasn’t done anything in reaction to the court ruling, which is not surprising. New Mexico has almost the lowest percentage of broadband coverage in the country. This means there are a huge number of students in the state without broadband access. Ordering the State to somehow fix the last-mile broadband gap seems misplaced when the federal government and the FCC have given lip service to the broadband gap for the last several decades.

Karen Sanchez-Griego,  the Cuba Independent Schools Superintendent decided to tackle the issue directly. The School District has come to an arrangement with Starlink to bring broadband to 450 families in the area. This involves the District paying for the $500 satellite receiver and also the monthly $99 fee per student. I assume the monthly rate will increase due to the recent rate increase announced by Starlink. This is being funded from monies coming from the CAREs and ARPA funding. But it’s hard to imagine that the school district can sustain that level of funding for long, and the big question is what happens when local funding is depleted. Sanchez-Griego is hoping the State will step up to keep the broadband going.

The ultimate fix for New Mexico’s broadband gap is to build the network needed to reach these and other students with no access to home broadband. New Mexico will probably be getting something in the range of $1 billion in funding from the upcoming BEAD grants – and it’s unlikely in a state with so many broadband gaps that this will be enough money to build the needed last-mile infrastructure. The court order assumed that the State would somehow pick up the tab to get broadband to every student.

If solving the broadband gap was as easy as a court order, I’d hope to see a lawsuit in every state with a big broadband gap. However, the fact that the State has not responded to the lawsuit tells you all you need to know. State legislators are not going to easily give into courts telling them they must undertake expensive spending programs. It’s always controversial when such edicts come from the federal government, but state governments are more likely to ignore such an order from a state court.

I must admit that I never thought of the possibility of courts ordering jurisdictions to fix the broadband gap. It’s an interesting idea, but it’s hard to think that an order from a single judge will free the huge amounts of spending needed to solve the broadband gap. The Cuba Independent School District should be applauded for tackling the issue directly, but their effort doesn’t seem to be sustainable. Let’s hope an ISP in that part of the state is willing to pursue the grant funding to find a permanent broadband solution.

Will Some States Not Accept Broadband Funding?

The upcoming BEAD (Broadband Equity, Access, and Deployment) grants bring a huge once-in-a-generation grant to states to solve the digital divide and build broadband infrastructure. The average state will get over $800 million dollars, with the exact amount per state still to be determined.

It seems almost too absurd to imagine for communities with poor broadband, but there are some states that may end up not getting this funding. I’m working with communities all over the country who are working to put together the partnerships with ISPs to be able to win and use this funding – and who will be shocked if their state turns the money down. But this seems like a real possibility.

The BEAD grant funding will flow from the NTIA through states, and states get to decide who wins the grants. But states need to take steps first to get this funding. They must decide who in the state is going to administer the large grant program, and states must demonstrate that they plan to hire the staffing needed for this – using funding supplied by BEAD.

States also have to file a detailed plan that shows how the grant program will function – who is eligible, how the grant winners will be chosen, how funding will be distributed to grant winners, and how the state will ensure that grant funding is spent wisely. Many of the details of how this will work were spelled out in the Internet Investment and Jobs Act that enabled the grant program.

And that is where the rub will come in for some states. In almost any instance where large federal money flows to states, there is arm-wrestling between some states and the federal government over the rules of the funding, which is often referred to at the state level as federal mandates. There are many examples where states have refused to accept federal mandates and have not been given funding. The most recent major example is the Affordable Care Act funding which provides funding to bring affordable health insurance. There are still twelve states that have not accepted the rules of this plan and which have subsequently passed on billions of dollars of federal funding.

There is proposed legislation in Illinois that would probably stop the NTIA from agreeing to give the funding to the state. State Senator Patrick Joyce has introduced a bill (SB 3683) that would establish the rules for administering the BEAD grant funding. That step of requiring legislative approval is needed in most states to accept the federal funding, so having a bill like this is a normal procedural step.

But the proposed legislation adopts some language that is clearly in conflict with the funding rules established by the U.S. Congress. Some of these conflicts include:

  • Excluding local government from grant eligibility. Congress clearly stated that this funding is available to all sorts of entities including local governments.
  • Uses the funding only in unserved areas. This violates a few of the goals established by Congress such as making sure that public anchor institutions get access to gigabit broadband. This would also likely restrict funding from going to low-income areas in cities that have poor broadband adoption rates.
  • The law would oddly eliminate from BEAD grant eligibility any entity that has partnered with the state in setting goals and priorities for broadband access and deployment.
  • Eliminates any rate regulation, meaning that grants can’t consider an ISP’s willingness to participate in programs for providing discounts for low-income households.
  • Doesn’t allow the layering of grants. Congress explicitly intends for BEAD grants to supplement both state grant awards and local grant awards using ARPA funding.
  • The state BEAD grant couldn’t be used to enhance or expand current grant-funded projects.
  • Finally, the new law would limit the awards to $10 million per ISP. That’s absurd when the cost of bringing broadband to the rural area in many counties is far more than that. This would also stop ISPs from participating in partnerships with multiple counties.

It’s hard to imagine that the NTIA could approve the BEAD funding to Illinois if this law passed. The law is contrary to almost every key position taken by the federal legislation that approved the BEAD program.

Illinois is not the only state facing this problem. There is new proposed legislation in New York (S 8008 B) which could be a problem. Other states, including North Carolina, where I live, have existing prohibitions against local government funding and building broadband infrastructure. NC and other similar states will have to make a legislative exception to current state rules to be eligible for the BEAD grant funding. It will not be surprising to see some legislatures decide that sticking with existing state laws is more important than getting the grant funding.

I’ve been advising communities to get active and to make sure you know where your state stands in the ability to receive the BEAD grant funds. I believe that funding of the magnitude we are seeing now may not come along for another decade, if ever. A future Congress might not be sympathetic about providing broadband funding to states that turned it down this year.

What Duopoly?

For the last twenty years, the industry has talked about broadband in cities as a duopoly, meaning there was competition between cable companies and telcos – competition between cable modem broadband and DSL broadband.

Twenty years ago, there was a true duopoly when the speeds on DSL and cable modem were close in capability. The market at that time demonstrated real duopoly behavior. Both telcos and cable companies charged roughly the same prices. Whether coordinated by backroom deals or by listening to smart advisors, both industries gave up trying to compete on price. For the first five years after 2000, there was fierce marketing rhetoric about which technology was best – but price competition never entered the picture.

A few cable companies tried to punish small fiber providers and a few of the first municipal ISPs through price wars, but the public blowback and outcry was loud enough for them to worry about the FCC stepping in, and cable companies abandoned the price war tactic.

By the time cable modem speeds hit 30 Mbps speeds, the market competition was over, and cable clearly won the price war. AT&T made an effort a few years later to reintroduce speed competition when it went to the DSL U-verse product using two copper pairs, but by then, cable modem speeds were already faster than the newer DSL.

I would argue that’s the duopoly died when faster DSL was a flop because telcos stopped raising rates and were content serving the third of the public who cared more about price than speed. Even today, most people who stick with DSL hate the speeds and performance but don’t want to pay the price for cable modem broadband that is approaching twice the price as DSL.

Verizon and AT&T not only stopped trying to sell DSL, but both are now actively deactivating copper. It’s fair to say that real duopoly competition ended about the time when AT&T U-verse did not claw back many cable customers.

There was one example of duopoly competition that survived. Verizon built FiOS fiber throughout portions of the Northeast. Verizon and the cable companies competed on price when fiber first hit the market, but over time this devolved into classic duopoly competition where both companies charged high rates. Verizon and the cable companies still market against each other using special one-year pricing deals, but most consumers have picked one side or the other and stopped switching provides to chase a slightly better price.

What I find most amusing about the state of the broadband market is that the FCC regularly brags about the large percentage of the public that has a choice of multiple ISPs. In the last FCC broadband report for 2020, the agency still acts as if the ability to buy 25 Mbps broadband is a second legitimate broadband option compared to gigabit-capable cable company broadband. The FCC said that at the end of 2020 that 94.4% of all US homes had the option to buy 25/3 Mbps broadband. I think anybody that reads this blog knows that is a joke in rural America, but that FCC also expects that the telcos are telling the truth about 25/3 Mbps capability in cities. I’ve been pouring through speed test data from all across the country, and I rarely see a market where DSL speeds average faster than 15 Mbps in real life. But the 25/3 Mbps argument is a red flag. Even if every urban resident could buy something that fast, the public has rejected DSL technology, and households continue to drop DSL lines by the millions.

The other evidence that duopoly competition died is that the cable companies began acting like monopolies. They have steadily raised prices every year, and they barely acknowledge that DSL even exists.

There are a lot of plans by ISPs to build fiber in the coming few years. But much of this building is by the big telcos. For those who think this that is going to bring new competition, I refer you to the history of Verizon FiOS. It’s more likely that the new fiber builders will piggyback on the already-high rates of the cable companies. If history is our guide, we’ll see three or four years of loud advertising after fiber is introduced into a market. But then, both sides will likely grow comfortable with the adjusted market share, and we’ll have revived the duopoly again.

Traditional Cable Dives in 2021

Leichtman Research Group recently released the cable customer counts for the largest providers of traditional cable service at the end of the fourth quarter of 2021. LRG compiles most of these numbers from the statistics provided to stockholders other than for Cox, which is privately held and estimated. Leichtman says this group of companies represents 96% of all U.S. cable customers.

The industry continues to bleed customers, losing over 1.3 million customers in the fourth quarter. This follows similar losses in the second and third quarters and a drop of over 1.6 million customers in the first quarter of 2021. Overall, the traditional cable providers list almost 5.6 million customers for the year or a loss of 15,300 customers every day during the year.

Annual Annual 4Q 4Q
4Q 2021 Change Change Change Change
Comcast 18,176,000 (1,670,000) -8.4% (373,000) -2.0%
Charter 15,833,000 (367,000) -2.3% (58,000) -0.4%
AT&T / DirecTV 14,600,000 (1,905,000) -11.5% (400,000) -2.7%
Dish Network 8,221,000 (595,000) -6.7% (203,000) -2.4%
Verizon 3,644,000 (283,000) -7.2% (70,000) -1.9%
Cox 3,390,000 (260,000) -7.1% (70,000) -2.0%
Altice 2,732,300 (240,900) -8.1% (70,700) -2.5%
Mediacom 572,000 (71,000) -11.0% (18,000) -3.1%
Frontier 380,000 (105,000) -21.6% (20,000) -5.0%
Atlantic Broadband 346,729 (36,271) -9.5% (13,271) -3.7%
Cable ONE 261,000 (50,000) -16.1% (18,000) -6.5%
   Total 68,156,029 (5,583,171) -7.6% (1,313,971) -1.9%
Hulu Live 4,300,000 300,000 7.5% 300,000 7.5%
Sling TV 2,486,000 12,000 0.5% (70,000) -2.7%
FuboTV 1,129,807 581,927 106.2% 185,202 19.6%
Total Cable 41,311,029 (2,695,171) -6.1% (620,971) -1.5%
Total Telco / Satellite 26,845,000 (2,888,000) -9.7% (693,000) -2.5%
Total vMvPD 7,915,807 893,927 12.7% 415,202 5.5%

It doesn’t look like people are replacing traditional cable with an online alternative like Hulu and Sling TV. A few major online alternatives like YouTube TV aren’t on the list, but the loss in traditional cable far surpasses the net gain for the online cable alternatives.

Charter is losing customers at a far slower rate than everybody else in the industry and has for the past several years. Charter CEO Tom Rutledge explains this by Charter’s willingness to move cable subscribers to less expensive tiers, such as the $44.99 Spectrum TV Select product. He says that Charter actively points out to customers that the online alternatives cost more. The rest of the industry seems resigned to letting cable customers go.

Explaining SDN

Somebody asked me to explain software defined networking (SDN), and I thought a good way to answer the question was to send them to an article that explains the concept. I couldn’t find anything on the web that explains SDN in plain English. This is not unusual for technical topics since tech guys generally have problems explaining what they do to laypeople. They hate boiling things down to simple language because a simple description doesn’t capture the nuances of the technology. I’ve always challenged engineers I work with to explain what they do in a way that their mother could understand – and most look at me like I’m an alien. I won’t promise that this is in plain English, but here is my shot at explaining SDN to a non-technical person.

The basis for SDN is that it is a technology that allows networks to be centrally and intelligently controlled or programmed. What does that mean?

There was a time in early computing when a network owner purchased all of the network gear from one vendor. Doing so made it possible to control the network with one set of software as long as the network owner could master the protocols used by the vendor. This sent a whole generation of IT technicians to become Cisco certified to prove that they had mastered Cisco network gear.

But it’s no longer reasonable today to have a complex network provisioned from one vendor. For one thing, most networks now use the cloud to some extent as part of the network – meaning they use computing power that is outside the direct control of the network owner. The pandemic has also forced most companies into allowing their network to communicate with remote employees – something that many companies refused to consider in the past. Networks have also gotten more complex due to the need to control Internet of Things devices – networks don’t just communicate with computers anymore.

The first goal of SDN is to bring everything under one big software umbrella. SDN provides a software platform that lets a network owner visualize the entire network. What does that mean in plain English? The goal of a network owner is to efficiently flow data to where it needs to go and to do so safely. It’s incredibly challenging to understand the flow of data in a network comprised of multiple devices, multiple feeds to and from the outside world, and constantly shifting demand from users on how they want to use the data.

SDN is a software platform that enables the network owner to see the data flow between different parts of the platform. Modern SDN technology has evolved from the OpenFlow protocol developed in 2008 in a collaboration between Stanford University and the University of California at Berkeley. The original platform enabled a network owner to measure and manage data traffic between routers and switches, regardless of the brand of equipment.

Over time, SDN has grown in sophistication and can do much more. As an example, with SDN, a network owner can set different levels of security for different parts of the network. A network operator might wall off traffic between remote employees and core data storage so that somebody working remotely can’t get access to some parts of the network. SDN software provides a way to break a network into subsets and treat each of them differently in terms of security protocols, the priority of routing, and access to other parts of the network. This is something that can’t easily be done by tinkering with the software settings of each individual router and switch – which is what network operators tried to do before SDN.

There have been huge benefits from SDN. Probably the biggest is that SDN allows a network owner to use generic white-box devices in the network – inexpensive routers and switches that are not pre-loaded with expensive vendor software. The SDN software can direct the generic devices to perform a needed function without the box needing to be pre-programmed. That’s the second big benefit of SDN – the whole network can be programmed as if every device came from the same vendor. The SDN software can tell each part of the network what to do and can even override preset functions from vendors.

It’s not hard to see why this is hard for a network engineer to explain because they don’t want to explain the primary goals of SDN without dipping into how it does all of this – and that is something that is incredibly hard to explain without using technical language and jargon. For that, I’d send you to the many articles written on the topic.

FCC Investigating Cost of Pole Replacements

The FCC recently issued a Second Notice of Proposed Rulemaking concerning the allocation of costs when replacing poles to accommodate adding fiber or other communications wires communications devices to poles. The traditional rule has been that the new attacher must pay for 100% of the cost of make-ready, including the cost of pole replacement if there is not sufficient room to add a new wire or device (like a small cell).

In January 2021, the FCC issued an order that clarified that it is unreasonable for a new attacher to automatically have to pay the full cost of swapping a pole. This current NPRM now asks the industry for comments to clarify some of the stickier situations that arise out of trying to allocate the costs of pole replacement. For example, the NPRM asks for comments on the following situations and questions:

  • How do you determine the extent to which a pole owner will benefit from a pole replacement? There are plenty of cases where poles are clearly at the end of life and should have been replaced by the pole owner as a part of routine maintenance.
  • What standards or formulas should be applied to calculate the amount that a pole owner should be responsible for?
  • How should any new rules handle having to replace a pole that is not near the end of economic life – what the FCC is calling early pole replacement.
  • Will requiring pole owners to pay a share of pole replacement negatively impact the negotiation between telecom companies and pole owners?
  • Is there any mechanism that can be used to minimize disputes or to expedite the resolution of disputes?
  • Finally, the FCC is looking at the question of pole attachment rates and asks if there should be refunds to pole attachers if a finding is made that pole attachment rates are too high?

The FCC is asking the right questions. Carriers wanting to add wires or devices to poles have had two common complaints – the process takes too long and is too expensive.

The dilemma faced by the FCC is that anything other an iron-clad, non-debatable formula for allocating costs for pole attachments will make the timelines worse. If there is even a sliver of a chance for the costs to be negotiated, there will be a lot of disputed negotiations that will be to be resolved by regulators – and that will inevitably add even more time to the pole attachment process.

Let’s put this into perspective with a few examples. I know of several rural electric cooperatives where the poles are in dreadful condition. The poles are old, short, and starting to rot and fall down. I know fiber builders who have walked away from bringing fiber in these areas because they were told that practically every pole must be replaced – at a cost of $20,000 or more per pole. A fair finding might be that these cooperatives should pay for 100% of the cost of pole replacement since it is needed for the electric grid – it’s something they should have been doing anyway. Should a new attacher pay a penalty because pole owners had no pole maintenance and replacement plan? But these cooperatives are in poor counties, and the cooperatives don’t feel they can afford to replace the poles. An order that makes the cooperative quickly replace all of the poles could be an unaffordable burden. There may be no winners in this kind of dispute.

Remember that all pole owners are not neutral parties. Some poles are owned by telcos or by a utility that plans to offer broadband. In both cases, the pole owner has a financial incentive to delay or drive away potential pole attachers who are competitors. These owners might avail themselves of every possible delay that comes from any regulatory established timeline to settle disputes on the pole replacement issue.

For every one of the questions that the FCC is asking, there are real-life examples of sticky situations that are hard to resolve. A solution cannot include a dispute resolution process, or bad actor pole owners are going to fight every pole replacement request.

The very questions that the FCC is asking would lead to the grounds for a dispute. For example, what party can determine the condition of a given pole and if a pole owner will benefit from a free replacement? Who is to define what an early pole replacement looks like – in a way that can’t be disputed? Regulators must be cringing when they read this NPRM because they know they will be flooded with individual disputes over single poles filed by a fiber builder that wants a fast resolution.

Even the simplest solution I can think of would lead to disputes. Consider a solution that uses a formula that determines the share of costs allocated to the pole owner by the age of the pole – the older the pole, the more a pole owner pays. I can promise even that will lead to arguments about the age of a given pole.

The Concept of Partnership is Expanding

For many years there have been people extolling the huge benefits of public-private partnership for broadband. For all of that talk, there is not a big number of partnerships, but there are some successful examples around the country.

The following are the kinds of partnerships that I’ve seen created in the marketplace:

  • Operator for Hire. There are a few examples of municipalities that have hired an ISP to operate the broadband business. The government builds the network and then hires a commercial ISP with experience to operate it.
  • Leasing the Network. There are a few examples of governments that have constructed fiber networks and are leasing the capacity on the network to others. The newest example of this is West Des Moines, Iowa which has reached an agreement to lease dark conduit to both Google Fiber and Mediacom.
  • Full PPPs. In a full public-private partnership, both the municipality and an ISP make a capital investment to add customers. For example, the government might build fiber into neighborhoods while ISPs pay for drops and customer electronics. There are many examples of this structure for serving business corridors, but fewer for serving residential neighborhoods.
  • Open Access. For some reason, this isn’t mentioned much as a public-private partnership, but this is a full PPP between a municipal fiber owner and multiple ISPs.

I’m suddenly hearing about a bunch of new kinds of creative partnerships being created by communities. Communities that are looking for broadband solutions might want to consider the following:

Public-Public Partnerships. I’m seeing public-public partnerships develop that are similar to the more traditional public-private partnership. We’re going to need a new acronym other than PPP.  Existing municipal ISPs are reaching out to help neighboring communities. The most common model I’m seeing discussed is where a community is building a fiber network and asking an existing municipal fiber provider to operate it. There are a handful of such arrangements but communities nearby to successful municipal ISPs are reaching out for help.

I’m also seeing multiple communities banding together to find broadband solutions. I’m working with several coalitions of multiple counties working together to find a broadband solution for a region so that nobody gets left behind.

Non-Profit Partnerships. I’m sure that these partnerships have always existed, but the federal digital equity funding is bringing communities and non-profits together to work towards digital literacy. This might mean programs to get more computers in homes and for students. It might mean training to use computers and to navigate the Internet. It might mean programs to train fiber technicians or coders.

While governments can tackle these kinds of programs, a better permanent solution is to work with non-profits to create sustainable programs that will survive this temporary burst of grant funding.

Are Broadband Grants Taxable?

Casey Lide of Keller & Heckman wrote a recent blog that warns that federal grant funding might be considered as taxable income by the IRS. This would be a dreadful outcome for any taxable entity that receives the grant funding since it would create a huge tax liability that would have to somehow be covered outside of the grant funding. This would not affect just the big telcos and cable companies but also the many small telephone companies and cooperatives which are also taxable.

This is not a new issue. There were a lot of questions about federal grants being taxable in 2009 when the NTIA awarded BTOP and BIP grants that were the result of the stimulus spending that came out of the recession. The IRS eventually declared a ‘safe harbor’ for those grants, meaning that it agreed to not tax the grant funding. But the threat of possible taxation stopped many of my commercial clients from pursuing those grants in 2009.

Lide points out that the IRS has always presumed that grant funding is income to the entity receiving the grant and is taxable. Consider a common type of federal grant such as when a research lab gets a grant to pay for the salaries of researchers. Such a grant has always been considered to be taxable income to the lab. The research lab doesn’t worry about this because when it spends that money for salaries, the expenses are deductible from the income, and the lab doesn’t incur any net tax liability. This is one of the reasons that this kind of grant is often awarded each fiscal year to give the grant recipient a chance to spend the grant money in the year the income is received.

But grants given to build infrastructure are different. If a corporation accepts a $10 million grant to build fiber, it cannot expense the fiber immediately to offset the income from the grant. IRS rules have always insisted that hard assets are written off over the economic life of the asset using depreciation expense. I haven’t checked lately, but the IRS suggested tax life for fiber has been set at 25 years, meaning that one-twenty-fifth of the cost of the fiber is recognized as an expense each year over 25 years.

In this example, the corporation that accepted the $10 million grant would be saddled with a $10 million revenue and only be able to wipe out a small portion of it in the first year using depreciation. That would create an instant federal tax liability of 21% on the difference between the grant and one year of offsetting depreciation expense, plus whatever state incomes taxes would be owed. The corporation could not use the grant funds to cover the tax liability – grant money can only be used to build infrastructure. The corporation would eventually see the benefit of depreciation on future taxes, but that relief would be glacially slow over 25 years – it would not stop them from having to write a big check to the IRS this year.

Lide points out the way that the IRS got around this rule with the 2009 grants. There was a legal case in the 1950s, Brown Shoe Co., Inc. v Commissioner where the courts rules that grant funding received by a shoe company for keeping their factory operating was not taxable since none of that money was used to enrich the owners of the business. The IRS was able to make this same determination with the BTOP and BIP grants because, by definition, none of the money was used to enrich the owners of corporations since it was all spent to build infrastructure.

Lide believes that there have been changes in the 2017 Tax Cuts and Jobs Act that might make it impossible for the IRS to make that same ruling for current federal grants. Congress could have avoided this issue by explicitly saying that the new grants aren’t taxable – but that’s not in the various laws.

This is very distressing news for a corporation that has already accepted grant funding from the CAREs Act or from ARPA funds because they might be facing an unexpected tax liability. I know cooperatives and telephone companies that have already accepted some of these funds and who will be shocked if this interpretation holds to be true. One of the problems we have currently in dealing with these kinds of issues is that the IRS is running several years behind and won’t have yet dealt with a tax return from a corporation receiving recent the latest infrastructure grants.

As a further word of warning, this same issue would apply to anybody accepting state infrastructure grants. A state would have to take positive action to forgive the grant from state income taxes, but that would not shield state grant revenue from federal tax liability. Any taxable entity that has already received CAREs or ARPA funding, or anybody thinking about taking ARPA or BEADs funding to reach out to legislators on the issue. It may turn out that Congress might be the only one who can fix this – they certainly didn’t intend for anybody building rural broadband to incur a huge tax penalty. If this doesn’t get resolved, many of the carriers who are planning on using grants to solve the rural broadband gap might have to drop out of the pursuit of grants.

AT&T to Chop Copper Networks

In a pronouncement that is news to nobody, AT&T announced at a recent investor day event that it has plans to cut its copper network footprint in half by 2025. This can’t be a surprise from a company that stopped connecting new DSL customers in October 2020. I figured we could start the countdown clock on copper from that date.

However, Jeff McElfish, the CEO of AST&T’s Communications division, said something that is surprising. He said the company isn’t planning to forcibly move customers off copper as they decommission copper. He says customers are naturally migrating off copper. I find that hard to believe.

My consulting firm administers surveys, and we are still seeing DSL penetration rates in cities between 10% and 40%. Our surveys indicate that the people who are staying with DSL are doing so because of price – they largely hate DSL performance, but it’s what they can afford. This is not hard to understand when looking at the rates for broadband from the big cable companies.

In this blog, I’ve often talked about how expensive broadband is from Comcast and Charter, but broadband rates from some of the other cable companies like Cox and Atlantic Broadband are even higher. There are a lot of homes that can’t afford the cable company prices. It’s hard for me to believe that all of these people are going to voluntarily walk away from DSL over the next two or three years. The last estimate I vaguely remember reading was that there is still something like 19 million households still using DSL.

McElfish said AT&T plans to have 75% of its footprint covered by fiber or fixed cellular wireless by 2025 – I have to assume that in terms of square miles of footprint that this will mostly be wireless. AT&T is going to have a PR problem with trying to push customers to wireless. For rural customers within reach of a tower, a switch from DSL to fixed cellular wireless will be a no-brainer. The broadband speeds will be faster, and the price still affordable. But the big problem in rural markets is that there are huge parts of rural America where fixed wireless won’t work. The rural cellular coverage maps for all three big cellular companies are a joke, and anybody who drives into rural areas can see that you don’t usually have to go far to run out of bars of service. It’s worth noting that cellular voice covers a much larger footprint than cellular data. At some point, AT&T will have to drop rural DSL customers who might have no other alternative than satellite broadband. Extrapolating from McElfish’s statement of covering 75% of the footprint means that AT&T will be abandoning folks in 25% of its footprint.

Urban areas are a bigger issue for AT&T because that’s where most of the DSL customers remain. It’s clear that AT&T has no goal of overbuilding whole cities with fiber but is building in selected neighborhoods. It’s not clear if those neighborhoods are chosen due to the most affordable construction costs or the best demographics – but AT&T will not be building fiber to cover the majority of its footprint in most cities.

With today’s 4G LTE technology that’s been branded as 5G, AT&T is not prepared to deliver fixed cellular broadband to huge numbers of people in cities. That’s what 5G is supposed to fix, and it’s not here yet. But even when AT&T finally implements real 5G (estimated to be 5 – 7 years in the future), the company would have to install a huge number of small cell sites to have enough broadband capacity to migrate DSL customers to fixed cellular broadband. And that means building more fiber deep into neighborhoods to serve the small cell sites. None of that is happening by 2025, so AT&T must be planning on turning down rural copper markets first.

Perhaps AT&T is really counting on everybody else to pick up its DSL customers. T-Mobile is already aggressively rolling out fixed cellular broadband, and Verizon plans a big push starting in late summer of this year. Dish plans to open 25 major markets with cellular data by June. Smaller wireless player like Starry might be making a dent by 2025.

AT&T is ultimately going to have to force people off DSL. The download speeds on much urban DSL are not dreadful, at 15 – 30 Mbps, although upload speeds are nonexistent. I don’t see millions of people voluntarily abandoning the product so that AT&T can tear down the copper without a public stir.

But maybe there is another motive behind this – as the technicians who understand DSL keep retiring, AT&T might not be able to keep DSL running by 2025. I know that sounds cynical, but I don’t think it’s far from the truth.