When to Raise Rates

I’ve been getting the question lately about raising broadband rates. I don’t think there is a decision that smaller ISPs agonize over more than the idea of increasing prices to customers. The question is obviously being raised now due to inflation. Small ISPs see their costs increasing for fuel, materials, and requests from employees for salary increases – and ISPs see margins shrinking.

The current economy is particularly traumatic for newer ISPs who haven’t gone through an inflationary period before. It’s not particularly comforting to them to hear that over the life lifecycle of the economy that periodic bouts of inflation are normal. For most of my career, I’ve seen a recession and a period of inflation roughly every ten years. Inflation was never fun, but it was never unexpected.

We’ve just lived through one of the most unusual economic periods of the last few centuries. Everything we came to expect as normal, like periods of inflation and fluctuating interest rates has not happened for over a decade. The U.S. economy has never had such a stable and ideal period where the economic outlook was completely predictable – and good. Much of what we experienced came through government actions to suppress interest rates, to the point that the federal reserve interest rate even went negative for a short time.

ISPs worry about how customers will react to price increases. ISPs fear they will lose customers to competitors if they raise rates even a little. I can remember working with a client over twenty years ago who agonized for over a year about a $1 increase in telephone rates. They were sure that would drive consumers to drop telephone service in droves. It turns out that nobody dropped telephone service after the rate increase.

I hate to say this, but we can learn a lesson from the biggest ISPs. The big cable companies have been raising rates aggressively for the last five years – not in reaction to higher costs but strictly to drive up profits and improve stock prices. If you look back twenty years, you’ll see the all-in rates for broadband from companies like Comcast and Charter have risen at least $20 per month. The big ISPs are often sneaky about the increases and hide a lot of the rate increases in things like the cost of the broadband modem – but the checks that customers write have gone up every year.

A more salient example is the cellular carriers. Verizon and AT&T both recently announced rate increases – and these companies are now in a highly competitive market. Their reasoning is that they will lose some customers with a rate increase, but the gains from the customers that remain make the increase worthwhile. Small ISPs have to think of rate increases in the same way – you might lose a few customers, but the alternative is to do nothing and watch costs catch up to revenues.

Most other industries don’t agonize about rate increases in the way that ISPs do. If underlying costs go up, the makers of cereal, soap, and most things we buy raise rates to match. It’s always surprised me that very few small ISPs get this. Rate increases don’t have to be large, and an ISP might not be staring at a rate increase today if it had raised rates in prior years by a small amount each year when it was warranted. ISPs seem fixated on the concept that broadband prices must be at a value like $59.99 instead of $61.17. I really don’t know how that idea became so pervasive, but it’s a dumb one. Do ISPs really believe that consumers somehow equate $59.99 with fifty dollars and not sixty dollars? Because of this pricing paradigm, ISPs tend to wait until they have no choice and will raise the $59.99 rate to another magic number like $64.99 or even $69.99.

The need for rate increases during times of inflation is basic math. If your predominant product is broadband, and if costs are rising, you either raise rates or suffer a loss of margin – there isn’t any other alternative after you have done whatever belt-tightening you might do with expenses.

The only other alternative to rate increases is to sell a lot more broadband, but as broadband markets get mature, this gets to be harder to do. We are approaching a nationwide broadband penetration rate of 90%, and at some point, everybody who is willing to pay for broadband will have it.

My advice to ISPs has always been to make small rate increases over time, something small like 25 cents per year, rather than waiting until raising rates is a crisis and dramatic. But if you’ve waited until you have no option but to raise rates, then don’t be timid. Raise the rates to what is needed, and don’t be afraid to explain to your customers why you had to do so.

No Love for the Big ISPs

It’s the time of the year when the results come out for the American Customer Satisfaction Index that asks customers to rate their satisfaction with a wide range of industries and the larger companies within those industries. This is a huge nationwide poll that ranks the public’s satisfaction with 400 large companies in 45 sectors.

As has been happening for many years, the large Internet Service Providers come in dead last when comparing ISPs to 44 other industries. ISPs were given an overall customer service ranking of 64. The industries ranked just above ISPs at the bottom were related, with subscription TV services (66) and video-on-demand services (68). This puts ISPs below gas stations (68), hospitals (69), and the U.S. Post Office (70).

Following are the specific rankings for the ISPs included in the survey:

2021 2022
Verizon FiOS 71 72
T-Mobile N/A 71
AT&T Internet 71 69
Xfinity (Comcast) 67 66
Spectrum (Charter) 63 63
Windstream 61 62
Cox 63 61
Frontier 57 61
CenturyLink 62 60
MediaCom 60 60
Optimum (Altice) 60 59
Suddenlink (Altice) 55 53

I’ve been following the ASCI results for many years, and it’s normal to see the ranking score vary by a small amount from year to year. But it looks like a significant change to see Frontier’s leap from a 57 ranking to 61. Perhaps the message that Frontier has changed coming out of bankruptcy is reaching customers. The most interesting number is the ranking for T-Mobile, which has been added to this survey for the first time. The company came in second, just below Verizon FiOS. Verizon has been at the top of the survey ranking for many years.

At the bottom are the two Altice companies, with Suddenlink ranked at the bottom again with a ranking of 53. Interestingly, Altice announced recently that it is relabeling Suddenlink as Optimum – which is second worse in ranking. From there, other ISPs are ranked slightly higher than Altice, such as MediaCom, CenturyLink, and Cox.

Companies can change rankings within the industry, but it’s hard. A decade ago, Comcast was nearer the bottom of the rankings and has slowly climbed closer to the top. I’m not a Comcast customer (I once was), and I don’t know what they’ve done to change, but I’ve noticed that I no longer read what used to be almost monthly news articles talking of specific ways the company mistreated customers.

What I find most amazing about this ranking is how politicians have fought so hard and often to protect these companies from regulation. Maybe it’s just me, but I’ve always thought that a state politician running to strongly regulate the biggest cable company in a state would gain a lot of votes.

BEAD Grants in High-cost Areas

There are two interesting aspects of the BEAD NOFO that discuss how States might deal with parts of the country that have higher than average costs. As a reminder, when reading the following, Eligible Entity means a State broadband office. The two provisions are as follows:

An Eligible Entity may decline to select a proposal that requires a BEAD subsidy that exceeds the Extremely High Cost Per Location Threshold for any location to be served in the proposal if use of an alternative Reliable Broadband Service technology meeting the BEAD Program’s technical requirements would be less expensive.

 If no Reliable Broadband Service technology meeting the BEAD Program’s technical requirements would be deployable for a subsidy of less than the Extremely High Cost Per Location Threshold at a given location, an Eligible Entity is authorized to select a proposal involving a less costly technology for that location, even if that technology does not meet the definition of Reliable Broadband Service but otherwise satisfies the Program’s technical requirements.

Let’s unpack these two sections of the NOFO. The first citation says that in areas with high costs, a State should strongly consider using the lowest-cost technology that the NTIA has defined as capable of providing broadband speeds of at least 100/20 Mbps. To give an example, a State should give a preference in high-cost places to use fixed wireless using licensed spectrum instead of fiber.

The second quote goes further and says that a State can go even further and consider using a technology that is not considered capable of providing reliable broadband service. That might mean rejecting a proposal to build fiber and awarding funding to a satellite provider that promises to deliver 100/20 Mbps.

I can foresee both positive and negative aspects of this approach. Unfortunately, at this point, the NTIA hasn’t defined what extremely high-cost means and the NTIA plans to issue more guidance. I read the NOFO to require each state to define high-cost based on the local situation.

On the positive side, there are many remote locations that are extremely costly to reach with wired technology. Homes on mountaintops or deep in canyons might be unreachable with the technologies listed by the NTIA as capable of providing reliable broadband (fiber, coaxial cable, DSL, and fixed wireless using licensed spectrum). It seems practical not to waste grant money to build technology to reach really remote homes.

But then I start looking at a lot of real-life situations, and I get worried about this provision. By definition, practically any homes in the woods in Appalachia, the Ozarks, or the Sierra Nevadas will cost a lot more to reach than homes in the plains of Iowa or Minnesota. It costs a lot more to get broadband to the many folks who live on islands because of the backhaul. Homes that happen to be near federal parks or other federal lands are often going to cost a lot more to reach because of the added paperwork. Does the NOFO give a State the cover to write such places off or fund to technologies that are not considered to provide reliable service?

I find that a bit ironic since there is a statement in the NOFO goals about wanting to reach everybody with good broadband – the NTIA said states should consider a grant request to serve even a single remote home. Part of me says that the whole intent of Congress is to reach exactly these high-cost places – they are the ones that really need the federal subsidy.

I worry about the ability to substitute technologies in places like heavy mountains and woods. The only reliable broadband in such places is a wired network. I know wireless vendors claim the ability of wireless technology to penetrate trees and woods, but it doesn’t work well where there is nothing but woods along with rough terrain where lines of sight are impossible.

Each state is going to have a public comment period, and counties and communities that have the more challenging costs and terrains need to pay close attention to your state’s proposed plan to make sure the state isn’t going to write you off before the grant process even begins. That challenge process might be the only chance you’ll have to get good broadband.

Get Ready for Higher Interest Rates

The Federal Reserve recently raised its benchmark interest rate by 0.75%, the biggest increase since 1994. The interest rate is still low by historical standards, with the fed rate now at 1.75%. But there is a lot of talk among economists that the fed rate will likely increase to as much as 3.5% this year and possibly 4% next year.

The federal benchmark rate is the rate at which the Federal Reserve loans money to large banks, and the higher interest rates quickly permeate through the economy in the form of higher interest rates for commercial lending, car loans, mortgages, etc.

Refer to the graph below to see why I refer to current rates as still low. The federal reserve rate dropped to near to zero at the beginning of 2009 and has stayed incredibly low since then, other than a blip upward to 2.4% at the beginning of 2019. But the last time the fed rate was this low was in 1958, so the recent low rates have been an historical anomaly. After having enjoyed low interest rates for thirteen years, I think it’s obvious that most of the economy has come to take low rates for granted.

This is a particularly germane issue today because a lot of ISPs are considering borrowing large amounts of matching funds for broadband grants. Higher interest rates mean larger annual debt payments, and that can easily make the difference between a business plan being feasible and not feasible. For a new project to cash flow, the new customer revenues must be large enough to cover operating expenses plus the cost of debt.

Below is a simple table showing the annual debt costs for a $10 million loan – which would represent a 25% grant matching for a $40 million broadband grant project. Down the left are interest rates. Across the top is the loan term, in years. The values in the table are the annual debt payments. This makes it easy to grasp the impact of an interest rate increase. If you were hoping for a 15-year loan for $10 million at 4% and the interest rate increases to 6%, the annual debt payment climbs by $128,000.

Loan Term
Rate 10 15 20 25
3% 1,424,564 940,295 727,087 608,139
4% 1,485,278 1,001,437 789,933 673,091
5% 1,547,218 1,064,558 855,462 741,368
6% 1,610,359 1,129,601 923,565 812,785
7% 1,674,678 1,196,508 994,126 887,139

The chart also suggests the strategy to offset interest rate increases, which is to find longer-term debt. If that same 15-year loan at 4% can instead be financed for twenty years at the higher 6% interest rate, the annual debt payments would decrease by almost $78,000, even with the higher interest rate.

This is not to suggest that finding longer-term loans is easy. Most commercial banks don’t like making loans for longer than 10 or 12 years in length. There are specialty banks like CoBank and RTFC that will give out longer-term loans, but even they are not going to make long-term loans available to everybody. Most banks dislike tying up their equity in long-term loans.

The only group of borrowers that have a relatively easy time getting longer-term loans are municipalities. Federal bond law allows financing for terms up to the economic life of the assets being financed. I’ve routinely seen municipal bonds for fiber networks financed for terms as long as 25 or 30 years.

The bottom-line advice in a time of increasing interest rates is to make sure that you understand the implications for whatever project you’re thinking of funding. In past decades I can remember many times when increasing interest rates put projects on hold since they became impossible to pencil in. As you can see by the long-term fed chart, if you wait long enough, interest rates that go up will eventually come back down.

Unfortunately, grant projects are not going to allow borrowers to wait out a bad cycle of interest rates. You either take the higher-rate loan or you pass on the project. As an aside, the rising interest rates are another reason against asking for irrevocable letters of credit. Banks are not going to guarantee or lock in interests today if the money is going to be needed a year or two from now. An irrevocable letter of credit is worthless if the interest rate rises and the borrower can no longer afford the debt.

Economists have been saying for a number of years that interest rates need to return to the normal cycle. Much of the reason for low interest rates has been meddling b the government to force interest rates lower. But this return to normal rates couldn’t happen at a worse time for purposes of funding BEAD matching. It’s one more factor that is going to make accepting a big grant that much more expensive.

Will Broadband Labels Do Any Good?

The FCC is still considering the use of broadband labels that are supposed to explain broadband to customers. This sounds like a really good idea, but I wonder if it’s really going to be effective?

Some of the items included on the FCC sample label are great. The most important fact is the price. It has become virtually impossible to find broadband prices for many ISPs. Many ISP, including the largest ones, only show special pricing online that applies to new customers. These ISPs show the public the sale prices, but it’s often impossible to know the list prices. It’s often the same if somebody calls an ISP – they’ll be offered different promotional packages, but it’s like pulling teeth to get the truth about the everyday price that kicks in at the end of a promotion.

I’m curious about how the broadband labels will handle bundling. The surveys we’ve done recently show that half or more of homes in many markets are still buying a bundle that might include broadband plus voice, cable TV, security, smart home, or cellular. Big ISPs have never wanted to disclose the cost of individual products inside of a bundle and I can’t wait to see how ISPs handle a bundled broadband product.

There are also hidden fees and other ways to disguise the real price. Disclosing pricing will be a huge breath of fresh air – if ISPs are forced to be totally honest. I can imagine the PR and marketing groups at the bigger ISPs are already agonizing over how to disclose pricing while still keeping it cloudy and mysterious.

More perplexing is the broadband speed issue. The sample label that the FCC circulated for comment would require ISPs to list the typical download speeds, typical upstream speeds, typical latency, and typical packet loss. What does typical mean? Consider a Comcast market where the company sells residential broadband that ranges between grandfathered 50 Mbps and 1.2 Gbps. What is the typical speed in that market? How will any consumer be able to judge what a typical speed means?

I’ve written about broadband speeds a lot, and for many technologies, the speeds vary significantly for a given customer during the day. What’s the typical broadband speed for a home that sees download speeds vary by 50% during a typical day? I don’t always want to come across as skeptical, but I’m betting that the big cable companies will list the marketing speeds of their most popular broadband product and call it typical. Such a number is worthless because it’s what customers are already being told today. I don’t have a proposed solution for the various speed dilemmas, but I fear that whatever is told to customers will be largely uninformative.

What will the typical consumer do when told the typical latency and packet loss? It’s hard to think many homes will understand what those terms mean or what the typical values mean.

ISPs are also supposed to disclose network management processes. Does this mean a cable company must be truthful and tell some neighborhoods that their coaxial cable is too old and needs to be replaced – because that is s specific network practice? Will a cable company tell a customer that their neighborhood node is oversubscribed, which accounts for slowdowns at peak times? I’m guessing the network management processes will be described at the total market level instead of at the neighborhood level – again, making them largely uninformative.

I’m also curious how the FCC will know if customers are being told the truth. Folks who read this blog might tell the FCC if a broadband label is deceptive or wrong – but what is the FCC going to do with such complaints? Broadband issues are often hyper-local, and what happens on my block might be different than somebody living just a few blocks away.

I want to be clear that I am not against the broadband labels. Forcing ISPs to be public with prices is long overdue, as long as they disclose the truth. But I’m skeptical about many other things on the labels, and I fear big ISPs will use the labels as another marketing and propaganda tool instead of disclosing what people really need to know.

BEAD Matching Funds

Most of the published summaries of the BEAD grant rules state that the BEAD program will provide 75% funding, meaning a grant applicant must contribute 25% of the cost of the grant project. The reality is that the matching rules are more complicated than that simple rule. Following is a more detailed dive into the issue of BEAD matching.

Matching funds can come directly from the grant applicant or can be provided by local and state governments using funding from the CARES or the ARPA programs. The BEAD rules don’t allow matching contributions from other federal sources such as the FCC Universal Service Fund, ReConnect grants, or the RDOF subsidy awards. The BEAD rules allow federal broadband loans to be used to supply the matching funds.

While the grant rules allow matching to come from the CARES or ARPA money, there is a big catch. States are required to incentivize matching funds to be directly funded by entities with the financial wherewithal to make such contributions. This means a State might penalize an applicant with a good balance sheet from using state and local matching funds in an application. This is an interesting feature that means that big corporate applicants or other entities with a strong balance sheet probably should be prepared to directly fund all matching and not use other grants as matching. One way to think about this rule is that the NTIA wants to reward applicants that put skin in the game. They don’t want to see entities that come with 75% BEAD grants and 25% local grants. I know that the big ISPs and other strong entities like larger electric cooperatives are seeking to make partnerships to get access to local grant funds – but this rule might mean that is a bad idea.

There is another provision that I think a lot of grant applicants are going to find disturbing. States are required to incentivize matches of more than 25%. This brings an aspect of what feels like the reverse auction into the process, meaning entities willing to contribute higher matching will gain a preference over applicants bringing 25% matching. I label this as disturbing because this could be a way for the well-heeled giant ISPs to snag a lot of grant awards – they can outbid other applicants by bringing more than 25% matching funds. However, unlike a reverse auction, an outbid applicant gets no opportunity to amend their first proposal and make a counter-off. This makes the BEAD application feel like a blind, one-round reverse auction.

At the other extreme, a State has the ability to waive any matching requirements, particularly for small applicants or for areas with extremely high costs. If not done well, this could really gum up getting funding to high-cost areas. Would somebody offering a 5% match automatically beat somebody that is asking for the match waiver?

The BEAD grants also allow for in-kind matches. These are non-cash donations of property, goods, or services that meet federal audit standards. In-kind matches can be complicated and might include things like employee time or volunteer services; equipment; supplies; indirect costs; computer hardware and software; use of facilities; or waiver of fees associated with access to rights of way, pole attachments, conduits, easements, or access to other types of infrastructure. These are worth considering. For example, it would count as a non-cash in-kind match if a local government provided free permitting for a grant project.

These various matching rules add another layer of complication to the grant process. Applicants now have to worry if pursuing local matching funds from ARPA will hurt their chances of winning. Applicants must worry if some big ISP offers more than a 25% match to outbid them to grab a market. A lot of the answers to these questions will depend upon how a given state interprets the NTIA rules – it won’t be surprising to see these requirements handled differently by state. This means that it’s going to be vital to understand the nuances of what your state is proposing because the grant rules are not going to be the same everywhere.

Bringing Broadband to the Arctic

The Arctic region has largely been left out of the broadband arena in the past due to the high cost of building last-mile broadband infrastructure. The primary broadband available in the region has been provided for decades by Iridium Communications, which provided only low-bandwidth connections capable of supporting satellite phones and low-bandwidth monitoring devices. The lack of broadband looks to be changing as multiple satellite companies are targeting the region as a good business opportunity.

Starlink and OneWeb already have polar-orbiting satellites that can serve the region. In fact, the original OneWeb business plan focused on the Arctic as its first priority due to the lack of competition.

Telesat has negotiated to connect to indigenous communities in the Arctic through a partnership with the Canadian government. The government has already provided some grants and last year announced a financing deal that will invest $690 million in preferred equity and $790 million in loans to enable Telesat Lightspeed to complete its low-orbit satellite constellation. The government will also receive warrants that can be exchanged in the future for additional shares of Telesat stock. This adds to the $400 million provided by the government of Quebec. The low-orbit constellation will begin with 298 satellites positioned to deliver speeds up to a gigabit across Canada.

SES plans to serve the Arctic with a fleet of medium-earth-orbit satellites that should start launching by the end of the year. MEO satellites deploy in orbits higher than 1,200 miles but closer than the geostationary satellites at 22,000 miles above the earth. The biggest challenge for these satellites is finding orbits that avoid the high-energy Van Allen radiation belts. The SES business plan is to provide high-bandwidth connections to remote places and in addition to the Arctic, will be pursuing broadband for cruise ships, cellular towers, and government networks.

The Arctic Satellite Broadband Mission (ASBM) is being built by Northop Grumman and is a joint venture between Inmarsat, the British satellite operator, the Norwegian Ministry of Defense, and the U.S. Air Force. These satellites are aimed at providing cellular telephone service and also supporting the military. Two satellites are scheduled to launch by the end of this year and will have highly elliptical orbits that will vary between 5,000 and 27,000 miles above the earth. The orbits can be changed to avoid radiation storms.

The Russian Satellite Communications Company (RSCC) announced plans to launch four satellites in highly elliptical paths within a few years to serve the far north polar regions. I have to wonder if these plans are on hold due to the severe economic sanctions in place against the country.

Satellite broadband is an awesome solution for places where there are likely to be no alternatives. I understand why rural residents of the U.S. are flocking to Starlink since, for many of them, it’s the only workable broadband solution on the horizon. I continue to wonder how satellite broadband will stay competitive in the lower forty-eight after the many grant-funded networks are finally built. But there will always be homes in the U.S. out of reach of landline networks or customers that don’t like the landline ISPs, so it would not be surprising to see the satellite companies with a small but steady customer base south of the Arctic for the long-haul.

But satellite broadband ought to dominate the Arctic for decades to come. It can bring decent bandwidth to remote places that may never be candidates for building landline networks. It will be an interesting change for the area as it goes from barely connected to fully connected.

Should You Pursue the BEAD Grants?

I took part in a webinar last week for the NRTC that talked about the good, the bad, and the money issues with the upcoming BEAD grants. It was one of the better webinars I’ve participated in, and the panelists were full of great ideas and perspectives. At the end of the session, the last question asked, “How do you reconcile some of the impractical aspects of the BEAD grant processes with the reality of the market?” That question referred to the long list of issues with accepting the BEAD grant funding that was highlighted during the webinar. To mention just a few of them:

  • There are a number of grant provisions that are going to increase the cost of the grant. This includes things like getting an irrevocable letter of credit, having to pay prevailing wages, having to conduct an environmental and historical review, having to comply with Buy America, and an extensive (and probably expensive) grant preparation process. These might significantly increase the amount needed for matching funds.
  • The grant NOFO rules encourage States to award grants that offer the highest amount of matching funds. This brings in a reverse auction feel to the grants where ISPs willing to contribute more can likely win the grants.
  • There is a possibility of big issues with the FCC mapping that an applicant will have to navigate.
  • Grant funds are considered to be taxable income.

Any potential applicant is going to have a problem with these or other aspects of the grants. The question is really asking how far an applicant ought to go out of their comfort zone.

My response to the question was to get immediately get involved with your State broadband grant office. The various State broadband grant offices are in communication, and there is hope that if enough States push back that the NTIA might soften some of the most troubling aspects of the grant rules. States also have another option, which is to build friendlier rules into the State grant rules since, at the end of the day, each State gets to decide who wins the grant funding. ISPs need to provide specific feedback to State grant offices now so that they understand how troubling some of the grant rules are for potential applicants.

I still stand by that advice, but the instant the webinar was over, I realized that is only half of the answer. At some point, an ISP is going to have to determine if it can live with all of the grant requirements.

I haven’t talked to any ISP that isn’t uneasy about some aspect of the grant rules. My first advice to an ISP considering the BEAD grants is to take the time to consider the aspects of the grants that you find troublesome – then categorize them. Some grant issues are just annoyances that will make it harder to ask for the grants. But other issues are more serious, and every ISP will have its own list. You should separate the troubling issues into two categories – issues that will cause big headaches and issues that are potential deal stoppers and might make you decide not to bother with the BEAD grants.

Obviously, an ISP needs to publicly communicate about the issues that might cause you to bow out of the grant program. The States and the NTIA need to hear this because it will be a national embarrassment if good ISPs don’t ask for the grant money. The NTIA does not want to be labeled as having created the next RDOF plan.

But this list also means that an ISP is going to have some hard decisions to make. I already know ISPs that have decided that it’s not going to be worth jumping through all of the hoops to pursue BEAD grants. I’ve advised them to at least wait until their State files a plan that might take the edges off of the provisions that are troubling.

But at the end of the day, an ISP should not take grant money that will ultimately harm your business. For example, you can’t take a grant if you know the math doesn’t work. There are plenty of examples of ISPs that have gone south because they bit off more than they could chew by entering a market where they were not successful. If the numbers look bad, don’t assume that some future magic will somehow turn that around.

The final gut check before saying no to the grant funding is to understand what happens if the grant goes to somebody else. For example, if you are an electric cooperative, will you be okay if the grant instead goes to AT&T, Frontier, or a giant wireless carrier? It’s highly likely that somebody is going to pursue and win the grants in most of rural America. If you are a rural ISP and you don’t take part in the BEAD grant, you may never have another chance to expand your rural footprint. This is what makes this such a hard decision – for many ISPs it’s going to be either take grant money that includes a lot of problems and issues or else be locked out expansion in the areas around you.

The NTIA Preference for Fiber

As might be expected when there is $42.5 billion in grant funds available, we are probably not done with the rules for the BEAD grants. There are several areas where heavy lobbying is occurring to change some of the rules established by the NTIA in the NOFO for the grants.

One of the areas with the most lobbying is coming from WISPs that are complaining that the NTIA has exceeded its statutory authority by declaring a strong preference for fiber. The NTIA went so far as to declare that fixed wireless technology that doesn’t use licensed spectrum is not a reliable source of broadband and isn’t eligible for BEAD grants. The wireless industry says that the NTIA is out of bounds and not sticking to a mandate to be technology neutral.

I decided to go back to the Infrastructure Investment and Jobs legislation and compare it with the NOFO to see if that is true. Let’s start with the enabling language in the legislation. The IIJA legislation makes it clear that the NTIA must determine the technologies that are eligible for the BEAD grants. One of the criteria the NTIA is instructed to use is that grant-funded technologies must be deemed to be reliable. Reliable is defined in the Act using factors other than speed and specifically says that the term “reliable broadband service’ means broadband service that meets performance criteria for service availability, adaptability to changing end-user requirements, length of serviceable life, or other criteria, other than upload and download speeds.

I interpret ‘adaptability to end-user requirements’ to mean that a grant-eligible technology must have some degree of what the industry has been calling being future-proofed. A grant-funded technology must be able to meet future broadband needs and not just the needs of today.

‘Length of serviceable life’ refers to how long a grant investment might be expected to last. Historically, broadband electronics of all types typically don’t have a useful life of much more than a decade. Electronics that sit outside in the elements have an even shorter expected life, with components like outdoor receivers for wireless not usually lasting more than seven years. The broadband assets with the longest useful lives are fiber, huts, and new wireless towers. If you weigh together the average life of all of the components in a broadband network, the average useful life of a fiber network will be several times higher than the useful life of a wireless network.

NTIA then used the reliable service criteria to classify only four technologies as delivering a reliable signal – fiber, cable modem hybrid fiber-coaxial technology, DSL over copper, and terrestrial fixed wireless using licensed spectrum. Since DSL cannot deliver the speeds required by the grants, that leaves only three technologies eligible for BEAD grants.

The legislation allows the NTIA to consider other factors. It appears that one of the other factors the NTIA chose is the likelihood that a strong broadband signal will reach a customer. I speculate that fixed wireless using only unlicensed spectrum was eliminated because interference of unlicensed spectrum can degrade the signal to customers. It’s a little harder to understand which factors were used to eliminate satellite broadband. The high-orbit satellites are eliminated by not being able to meet the 100-millisecond requirement for latency established by the legislation. I would speculate that low-orbit satellites are not eligible for grants because the average life of a given satellite is being touted as being about seven years – but I’m sure there are other reasons, such as not yet having any proof of the speeds that can be delivered when a satellite network fills with customers.

From the short list of technologies deemed to be reliable, the NTIA has gone on to say several times in the NOFO that there is a preference for fiber. When looking at the factors defined by the legislation, fiber is the most future-proofed because speeds can be increased drastically by upgrading electronics. Fiber also has a much longer expected useful life than wireless technology.

The accusations against the NTIA seem to be implying that the NTIA had a preference for fiber even before being handed the BEAD grants. But in the end, the NTIA’s preference for fiber comes from ranking the eligible technologies in terms of how the technologies meet the criteria of the legislation. It’s worth noting that there are other parts of the NOFO that do not promote fiber. For example, state broadband offices are encouraged to consider other alternatives when the cost of construction is too high. I think it’s important to note that any NTIA preference for fiber does not restrict a state from awarding substantial awards to fixed wireless technology using licensed spectrum – that’s going to be a call to make by each state.

There is a lot of lobbying going on the expand the NTIA’s list to include fixed wireless using unlicensed spectrum and satellite broadband. I’ve even heard of rumors of lawsuits to force the expansion of the available technologies. That’s the primary reason I wrote this blog – as a warning that lobbying and/or lawsuits might delay the BEAD grants. I think the NTIA has done what the legislation required, but obviously, anybody who is being excluded from the grants has nothing to lose by trying to get reinstated in the grants. When there is this much money at stake, I don’t expect those who don’t like the NTIA rules to go away quietly.

Here Comes FWA

Broadband industry statistics have been compiled by the Leichtman Research Group which provides an interesting new narrative for the industry. The biggest ISPs added just over one million new broadband customers in the first quarter of 2022, but half of the new customers went to the FWA products from Verizon and T-Mobile.

FWA stands for Fixed Wireless Access and is home broadband delivered using cellular frequencies. T-Mobile and Verizon are aggressively marketing the product, which is touted to have download speeds over 100 Mbps. The market is going to get hotter when Dish gets its launch underway soon. AT&T has also been promising a major new marketing effort to sell the product.

 1Q 2022 1Q Change % Change
Comcast 32,163,000 262,000 0.8%
Charter 30,274,000 185,000 0.6%
AT&T 15,533,000 29,000 0.2%
Verizon 7,400,000 35,000 0.5%
Cox 5,560,000 30,000 0.5%
Lumen 4,470,000 (49,000) -1.1%
Altice 4,373,200 (13,000) -0.3%
Frontier 2,819,000 20,000 0.7%
Mediacom 1,468,000 5,000 0.3%
Windstream 1,176,000 11,300 1.0%
Cable ONE 1,057,000 11,000 1.1%
T-Mobile FWA 984,000 338,000 52.3%
Breezeline 719,608 2,830 0.4%
TDS 495,200 4,900 1.0%
Verizon FWA 433,000 194,000 81.2%
Consolidated 380,150 (850) -0.2%
   Total 109,305,158 1,065,180 1.0%
Total Cable 75,614,808 482,830 0.6%
Total Telco 32,273,350 50,350 0.2%
FWA 1,417,000 532,000 60.1%

FWA was originally touted as the replacement for rural DSL. However, both T-Mobile and Verizon report having success selling the product in urban areas and competing with cable companies. This means that FWA success is going to bring down customer counts for other ISPs.

Over the past several years, Comcast and Charter have been accounting for most of the growth in broadband customers. In the first quarter, the two FWA providers and Comcast and Charter together account for 92% of net increases in broadband customers.

There are some interesting numbers inside this report.

  • Frontier has clearly turned it around after steady losses for several years and saw growth of 0.7% for the quarter.
  • The big loser is now Lumen, which lost over 1% of its broadband customers in the quarter.
  • We know that AT&T has been selling fiber connections at a hot pace but is still seeing significant losses of DSL customers to net out at a small positive growth.
  • The biggest percentage gainer among landline companies for the quarter is CABLE ONE, with quarterly growth of 1.1%.
  • Altice continues to struggle and lost broadband customers for the quarter.