I’ve been asked three or four times in the last few weeks why anybody would invest in building rural broadband networks with the goal of getting rich. I’ve been hearing the same rumors as everybody else that there are private equity investors ready to jump into the rural grant arena. I have no specific knowledge that this is going to occur, but I’ve run across several ISPs recently who claim to have access to nearly unlimited equity funding.

It’s easy to understand why somebody who doesn’t understand the rural industry might think this is a great time to invest. Just having a $42.5 billion BEAD grant program on the horizon is bound to attract investors who think that free money ought to mean big returns.

But I’m afraid that private equity investors are going to find a different business environment in rural broadband markets than what they are expecting. Consider the following:

• Even with a 75% grant, it’s often hard to pencil in a rural grant project. I’ve always used the metric that the total cost per passing (home or business that could buy broadband) needs to be no higher than $3,000 to break even or $2,000 to earn a decent return. That means that even with a 75% grant, an ISP needs to be cautious if the cost per passing approaches $12,000 – many of the rural communities that will qualify for the BEAD grants will cost even more than that.
• The $2,000-$3,000 metric is only a rough rule of thumb because success also depends on the customer penetration rate. Any broadband business plan can go south in a hurry if it doesn’t attract enough broadband customers. I’ve worked in enough rural markets to know that the interest in buying broadband varies widely. I know of farm communities that have 90% broadband penetration – but I’ve seen others where the public interest in broadband is only half of that number.
• A rural broadband business is also extremely sensitive to operating costs. It takes more technicians to cover a spread-out rural market than in denser towns. Having to add just a few extra technicians in a market can be a huge drag on profitability.
• I’ve written several blogs where I note that the complex grant rules are going to layer on extra costs for grant projects. Having to pay prevailing wages, getting irrevocable letters of credit, and paying for environmental studies are going to drive up the cost of BEAD and similar grants. The fact that the grant money is considered as taxable income can create a huge early cost.
• It’s hard for even the most experienced ISP to currently estimate the impact of supply chain issues and inflation on a large construction project. If an ISP wins a grant but underestimates costs, the extra expenditures are all out-of-pocket for the grant winner.

That list makes it sound like I don’t think anybody should be going after the BEAD grants, but it doesn’t. There are ISPs in the industry with the right mentality for pursuing the slow returns of rural broadband. I’ve talked to electric cooperatives that would be satisfied if a new broadband business breaks even in a decade. They know they are building a hundred-year business, and they know that the broadband business will be solid once the initial debt is retired in twenty years. They understand that a rural broadband business might eventually become a cash cow if they are patient enough – but even then, the returns are modest in terms of what investors are seeking. These coops are more interested in taking care of their existing customers and communities than in somehow getting rich from broadband.

I suspect that part of the lure for new investors to the industry is the high multiples being paid recently for broadband networks. Some of the multiples I’ve seen in the last few years are the highest in my memory. Even the prices being paid for copper networks, like Apollo’s purchase of CenturyLink properties, are astronomical when considering the underlying business. But there is no reason to think that today’s high multiples will somehow accrue to rural fiber networks, especially if those networks aren’t generating much return.

To answer the original question that I’ve been asked – why would private equity want to invest in rural broadband? The more I think about it, the more I come up with the same answer – I have no idea.