Net Neutrality Legislation

In late July, Senators Edward Markey and Ron Wyden, along with Representative Doris Matsui introduced a short bill titled the Net Neutrality and Broadband Justice Act that would classify broadband as a telecommunications service under Title II of the FCC rules.

It’s an interesting concept because this bill would stop the see-saw battle between democrats and republicans about regulating broadband. The Tom Wheeler FCC implemented net neutrality and related broadband regulation using Title II authority in 2015, and the Ajit Pai FCC completely killed Title II regulation in 2017. It’s clear that the current FCC under Jessica Rosenworcel intends to reinstate the Title II authority. If Congress was to enact this law, it would make it impossible for future FCC’s to flip flop on the issue.

What is almost comical about the issue is that both parties make this appear to be a fight over net neutrality, which it is not. All of the public discussions of the issue have been couched as a discussion of whether we need federal net neutrality rules. However, the real fight is about whether broadband should be regulated. When the Ajit Pai FCC stripped away Title II authority for broadband, most of the FCC’s ability to regulate broadband in any meaningful way disappeared. It seems crazy not to have a national policy to regulate an industry where the two biggest ISPs control over 55% of the national market, where the four largest ISPs control over 75% of the market, and where fifteen ISPs control 95% of the market. Beyond the market power of a handful of ISPs, most consumers will say they have only one choice of fast broadband.

Net neutrality has never been the issue. The big ISPs have only violated the principles of net neutrality in a serious way a few times, like when the biggest ISPs restricted Netflix traffic in 2013 and 2014 to get the company to pay more for using the Internet. Soon after the Ajit Pai FCC killed net neutrality, the State of California introduced nearly identical rules, which have subsequently been affirmed by the courts. The biggest ISPs are largely following net neutrality since doing so everywhere except California would be nearly impossible to manage.

The real fear the big ISPs have of Title II authority is that the FCC could theoretically implement rate regulation. This is the underlying issue for the continuing fight. The big ISPs also understand that the FCC will enact other restrictions if the agency has the authority to do so. But it is the fear of putting any restrictions on rates that draws heavy lobbying from the industry. The big ISPs have been using the term light-touch regulation to describe the current state of affairs – which in real life translates to practically no regulations at all.

I can’t imagine a time when the FCC would try to put a cap on ISP rates, but the agency could still restrict what ISPs charge. For example, it’s not hard to imagine the FCC putting curbs on data caps, where ISPs charge customers a lot extra for using too much broadband in a month. Everybody who knows how ISPs operate understands that there is almost no extra cost to an ISP for serving a heavy broadband user – data cap fees verge on the edge of fraud.

It doesn’t look likely that this bill has any chance of making it through the current Congress. The bill is unlikely to draw any Republican votes and may not even gain a positive vote from all of the Democrats. The only way to ever get this passed would be to somehow find a way to do so with a simple majority vote rather than the needed 60 votes to pass.

It’s a shame because there should be regulatory oversight over such a vital industry that is operated by oligopolies. While a few cities seem to be finding a way to bring multiple ISPs to complete, most of the country still only has one or two ISPs that offer fast broadband. Because of the huge barrier to market entry due to the cost of building a new network, most of the country is not likely to see price competition for broadband. At a bare minimum, we ought to have the FCC fulfilling one of its prime regulatory responsibilities, which is to make sure that ISPs don’t overreach too badly with the public.

Subsidized Interest Rates

The recent increase in interest rates suddenly makes it more attractive to pursue subsidized government interest rates to build broadband. Meeting debt payments is one of the primary hurdles to launching a successful broadband expansion.

We’ve been lucky over the last decade that interest rates have remained historically low. At a few points, the Federal Reserve rate almost got to zero. In a cycle that I’ve seen many times during my career, businesses get so used to low interest rates that they begin believing that interest rates will stay low forever.

But historically, interest rates have risen and dropped in response to changes in the economy. Over the last decade, the federal government made the deliberate decision to keep interest rates lower than where the market would have normally taken them.

But this year, the reemergence of inflation has forced the Federal Reserve to raise its core federal funds rate several times, and it’s up to 2.5% after starting this year at around 0.25%. There are strong indications that the rate might be raised more, although some of the inflationary pressure is starting to ease. The Federal Reserve rate is important because it is the rate at which large banks borrow from the government, and so increases in the Federal Reserve rate translate instantly into higher bank loan rates and ultimately into higher municipal bond rates.

Suddenly, federally subsidized interest rates look attractive again. The primary federally subsidized interest rate for broadband comes from the Rural Utility Service (RUS) which is part of the USDA. The RUS has always had the ability to offer low-interest-rate loans for projects that hit its target profile of bringing broadband infrastructure to rural locations. The agency currently has several billion in available loans at its disposal.

There are a few other federal programs that can offer lower rates through loan guarantees. In these situations, a borrower works with a bank, and the loan repayments are guaranteed by a federal agency, which generally translates into a lower interest rate. The HUD 108 program can guarantee loans that are used to build infrastructure in areas with lower-than-average incomes. The SBA 504 Loan Program can guarantee loans to start-up businesses, with half of the loan coming from a bank and half loaned or guaranteed by the SBA. The USDA Business and Industry Guaranteed Loans (B&I) can be used to subsidize loans that spur economic development.

Many ISPs don’t like using federal loans for a number of reasons. Applying for federal loans requires a lot of paperwork and cost to prepare, and the loan approval process is not quick. Federal loans often come with harsher requirements for borrower surety, meaning a borrower often has to pledge the entire business to get the loan. Government loans often don’t mix well with other kinds of financing since the federal loan generally requires first priority for repayment. Federal loans sometimes restrict dividends from the loan project until the loan is retired. Finally, federal loans require more reporting.

But even with all of these restrictions, the lower interest rates start to look attractive when a project doesn’t pencil in at normal bank interest rates. An RUS loan at 2% might be worth all of the extra hassle if market interest rates are 5% or 6%.

I know many ISPs who purposefully weaned themselves from federal loans over the last decade to avoid the extra work and inconvenience. This was relatively painless when there wasn’t a big difference between bank rates and the interest rates offered by federal programs.

We have no way to know if today’s higher interest rates are a temporary blip or if interest rates will stay high and return to the traditional up-and-down fluctuation that has been more historically normal. One of the bets you’re making when you pursue a federal loan is that rates will stay high and that the benefits of the lower rates will provide a long-term advantage. ISPs all over the country are likely doing the math to consider the options, and I’m sure that in many of these deliberations that federal loans are back on the table.

Beware the Grant Challenges

One of the hurdles faced by communities pursuing broadband grants is that many grant programs allow incumbent broadband providers to challenge the validity of a grant. The most common challenge is for an incumbent provider to claim that a grant incorrectly includes homes and businesses that already have fast broadband. Today’s blog includes a few examples of recent grant challenges and warns that communities need to be ready for challenges as part of seeking better broadband. It appears that the purpose of many challenges is to delay the process, with the ultimate hope to derail or cancel grant requests.

The first challenge story comes from northeastern Louisiana in East Carroll Parish for the state grants that have been dubbed GUMBO grants. In this case, the grant was to go to Conexon to bring fiber to the rural parts of the Parish. A challenge was filed by Sparklight, the incumbent cable company (which has rebranded from Cable One). Sparklight claimed that it serves 2,856 homes in the East Carroll Parish with 960/50 Mbps broadband – a dubious claim since the entire Parish only has 2,792 households. I talked to several residents of the county who say that Sparklight does not serve rural residents and that most of the parish has little or no broadband options.

This challenge is unusual in that it came after the grant was awarded. The grant process had included several months to file protests, and Sparklight had said nothing during that period. I’m not sure I have the facts entirely straight, but it seems like the Legislature allowed for a second 7-day challenge period that was not part of the original rules. In this case, the challenge came on the same day that the Parish had planned to kick off the process of asking residents to join a sign-up list to get service, and after the Governor had come to the Parish to announce the grant award. There were a lot of other challenges around the state as part of the Gumbo grant process.

Another well-publicized grant challenge came from an NTIA grant being sought to bring broadband to Grafton County, New Hampshire. In this case, the incumbents challenged 3,000 of the 4,000 Census Blocks covered by the grant. It’s difficult for any grant applicant to defend a challenge of this magnitude, even if the grant areas legitimately qualify for the grant funding. It turns out that most of the challenges were erroneous.

An interesting grant story comes from Washington State. I ran across an article talking about the challenge to a grant filed by the Grays Harbor Public Utility District, which is an electric and water utility serving the county. The PUD operates an open access network where it builds fiber and lets multiple ISPs compete to serve residents and businesses, and the grants asked to expand the open-access networks.

Grays Harbor PUD had asked for a grant to serve 922 homes in an area where both broadband and cellular coverage are almost nonexistent. The PUD would have used the grant money to bring fiber to this pocket of rural homes. In Washington State, grants and challenges are handled by the Public Works Board, a group of 14 volunteers appointed by the Governor. Comcast objected to the grant and said that 249 of the homes near one of the towns could already buy broadband from Comcast.

There was no investigation of the challenge claim, and the Public Works Board rejected the grant outright, along with eight other grants that had received similar objections. The PUD believes that almost all of the homes being challenged cannot buy broadband from Comcast, but the PUD was given no opportunity to dispute the objection. A better solution would have been to investigate the challenge and trim out homes that can already buy broadband. The Public Works Board thought it was obligated to toss out a grant that violates the grant rules, but has since examined its processes since it appears that State law would have allowed the Board to make a partial grant based on the homes that don’t have broadband.

These are just a few of the many hundreds of stories of challenges that have been filed against grants over the last year. These stories are important because they presage what might happen with the upcoming $42.5 billion BEAD grants that include a challenge process. The fact that challenges are allowed puts the burden on communities to do the homework to make sure that grant areas fit the grant rules. This means gathering speed tests and also getting testimonials from residents explaining the lack of broadband choices. Grant offices can get overwhelmed if huge numbers of challenges are filed – communities that can prove their story are going to fare the best.

The Birth of the Digital Divide

A lot of the money being spent on broadband infrastructure today is trying to solve the digital divide, which I define as a technology gap where good broadband is available in some places, but not everywhere. The technology divide can be as large as an entire county that doesn’t have broadband or as small as a pocket of homes or apartment buildings in cities that got bypassed.

I can clearly remember when the digital divide came about, and at that time I remember discussing how the obvious differences between technologies were going to someday become a major problem. Today I’m going to revisit the birth of the digital divide.

Until late in the 1990s, the only way for almost most people to get onto the Internet was by the use of dial-up access through phone lines. ISPs like AOL, CompuServe, and MSN flourished and drew millions of people online. At first, dial-up technology was only available to people who lived in places where an ISP had established local dial-up telephone numbers. But the online phenomenon was so popular, that ISPs eventually offered 800 numbers that could be reached from anywhere. There was no residential digital divide, except perhaps in places where telephone quality wasn’t good enough to accommodate dial-up. Some businesses used a faster technology to connect to the Internet using a T1, which had a blazingly fast speed of 1.6 Mbps, almost 30 times faster than dial-up. To people connecting at 56 kbps, a T1 sounded like nirvana.

The digital divide came into being when the faster technologies of DSL and cable modem were offered to homes. My first DSL line had a download speed of almost 1 Mbps, an amazing 18 times increase in speed over the dial-up modem. At almost the same time, some cable companies began offering cable broadband that also had a speed of around 1 Mbps. Homes in urban areas had a choice of two nearly-identical broadband products, and the early competition between telephone and cable companies was loud and fierce.

The advent of DSL created the first digital divide – the gulf between urban areas and rural areas. While telcos theoretically offered DSL in much of rural America, the 2-mile limitation of the DSL signal meant the speed didn’t carry far outside of the towns that housed the DSL transmitters, called DSLAMs. Many telcos were willing to sell rural DSL, even if speeds were often barely faster than dial-up. Soon after the first DSL was offered to customers, the vendors came up with ISDN-DSL that could deliver a speed up to 128 kbps deeper into rural copper networks – twice the speed of dial-up. But decent DSL never made it very far into most of rural America – and still doesn’t today for much of rural America.

The DSL and cable modem technologies improved within a few years after introduction, and the technology improvements created the second digital divide. I recall versions of DSL that had a maximum speed of 3, 6, 12, 15, 24, and eventually 48 Mbps. The big telcos upgraded to later DSL technology in some neighborhoods, but not others. Sadly, even today we continue to find places where the earliest versions of DSL are still offered, meaning there are places where DSL speeds never climbed above 3, 6, or 12 Mbps. This was particularly painful in towns that didn’t have a cable competitor because they were stuck with whatever flavor of DSL the telephone company offered to them. This was noticeable in big cities where some neighborhoods never saw any DSL upgrades. There was a well-known study done a number of years ago documenting the DSL technologies available in Dallas, Texas. The study showed that poor neighborhoods still had the slowest versions of DSL while more affluent neighborhoods had DSL speeds up to 50 Mbps.

Cable modem technology improved more quickly than DSL. By 2005, the cable modem won the speed game. And that’s when the cable companies started charging more for cable broadband – something they could do because the broadband was faster. This price difference largely meant that low-income households were stuck with DSL, while folks who care about speeds migrated over the years to the cable companies.

The digital divide in rural areas deepened as older DSL was not upgraded while the DSL that had originally been deployed started to reach end-of-life. Copper networks have lasted far past the expected economic useful life and get a little worse every year. In cities, any parts of the city stuck with only DSL fell far behind the neighborhoods where speeds increased significantly from both DSL and cable modems.

Unfortunately, we are not at the end of this story. There is a huge amount of fiber being constructed today in urban areas. But there is no reason to think that most of the ISPs building fiber are going to serve every neighborhood. The big telcos that build fiber like Verizon, AT&T, Frontier, CenturyLink, and others have always cherry-picked what they think are the best neighborhoods – best in terms of either demographics or the lowest in cost of deployment.

Unless we reach a time when fiber is everywhere, the digital divide will stick around. Right now, we’re tackling the rural digital divide – I expect in 5 or 10 years we’ll have to do this all over again to tackle the urban digital divide.

Right to Place Telecom Infrastructure

There was an interesting legal decision recently from the United States District for the Eastern District of New York that found that the Village of Flower Hill, NY had the right to deny ExteNet, an agent of Verizon Wireless, from placing small cell sites within the Village. The decision raises some interesting legal and other issues about telecom infrastructure.

The facts are straightforward. ExteNet was hired by Verizon Wireless to place 66 small cells site in and around the Village, including 18 within the Village, for the stated purpose of strengthening the existing 4GLTE network. ExteNet and the Village went through several rounds of negotiations on the appearance of the small cell sites, but ultimately, the Village denied the request. One of the primary reasons for the denial is that the Village didn’t see any evidence of current gaps in 4GLTE cellular coverage.

As has happened with many similar suits, the case boiled down to language included in the Telecommunications Act of 1996 – language that has been described in some cases as ambiguous. ExteNet cited the provisions of the Act that says that no state or local government shall prohibit the ability of an entity to provide any interstate or intrastate telecommunications service. The Village countered with language also from the Act that says that the FCC cannot preempt the rights of state or local governments to manage the public rights-of-way in a competitively neutral and nondiscriminatory manner.

The Court ultimately decided in favor of the Village using additional language from the Act that says that any denial for the placement of telecommunications infrastructure must be supported by substantial evidence. The Court ultimately decided that one of the reasons given by the Village to deny the permitting request could be construed as substantial evidence – that there was already sufficient 4G cellular coverage in the Village.

Interestingly, it doesn’t seem like the case invoked what I think are the strongest arguments for the Village. The case was decided because the Court decided that there was no evidence that Verizon needed the new network to bolster cellular voice traffic – a telecommunications service.

What the case didn’t say, and I’m sure that ExeNet wasn’t allowed to raise by Verizon, is that the purpose of the new small cell sites is not to improve voice service – the network expansion is to introduce and bolster Verizon’s cellular broadband FWA network so that the company can provide commercial broadband to homes and businesses. The reason ExteNet wouldn’t want to raise that issue is that broadband is currently not considered a telecommunications service due to the actions of the Ajit Pai FCC that eliminated Title II regulation over broadband.

The Telecommunications Act of 1996 does not provide any rights to expand broadband networks since it only gives those rights for expanding telecommunications services. Had this issue been raised, the Court would have had an easier time denying the expansion of the Verizon network.

This raises all sorts of uncomfortable issues for the industry. First, Verizon would have been better off in this case if the Ajit Pai FCC had not eliminated broadband regulation. If broadband was still a telecommunications service, and if Verizon claimed the new network was to bolster broadband, I don’t think the Court would have had any choice other than to rule in favor of ExteNet and Verizon. This case is another example of the trickle-down impact of declaring that broadband is not a telecommunications service. With this court ruling, communities across the country can feel emboldened to deny the placement of small cell networks built to bring broadband.

But this raises an even more uncomfortable issue. Are local communities able to deny the construction of any new broadband infrastructure? That could mean fiber or the wireless infrastructure in this example. If broadband is not a telecommunications service, then all of the parts of the Act that allow for access to rights-of-ways would not be operative. A community would just need to declare that the community already has sufficient broadband to deny permitting requests. I hate to even think where that line of reasoning might go.

Of course, the opposite is also true and the above arguments all get reversed if the current FCC is able to somehow reinstitute Title II authority for broadband, something that Chairman Jessica Rosenworcel says the FCC has the power to do (if it seats the fifth Commissioner).

As I’ve argued many times, it does the country no good to be on this regulatory yoyo where broadband is declared to be telecommunications and then not, depending upon the philosophy of the party with the most votes at the FCC. That is no way to regulate such a giant industry. For now, there is a gaping hole in the ability of ISPs to know they have the right to build broadband in a community – this case says that the community can deny them if there is evidence to support the denial. The evidence could be something as simple as not wanting construction that disturbs the paved streets.

Cable Companies Tout Speed Increases

Earlier this month, NCTA – The Internet and Television Association – posted an article on its website touting the big increases in broadband speeds since the start of the pandemic. NCTA is the industry trade and lobbying association for medium-sized and large cable companies.

The article touts that the average U.S. download speed has grown from 138 Mbps in March 2020, the first month of the pandemic, to 226 Mbps in June 2022. These speeds come from the Ookla Speedtest Global Index. The cited numbers are the mean, or the average speeds measured by Ookla in the respective months across the whole U.S. Obviously, the cable companies are taking credit for much of the speed increase, and to some extent, that’s true. But there are a number of different reasons why average download speeds are increasing.

One of the primary reasons is directly related to the cable companies. Over the last year, cable companies have almost universally increased the download speed of the base broadband product to 200 Mbps to 300 Mbps. This not only applies to new customers, but many existing customers woke up one day in the last year with a download speed increase. This is something that the cable companies had done periodically since the days when speeds were 6 Mbps download. Since Comcast and Charter alone serve over half of all broadband customers in the country, anything the big cable companies do to increase speeds affects a lot of people and drives up the national average speed.

Another factor that is driving up average speeds is more homes getting access to fiber. This is starting to rachet up and many homes are now seeing a second fast choice other than the cable company. When looking at the amount of fiber being built and the sales goals of the fiber companies, this is going to be picking up in the coming years. To some extent, the big cable companies are also building fiber. Charter, in particular, is building fiber on the fringe of its traditional cable markets to new subdivisions or areas where the company has gotten grants. I’ve been hearing from Charter cable customers lately who are frustrated that the company is building fiber nearby and not in their neighborhood.

One of the major reasons for the average speed increases reflects poorly on the cable companies. Over the last two years, there has been a huge migration of homes buying faster broadband packages. These are homes that struggled with broadband performance and upgraded to get better speeds. Most people didn’t realize (and still may not realize) that their issues during the pandemic were mostly due to poor upload bandwidth from the cable companies. Folks upgraded to faster download packages hoping to get better upload performance, and even after the upgrade, many did not. You’ll notice on the NCTA website that there is no mention of upload bandwidth – a topic the cable companies absolutely do not want to discuss.

A final factor that is contributing to a faster national average download speed is the rapid expansion of fiber in rural areas. While this doesn’t represent a big slice of people, the national average speeds are boosted when households migrate from download speeds of 1 or 2 Mbps to fast download speeds on fiber. There is currently a lot of construction going on funded by the FCC’s ACAM program, federal grants and subsidies like ReConnect and RDOF, and numerous state broadband grants.

So yes, the cable companies deserve credit for increasing download speeds – and they are a big part of the reason behind the faster national average speeds. But it’s not all due to the cable companies.

Big Telcos and the BEAD Grants

We’re finally starting to gain a picture of the plans of the big telcos for the upcoming BEAD grants. The bottom line is that some of the big telcos seem to be prepared to pursue the upcoming grants in a major way. Consider the following:

  • At a recent industry conference, Frontier’s CFO said that Frontier has ambitious plans to pursue grants for all of the three to four million rural homes that it serves today with DSL.
  • When the BEAD grants were first announced, AT&T added five million new passings to its goal for 2025, all due to pursuing rural grants. AT&T hasn’t said much about grants since that early announcement.
  • Brightspeed, which purchased twenty states of copper networks from CenturyLink, has made it clear that it will be seeking state and federal grants to build as much fiber as possible. CenturyLink has been aggressively pursuing grants in the states sold to Brightspeed, for the obvious benefit of the new company.
  • Windstream was a big winner in the RDOF reverse auction and has been aggressively pursuing ARPA funding. It seems obvious that the company will also pursue BEAD grants.

The two big telcos that have not said much about grants are CenturyLink and Verizon. There are rumors that CenturyLink is seeking somebody to buy the rest of its copper lines, but it also would not be surprising to see the company come out swinging for grant funding if a sale isn’t forthcoming. Verizon abandoned a rural strategy years ago, and it would be surprising but not impossible to see the company tackle grant funding if the math is good.

The other big ISP that has aggressively been pursuing grant funding is Charter. It would make sense for the company to pursue BEAD grants to fill in around where it has already won the RDOF auctions.

This is an interesting dilemma for rural communities. The telcos all say they will be building rural fiber with grant funding – which is what rural America most desires. But a lot of rural folks blame the big telcos for the current miserable state of rural broadband. It’s the big telcos that stopped maintaining copper, reduced staffing drastically, and basically walked away from rural America. I know a lot of folks who hope that anybody other than the big telcos wins the grant funding in their area.

There are several big fears that I hear voiced about the big telcos winning the grant funding. One is that the big telcos will not follow through after winning the grant funding. Many communities remember how some of these telcos walked away with huge amounts of CAF II funding without doing the promised DSL upgrades. I think the fear is that the big telcos might cut corners and not build to the most remote households in a grant award area. I’ve also heard the fear that the big telcos will accept grants and then decide not to build some areas in a state.

Perhaps the biggest fear about big telcos building rural fiber networks is that we’ll see a repeat of the past. They will build the new network as funded. But if the telcos don’t hire enough technicians or cut corners on maintenance, the fiber networks will deteriorate over time.

This is a real concern because there is a big difference between copper networks and fiber networks. It’s been possible to keep a copper network limping along for decades with minimum maintenance. This is due to the relative simplicity of the DSL technology. There are twenty-year-old DSL cards still limping along, long past the expected economic life. But fiber networks are not likely to be so tolerant. Fiber technology is complicated and precise, and when a card starts going bad, it most commonly means the fiber will go dark. I think the big fear in rural America is that the big telcos will build fiber but let it go dark in 10 or 15 years if they can’t get additional subsidies. This is an impossible scenario to imagine the big telcos demanding future subsidies to keep networks working.

One of the most important aspects of the BEAD grants will be community approval and partnerships with the grant applicants. It will be curious to see if the big telcos seriously court local support for grant applications or do little more than ask for a letter of support when it’s time to file grants. If a community really wants to keep out the big telcos, the best strategy is to partner with somebody you trust more.

Is 75% Grant Funding Enough?

It seemed like a really big deal when the ReConnect program and the new BEAD grants upped the amount of federal grants to 75%. Before this, it was hard to find a grant program that offered more than 50% of the funding.

I’ve created hundreds of rural business plans, and I’m still seeing a lot of situations where a 75% grant is not enough assistance to create a viable ongoing business plan. I’ve recently worked on several business plans that gave me the opportunity to explore this issue in more detail.

People always want me to provide metrics. They want to know generically if a market can work with the available grants. But it’s not that easy. There are multiple variables that impact the amount of grant that is needed. One is the cost per passing – what’s the capital cost to bring fiber past every customer in a given footprint? Equally as important is the expected customer penetration rate. There has to be enough customers and revenues to pay to support any matching funds. Another key variable is broadband prices – you need less grant funding if customers will be paying $70 instead $50 per month. Finally, the newest variable that has entered the picture is the interest rate, assuming that an ISP is borrowing the matching funds. There are other variables that matter to a lesser extent, such as the relative cost of the salaries and benefits for new employees, something that varies significantly from region to region and ISP to ISP.

It is the interplay of these many variables that determine the percentage of grant funding that is needed for any particular ISP in a given market. For example, if two ISPs have the same cost per passing, interest rate, and expected customer penetration, the ISP with the lowest broadband rates will need more grant funding. It’s a fairly intricate algebra problem that every ISP needs to solve.

I’ve created enough business plans that I know there are a whole lot of business plans that are going to require more than a 75% grant to be viable for an ISP. If an ISP doesn’t get enough grant funding, then taking on a new market will drag down the core existing ISP business for decades to come until after the matching funds have been paid for.

The NTIA is going to allow for some grants greater than 75% based upon categorizing areas as high cost. This is a mixed benefit because being classified as high-cost can also mean that the BEAD grants can fund a technology other than fiber. The NTIA hasn’t announced its high-cost parameters yet, but it seems likely that this will be some variation of cost per passing. The agency still hasn’t released that number, and I’m hoping that’s because they are finding out that concentrating on just one of the key variables cannot suffice to define a high-cost area.

Cost per passing is obviously an important variable. It’s going to generally be easier to find a funding solution for a market with an average cost per passing of $10,000 compared to another market with a cost of $15,000. But if the NTIA looks deeper, it might find that the ISP seeing the higher cost per passing might have a viable business plan while the other does not. For example, if the ISP with the highest network costs has higher broadband rates and knows it will achieve a higher customer penetration rate, that ISP might be comfortable accepting a 75% grant, while that may not be nearly enough grant for the second ISP.

When ISPs seek grant funds, they often have to make uncomfortable decisions. I’ve worked with several ISPs recently that finally came to realize that their proposed broadband rates are too low for grant areas. Cooperatives and municipal ISPs want to bring low rates to customers. But the algebra doesn’t lie, and there has to be enough future revenue to satisfy the debt used to finance the matching funds. If that means starting with higher rates, then that’s what is needed to accept grant funding.

I fear that there are a whole lot of ISPs not doing the math that will wonder five years from now why they took the grant funding to expand. The good news is there is usually a way out of a struggling business plan, but it might not be comfortable. It might mean raising rates or going door-to-door to get every possible customer in a market to make it work.

I know that some folks were hoping after reading the first few paragraphs of this blog that I was going to give them the magic metric – a 75% grant will be sufficient in an area that has a cost per passing under $X. I wish it was that simple, but it’s not.

Traditional Big ISPs Stagnate

In the first quarter of this year, the big cable companies added 482,000 customers while telcos added over 50,000 customers. In what is a surprise to the industry, that growth has disappeared, and all of the big ISPs collectively lost almost 150,000 customers. That’s a loss of 60,000 customers for the cable companies and 88,000 for the big telcos.

The following statistics have been compiled by the Leichtman Research Group, which tracks the broadband performance of the largest ISPs in the country.

The other big news is that the Fixed Wireless Access (FWA) products of T-Mobile and Verizon added 816,000 customers in the second quarter to bring the sector to net growth of 668,000 customers. This is huge news – FWA is booming while the big ISPs are standing still. The FWA product 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 even hotter when AT&T and Dish networks enter the market in a big way.

The numbers for the second quarter of 2022:

 2Q 2022 2Q Change % Change  
Comcast 32,163,000 0 0.0%  
Charter 30,253,000 (21,000) -0.1%  
AT&T 15,509,000 (24,000) -0.2%  
Verizon 7,412,000 12,000 0.2%  
Cox 5,560,000 0 0.0%  
Lumen 4,377,000 (93,000) -2.1%  
Altice 4,333,600 (39,600) -0.9%  
Frontier 2,827,000 8,000 0.3%  
T-Mobile FWA 1,544,000 560,000 56.9%  
Mediacom 1,468,000 0 0.0%  
Windstream 1,178,500 2,500 0.2%  
Cable ONE 1,059,000 2,000 0.2%  
Breezeline 717,919 (1,689) -0.2%  
Verizon FWA 700,000 256,000 57.7%  
TDS 500,800 5,600 1.1%  
Consolidated 381,213 1,063 -0.2%  
   Total 109,984,032 667,874 0.3%  
Total Cable 75,554,519 (60,289) -0.1%  
Total Telco 32,185,513 (87,837) -0.3%  
FWA 2,244,000 816,000 57.1%  

There is a lot to unpack in these numbers:

  • The cable companies have gained customers every quarter for far longer than a decade, so this net loss for the sector is a big surprise.
  • There is another story underneath the big telco losses – fiber is doing well. AT&T added 316,000 fiber customers in the quarter but still had a small net customer loss. Frontier added 54,000 fiber customers for the quarter and had a small net customer gain. Verizon added 36,000 FiOS customers in the quarter. Lumen added 28,000 fiber customers for the quarter but continued to bleed DSL customers.
  • T-Mobile leaped to become the ninth largest ISP in the country.
  • TDS repeated as the fastest growing traditional ISP.
  • Lumen lost the largest percentage of customers compared to other telcos. Altice was the biggest percentage loser among cable companies.

The CHIPS Act and Wireless

The recently enacted CHIPS and Science Act of 2022 is providing a lot of funding to bring more chip manufacturing back to the U.S. This funding fills a big hole in the U.S. supply chain. We have some chip manufacturing in the U.S., but we only make about 12% of the chips that we use in cellphones, cars, computers, and broadband technology.

Making domestic chips became a national priority when we saw during the pandemic that international chipmakers took care of regional demand before U.S. demand. U.S. automakers are still largely on hold due to a lack of chips, and there has been a rumor floating around the broadband industry that we’re going to see another round of chip shortages for broadband gear. It will take some years to turn this new funding into chip factories, but in the long run, this is one of the more sensible things Congress has done in many years.

The CHIPs Act approved $52 billion to bring chip manufacturing back to the U.S. But like all big legislation, not all of the money appropriated goes to the main goal. For example, there is funding in the bill for new research and development in the technical sciences. Today’s blog looks at funding from the CHIPs Act that is being used for the mobile industry. Specifically, the CHIPS legislation:

Appropriates $1.5 billion for the Public Wireless Supply Chain Innovation Fund, to spur movement towards open-architecture, software-based wireless technologies, funding innovative, ‘leap-ahead’ technologies in the U.S. mobile broadband market. The fund would be managed by the National Telecommunications and Information Administration (NTIA), with input from the National Institute of Standards and Technology, Department of Homeland Security, and the Intelligence Advanced Research Projects Activity, among others.

This sounds like funding for wireless product research to find new market uses for 5G. I’m a big believer that the federal government should have a large role in funding basic science research and development. One of the reasons that the U.S. has had technological success in the past is that we funded the basic research that has made the breakthroughs that turned into our current technology industries. National funding for pure research has fallen in recent years to woefully low levels.

But I’m not a big fan of the U.S. government undertaking product research. That is something that ought to be left to the industries that will benefit from the research. This $1.5 billion feels like a handout to the big wireless companies – and they don’t need this money.

Consider dividends. Verizon paid out $10.4 billion in dividends to stockholders in 2021, or almost $2.50 for every outstanding share. In recent shareholder meetings, the company says the goal is to increase dividends in the coming years. AT&T most recently paid $8 billion per year in dividends or $1.11 per share in recent quarters.

T-Mobile is the most cash-flush of the big cellular carriers and told shareholders earlier this year that the company plans to spend $60 billion by the end of 2025 to buy back its own stock.

These three companies don’t need a $1.5 billion government handout, but as often happens, the industries that lobby the hardest often get rewarded with funding. If the $1.5 billion is spent wisely, it might turn into future profits for these companies. But this is research that these companies should be routinely funding directly.

This feels like a residual benefit to these companies from all of the effort they put into persuading the government that we were losing an imaginary 5G war with China. That discussion is still not completely dead, and we still occasionally hear a politician talking about our 5G crisis.

I love the concept behind the CHIPS Act, and I hope it spurs 100,000 new permanent manufacturing jobs and greatly expands the domestic chip supply. But I am not a fan when big legislation is used to pay back industries that spend huge money to lobby politicians.