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.