Monthly Archives: November 2022

Broadband Pricing Disparities in L.A.

Now that digital equity has become a hot topic. I’m starting to see studies from around the country looking at the inequities in the way that large ISPs treat customers.

One of the latest studies comes from the California Community Foundation, which looked at rates being offered to new customers in different parts of Los Angeles. Los Angeles is an odd broadband market in that Charter is a monopoly in much of the market. Charter claims to provide service in almost 96% of Census blocks, while AT&T and Frontier each only serve about a fifth of the market. Fourth is Cox, with a tiny market share. This means that a majority of customers in Los Angeles can only buy broadband from Charter, with no other landline option.

The study concentrated on Charter since they are the ubiquitous ISP, but there are findings about the other two ISPs as well. The study was done by looking at broadband products and rates that are advertised to homes scattered across the 88 separate communities in the LA area. ISPs today make offers online to customers looking to connect to broadband, and the study looked at specific offers made in different communities.

The study instantly found that the products and prices offered to residents vary widely by neighborhood. You might think that the products available online from a big ISP like Charter would be the same for the whole market or even the whole country, but there is a dramatic difference in some cases with the products and prices that are offered online.

For example, the base broadband product offered by Charter online seems to be Internet Ultra, which provides a download speed of 500 Mbps. This is the only product that was offered at every address in the study. About three-quarters of addresses were offered the 300 Mbps download product. Only about one-fourth of homes were offered the 100 Mbps broadband product.

The biggest finding from the study is that Charter offers better pricing along with better terms and conditions to wealthier neighborhoods. That is counterintuitive, and basic economics 101 says that businesses should be expected to get the highest prices out of customers who can afford it.

The examples listed in the report are devastating. In one case, Charter offered an address in Willowbrook (where the poverty rate is 8%) a 2-year special rate of $30 per month for a new subscriber to the Internet Ultra product. A home just two miles away in Watts, where the poverty rate is 31%, was offered the same product for a 1-year deal at $70 per month. In both cases, the product reverts to the $95 list price at the end of the term. This is a gigantic difference. The home in Willowbrook was offered 500 Mbps for a two-year cost of $720, while the home in Watts was offered a package that would cost $1,980 over two years.

Charter called the report misleading and said that promotional rates change all of the time. But the study was done across the city at the same time, meaning there was no big timing difference where promos had changed. Charter’s defense is that everybody eventually pays the full price.

There is no easy way for Charter to defend this. It’s obvious that somebody at the company is uploading different specials into the online portal by address or neighborhood. This can’t be random, and that means that somebody in the Charter marketing department (or, more likely, some piece of software) is making these determinations based on what others are willing to pay in each neighborhood. This feels like broadband pricing set by a sophisticated pricing algorithm like what is used for airline seats.

Charter has broken no laws, but this is still a black eye for the big ISP. The big cable companies might wonder why a fiber overbuilder does so well in new neighborhoods – but they need to look no further than the findings from this study to know why customers don’t like or trust them.

Being Stingy with Broadband Speeds

As I work in various parts of the country, I help new ISPs choose the speeds and the prices to offer on fiber networks. Part of that research begins with looking at what other ISPs charge in the region. I should probably stop being surprised, but I’m still taken aback when I see fiber-based ISPs offering what can best be described as stingy speeds. Just the other day, I ran across an ISP that is offering a range of speeds between 25/3 Mbps and 100/20 Mbps on fiber. Earlier this year, I ran across an ISP that has fiber products as tiny as symmetrical 10 Mbps.

This frankly mystifies me, and I always wonder why somebody with fiber would offer broadband products that are similar to their competitors. I figure that part of the reason is what I would call old thinking. Somebody offering that kind of speed is likely a small telco that used to offer DSL or a small rural cable company that didn’t have fast speeds. DSL products were set at a range of speeds up to 25/3 Mbps because that’s what the technology would allow.

I can’t imagine the thought process that says the slow speeds are adequate. According to OpenVault, 75% of U.S. Households are currently subscribing to download speeds of 200 Mbps or faster. That includes over 14% of homes nationwide that are subscribing to a gigabit product. It’s clear that people want faster broadband.

I think another part of the reason that an ISP would set low speeds is a fundamental belief that customers that buy faster speeds will somehow cost the ISP a lot more money. But after having seen the impact of hundreds of ISPs that have upgraded to faster speeds – I know this is not true. There is a one-time increase in broadband usage when you unblock a community that has had restricted broadband. The people in such communities start using broadband like everybody else, and that looks like a one-time big increase in usage – but people are just catching up to the ways that most of the rest of country uses broadband. After that short burst to catch up, usage then grows like everybody else.

Another reason behind offering slow speeds probably goes back to the day when buying Internet backbone connections was extremely expensive, and operators feared that a burst in usage would cost a lot. That’s also not true anymore in most places. Wholesale broadband prices have tumbled over the last decade. I know ISPs that are buying eight or ten times more bandwidth than a decade ago, at basically the same cost. I know that there are still some small ISPs located deep in rural areas that are paying far too much for broadband from the local telco.

There was a time when most of the industry tried to throttle customer usage. I remember quotes from the CEOs of the big cable companies and telcos saying that people didn’t need faster speeds. However, folks like Verizon FiOS and a handful of early fiber overbuilders exploded that concept and the cable companies did a 180 and now routinely increase customer speeds as a way to keep folks satisfied.

This same thinking also manifests in pricing. An ISP that offers 25 Mbps on fiber might also offer a gigabit product – but at a price that nobody can afford. I still run across gigabit broadband on small fiber ISPs priced at $175 per month or higher. These prices are set to make sure that only a few people buy the faster broadband. This thinking comes from the underlying belief that faster speeds are a luxury. But that’s really odd thinking for somebody that operates a network that can easily provide symmetrical gigabit broadband at an affordable price.

And that’s what gets me the most – these ISPs are losing revenues by being stingy. If they offer a slow broadband product at $50, they would likely have a lot of customers willing to pay $70  or $80 per month for gigabit broadband. I can tell by looking at the offerings that most ISPs with slow speeds are making less than their peers.

I understood these speeds and prices somewhat a decade ago when fiber networks were new and buying backbone Internet was expensive. But I can’t understand ISPs that have these stingy pricing plans when their peers a town away have normal broadband pricing.

ISPs and Customer Data

The FCC recently made a data request to cellular carriers asking how long the companies retain geolocation data on customers. For those not sure what that means, it means that the carriers record your location from your smartphone as you move around during the day. Your cellular company keeps data that can retrace everywhere you’ve been during the day. This rightfully makes most people nervous that somebody is watching and recording every place they visit.

Geolocation data is only one small piece of the data that cellular carriers collect on people. Cellular companies obviously know everybody you’ve called and texted, including the content of every text. They know every app you’ve used, websites you’ve visited, and the topic of every Google search you’ve made from your phone. Cellular companies also know the content of every email you send, assuming the email is not encrypted.

The FCC sent the data request in response to pressure from the public and politicians to put some commonsense caps on the collection and use of customer data. Here is a link to the responses from the fifteen largest cellular carriers.

Here are a few of the most common responses to the data request:

  • Cellular carriers said they retained records of customer activity to be able to respond to requests from law enforcement. This is a big turnaround from twenty years ago when telephone companies only tracked customer telephone usage after getting a valid subpoena to do so. It now seems that the carriers claim to record everything done by all customers to be able to respond to subpoenas involving only a minuscule percentage of people. The carriers cite law enforcement and FCC rules that force them to track customers.
  • Ten of the carriers said that customers have no options for opting out of having their locations tracked.
  • The amount of time that carriers retain data varies from two months to five years.

This is an issue that has been investigated at the FCC before. Several years ago, the FCC considered large fines against some of the largest cellular carriers for improperly misusing customer location data, such as selling data to bail bondsmen.

This FCC investigation centered only on geolocation data, but people are concerned about how ISPs and wireless carriers use all collected customer data. Company privacy practices vary widely, as does the way that carriers explain data collection practices. Consider what various carriers tell customers in the terms of service.

T-Mobile explicitly tells customers that it uses their data to consider marketing to them. Further, its privacy policy not only says that customer data is collected directly but that the company might buy or get personal data from third parties like social media platforms, analytic providers, and consumer data resellers.

AT&T says that it might share customer data with third parties, such as device information, advertisements you view, and demographic information like your age, gender, and ZIP code.

Verizon says it may collect demographic and interest data and look at how customers use the Verizon website and apps. That may not sound like a lot, but it includes “information about browsing, searching and buying activities; IP address, mobile phone number, device numbers and identifiers, web addresses of the sites you come from and go to next, screen recordings, browser and operating system information, platform type, connection speed, and other attributes.” Verizon also sells data to third parties.

At the other extreme are carriers like Comcast, which says that it doesn’t track or record the apps people use, or the websites visited.

But interestingly, most of the carriers that say they don’t use customer data have resisted any FCC or FTC attempts to restrict the data that might be collected.

The FCC inquiry only dips a toe into the fringe of data collection practices. It’s always been assumed that the carriers make a lot of money selling and using customer data, but none of them ever identify or quantify the financial benefits. I know I am probably like a lot of the public and would like to see more restrictions and disclosure requirements for carriers and ISPs. I know this view is shared by most small ISPs that don’t record or share data – I think they need to remind folks about this more often.

Update on Satellite Broadband

It’s been a busy few weeks with announcements from the satellite broadband industry. The industry keeps moving us closer to a time when almost anybody in the world will potentially have access to broadband.

The first announcement came from OneWeb. The company successfully launched 36 new satellites with rockets supplied by NewSpace India Limited. This new rocket company was formed in 2019 and is a public sector undertaking sponsored by the Indian Government and an arm of the India Space Research Organization. This launch is a reminder that many parts of the world are now interested in the space business.

These new satellites bring the OneWeb fleet of satellites up to 462. The company says it will ultimately launch 648 satellites. OneWeb intends to soon open up the constellation to global coverage. OneWeb’s business plan is to reach the remotest places in the world. The company has also been hinting at using the satellites to bring broadband to remote cell towers and to remote outposts for governments and militaries around the world.

Project Kuiper, owned by Amazon and Jeff Bezos is finally ready to hit the skies and plans to launch its first two prototype satellites in early 2023. The company has an ultimate goal of launching a total of 3,236 satellites. The first launch will use rockets from the United Launch Alliance using the new Vulcan Centaur rockets. Project Kuiper has already secured 38 additional launches on the Vulcan Centaur rockets, but the majority of its satellites will be deployed using the ULA Atlas V rockets. The company is rumored to have secured as many as 92 rocket launches.

One of the most interesting pieces of news comes from subscribers of Starlink. The company recently added new language to the terms of service for both residential and business customers that introduces the idea of a data cap. The new terms of service say that customers will get a monthly limit of ‘priority access’, and once that limit is reached, the customer will no longer be prioritized over traffic generated by other customers.

This is interesting from several perspectives. First, Starlink said in the early days of the business that it would never put a cap on usage. And with this announcement, it still hasn’t done that since customers will be free to continue to use broadband for the remainder of the billing cycle.

This feels eerily reminiscent of plans offered by the high-orbit satellite companies where usage slows down after customers reach a monthly usage limit.

Numerous engineers have speculated that any satellite constellation will have a finite capacity to move data, and this announcement hints that that data limit is already foreseeable for Starlink. Of course, the company can continue to launch more satellites and has plans on the drawing board to have as many as 30,000 satellites in its constellation. But for now, with a little over 2,300 satellites, this announcement says that the constellation is probably already getting over-busy at times. The ability to slow down customers is a classic way to serve more customers than the capacity of a network. The technique has been used for years by cellular carriers, and the supposed unlimited cellular data plans are not really unlimited because user speeds get significantly slowed when a customer reaches the subscribed data limit.

Satellite providers face the same dilemma as all ISPs in that the average broadband data consumption by consumers continues to grow at a torrid pace. According to Ookla, the average monthly broadband usage in the US has grown from 215 gigabytes per month in early 2018 to 481 gigabytes in June of this year. This growth puts a strain on all networks, but it has to be more of a problem for a satellite constellation which is going to have more backhaul restrictions than a landline network fed by fiber.

The RDOF Fixed Wireless Dilemma

I’m working with a number of rural counties that are trying to come to grips with the long-term implications of RDOF awards in their counties going to ISPs that plan to deliver broadband using fixed wireless technology. Most of them are not sure what to make of the situation for a number of reasons.

First, many of these counties are pleased about the wireless RDOF winners if that means bringing a broadband solution sooner. The folks in their counties are crying out for a broadband solution. But the big worry about the RDOF award winners is that the FCC gave RDOF winners a relaxed construction obligation compared to most other grants.

An RDOF recipient has six years to build the full broadband solution – starting with the year after the award. A recipient of a 2022 RDOF award must build 40% of the network by the end of 2025, 60% of the deployment by the end of 2026, 80% of the network by the end of 2027, and 100% of the network by the end of 2028. At the end of 2028, the FCC will publish a final list of locations in the RDOF area, and the ISPs have until the end of 2030 to reach any locations that were not already covered. Counties are rightfully worried that RDOF recipients will use the full timeline, meaning some folks won’t see a solution until 2027 or 2028.

There is also a concern that the FCC has a poor history of follow-through with subsidy awards, such as the many locations that were slated to get CAF II upgrades that don’t seem to have been upgraded – with no apparent reaction or consequences from the FCC. The fear is RDOF winners will cherry-pick the easiest areas and not bother with the rest and some folks will never get served. The worst thing is that a county won’t know for sure that folks won’t be served until 2028.

Another concern I’m hearing is that, in many cases, the RDOF awards were given in counties where there is one or more local ISPs willing to build fiber with grant assistance. These might be an electric cooperative or small telco that would willingly have brought fiber to the RDOF areas. These counties feel cheated by the FCC, particularly the RDOF awards that were made by the FCC after the announcement and funding of the $42.5 billion in BEAD grants. These counties feel that the FCC snatched away a fiber solution instead of putting the RDOF awards on hold.

The concern several of them have expressed is the sustainability of fixed wireless. They understand that a fiber network is probably going to still be in place and working at the end of this century, with perhaps three or four electronics upgrades during that time. But they’ve all heard that wireless technology has a shelf life of perhaps seven years, and they worry if the RDOF winners are going to be willing and able to pay for upgrades ten or eleven times during the rest of the century.

Finally, the ISPs in these counties are dismayed at what can best be described as the checkerboard way that the RDOF was awarded. The RDOF award areas are rarely nice contiguous service areas but are scattered pockets of Census blocks. ISPs can see that it is going to be extra challenging to find other grant funding to bring a solution to other areas. In many cases, they’ll have to spend their own money to build across RDOF areas in order to create a coherent fiber network.

Finally, some counties are concerned that the RDOF winners have not reached out to them to discuss these concerns and to convey their plans for bringing the promised faster broadband. I know that many of these awards were just made this summer, but there has been sufficient time for the RDOF winners to have met with local officials to convey their plans.

To be fair, some of these same counties have a similar list of concerns if grants go to the giant ISPs instead of somebody local. The folks in most rural areas know that the current round of grant funding is probably the only chance to get the broadband solution done right, and none of them want to be the poster child as a place where the giant grants and subsidies failed.

Regional Differences in Broadband Costs

ISPs and communities are always asking me for metrics to help them estimate how much grant funding they might need to subsidize building a new broadband network. Unfortunately, there is no such metric because broadband costs are always unique to a given community.

One of the statistics they want to give me is the population density – the number of homes and businesses per square mile. They are often surprised when I tell them that number alone tells me almost nothing about broadband costs. It’s far more important to know where homes are located in relation to roads.

Let me give two easily contrasting examples. One is a rural area made up of rather large family farms engaged in growing row crops. Generally, the farm and a few buildings sit somewhere in the center of the farm, and there may be a few more homes added over the years along roads. From the perspective of building fiber, this is about the worst situation you can find. The cost of fiber per customer is extremely high when neighbors can’t see each other. This situation gets particularly expensive in a county with a square grid road system where there are at least a few homes on every road – that adds even more cost.

Contrast this with places that look on paper to have a lower population density. For example, some of the rural counties in New Mexico are sparely populated compared to a farming community in the Midwest when looking at people per square mile. But in the rugged terrain of New Mexico, the houses and business test to be relatively close to the handful of roads that traverse a county. While there aren’t a lot of homes, there also aren’t a lot of miles of roads. The number of homes per mile of fiber construction might be much higher in New Mexico than a Midwest farm community, even with far fewer people.

But there are still nuances that matter. Another issue is how far the homes are from the roads. In some of the mountain valleys of Pennsylvania, homes tend to be close to the country roads since the hills rise up immediately behind the homes. I looked at the cost of building a county in West Virginia and another in Minnesota where a large percentage of homes are far back long lanes off the handful of main roads. The amount of fiber per customer needed in the Pennsylvania example is far less than the other two cases.

While the relationship between homes to roads is a major factor, it’s not the only one. There are some counties where the cost to build is higher than expected for other reasons. I was looking at a county in Colorado where the existing utility poles were in dreadful shape, with more than half needing replacement. In the same county, there is hard rock right up to the surface of the soil. In this particular county there is no affordable way to build fiber. When people talk about places that need an alternative to fiber, they are talking about situations like this. This contrasts significantly from places with deep topsoil, like the farmlands in Minnesota and Iowa or the farming valleys of California. I’ve always joked that in some of these places, you can bury fiber with a tablespoon.

Most places in the country are not as extreme as the above examples. A more typical circumstance is where a county has a mix of different construction situations. For example, there might be a lot of farmland, but also many homes located along rivers where it’s rocky and much more expensive to build. It’s not unusual to find pockets of good and bad poles in most counties, meaning that any estimate of cost means looking everywhere first to understand the places that will be more expensive to build. I worked in one county that seemingly had water everywhere, with numerous small streams, lakes and ponds, and wetlands. Building a mile of fiber at any one place didn’t seem too expensive, but the cost of crossing the bridges and of avoiding the wetlands makes this whole county a challenge for building an extensive fiber network.

I know folks want quick and easy answers, but I refuse to give back-of-the-envelope construction cost estimates until I know an area well. I’ve seen too many places where a quick estimate would have been way off from the actual cost. There are consultants around who have generic models that will provide a quick cost estimate – but until an engineer has put eyes on the local situation, such quick estimates might not be the paper they are written on.

The Outlook for Cable Company Broadband

A majority of my clients compete against one of the big cable companies, so they are always watching anything that affects the prices, technology, or performance of these companies. After a decade of unending success, 2022 has been a rough year for cable companies.

The statistic that probably matters the most to these companies is that stock prices are way down for the year. As I write this blog, Comcast has dropped 39%, Charter 46%, Altice 72%, and Cable One 61%. Stock prices are down for a lot of companies this year, but these large drops show that Wall Street has lost faith in the cable company earnings model, where the companies gained customers quarter after quarter and raised rates a healthy amount each year. For many years it wasn’t hard to predict that the cable companies were going to have a good year.

The cable companies have been losing cable customers at a rapid pace in recent years and collectively lost 2.7 million cable customers in 2021. But losses of cable subscribers were more than offset by the growth of higher-margin broadband customers. In 2021, the big cable companies collectively gained 2.8 million broadband customers as they continued to take customers away from DSL while benefitting from the surge in home broadband subscriptions during the pandemic.

But the growth in broadband customers was slowing, and in the fourth quarter of 2021, the cable companies collectively added 445,000 customers and another 482,000 in the first quarter of this year. But then the wheels came off, and the big cable companies collectively lost 60,000 customers in the second quarter of this year. While that’s a mere blip for companies that collectively have 75.6 million broadband customers, it feels like a watershed event in the broadband industry. It looks like cable is no longer the automatic king of broadband in attracting and keeping customers.

It’s not all bad news for cable companies since the biggest ones are aggressively pursuing cellular customers. It seems like this is being done to make customers stickier and less likely to churn. But at some point, the cellular business ought to add to the bottom line for the cable companies as they shift from pure cellular resale to carrying more of the cellular traffic on their own spectrum.

All of this obviously has the big cable companies examining their future. We’ve all been wondering how the cable companies would react to this accumulated bad news. We got at least one inkling of their strategy when Charter recently raised the price of standard broadband by $5 per month. It first seemed gutsy to raise prices when subscribers have stopped growing until you realize that the cable companies are not losing customers but have just stopped growing for now. A $5 increase in broadband price means over $1.8 billion in new revenue for Charter. The company would have to start bleeding customers to put a dent in that much new bottom line. I think this tells us that price increases are still on the table – the stock prices will tumble even further without the new bottom line from a price increase.

Interestingly, Charter also announced a new discount program called SpectrumOne, where the company is bundling broadband, a modem, and one line of unlimited mobile for one year. The price is $49.99 per month (for 12 months) with 300 Mbps broadband and $69.99 per month with 500 Mbps broadband. I saw a few articles pointing this out as Charter’s reaction to its lack of growth, but I see this differently. This is a one-year special only, and prices will return to normal at the end of the year. Charter has always had special promotions, and this promotion is not aimed at adding broadband customers – instead, the company is giving away cellular for a year to hook new wireless customers who have been reluctant to trust the cable company for cellular service.

There are several takeaways for ISPs competing against Charter. First, broadband prices will probably continue to rise, giving hope to competitors who follow suit with higher prices. Charter’s real push for a competitive edge is to hook a lot more folks on its cellular service, making it inconvenient for customers to break the bundle. We’ll still have to wait to see if Comcast and the other big cable companies adopt a similar tactic – but it’s one that makes a lot of sense for the bottom line.

Cloud Gaming

In September, Google announced it will be shutting down its game platform Stadia on January 18. Google will be making a full refund to anybody who bought Stadia hardware or bought gaming content. The announcement is reported to be a shock to the online gaming industry because it calls into question the business model of selling gaming through monthly subscriptions.

Gaming is a huge business. In 2021, gaming generated $214 billion in revenues worldwide. That represents over 6% of all spending on entertainment. Gaming market experts are predicting that this will grow to over 10% during this decade.

The pandemic triggered a growth spurt in gaming, with revenues almost tripling since 2019. During that time, there was also a big change in the dynamics of the industry, where many games are offered for free. Many game makers  are willing to forego the upfront fees for purchasing a game, which is a barrier to entry for consumers, and instead are hoping to get tens of millions of users by giving free access to games. Free games get monetized by microtransactions within the games to buy in-game goods and services. The biggest example is Fortnite, which is free to play and yet generates several billion dollars per year in revenue from players. Currently, almost all mobile games and six of the ten top PC games are free. The console game companies have stuck with the traditional paid model.

Before the pandemic, some large tech companies like Apple, Google, Microsoft, NVIDIA, and Tencent created online gaming platforms where customers could get access to libraries of games with a monthly subscription. The online platforms were chasing several groups of gamers. First, online games freed players from an expensive PC or console, and gamers could play with a handheld device anywhere they could find fast broadband. Second, the online platform libraries were meant to attract casual gamers who aren’t focused on playing only a few games. The vast majority of gaming revenue comes from casual players.

But online game platforms like Google got mixed reviews. The biggest complaint was that gaming through handhelds could be sluggish – a death sentence for gaming. This speaks more about the quality of broadband connections than it does the gaming platforms. Serious gamers using PCS or consoles invest in buying the fastest broadband available. But people willing to game on handheld devices from anywhere were subject to the big variability in broadband connections away from home. I recently talked to a librarian whose library had banned online gaming because it killed the broadband connections of other library patrons.

Google obviously didn’t achieve the goals it had set for the gaming platform and didn’t get the number of subscriptions it was hoping for. Online reviews of the Google platform are mixed, with some users loving the service while others pan it. Some users said the online libraries of games aren’t dynamic, with the companies going for a large library instead of a great library.

Google’s demise might spell a change in the idea of subscription gaming – it might not be what enough people want. But even if these online services die or aren’t very popular, there is still going to be a huge demand on broadband networks to carry gaming content. Both PC and console platforms invite gamers to play online with friends by setting up VPNs. Many of the popular free games allow for multiple players, in some cases millions at a time.

Gaming has spread to all age groups in the US. 24% of all gamers in 2022 are under 28, while 26% are between 18 and 34. But the other 40% of gamers are over 34, with 6% of gamers over 65.

Ten years ago, we didn’t even mention gaming when talking about uses of broadband. But for many households, gaming has become the predominant driver of bandwidth demand. Interestingly, people don’t just play games, and millions watch others play games on Twitch and YouTube. While the Google gaming platform didn’t make it, I think we can expect gaming to be a significant driver of broadband usage.

Inflation and Grants

Diana Goovaerts wrote an article for Fierce Telecom with the headline that Inflation has doubled RDOF build costs. The article is based on interviews with three ISPs that won RDOF funding in the December 2020 reverse auction – TekWav, Nextlink, and Plains Internet. All three ISPs plan to satisfy the RDOF obligations with a combination of fixed wireless and fiber. Two of the three ISPs were quoted as saying that the cost to build the networks to satisfy the RDOF obligations has doubled since they won the award – the third said costs have risen materially. The three companies have significantly different obligations. Plains Internet is obligated to build broadband to 250 passings in Kansas, while Nextlink must build to pass 206,136 locations over twelve states.

There is a lot to unwrap in the assertion that costs have doubled. First, everybody in the industry will agree that the costs of both material and labor have increased over the last two years. But most of the ISPs I’ve been working with estimate the increase to be between 15% and 30%, differing by region and the planned technology. The article includes an interview with Jonathan Chambers of Conexon, who believes that the claims that a doubling of cost is highly unlikely.

But the interviews raised a few issues related to the cost of building broadband that aren’t talked about a lot. Clearly, materials and labor are more expensive. In the case of wireless ISPs that are obligated to deliver superfast speeds, the costs I’ve been seeing for newer radios like the ones from Tarana look to be triple or more the cost of other radios.

One issue that is not being widely discussed is the availability of loans. One of the things that always happens when interest rates increase is that banks drastically curtail making loans to new customers. They may still offer higher interest rate loans to existing customers, but an ISP looking for a new banking relationship is going to hit a stone wall. That is exactly what the Federal Reserve has in mind with interest rate increases – they want to cool off the economy by curtailing new lending. The trick for the Fed is threading the needle to cool the economy enough to slow inflation but not enough to cause a crash.

The difficulty in getting bank loans creates a dilemma for an ISP trying to fulfill an obligation to build a broadband solution with specified construction deadlines. And RDOF award winner has three years, starting with the year after the FCC finalizes the award to build 40% of the promised network. The rest must be built in the following three years. For the big RDOF winners, that probably means having to start on some of the construction right away to meet the first completion goal.

The RDOF awards suppose that recipients will fund the majority of a new network, with debt or equity – and except for the giant ISP winners like Charter, most ISPs rely on new debt. The current big grant programs like BEAD also assume an ISP will bring a significant matching fund to a project, most likely debt for most companies. It’s a huge problem for somebody trying to build a grant or subsidy project if they can’t find the loans.

The three RDOF winners didn’t cite the impact of higher interest rates. I’ve seen interest rates on infrastructure projects nearly double over the last year, and that means double the interest expense from the day of borrowing –  a huge financial hurdle to overcome for any kind of infrastructure project.

The other issue identified by Joseph McGrath of TekWav is the time lag between the cost of a new network and the revenues needed to pay for them. Most ISP have historically expanded organically in the past. They add new territory and customers each year that is partially funded by the cash flow from the existing business, supplemented with short-term loans. An ISP trying to grow fast must abandon the organic growth model. This means spending a lot of money before there is any new revenue. I’ve always referred to this as the cost of expansion, and it’s only a problem for an ISP that is trying to grow faster than what its existing financial structure can handle.

Unfortunately, anybody taking any sizable RDOF or grant projects will experience expansion costs. The ISP will be paying staff to work in the new areas and paying interest on the cost of the equipment for the new area, with far more costs to eat than would be experienced with organic growth. I have to wonder if the big RDOF winners built these costs into its plans. A company that has never tried to grow quickly before is likely to understand the cost of expansion.

The bottom line is that RDOF winners will either have to absorb these unexpected costs or default on the subsidy. There is a fairly minor penalty for defaulting on RDOF funding before any funding has flowed or construction begins. But I would suspect the FCC will level much bigger fines on somebody who has already taken funding, and the fine would likely include returning everything they’ve received. As Jonathan Chambers was quoted, there is a cost for taking federal funding – and it’s always more expensive than anticipated.

How Are You Solving the Digital Divide

One of the most common questions I’m being asked these days is from local politicians and economic development folks who want examples of other communities that are tackling and solving the digital divide.

I’m able to trot out the big-picture stories because they come to my attention in reading about the industry. As an example, just before I wrote this blog, I read an article that says that the State of Maryland will be providing 150,000 laptops to homes that don’t have a computer. The article also mentions that the State has a program labeled the Emergency Broadband Benefits program that has spent $4.6 million this year to help low-income homes pay for home broadband.

Those programs sound great, and there are other large initiatives at the state level around the country undertaking similar efforts. But telling local officials about those big programs is not the answer they are looking for. They want to know what they can do to tackle the digital divide in their local town or county.

My blog has been full of discussions over the last year of federal and state grant programs aimed at building faster broadband networks to rural homes that have no decent broadband alternatives. I’ve had several recent blogs talking about how the pace of building new broadband networks is going maddingly slow – but these networks are coming.

While a new rural fiber or wireless network in a county might solve the broadband speed issue, these local folks know that they still have a lot of other broadband issues to overcome. The classic example of the digital divide uses the analogy of a three-legged stool. Even when a home gets faster broadband, the home is not going to get over the digital divide until three issues are solved. Bringing a new network solves the need for an adequate broadband connection. But many homes will not be able to afford the new broadband connection. Folks also need a computer in the home in order to fully enjoy the benefits of broadband. Finally, folks need to know how to use the computer and how to navigate the online world to achieve their digital goals.

Local officials are looking for examples of local plans and programs that are tackling all three of these issues. I think it’s almost universally agreed that a community will be far better off when most of its citizens have digital literacy.

My broadband career has been focused on the network solution – how to fund and build the needed broadband networks that communities need. I find that I have almost no examples of small or rural communities that have solved any of the three legs of the digital divide. For example, I have talked to dozens of counties that found ways to get computers to every student during the pandemic. But none of these counties had any plans for getting computers to homes without students – and very few have any plans for continuing to give computers to students once the federal monies that paid for the computers are gone.

This blog is asking for help from my readers. I want to hear stories from communities that are tackling any of the three legs of the digital divide head-on. I really want to hear from a community that is tackling all three issues – because they are the poster child that everybody is looking for. I will likely write blogs about some of the success stories I hear – but even if I don’t write about each one, I will let other communities know what you are doing. I also am interested in hearing about efforts that didn’t work – please help others not repeat your mistakes.

Everybody tells me that solving the digital divide means tackling the issue for one person or one family at a time. The question everybody is asking me is how to create a sustainable program that can do that. My contact email is under my picture on this blog. I’d love to hear your story.