I’ve heard from a few ISPs who told me that State Broadband offices are asking ISPs interested in BEAD to self-fund a $30 discount for low-income customers after the end of ACP. Since this request came from multiple states, I have to imagine the idea came from NTIA. I can’t think of any better proof that policymakers are out of touch with the reality of rural business plans.

First, any ISP is going to lose money for the first two or three years of launching a new broadband market until that market gets enough customers for revenues to cover costs. The request is asking the ISP to fully fund the discounts for this period out of their pocket since the grant-funded market can’t fund the discount.

But more fundamental is the idea that ISPs will have excess margins in a rural market that can somehow be used to fund these discounts permanently. Even with a 75% grant, most rural market business plans are barely going to cash flow – and realistically, some BEAD-funded markets are going to lose money for twenty years until the debt used to fund the matching is retired. ISPs like Cooperatives are willing to wait that long to be profitable since they have a hundred-year outlook on the broadband business, but even they can’t be comfortable with self-funding these discounts.

Even ISPs that are successful in rural markets are going to have small margins. They will be lucky to build margins to 10% to 15% annually over time. These margins are needed to fund future retirements and replacements of electronics that will inevitably come in 12-15 years and to replace assets like vehicles a lot sooner than that.

It’s not hard to do the math on what this request means in terms of ISP margins. Consider an ISP that has an average revenue per customer of $65. If that ISP gives a low-income $30 discount to 10% of customers, that would equate to giving away 4.6% of its margin. For an ISP that was only going to make a 10% margin, that means giving away half of the margin. If the percentage of customers that get the discount is higher, then self-funding the $30 discount can get ugly in a hurry.

I’ve read reports of a few ISPs that have more than 70% of customers enrolled in ACP, and they obviously can’t self-fund this. But it’s ludicrous to ask an ISP with even 20% of customers using ACP to self-fund this discount.

There is another way for some ISPs to continue the discount, which would be to raise the rates for everybody else. Using the sample ISP discussed above, the ISP with 10% of customers on ACP could fund the ACP discount by raising rates on everybody else by $3.30 per month. The amount of rate increase grows to be gigantic if more than 10% of customers are on ACP. The idea of ISPs raising rates will likely horrify State Broadband Offices that are already pressuring ISPs to have low rates.

This whole concept stems from a mistaken assumption that all ISPs are fat with profits and that they can dig into excess earnings to fund things. That might be true for some giant ISPs, but even for them this is not true in rural markets. The policy makers have already stacked extra costs on top of ISPs in the BEAD grant process, and this just adds to the pile.

ISPs with a lot of ACP customers are in real trouble. They are likely to lose a lot of customers when the ACP ends. They can’t survive if they lose too many customers, and they can’t survive if they keep them by giving giant discounts.

Policymakers often wonder why some ISPs refuse to participate in federal programs like ACP, and I hope they now understand why. It’s truly a bad decision for an ISP to sign up a lot of customers in a government-subsidized program if there is no guarantee that the program will survive from year to year. Smart ISPs signed up for ACP because of the political pressure to do so, but they only enrolled customers who asked for the discount. ISPs that fully embraced and advertised ACP are now going to pay a big financial penalty for trusting a program that had a clear and expected expiration date.

I hope that no State Broadband Office makes it mandatory for BEAD winners to self-fund the $30 discounts. They are already worried about ISPs taking a pass on BEAD, and this will convince more to walk away from the grant program. ISPs pressured to do this just need to say no.