Some State Broadband Offices are taking a stab at social engineering by trying to force BEAD grant winners to offer low broadband rates. I understand the sentiment behind this because everybody in the industry involved with digital equity issues hears stories about homes that can’t afford broadband even when it is available. It’s a serious issue, and a Pew Research Center study in 2021 showed that only 57% of homes with household incomes less than $30,000 had broadband, compared to 92% of homes with household incomes over $75,000.
It’s natural for folks in a grant office to want to use the power of grant awards to do a little social engineering and force lower rates for ISPs that accept BEAD grants. I know this feels like a broadband office is doing something good, but there are a number of reasons why this is a terrible idea. The first is simple since Congress specifically prohibited the NTIA and States from regulating rates in the BEAD grants.
I’m guessing that States will argue that they are not regulating rates. States are instead tying the number of grant points that are awarded to broadband prices. I’m sure the rationale is that the State isn’t forcing low rates and that ISPs are voluntarily lowering rates. But that is clearly not true when low rates earn a lot of grant points, and any ISP that doesn’t lower rates can’t win a grant. No matter how you try to justify it, this is rate regulation.
The more important reason why rate regulation is dangerous with BEAD is that many rural business plans are highly stressed and will have a hard time just breaking even with normal rates. The BEAD grant process adds a lot of cost to an ISP by using prevailing wages, requiring a letter of credit, requiring expensive environmental studies, and mandating smothering reporting. BEAD is hitting the market at a time when interest rates are at the highest levels we’ve seen in well over a decade.
The operating costs after building networks are also high. A technician in a rural market might be able to visit only half as many customers in a day compared to a similar technician in an urban market – and the rural tech will expend a lot more vehicle resources during the day.
I don’t think that many of the folks in state broadband offices understand the rural business plan and that just breaking even is a decent goal. Even a slight change of rates can have a huge impact on cash over time. Consider the following graph. This is from a real business plan for an ISP considering a BEAD grant. The grant application would cover almost 5,000 rural passings. It’s in a relatively poor area, and the ISP hopes to eventually attract 60% of the residents to the new network.
The yellow line represents rates that range from 100 Mbps for $60 per month to a gigabit priced at $90. At those rates, this ISP will just barely keep its head above water for the next twenty years. Raising rates by $5 can add a comfortable margin over time, but a $5 decrease in rates would absolutely sink this ISP.
Some States have a grant point structure that rewards rate far lower than what is used in this example. I recently noticed a state where the maximum grant points are awarded for offering a $65 gigabit product. I didn’t even bother to show the impact of that rate since the losses are so large that the ISP would likely have to walk away from the market in few years.
I know that broadband offices want to do social good, and I applaud them for the sentiment. High rates are a problem. But it’s irresponsible to put the full burden on ISPs to solve the digital divide with low rates. It’s irresponsible to force low rates in rural areas where costs are high while the ISPs serving metropolitan areas can charge high rates with impunity.
Any State broadband office that thinks ISPs can easily absorb a big rate decrease does not understand the reality of operating a rural broadband network. They clearly believe that ISPs are secretly making obscene profits and can easily lower rates if pushed.
Driving down rates without understanding the consequences is a terrible idea. I think the best strategy for a grant office is to award BEAD funding to responsible ISPs who will commit to providing long-term great service. Forcing down rates will drive away the ISPs a State is hoping for. Grants will instead go to the giant ISPs that will pay lip service to low rates for a while but will raise rates over $100 per month as soon as possible.
I don’t think it’s that unusual for the customer to say, “this is how much I can afford, I won’t pay more.” In this case the government is the proxy for the customer. If the ISP can’t make a profit then this business isn’t for them.
It’s not a moral obligation that the ISPs be deliriously happy or that all ISPs be able to participate in the program. If it’s not profitable, they don’t bid. The rates aren’t driven down if nobody takes the government up on their offer, ISPs just can’t take part in the taxpayer gravy train.
Who besides ISPs will solve the digital divide? Is there someone else out there who’s creating it?
The issue isn’t low rates, it’s competition. The original plan included provisions for supporting muni networks. Monopoly ISP lobbyists got to work and struck that out. (Big surprise.) It’s still *illegal* in 20 states.
Without competition nobody’s going to have the incentive to make their business efficient. Pricing pressure from the government (equivalent to insulin pricing) isn’t what I’d like… but in a system where there are monopolies, duopolies, or literally no choice in some majority of markets, just what are the options, exactly?
I’d like the FTC to grow some spine and break up the big ISPs into smaller regions and, especially, break up the ISP-entertainment-conglomerates, enable public ISPs, or screw it and nationalize the whole deal as a public good or.. something. Look, you can’t have a publicly traded growth-oriented business when you have a saturated market without some deeply corrupt practices evolving and there aren’t that many market-friendly tools one can use in response.
https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/
https://arstechnica.com/tech-policy/2014/02/isp-lobby-has-already-won-limits-on-public-broadband-in-20-states/
https://ilsr.org/report-most-americans-have-no-real-choice-in-internet-providers/
“I’d like the FTC to grow some spine and break up the big ISPs into smaller regions and, especially, break up the ISP-entertainment-conglomerates,”
Sounds like the 1983 consent degree that broke AT&T into the regional bell operating companies.
“enable public ISPs, or screw it and nationalize the whole deal as a public good.”
The pricing issue we are seeing in higher cost areas certainly is suggesting public ownership with the struggle to break even within a standard business model. Jonathan Chambers of Conexon recently blogged on this:
https://conexon.us/weekly-briefing/post/god-save-us-from-people-who-mean-well-0
ISP’s have a responsibility to shareholders to be profitable. Economics has flipped on these grants, once attractive. Legacy carriers with junk copper networks have monthly internet prices “racing to the bottom.” Rates are falling; customers fleeing old cable networks by the droves. In an attempt to stop the bleeding, prices are being dropped and false promises of bigger internet capacity deliveries abound with no possible way to deliver. The bigger lie.
Three years ago, payouts were possible on these FTTH projects. Now, they can only be built with government subsidies. The thought of sub-$100 plans leaves one cold. We see the manipulation of the grants being tied to pricing, but they won’t new network won’t be built by competent companies. Simply, charlatans will emerge to grab the prize of grants, promising anything in the process.
I cannot wait to see how this goes…
Bobby Vassallo
We are using taxpayer money to build local monopolies providing an essential service. Are we really not going to worry about the rates those monopolies charge in areas that are extremely unlikely to see competitors?
You all are missing it. The monopoly ISP’s your scared of mostly exist in the city where it’s much more difficult for a Wisp to operate. In rural settings where there are not a lot of trees and user density is much more sparse a Wisp can come in, or multiple, and quickly overlay coverage to some/most of the homes with private money, and not actually that much of it, and provide that competition your talking about. This whole blog post was about rural internet prices, not urban. In our area there are 4 Wisps competing in the rural space and exactly one ISP in the city. To ask the wired provider from the city to extend their coverage into the rural space at the same rates they offer in town is so short sited is hilarious. If Ford lost half of their car sales do you think they could keep the prices of a single vehicle where they are now? Absolutely not. It’s called economics of scale. We’re providing 100×100 service for $95 in this 4 wisp competitive market, with lower latency than the wired ISP in town. I have 2540 monitored devices on our network to service 800 clients. That’s over 3 pieces of network equipment per client. Show me a wired ISP in town that is anywhere near that much infrastructure bloat. If you ask me to provide service at $40 per home I will need perpetual funding from the government to operate. Is that what we want? You all talk out both sides of your mouth. You want to break up the monopoly ISP’s but you want to have the huge ISP cheap rates. You only get those kinds of rates from huge ISP’s that have thousands of customers. And you only get that many customers in the city. How much simpler can this be stated? I’ve busted my butt for a decade to build this business. I’m living very carefully and still carrying personal debt because I don’t pull enough money from our business to really live like my neighbors that I serve internet to. And you want me to cut our rates in half?
If we think hard about separating infrastructure from operations, this problem is less thorny. Operating a BSP can be very efficient and profitable if you can expand your subscriber base, even at comparatively low costs. It’s the infrastructure, fiber, copper or wireless, that is hugely variable, and that includes maintenance (ie. truck rolls).