The FCC has addressed this issue in the past, and numerous FCC programs have provided ongoing subsidies for rural broadband networks. The FCC has been very careful over the past decades to create separate subsidies for small telephones and cooperatives versus the largest telephone companies. The reasons for the distinction had to do with economy of scale. A higher level of subsidy has been provided to smaller telcos since it was reasoned that small rural companies have a hard time staying afloat without a subsidy.
Conversely, the historic reasoning of regulators was that large telcos didn’t need as much subsidy, or even any subsidy since the big companies also operated in county seats and large cities. Historic regulation assumed that the profits generated in urban and suburban areas could be used to subsidize rural areas.
The original subsidy to small telcos came from the Universal Service Fund (USF). Not every small telco received a subsidy, and the amount of any FCC subsidy was calculated according to the cost structure of each small telco. Small companies would annually calculate costs, and the amount of subsidy benefited the rural companies with the highest costs.
The FCC adopted a major change to the rural subsidy program in 2014 with the USF/ICC Transformation Order. This made the compensation for small telcos more complicated and created different subsidies for different kinds of costs – but the subsidies still benefited the highest-cost small telcos. The subsidy program for small telcos eventually morphed to include the A-CAM program.
Before the USF/ICC Order, only a small portion of big telephone company areas were eligible for any USF subsidy. The ICC Order was a huge win for big telcos, and subsequent to the Order, the FCC created the CAF II subsidy for the most rural locations served by the big telcos. Suddenly, many billions of dollars of subsidy flowed to big telcos to upgrade rural DSL speeds to at least 10/1 Mbps.
In recent years, the FCC opened subsidy programs to a wider range of carriers than just incumbent telephone companies. Both the CAF II reverse auction and the Rural Development Opportunity Fund (RDOF) were conducted using a reverse auction and were available to any ISP. Some of these funds went to telcos, but also went to cable companies, fixed wireless ISPs, and new start-up fiber overbuilders.
This history raises an interesting question. The BEAD grants are not a subsidy program. As a grant program, practically every dollar spent with BEAD funds must be used to build broadband infrastructure – with only some minor reimbursements allowed to cover the cost of complying with the grant paperwork. The BEAD money does not cover any operating expenses for the rural networks that will be built.
In a post-BEAD world, there will be a reshuffled mix of rural broadband networks – properties still operated by small telcos, properties that are still receiving CAF II or RDOF subsidies, and areas built with BEAD or ARPA grants that will not be receiving any subsidies. Some of the BEAD properties will be operated by giant telcos and cable companies, while others will be operated by a wide range of smaller ISPs. The FCC will have created a real mess in rural America, with adjoining areas receiving drastically different levels of federal support – even when the local cost characteristics are identical.
I find it inevitable that companies that win BEAD will start lobbying for operating subsidies within a few years of networks being constructed. The FCC will be faced with the challenge of coming up with a sustainable subsidy program for all rural broadband networks. I think the FCC has several possible paths to take in the post-BEAD world:
The FCC could continue with existing subsidy programs with no acknowledgement that there is a wide disparity between areas that get and don’t get subsidies. The FCC could randomly decide on new subsidy programs to support subsets of companies – perhaps a subsidy program for BEAD winners and another for RDOF properties.
Or the FCC could start all over and design a subsidy program for the post-BEAD world. The best subsidy program would be cost-based, like the original USF. The original cost-based USF looked at the company-wide costs of each ISP, not at the costs to operate in rural areas. Under a cost-based system, small rural companies would likely get the most subsidy per subscriber while large ISPs that operate urban networks would likely get nothing and would be expected to support rural properties with urban profits.
Another option would be that the same amount of subsidy goes to support every rural subscriber, regardless of who owns the ISP business.
There has been a tickle in the back of my brain for the last year wondering why companies like AT&T, Charter, and Comcast seem to be willing to pursue grants for rural areas where it will be a challenge for revenues to fully cover costs. The big telcos have been working feverishly to ditch copper networks, and it’s hard to understand why they are now willing to go back into rural areas that have low density and long drive times.
But it recently struck me – these big companies are betting on the FCC creating a future subsidy program for areas being built with the current flood of ARPA and BEAD grants. I can’t see any other way to justify some of the grants I’ve seen the big companies accept. My bet is that we’ll barely make it through the BEAD grant awards before the big company start lobbying for new subsidy programs that benefit them more than other rural ISPs.
3 replies on “Subsidizing Rural Broadband Networks”
Doug, Well said…..I don’t disagree that the “bigs” will be first in line to solicit and demand subsidies for continued rural service. I fail to understand why the FCC and NTIA continue to ignore smaller ISP’s who have already proven themselves by creating sustainable programs. I realize that getting the FCC or NTIA to even acknowledge the existence of the BTOP program, which they deem as a miserable failure, is akin to seeing an unidentified flying object or Bigfoot, but in reality, several smaller rural ISP’s owe their origins to the BTOP program and have performed, grown and provide vital services to the communities they serve today. These few providers, who have proven their worth through deeds, should be at the very top of the BEAD list….to use those precious funds to expand on their success.
Steven
Chief Executive Officer & Executive Director, OpenCape
95% of the US population uses broadband which implies the market is saturated because, effectively, everyone is already a customers of… someone.
This leaves internet providers exactly where they *don’t* want to be, competing on price to grow their customer base. That is *exactly exactly* where big ISPs who want to be seen as “growth companies” to maintain their stock prices don’t want to be.
They’re left scrapping over the younger generation for when they strike out on their own and leave their parent’s internet, or cutting expenses (aka, providing worse service) as the two ways they can prop up profits. (Or, becoming entertainment conglomerates, and hoping that someone rolls back net neutrality again so that they can use fast lanes to privilege their content… there’s a reason net neutrality was such a hot button when Ajit rolled it back.)
The big ISPs’ best remaining business plan is to get the US Government to pay them to stay in business. They’ll take grants to expand their reach then hold those customers hostage to get more federal dollars.
Other than car companies in the late 70’s I can’t think of an analog.
Unfortunately, dealing with the government comes easier to big companies, especially big companies with lobbying arms. None of this turns into good service and low prices for the masses.
Great thoughts Doug. I also have been predicting a return to the Obama era BTOP SBA (Sustainable Broadband Adoption) programs post-BEAD. Having run one of these programs in 2009-2013, and now working in rural Appalachia, I can’t help but see a parallel between the low-income urban need for computer skills training back in the early 2000’s where internet experience was constrained by barriers of cost – and the current need in rural communities who have a similar barrier to technology experience through a combination of access and cost.
It’s not going to be enough to build these networks and expect take rates to come flooding in. There is going to need to be an orchestrated effort to fund and deploy computer training in rural communities, stand up tech support service providers, offer device subsidies and teach end users – and community leaders how to make meaningful use of this new resource- both on an individual level and a community/ economic development level.
We have our work cut out for us!
But I am convinced that in order to ensure we have reliable subscribers to these shiny new networks- we are going to need to invest in the development of a digital ecosystem for many years to come.