Are Broadband Grants Taxable?

Casey Lide of Keller & Heckman wrote a recent blog that warns that federal grant funding might be considered as taxable income by the IRS. This would be a dreadful outcome for any taxable entity that receives the grant funding since it would create a huge tax liability that would have to somehow be covered outside of the grant funding. This would not affect just the big telcos and cable companies but also the many small telephone companies and cooperatives which are also taxable.

This is not a new issue. There were a lot of questions about federal grants being taxable in 2009 when the NTIA awarded BTOP and BIP grants that were the result of the stimulus spending that came out of the recession. The IRS eventually declared a ‘safe harbor’ for those grants, meaning that it agreed to not tax the grant funding. But the threat of possible taxation stopped many of my commercial clients from pursuing those grants in 2009.

Lide points out that the IRS has always presumed that grant funding is income to the entity receiving the grant and is taxable. Consider a common type of federal grant such as when a research lab gets a grant to pay for the salaries of researchers. Such a grant has always been considered to be taxable income to the lab. The research lab doesn’t worry about this because when it spends that money for salaries, the expenses are deductible from the income, and the lab doesn’t incur any net tax liability. This is one of the reasons that this kind of grant is often awarded each fiscal year to give the grant recipient a chance to spend the grant money in the year the income is received.

But grants given to build infrastructure are different. If a corporation accepts a $10 million grant to build fiber, it cannot expense the fiber immediately to offset the income from the grant. IRS rules have always insisted that hard assets are written off over the economic life of the asset using depreciation expense. I haven’t checked lately, but the IRS suggested tax life for fiber has been set at 25 years, meaning that one-twenty-fifth of the cost of the fiber is recognized as an expense each year over 25 years.

In this example, the corporation that accepted the $10 million grant would be saddled with a $10 million revenue and only be able to wipe out a small portion of it in the first year using depreciation. That would create an instant federal tax liability of 21% on the difference between the grant and one year of offsetting depreciation expense, plus whatever state incomes taxes would be owed. The corporation could not use the grant funds to cover the tax liability – grant money can only be used to build infrastructure. The corporation would eventually see the benefit of depreciation on future taxes, but that relief would be glacially slow over 25 years – it would not stop them from having to write a big check to the IRS this year.

Lide points out the way that the IRS got around this rule with the 2009 grants. There was a legal case in the 1950s, Brown Shoe Co., Inc. v Commissioner where the courts rules that grant funding received by a shoe company for keeping their factory operating was not taxable since none of that money was used to enrich the owners of the business. The IRS was able to make this same determination with the BTOP and BIP grants because, by definition, none of the money was used to enrich the owners of corporations since it was all spent to build infrastructure.

Lide believes that there have been changes in the 2017 Tax Cuts and Jobs Act that might make it impossible for the IRS to make that same ruling for current federal grants. Congress could have avoided this issue by explicitly saying that the new grants aren’t taxable – but that’s not in the various laws.

This is very distressing news for a corporation that has already accepted grant funding from the CAREs Act or from ARPA funds because they might be facing an unexpected tax liability. I know cooperatives and telephone companies that have already accepted some of these funds and who will be shocked if this interpretation holds to be true. One of the problems we have currently in dealing with these kinds of issues is that the IRS is running several years behind and won’t have yet dealt with a tax return from a corporation receiving recent the latest infrastructure grants.

As a further word of warning, this same issue would apply to anybody accepting state infrastructure grants. A state would have to take positive action to forgive the grant from state income taxes, but that would not shield state grant revenue from federal tax liability. Any taxable entity that has already received CAREs or ARPA funding, or anybody thinking about taking ARPA or BEADs funding to reach out to legislators on the issue. It may turn out that Congress might be the only one who can fix this – they certainly didn’t intend for anybody building rural broadband to incur a huge tax penalty. If this doesn’t get resolved, many of the carriers who are planning on using grants to solve the rural broadband gap might have to drop out of the pursuit of grants.

Can Satellite Broadband be Affordable?

When we first heard of the possibility of broadband from low-orbit satellites, there was a lot of speculation that the technology could bring affordable broadband to the masses around the globe. The latest announcement from Starlink shows that affordable broadband is probably not coming in the immediate future.

Starlink announced a premium tier of service with a $500 monthly fee for 150-500 Mbps. The receiver has a one-time cost of $2,500. The product offers faster speeds by doubling the size of the receiving area of the receiver. These prices are a big step up from the current Starlink broadband product that offers 50-150 Mbps service for $99 per month with a $500 fee for the receiver.

I’ve been thinking about the issues faced by a satellite constellation owner in trying to recover the cost of the network to make a profit. At current costs, it’s incredibly expensive to launch Starlink satellites. It’s rumored that it currently costs about $60 million for one launch that can place 49 satellites into orbit. That’s a cost of over $1.2 million per satellite before considering the cost of the satellite hardware. But this cost is supposed to be dropping due to the ability to reuse rocket components, with near-future costs soon to be around $30 million per launch. That would still mean a cost per satellite of $600,000 each. Elon Musk says his goal is to get the cost per launch down to $10 million, and that would still mean a launch cost per satellite of over $200,000.

These costs wouldn’t be bad if the satellites had some longevity, but it’s estimated that low-orbit satellites will remain in orbit from 5-7 years, meaning a satellite owner must recover its launch costs in a relatively short period of time.

This is not to say that Starlink can’t make money, and I have to assume that the current prices are set so that the company can become profitable. But it’s hard to imagine lowering prices until a satellite company has a large enough customer base to cover operating costs and the continued cost of replacing satellites.

Starlink also admits that it is subsidizing the home receivers it sells for $500. But with mass production, that cost is likely to plummet. But for now, it’s one more financial hurdle to overcome.

The other component of cost to consider is the cost of backhaul. In the U.S., it will be easy for Starlink to build a series of earth stations that can download and upload data with the satellite constellation. We have fiber backhaul routes crisscrossing the country, and there are numerous carriers willing to negotiate good prices with Starlink for connecting earth stations to the Internet.

But this is not going to be so in much of the rest of the planet. Consider places like inland Africa where there are far fewer fiber middle-mile routes, and where the amount of bandwidth is limited and expensive. Lack of backhaul could make it a challenge to operate in markets like Africa.

There are also countries that will block Starlink or that might impose big license fees to deliver the broadband. China is unlikely to allow broadband connections that bypass the Great Firewall of China. India is discussing license fees with Starlink, and could make it expensive to do business there. Those two countries alone contain 36% of the world’s population.

The last complexity faced by any satellite broadband company will be competition from other satellite owners. It’s likely that within five years that we’ll see worldwide coverage from Starlink, OneWeb, and Project Kuiper – and other companies and countries are considering satellite constellations. The industry math will quickly get challenging if there is any downward pressure on prices through competition. Starlink is only going to be able to sell $500 premium connections if no other satellite company offers something less expensive.

Elon Musk has said many times in the last year that there is no guarantee of financial success at Starlink and that the company could easily go bankrupt. The company must be losing money during this early beta stage, but that’s experienced by all new ISPs. Let’s also not forget the stated original reason for funding Starlink. The goal was to create a cash cow that would spin off the funding needed to settle Mars. The need to generate cash isn’t going to tempt the company to have affordable rates. There is a lot of moving parts to operate a satellite business, with many of the long-term costs still unknowable. It will be interesting watching the satellite companies figure out the business on the fly.

Closing the Homework Gap in Chattanooga

There are plenty of skeptics that deride municipal broadband for various reasons, mostly centered on whether local government should be competing against commercial ISPs. What those skeptics are missing is the immense benefits that a municipal broadband network can bring to a community.

Witness the huge undertaking in Hamilton County, Tennessee, home to Chattanooga’s municipal EPB fiber broadband network. At the start of the pandemic, the school districts quickly discovered that roughly one-third of the 45,000 households with students didn’t have home broadband, making remote school impossible.

The community is responding in a big way and has decided to solve the homework gap in the county, by making sure that every home with a student has broadband access. Even before the pandemic, EPB had offered a low-cost broadband product for $26.99 that had reached about 10% of the homes in the community – but EPB found that even that price was a barrier for a lot of households. The county also has a lot of students that live outside of the footprint of the fiber network.

The community has come together to create a partnership called HCS EdConnect. This is a collaboration between the EPB fiber business, the City of Chattanooga, Hamilton County, Hamilton County Schools, a local non-profit the Enterprise Center, and several private funders. HCS EdConnect has pledged that all low-income students in Hamilton County will have free broadband for the next ten years.

https://www.edconnect.org/

This is an expensive undertaking, and Deb Socia, the CEO of the Enterprise Center, says the total cost will be $15 million over ten years to fund broadband connectivity. That includes $8.2 million upfront to fund the cost of connecting homes to broadband. That money was raised with $1 million from Hamilton County Schools, $1.5 million each from the City of Chattanooga and Hamilton County, and generous donations from the private sector, including $1 million each from the Blue Cross Blue Shield Foundation of Tennessee and the Smart City Century Fund.

Qualifying homes with students will get free broadband for at least ten years, as long as they stay in the district and have students at home. Households qualify if they are eligible for free or reduced-price lunches and those receiving SNAP or TANF benefits.

By Tennessee law, EPB cannot provide free broadband, so the remaining funding will be to cover the monthly cost of the EBP low-cost broadband program in the city or to provide a free cellular hotspot outside the city. However, EPB is still a big participant in the project and has hired eight new technicians to implement the program.

The difference-maker in this case is having a municipal fiber network that puts the needs of the community above profits. There is no reason that a commercial ISP like Comcast or Charter couldn’t engage in a similar partnerships – but I’ve never heard of any discussions of this nature.

It’s almost impossible to stress the importance of this effort for the county. The benefits of having good home broadband transcend the temporary issues of the pandemic. A definitive study of the negative impact of students living in homes without broadband was published in early 2020 by the Quello Center, part of the Department of Media and Information at Michigan State. The results of that study were eye-opening. The study showed that students with no Internet access at home tested lower on a range of metrics, including digital skills, homework completion, and grade point average. Some of the specific findings include

  • Students with home Internet access had an overall grade point average of 3.18, while students with no Internet access at home had a GPA of 2.81.
  • During the study, 64% of students with no home Internet access sometimes left homework undone compared to only 17% of students with a high-speed connection at home.
  • Students without home Internet access spend an average of 30 minutes longer doing homework each evening.
  • One of the most important findings identified a huge gap in digital skills for students without home broadband. To quote the study, “The gap in digital skills between students with no home access or cell phone only and those with fast or slow home Internet access is equivalent to the gap in digital skills between 8th and 11th grade students.” It’s hard to grasp that the average 11th grade student without home broadband had the equivalent digital skills an 8th grader with home broadband.

Hamilton County is going to see transformational benefits from this effort. Students who grow up with good digital skills are going to grow up ready to thrive in a digital economy. Hamilton County has a lot of homes below the poverty level, and my bet is that in the decades to come that the county will become a different place.

This move by Hamilton County answers the big question of why cities might consider building a municipal broadband network – it can be transformational for the long-term well-being of the community. This move also throws a gauntlet at the feet of the cable companies. They never miss an opportunity to quash municipal and other potential competitors. Perhaps a better tactic would be to become a valuable partner with local government to tackle the digital divide.

Employees Favor Working from Home

USA Today reported on the results of the fifth annual survey of the State of Remote Work conducted by Owl Labs and Global Workplace Analytics. The nationwide survey was done last summer at a time when almost one-fourth of workers continued to work at least part-time from home.

The survey showed a strong desire of employees to work from home, at least part-time. Here are a few of the most interesting findings from the survey:

  • A little more than half of all employees would choose to work full-time from home. 74% of those interviewed said that working at home made them happier.
  • Almost half of workers said they would take a 5% pay cut to continue to work remotely, at least part of the time.
  • 91% of those working at home say they are as productive or more productive than when in the office. 55% say they work more hours at home than when they are in the office.
  • Almost one-fourth of employees said they would quit their jobs if they aren’t allowed to work remotely. For context, this survey was done at a time when employees were quitting jobs at historic rates.
  • A lot of employees changed jobs during the pandemic. 90% of them were looking for a better career. 88% also wanted a better work-life balance. 87% were looking for less stress. 84% wanted more flexibility for where they work, and 82% wanted more flexibility of when they work.
  • A lot of people relocated during the pandemic, which was made easier through working from home. Two-thirds of employees who relocated were between the ages of 26 and 40. Interestingly to those reading this blog, 63% of employees who moved from urban areas to rural areas were in this age group. More than half of those that moved from suburban to rural areas also were in the younger age group.

This survey shows similar results to other surveys taken over the last few years. It seems that many people got a taste of working from home and decided that they like it more than going to the office every day. A lot of employers are starting to demand that workers return to the office, and many have been reporting a mass exodus of employees who don’t wish to come back.

This has a lot of implications for rural and suburban communities. Many people want to get away from the stress of urban life and lead a more relaxing lifestyle – but they need good broadband to do so. Remote workers don’t want so-so broadband, but reliable broadband that means they can always connect remotely as needed. 56% of younger workers said they would love to incorporate virtual reality and virtual meetings into the workday – something that will require fast upload and download speeds.

From an economic development perspective, work-from-home employees are a huge boon to a rural community that has likely been aging and slowly shrinking over time. Employees making good salaries can provide a huge boost to a local economy. For years, rural communities have sunk big tax incentives into trying to attract new employers. It probably costs a lot less to attract one hundred remote workers than to lure a traditional employer that will bring a hundred jobs.

I have rural clients that operate rural fiber networks who tell me that their communities are seeing a new demand for building new homes and that housing prices are increasing as people want to move to the community.

This presents an interesting challenge to rural communities wondering how to get the word out to prospective work-from-home employees. This new trend is a 180-degree turn from traditional economic development efforts – but communities that master this ought to grow and thrive and bring fresh breath into aging communities.

Grants for Low-Income Apartments

There is one section of the $42.5 billion Broadband Equity, Access, and Deployment  (BEAD) grants that cities should find interesting. These grants can be used for installing internet and Wi-Fi infrastructure or providing reduced-cost broadband within a multi-family residential building, with priority given to a residential building that has a substantial share of unserved households or is in a location in which the percentage of individuals with a household income that is at or below 150 percent of the poverty line applicable to a family of the size involved (as determined under section 673(2) of the Community Services Block Grant Act (42 U.S.C. 9902(2)) is higher than the national percentage of such individuals.

The BEAD grants are mostly aimed at solving the rural digital divide, but this is an open invitation for cities to seek grant funding to bring better broadband to low-income apartment complexes.

As is usual with most new laws, this one has one interesting incongruity. The BEAD grants establish a priority for States to follow – States should first use BEAD grants to bring broadband to unserved locations with broadband under 25/3 Mbps, then underserved locations with broadband slower than 100/20 Mbps, and finally to anchor institutions. My reading of the language is that serving low-income housing shares top priority along with rural unserved locations – the language says that grants can be used for unserved apartment buildings OR for low-income apartment buildings. This language seemingly gives low-income apartment buildings a higher priority than underserved locations. This language also implies that there is no speed requirement for low-income apartments to qualify for grant funding – the only requirement is the level of poverty.

It’s going to be interesting to see how States interpret this. States with big cities could see huge demand for broadband grants from cities that see this as the chance to solve the urban digital divide. I know that $42.5 billion is a lot of money, but it’s not going to stretch as far as Congress might have believed if every major city sees this as a chance to bring fiber to low-income neighborhoods.

The language is interesting in that it allows for bringing either Wi-Fi or reduced-cost broadband. The term Wi-Fi suggests what I call centralized Wi-Fi that floods hallways and common areas in apartment buildings. It’s a nice thing to have, but it is not the future-looking broadband that is needed for the next twenty years. I’d hate to see a lot of grants asking to install Wi-Fi instead of bringing real broadband to apartment units.

Bringing broadband to apartments will require an ISP. That could be almost anybody under the BEAD grants. Cities could be the ISP in a state that allows municipal ISPs. Cities could partner with the large incumbent ISPs or with smaller commercial ISPs. The most interesting idea is to partner with a non-profit ISP. It would even be possible for cities to hand these networks off to an urban cooperative. Anybody interested in the last two possibilities needs to be moving quickly to have the non-profit or cooperative formed by the time the grant requests are filed in a year.

A year is not a lot of time for cities to capitalize on this possibility. The specific apartments to be served should be identified. Somebody has to design and price out a technical solution. A city will have a better chance of winning funding if it has identified the ISP partner. And cities need to get active over the next few months to make sure that States build this option into the broadband plan that must be approved by the NTIA.

This $42.5 billion grant program is extraordinary in its size and scope – and it’s a once-in-a-lifetime chance to solve persistent broadband gaps. Cities need to marshal their resources quickly to make this happen because there probably won’t be another funding program for a long time aimed at solving the urban digital divide.

Video Meetings are the New Normal

One of the big changes that came out of the pandemic will have a permanent impact on broadband networks. Holding online meetings on Zoom, Microsoft Teams, GoToMeeting, and other video platforms has become a daily part of business for many companies.

This article in the New York Times cites predictions that businesses will cut down on travel by 20% to 50%. This will have a huge impact over time on the airline and hotel industries. As a lifelong road warrior, I recall the relief every year when the school year started back in September and airports returned mostly to business travelers. It will be interesting in the future if airports really get more deserted during the business-only travel months.

But the real boon for businesses from less travel will be lower expenses and increased productivity. I can’t add up the number of times that I traveled somewhere for a one or two-hour meeting – something that has now fallen off my radar. We’re going to replace rushing to make a flight with the use of broadband.

What is interesting is how hard we tried in the past to make video conferencing into an everyday thing. Everybody of my age remembers these AT&T commercials from 1993 that predicted that video conferencing, working remotely, digital books, and GPS navigation would become a part of daily life. Most of the predictions made by these commercials became a reality much sooner than common video calling. Whole new industries have been built around digital books, and GPS is seemingly built into everything.

The business world fought against video conferencing. I recall a client from 20 years ago who had invested in an expensive video conference setup and insisted on either meeting in person or holding a video conference. I recall the hassle of having to rent a local video conferencing center to talk to this client – but even then, I could see how that expense was far better than spending time a wasted day in an airport and a night in a hotel.

I don’t know how typical my workday is, but I probably average 3 hours per day on video calls. I always hated long telephone calls, but I like the experience of seeing who I’m talking to. It’s enabled creating real bonds with clients and colleagues as I talk to them multiple times through video chat compared to an occasional live meeting.

A few weeks ago, I wrote about the concept of broadband holding times to account for the fact that we are tying up broadband connections for hours with video chats or connecting to a work or school server. I’m not sure that we’ve fully grasped what this means for broadband networks. Most network engineers had metrics they used for estimating the amount of bandwidth required to serve a hundred or a thousand customers. That math goes out the door when a significant percentage of those customers are spending hours on video chats that use a small but continuous 2-way bandwidth connection.

We’re not likely to fully grasp what this means for another year until the pandemic is fully behind us, and companies settle into a new normal. I know I’m not going to be in airports in the future like I was in the past, and many people I’ve talked to feel the same way.

Amazon Sharing Your Broadband

Amazon launched its Sidewalk network in June. This is a local network established between Amazon devices in your home and around your neighborhood. This connects devices like the various kinds of Echo devices and Ring cameras. The network will also communicate with Tile devices used to keep track of things like keys and pets.

The network does not use your home WiFi, but instead establishes a new network using a combination of Bluetooth and 900 MHz LoRa signals. While Amazon won’t comment on future plans for this network, it would be a natural way for Amazon to create a smart home network that is apart and separate from WiFi.

Amazon automatically enabled newer Echo and Ring devices to act as bridges in the network. The network can then connect to any other smart home device that has the ability to communicate with the bridges. This doesn’t work with the first few generations of Amazon Echo devices but comes built into fourth-generation Echo and Dot devices. Specifically, the network enables the following kinds of connections:

  • Localized Bluetooth LE connections between the Sidewalk bridges and Sidewalk-enabled devices in your home;
  • Long-range Bluetooth LE and 900MHz connections between your Sidewalk bridges and Sidewalk-enabled devices outside of your home, including other people’s devices;
  • Long-range Bluetooth LE and 900MHz connections between your Sidewalk-enabled devices and Sidewalk bridges outside the home, including other people’s bridges.

The bridges on the network communicate with the Amazon cloud using your home broadband connection. Amazon says that it is limiting an individual connection to no more than 80 Kbps and is capping total data usage from any home at 500 MB of data per month.

If you have one of these devices in your home, this becomes another use of your monthly data. While half a gigabyte may not sound like a lot pf broadband, it is significant to people using cellular hotspots or other data plans with small data caps. This will be one more use of data that contributes to total home usage for anybody saddled with a broadband data cap.

In urban areas where there are a lot of such devices, this creates an interesting network. If you drop your keys while jogging or your dog wanders away, they can be located if connected to a Tile locator device. Amazon is touting the Sidewalk network as something that is good for everybody.

Amazon’s real plans have to be more than making Tile devices work better. The giant retailer probably has visions of selling a range of outdoor sensors that will work as long as homeowners or neighbors have a bridge device. In the future, you might buy an external sensor that makes its broadband connection through your neighbor’s Ring camera.

But this is also a bit troublesome. This creates a free mesh network for Amazon. Over time, it’s likely that many devices sold by the company will be capable of communicating with this network. The richest guy on the planet will have created an incredibly valuable network by taking small amounts of data from anybody using an Echo or Ring device. Users are able to disconnect bridges from the Sidewalk network, but devices are enabled automatically.

Amazon says data is safe on the network. Data is supposed protected by several layers of encryption, and Amazon plans to delete all data every 24 hours.

This reminds me of the WiFi network created by Comcast using home routers. Comcast swears that the network doesn’t use home broadband, but it’s unlikely that somebody would know it if it did. Amazon isn’t making such a claim and is brazenly using a small slice of people’s home broadband for free. Amazon is the only company that could currently pull this off since it has a huge number of Echo and Ring devices already in homes. But there is nothing stopping other smart home device makers from doing something similar and not even telling us about it.

Ireland’s Solution to the Rural Divide

The pandemic has given the whole world a pause to consider if we should return to business as usual when the pandemic is behind us. Ireland has a unique reaction and is something that could make sense here.

Ireland plans to provide incentives to lure people from cities back to smaller rural towns. Like much of the world, Ireland has seen decades of young people moving to cities to find work, leaving behind shrinking and aging rural towns. The government has announced a plan called “Our Rural Future” that will hopefully lure residents back to smaller towns.

An obvious key piece of this plan is making sure that rural towns have fiber broadband – something the country has been tackling for several years. The new plan is to fund the renovation of rural city centers and to create 400 rural working hubs. The government will give tax breaks to people and corporations that shift to working in the rural hub towns. The government also plans to relocate at least 20% of the 300,000 federal civil servants to the newly established hub towns.

The hope is to rebalance the economy throughout the country, so that rural areas share the same growth and prosperity as cities. The Irish government tried something similar in 2000 when it moved some government jobs out of Dublin.

This is an idea that we should consider here. Two-thirds of US counties have lost population since 2010, representing a huge shift of the population from rural America to cities and suburbs. Further, the population in a lot of rural counties is aging, since much of the lost population are younger residents looking for better-paying jobs.

The US has already started down a path to bring a lot of fiber to rural areas – something that is a key factor for making rural America a place to work. We’ve had recent grants like RDOF along with the new state and federal grants that should give a big boost to rural broadband. Even bigger would be an infrastructure plan to build tens of billions of dollars of fiber. We have one significant difference compared to Ireland’s plan. The US government is funding better broadband for the most rural places in the country, but not funding broadband upgrades for county seats. It is those towns across America that could thrive and grow with the right incentives. Ireland is creating the work hubs in small towns that are the equivalent to small county seats here.

There are enormous incentives for the US to consider something similar. If rural communities continue to lose population while continuing to age, we’re going to find rural economies dragging down the economy as a whole. Luring people out of cities can also help to cool off the torrid urban housing market that is making it nearly impossible for young families to afford homes. Pushing new housing construction to smaller communities here would spread our prosperity, much as Ireland is hoping for.

To do this in a big way would require the full support and funding from the federal government. However, individual communities can undertake a programs to lure urban residents. I wrote a blog some years back about how Independence, Oregon had a program to lure Portland residents to its lower cost of living and its fiber network.

As a nation, we only get a reset button once or twice per century, and this could be one of those times. Newspapers and the web are full of stories of people who used the pandemic year to reexamine their priorities, and there are seemingly millions of people willing to step off the urban treadmill if we make it easier for them to do so.

It seems kind of a shame to spend money on better rural broadband networks if we don’t also make a push to get people to use them. Perhaps some of this shift will happen naturally from people who have found a way to permanently work from home – something that is made easy with new fiber networks.

I’d love to hear from any communities that are actively using fiber to lure new residents.

Why Do We Give Grants to Huge ISPs?

The blog title is a rhetorical question because we all know why we give federal money to big ISPs – they are powerful companies that have a lot of lobbyists and that make a lot of contributions to politicians. But for some reason, the rest of us don’t talk enough about why giving money to the big ISPs is bad policy.

I could write a week’s worth of blogs detailing reasons why big ISPs don’t deserve grant funding. The public dislikes big ISPs and has rated them for two decades as having the worst customer service among all corporations and entities, disliked even more than insurance companies and the IRS. The public hates talking to big ISPs, because every call turns into a sales pitch to spend more money.

The big ISPs routinely deceive their customers. They routinely advertise special prices and then proceed to bill consumers more than what was promised. They have hidden fees and try to disguise their rates as taxes and fees. The big telcos unashamedly bill rural customers big fees for decrepit DSL that barely works. The telcos have known for over a decade that they can’t deliver what they are peddling.

Cable companies come across as better than the telcos only because their broadband technology is faster. But in every city, there are some neighborhoods where speeds are far slower than advertised speeds – neighborhoods where longstanding network problems never get fixed. I hear stories all of the time about repeated slowdowns and outages. About 30% of the folks we’ve surveyed during the pandemic have said that they couldn’t work from home due to problems with cable company upload speeds.

And then there are the big reasons. The big telcos created the rural broadband crisis. They made a decision decades ago to walk away from rural copper. They quietly cut back on all upgrades and maintenance and eliminated tens of thousands of rural technicians, meaning that customers routinely wait a week or longer to even see a technician.

What’s worse, the big telcos didn’t walk away from rural America honestly. They kept talking about how they could provide good service, to the point that the FCC awarded them $11 billion in the CAF II program to improve rural DSL – we paid them for what they should have routinely done by reinvesting the billions they have collected from rural customers. But rather than use the CAF II money to improve rural DSL, most of the money got pocketed to the benefit of stockholders.

While I think the decision to walk away from rural broadband was made in the boardroom – the worst consequences of the decision were implemented locally. That’s how giant companies work and is the primary reason we shouldn’t give money to big ISPs. Upper management puts pressure on regional vice presidents to improve the bottom line, and it’s the regional managers who quietly cut back on technicians and equipment. Rural broadband didn’t die from one big sweeping decision – it was murdered by thousands of small cutbacks by regional bureaucrats trying to earn better bonuses. I’ve talked to many rural technicians who tell me that their companies have taken away every tool they have for helping customers.

What does this all boil down to? If we give money to the big ISPs to build rural networks, they are going to pocket some of the money like they did with CAF II. But even if they use grant money to build decent rural networks, it’s hard to imagine them being good stewards of those networks. The networks will not get the needed future upgrades. There will never be enough technicians. And every year the problems will get a little worse until we look up in twenty years and see rural fiber networks owned by the big ISPs that are barely limping along. Meanwhile, we’ll see networks operated by cooperatives, small telcos, and municipalities that work perfectly, that offer good customer service, and that have responsive repair and maintenance.

I have a hard time thinking that there is a single policy person or politician in the country who honestly thinks that big ISPs will take care of rural America over time. They’ll take federal money and build the least they can get away with. Then, within only a few years they’ll start to nickel and dime the rural properties as they have always done.

I have to laugh when I hear somebody comparing current rural broadband grant programs to our effort a century ago for rural electrification. That electrification money went mostly to cooperatives and not to the big commercial corporations. We’ve lost track of that important fact when we use the electrification analogy. The government made the right decision by lending money to citzens to solve the electricity gap and didn’t give money to the big commercial electric companies that had already shunned rural America.

The main reason we shouldn’t give grants to big ISPs is that solving the rural broadband gap is too important to entrust to companies that we know will do a lousy job. There is nobody who thinks that the big telcos or cable companies will do the right thing in rural America over the long run if we’re dumb enough to fund them.

Frontier Faces a New Problem

Frontier recently emerged from bankruptcy and seemingly is ready to tackle some of its biggest problems. The company has been laden in heavy debt and unable to pursue an aggressive capital expansion program to build fiber. The company has been bleeding both broadband and cable customers over the last few years.

The company shed $10 billion of debt in bankruptcy and told the bankruptcy court that it intends to immediately start building fiber to kick-start the refreshed business. The industry analysts at MoffettNathanson have opined that a reinvigorated Frontier has a chance to improve performance and to achieve decent returns on capital investments. The analysts expect Frontier to stabilize its customer base by 2023 to 2024 and then begin growing customers and revenues.

However, after barely being out of bankruptcy, Frontier was hit by a lawsuit from the Federal Trade Commission and the attorney generals of Arizona, California, Indiana, Michigan, North Carolina, and Wisconsin. The lawsuit alleges that Frontier knowingly advertises speeds that it knows it can’t deliver. The FTC suit says that “Since at least January 2015, thousands of consumers complained to Frontier and government agencies that the company failed to provide DSL Internet service at the speeds they were promised.”

This lawsuit should be a warning to many other ISPs. The suit specifically attacks the practice of advertising “up to” speeds that no customer can attain. The FTC acknowledges that Frontier says that they might not be able to deliver the advertised speeds to all locations and that speeds are not guaranteed. This aligns with other recent FTC actions where the FTC believes that warnings in the fine print can’t be used to offset significantly different claims in the main body of advertising. Essentially, the FTC says Frontier can’t claim speeds up to 25/3 Mbps when it knows that no customer in a service area can get close to that speed.

The FTC is partnering with states due to a recent court ruling that said that the FTC cannot impose monetary damages. States are allowed to do so, and as partners in the suits, these states will clearly be seeking monetary damages from Frontier.

Anybody that has lived or worked in rural America knows that the FTC and state claims are valid. I’ve worked with clients in Frontier territory where the company claims 25/3 Mbps in the FCC reporting – and according to the suit also in advertising to customers. When we’ve done speed tests in some counties where Frontier is an ISP, we often haven’t seen any customer achieving speeds greater than 10/1 Mbps, with many even slower than this.

It’s worth noting that the FCC allows ISPs to report advertised speeds in the FCC mapping, so according to the FCC, as long as an ISP is advertising a speed to customers, they can report that to the FCC. What this lawsuit says is quite different – it says that ISPs shouldn’t advertise speeds that can’t be delivered. This is something that I’ve always thought the FCC should implement, but they never have. In fact, in the ‘new’ broadband mapping the FCC is planning to introduce it is still allowing ISPs to report advertised speeds instead of an estimate of actual speeds.

While this lawsuit is against Frontier, they are not the only ISP in the country that is claiming speeds to customers and to the FCC that are faster than what can be delivered. In rural areas, we’ve seen this same issue with other large telcos and from numerous WISPs. I would have to think that if Frontier loses this suit that this might be a big warning for the rest of the rural broadband industry.

When the FCC opens up the new mapping to public comments, I predict the agency will be swamped with people complaining about the actual speeds compared to what is being advertised. Oddly, if the FCC sticks with the idea that reporting advertised speeds is okay, it will ignore such complaints – which is not going to make the public very happy.