Look Out for those Grant Gotchas

One of the most disappointing things in the broadband world is when broadband grants have ‘gotchas’ that make it hard to use the money as intended. North Carolina has named its state broadband grant program the “GREAT” grants. That’s a pretty bold name, and I’m sure that the homes and businesses in the states that are getting broadband as a result of these grants think it’s great. But like other grant programs around the country, there are some gotchas in the grants.

Even though I live in North Carolina, I hadn’t looked into the details of the program until I got a call from a part-time professor at NC State. He was struggling while working at home due to COVID-19 and trying to hold remote college classes from a slow home broadband connection. He and his neighbors were upset because the State had awarded a grant in 2019 to bring broadband to his area of Caswell County, and yet nothing has happened. The rumor was that there was something amiss about the grant, but nobody locally knew why they weren’t getting broadband.

It didn’t take long to find that Open Broadband, a wireless ISP, had won a $1.54 million Great grant to bring broadband to 1,194 homes in the County – roughly one-fourth of the rural households in the county that the FCC says don’t have 25/3 broadband in the 2019 Broadband Deployment Report. This state grant was to have been matched with another $1.54 million from the ISP.

Open Broadband told me that the state had yanked the grant due to a change in the grant rules that was introduced after the grant award – a rule that had not been disclosed in the original grant rules. The state administrator of the grant, the Broadband Infrastructure Office, notified Open Broadband after the grant had been awarded that the ISP had to meet one of the following financial tests to receive the funds:

  • Letters from the applicant’s Board of Director or investors guaranteeing the total project cost.
  • A letter or actual statements from a bank or other financial institution verifying total available cash or lines of credit meet or exceed the anticipated total project costs.
  • Letters from a verifiable third-party entity guaranteeing the total project cost.

In case those rules didn’t sink in, the state is requiring an ISP to guarantee 100% of the cost of the project, including the portion of grant being supplied by the State. In this case, the state wants Open Broadband to guarantee over $3 million, even though they are only receiving $1.5 million of grant funding. Most grants that seek proof of financial viability would ask an ISP to guarantee their out of pocket costs – in this case that’s significantly less than $1.5 million since customer installation fees will cover a large portion of the ISP’s grant matching.

It’s ludicrous that the state wants an ISP to guarantee the portions of the grant paid by the State – is North Carolina worried that its own grant money is no good? The state wants Open Broadband to have $3.08 million in free cash or else a guarantee of that amount from a bank or a private investor. Whoever came up with this after-the-fact rule doesn’t understand ISPs or the banking industry.

ISPs don’t sit on much free cash – even fairly large ISPs. We are living at a time when every ISP I know is expanding – something that governments at all levels should support because government constantly says that the private sector should solve the broadband problems in rural America. Few ISPs are sitting on the free cash needed to make this guarantee.

The State will alternatively accept a guarantee from an owner or investor. This request is massively out-of-line with the nature of the project. A personal guarantee means putting your home and retirement savings on the hook. Many small and medium ISPs are already partially financed by personal loan guarantees by owners, and they can’t pledge this twice – even the rare owner that has over $3 million in net personal wealth.

The idea of an ISP having $3 million in an unused line of credit is even more absurd. Only a really large ISP would have a $3 million line of credit. A business line of credit is a loan that hasn’t yet been drawn. Banks are not like credit card companies and they don’t set big credit limits without an expectation that a borrower will use the money quickly.

The only other way to meet this requirement from a bank is with a bank letter of credit. A letter of credit is a formal negotiable instrument – a promissory note like a check. A letter of credit is a promise that a bank will honor the obligation of the buyer of letter of credit should that buyer fail to meet a specific obligation. Banks consider a letter of credit to be the equivalent of a loan. The banks must set aside the amount of pledged money in case they are required to disburse the funds. Most letters of credit are only active for a short, defined time. A letter of credit for a 2-year grant would be unusual and expensive – the ISP would likely to have to pay full interest expense as if this was a loan. The bottom line is that banks don’t issue a letter of credit for this kind of purpose.

I never heard of the concept of guaranteeing grants in this manner until last year. Out of the blue, the FCC suggested that winners of the $16.4 RDOF grants should be required to guarantee matching funds by either holding the cash or supplying a letter of credit. There was such an immediate outroar from the industry that this idea was killed in a matter of weeks. The industry conjectured that the idea came from the big ISPs, which have the FCC’s ear. The big ISPs know this requirement would stop most ISPs from applying for an RDOF grant – which would allow the incumbents to keep milking money out of rural properties with lousy and overpriced broadband. This may not be the reason for the North Carolina requirement, but the timing is suspicious.

This is not the only gotcha in the grant. The state also only reimburses funds that have been spent by a grant awardees once per quarter. Every other grant program I know of reimburses ISP expenses monthly. It’s a major financial penalty to make ISPs wait for months to get expenses reimbursed.

I was surprised to see major gotchas in North Carolina grants. This comes from a state that brags about its history of being first in broadband. For example, North Carolina says it was the first to have brought fast broadband to every school. I have no idea where the State got the idea for the grant guarantees, but it’s an absurd requirement that will do little more than discourage ISPs from investing in the state. ISPS can easily move across the border to nearby Virginia or Tennessee where the grant process is friendlier. North Carolina needs to kill this absurd rule. Those homes in Caswell County deserve the broadband they were promised, and it’s still not too late to make this grant work.

Expect a New Busy Hour

One of the many consequences of the coronavirus is that networks are going to see a shift in busy hour traffic. Busy hour traffic is just what is sounds like – it’s the time of the day when a network is busiest, and network engineers design networks to accommodate the expected peak amount of bandwidth usage.

Verizon reported on March 18 that in the week since people started moving to work from home that they’ve seen a 20% overall increase in broadband traffic. Verizon says that gaming traffic is up 75% as those stuck at home are turning to gaming for entertainment. They also report that VPN (virtual private network) traffic is up 34%. A lot of connections between homes and corporate and school WANs are using a VPN.

These are the kind of increases that can scare network engineers, because Verizon just saw a typical year’s growth in traffic happen in a week. Unfortunately, the announced Verizon traffic increases aren’t even the whole story since we’re just at the beginning of the response to the coronavirus. There are still companies figuring out how to give secure access to company servers and the work-from-home traffic is bound to grow in the next few weeks. I think we’ll see a big jump in video conference traffic on platforms like Zoom as more meeting move online as an alternative to live meetings.

For most of my clients, the busy hour has been in the evening when many homes watch video or play online games. The new paradigm has to be scaring network engineers. There is now likely going to be a lot of online video watching and gaming during the daytime in addition to the evening. The added traffic for those working from home is probably the most worrisome traffic since a VPN connection to a corporate WAN will tie up a dedicated path through the Internet backbone – bandwidth that isn’t shared with others. We’ve never worried about VPN traffic when it was a small percentage of total traffic – but it could become one of the biggest continual daytime uses of bandwidth. All of the work that used to occur between employees and the corporate server inside of the business is now going to traverse the Internet.

I’m sure network engineers everywhere are keeping an eye on the changing traffic, particularly to the amount of broadband used during the busy hour. There are a few ways that the busy hour impacts an ISP. First, they must buy enough bandwidth to the Internet to accommodate everybody. It’s typical to buy at least 15% to 20% more bandwidth than is expected for the busy hour. If the size of the busy hour shoots higher, network engineers are going to have to quickly buy a larger pipe to the Internet, or else customer performance will suffer.

Network engineers also keep a close eye on their network utilization. For example, most networks operate with some rule of thumb, such as it’s time to upgrade electronics when any part of the network hits some pre-determined threshold like 85% utilization. These rules of thumb have been developed over the years as warning signs to provide time to make upgrades.

The explosion of traffic due to the coronavirus, might shoot many networks past these warning signs and networks start experiencing chokepoints that weren’t anticipated just a few weeks earlier. Most networks have numerous possible chokepoints – and each is monitored. For example, there is usually a chokepoint going into neighborhoods. There are often chokepoints on fiber rings. There might be chokepoints on switch and router capacity at the network hub. There can be the chokepoint on the data pipe going to the world. If any one part of the network gets overly busy, then network performance can degrade quickly.

What is scariest for network engineers is that traffic from the reaction to the coronavirus is being layered on top of networks that already have been experiencing steady growth. Most of my clients have been seeing year-over-year traffic volumes increases of 20% to 30%. If Verizon’s experience in indicative of what we’ll all see, then networks will see a year’s typical growth happen in just weeks. We’ve never experienced anything like this, and I’m guessing there aren’t a lot of network engineers who are sleeping well this week.

Bad Customer Service as a Profit Center

There was a December article in Fast Company that spelled out what I’ve long suspected – that many big companies have lousy customer service on purpose – they want to make it hard for customers to get refunds or to drop service. The article was written by Anthony Dukes of USC and Yi Zhu of the University of Minnesota. The article is worth reading if you have the time to click through all of the links, which elaborate numerous ways that big companies abuse their customers.

This certainly rings true for the big ISPs. I harken back to the days of AOL, which was famous for making it a challenge to drop their service. Comcast has always had a reputation of making it hard for customers to break a bundle or leave the company for another ISP.

The article cites some interesting statistics. They claim that in 2013 that a study showed that the average home spent 13 hours per year disputing charges with customer service. That’s nearly two workdays of time, and it’s little wonder that people hate to call customer service.

Customer service at the big telcos and cable companies was never great, but in my time in the industry it’s gotten worse – the big ISPs are now rated at the bottom for customer satisfaction among all corporations. I think the big change in the industry came in the last few decades when the big ISPs got enamored with win-back programs – offering customers incentives to stop them from dropping service. Unfortunately, the ISPs tied employee compensation to the percentage of win-backs and there have been numerous articles published of ISP employees who would not let somebody drop service and who would keep a customer on the phone for an hour to convince them not to leave.

ISP customer service also took a downward spin when every call with a customer turned into a sales call trying to sell more services. Unfortunately, these sales efforts seem to result in new revenues, but it’s irksome to customers to have to listen to several sales pitches to accomplish some simple customer service task.

Dukes and Zhu claim that a lot of customer service centers are structured to dissuade customers from dropping service. They say that long hold times are on purpose to get customers to give up. They cite some customer service centers where the people answering the first call from customers have no authority to change a customer’s billing – only customers willing to fight through to talk to a supervisor have a chance at fixing a billing problem. They claim that chatbots are often set up in the same way – they can sound helpful, but they often can’t make any changes.

They also believe that companies are getting sophisticated and use different tactics for different customers. Studies have shown that women get annoyed faster than men in dealing with poor customer service. Research has shown that some demographics, like the elderly, are easier to dissuade from getting a refund.

Smaller ISPs understand the poor customer service from the big ISPs and most of them strive to do better. However, I know of smaller ISPs with aggressive win-back programs or who use every call as a marketing opportunity, and such ISPs have to be careful to not fall into the same bad habits as the big ISPs.

I find it amusing that one of the many reasons cited for breaking up the Bell System was to improve customer service. Regulators thought that smaller regional companies would be nimbler and do a better job of interacting with customers. This turned out not to be true. In fact, I consider my interactions with monopolies to be the easiest. I can’t recall a call I’ve ever had with an electric or water utility that wasn’t completed quickly and efficiently. Perhaps ISPs ought to strive to be more like them.

Is it Time to Sell?

A lot of ISPs hope to someday cash in on their sweat equity by selling the business. There have been some surprisingly high recent valuations in parts of the industry which raises the question if this is a good time to sell an ISP?

Anybody that has considered selling in the last decade years knows that valuation multiples have been stagnant and somewhat low by historic standards. A lot of properties have changed hands during that time with multiples in the range of 4.5 to 6.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization). Some ISP properties have sold outside of that range based upon the unique factors of a given sale.

In November, Jeff Johnston of CoBank posted a long blog talking about how valuations might be on the rise – particularly for companies with a lot of fiber or with other upsides. He pointed to three transactions that had valuations higher than historic multiples for the sector.

  • Zayo sold their network of 130,000 route miles of fiber transport for a multiple of 11.1 times EBITDA.
  • Bluebird Network in Missouri and nearby states sold a 6.500-mile fiber transport network for a multiple of 10.4 times EBITDA.
  • Fidelity Communications of Missouri sold an ISP with nearly 135,000 customers for a multiple of 11.7 times EBITDA.

Johnston doesn’t say that these high multiples are the new standard for other ISPs. However, he does surmise that the high multiples probably indicate an uptick in valuation for the whole sector. That’s something that’s only proven over time by seeing higher valuations coming from multiple and smaller transactions – but the cited transactions raise the possibility that we’re seeing an increase in valuation for fiber-based businesses.

It’s important to ask why any buyer would pay 10 or 11 times EBITDA. A buyer paying that much will take a decade to recoup their investment if the purchased business continues to perform at historic levels. Nobody would pay that much for a business unless they expect the margins of the acquired business to improve after acquisition – that’s the key to higher valuations. The buyers of these three businesses are likely expecting significant upsides from the purchased properties.

Buyers often see a one-time bump in margin from the increased efficiency of adding an acquisition to their existing business. This is often referred to as an economy of scale improvement – overheads generally become more affordable as a business gets larger. However, buyers rarely will reward a seller for the economy of scale improvements, so this is rarely built into valuation multiples.

A buyer is usually only willing to pay a high multiple if they foresee the possibility of significant growth from the purchased entity. The purchased company needs to be operating in a footprint with upside potential, or else the purchased company needs to demonstrate that they know how to grow. A buyer must believe they can grow the acquired business enough to recoup their purchase price and also make a good return. For a fiber ISP to get a high valuation they have to be able to convince a buyer that the business has huge upside potential. An ISP needs to already be growing and they need to be able to demonstrate that the growth can be ongoing into the future.

One of the more interesting aspects of getting a high valuation multiple is that a buyer might expect the core management team to remain intact after a sale. That often means that part of the compensation from the sale might be incentive-based and paid in the future based upon post-sale performance.

To summarize, an ISP can get a higher valuation if they can convince a buyer that there is future upside to the business. ISPs that don’t have growth potential will not see the higher valuation multiples cited above – although many potential sellers will think these multiples apply to them. The bottom line is that if your ISP is growing and can keep growing, and you can paint that picture to a buyer, your business might be worth more than you expected.

Taking Advantage of the $9B 5G Fund

The FCC will be moving forward with the $9 billion 5G Fund – a new use of the Universal Service Fund – that will be providing money to expand cellular coverage to the many remote places in the US where 4G cell coverage is still spotty or nonexistent. There is a bit of urgency to this effort since the big cellular companies all want to shut down 3G within a year or two. This money will be made available to cellular carriers, but the funding still opens up possible benefits for other carriers and ISPs.

Some of this funding is likely to go towards extending fiber into rural places to reach cell towers, and that opens up the idea of fiber sharing. There are still a lot of places in the country that don’t have adequate fiber backhaul – the data pipes that bring traffic to and from the big hubs for the Internet. In the last six months alone I’ve worked with three different rural projects where lack of backhaul was a major issue. Nobody can consider building broadband networks in rural communities if the new networks can’t be connected to the web.

By definition, the 5G Fund is going to extend into rural places. If the FCC was maximizing the use of federal grant funds, they would demand that any fiber built with this new fund would be available to others at reasonable rates. This was one of the major provisions of the middle mile networks built a decade ago with stimulus funding. I know of many examples where those middle mile routes are providing backhaul today for rural fixed wireless and fiber networks. Unfortunately, I don’t see any such provisions being discussed in the 5G Fund – which is not surprising. I’m sure the big cellular companies have told the FCC that making them share fiber with others would be an inconvenience, so this idea doesn’t seem to be included in the 5G Fund plan.

I think there is a window of opportunity to partner with wireless carriers to build new fiber jointly. The cellular carriers can get their portion of new fiber funded from the 5G Fund and a partner can pick up new fiber at a fraction of the cost of building the route alone. This could be the simplest form of partnership where each party owns some pairs in a joint fiber.

This is worth considering for anybody already thinking about building rural fiber. The new routes don’t have to be backhaul fiber and could instead be a rural route that is part of a county-wide build-out or fiber being built by an electric cooperative. If somebody is considering building fiber into an area that has poor cellular coverage, the chances are that there will be 5G Fund money coming to that same area.

It has always been challenging to create these kinds of partnerships with AT&T and Verizon, although I am aware of some such partnerships. Both Sprint and T-Mobile have less rural coverage than the other carriers and might be more amenable to considering partnerships – but they might be consumed by the possibility of their merger.

There are a lot of other cellular carriers. The CTIA, the trade association for the larger cellular carriers, has thirty members that are facility-based cellular providers. The Competitive Carriers Association (CCA) has over one hundred members.

Ideally, a deal can be made to share fiber before the reverse auction for the 5G Fund. Any carrier that has a partner for a given route will have a bidding advantage since cost-sharing with a partner will lower the cost of building new fiber. It might be possible to find partnerships after the auction, but there could be restrictions on the newly built assets as part of the grants – we don’t know yet.

My recommendation is that if you are already planning to build rural fiber that you look around to see if one of the cellular carriers might be interested in serving the same area. Both parties can benefit through a cost-sharing partnership – but the real winners are rural customers that gain access to better cellular service and better broadband.

It’s All About the Collateral

I’m often asked if a business plan is solid enough to take to the bank for financing. I disappoint a lot of folks when I tell them that, while a solid business plan is important, getting loans is all about the collateral.

Banks are not in the business of understanding your business. They don’t know how to evaluate a broadband business plan. It’s important to understand that in a given week a bank might be offered your broadband business plan, a plan to roll-out a dozen yogurt stores, a plan to combine several farms, and a plan to start a new brewery. They can’t begin to be able to understand the nuances of the many business plans they see.

It’s very easy to become too invested in your business plan. I often hear people describing their business plan as ‘can’t fail’. I can usually demonstrate that this is not so by changing a few of their key assumptions. It’s the rare broadband business plan that can’t be worsened by lowering the customer penetration rate, slowing down the speed of sales, or increasing the interest rate on debt.

Banks understand this. Every bank has a portfolio of failed projects where the bank lost a lot of their loan investment even though a project looked solid. Banks are skeptics by nature because they deal all day with prospective borrowers who are convinced that they are bringing a no-fail project. If a loan is large enough, a bank might hire an expert like me to check the assumptions in a business plan to help to identify the most sensitive variables. However, even with expert advice, a bank is still going to assume that a business can fail.

That’s why I say that the most important thing is collateral. Collateral represents the ability of the bank to recover some of their funds should a project fail. The stronger the collateral, the easier it is for banks to make the loan.

There are various types of collateral. The best collateral is a payment guarantee that kicks in even should a project be a total bust. This is the reason why municipal bonds that are backed by tax revenues can get lower interest rates. If a city builds a fiber network, a golf course, or an arena and the expected revenues don’t materialize, a tax-backed loan requires the city to raise taxes to make the bond payments.

Many new ISPs become familiar with the idea of collateral when banks ask them for a personal guarantee, meaning a borrower must pledge their home and savings as back-up for a project. That guarantee is rarely as powerful as tax-collateral, but it improves a borrower’s chance of getting the loan.

Established ISPs also face loan guarantees. If a telco wants to undertake a large new fiber project, they generally end up pledging their entire existing company to get the new loan. Communities often wonder why existing ISPs don’t expand faster, and more often than not it’s because they’ve already used up all of their collateral on existing loans. Just like with households, every business has a natural lending cap, at which no bank will loan them more.

Banks do consider other issues other than collateral. For example, a bank might consider track record when lending to an ISP that has been successful many times in the past – and that track record might lower the needed collateral. Banks love grants, but love owner equity even more since it means the owner has skin in the game.

Occasionally I see a new fiber venture that gets funded when it probably shouldn’t. There are local banks that lend to a local fiber project because they think their community needs fiber to thrive and survive. A bank in that situation is putting themselves on the line since they see their survival tied to the survival of the community.

The bottom line is that a project without collateral is not easily bankable. Unsophisticated borrowers think the numbers in their business plan tell a bank all they need to know. The truth is that the business plan is several items down the checklist for a bank, with collateral at the top of the list.

Cognitive Bias when Selling Broadband

One of the most successful ways to sell broadband on a newly constructed network is door-to-door sales. I know of numerous fiber overbuilders who have has great success with this sales method. Companies that sell this way all say that some salespeople do better than others.

I’m not going to cover the giant topic of sales training in a short blog, but I’ve been reading about one aspect of the sales process recently. Social scientists have been doing a lot of research into the topic of cognitive bias – the ways that brains take shortcuts to avoid having to do hard thinking all of the time. When somebody answers the door for a sales call, they often automatically react to the salesperson with various kinds of cognitive bias behavior that has to be overcome to make a sale. We’ve all heard that some people are natural-born salespeople, and that means that they have the talent of recognizing cognitive bias. Luckily, this is something that can also be learned.

Here are some examples of the most common kinds of cognitive bias encountered in door-to-door sales.

Attentional Bias. This is the bias where somebody’s actions are affected by the memory of experiences they’ve had in similar circumstances. A salesperson must react quickly if they hear, “I don’t buy from door-to-door salesmen” before the door is slammed in their face.

Confirmation Bias. This is when a person embraces their existing beliefs. Somebody who thinks they already did a great job in picking their current broadband product and provider might not want to admit that they could have done better.

Status Quo Bias. This is a natural desire to keep things the same. This might be the most common objection to buying faster broadband – “If it ain’t broke, don’t fix it.”

Reactance. Reactance is the natural impulse to do the opposite of what you’re told to maintain a sense of independence. In the sales process, this manifests as somebody who perceives the salesperson as pushy and who then reacts to the salesperson rather than to the sales presentation.

Loss Aversion. This is the brain’s natural tendency to fear losses more than gains. This manifests in a fiber sales if the expected installation and conversion process is perceived to be a bigger hassle than the resultant benefit from better broadband.

Bandwagon Effect. This is a bias that can work in a salesperson’s benefit. People tend to be influenced by what their neighbors do, so being able to tell them that their neighbors have already purchased can overcome reluctance. But this can work against a new market entrant if people perceive that sticking with the brand name incumbent is the consensus choice.

Ambiguity Effect. This is the tendency for the brain to avoid scenarios where the outcome is uncertain. Even if customers accept the benefits of faster broadband, they might worry about network outages or the responsiveness of the new provider in responding to customer service calls. Uncertainty can stop them from making a change.

Selection Bias. This is the natural tendency of the brain to notice more of something when it’s brought to their attention. In the sales process, this might mean that a potential customer will assume that your product has many of the same flaws and problems as their current product.

Mere Exposure Effect. This is the tendency for the brain to accept something if they are already familiar with it. This is why companies do brand advertising in a market along with door-to-door sales. A lot of potential customers are a lot more comfortable considering a new broadband product if they are already familiar with the new provider. This is also why ISPs often do well when moving into neighboring communities where many people already know thier name and have heard about them.

How Smart are Promotional Rates?

I think the big ISPs are recognizing the impact that special promotion rates have on their bottom line. Promotional pricing is the low rates that cable companies offer to new customers to pry them away from the competition. Over the years promotional rates have also become the tool that cable companies use to retain customers. Most customers understand that they have to call the cable company periodically to renegotiate rates – and the big ISPs have routinely given customers a discount to keep them happy.

We’re finally seeing some changes with this practice. When Charter bought Time Warner Cable they found that Time Warner had over 90,000 ‘special’ pricing plans – they routinely negotiated separately with customers when they bought new service or renegotiated prices. Charter decided to end the practice and told most former Time Warner customers that they had to pay the full price at the end of their current contract period.

We’ve seen the same thing with AT&T and DirecTV. The company decided last year to eliminate the special discount on DirecTV and DirecTV Now. When the discount period ends for those products the company moves rates to the full list price and refuses to renegotiate. The practice cost AT&T almost a million customers just in the first quarter of this year. But AT&T says that they are glad to be rid of customers that are not contributing to the bottom line of the company. I’ve seen where the CEOs or other big ISPs like Comcast have said that they are considering changes in these practices.

At CCG we routinely examine customer bills from incumbent ISPs as part of the market research of helping ISPs entering new markets. While our examination of customer bills has never reached the level of equating to a statistically valid sample, I can report that the vast majority of bills we see have at least some level of discount. In some markets it’s rare to find a customer bill with no discount.

The discounts must accumulate to a huge loss of revenue for the big ISPs. The big ISPs all know that one of the only ways they are going to be profitable in the future is to raise broadband rates every year. The growth of broadband customers overall is slowing nationwide since most homes have broadband, although Charter and Comcast are still enjoying the migration of customers off DSL. The ISPs are continuing to lose revenues and margins as they lose cable and landline voice customers. Most US markets are seeing increased competition in broadband services for businesses and large MDUs. There’s not much left other than to raise residential broadband rates if the big ISPs want to satisfy the revenue growth expected by Wall Street.

If the big ISPs phased out promotional discounts it would probably equate to a 5% to 10% revenue increase. This is something that is becoming easier for a cable company to do. Many of them have already come to grips with cord cutting, and many are no longer fighting to keep cable customers. Cable companies are also less worried over time about customers leaving them to go back to DSL – a choice that is harder for consumers to make as the household need for broadband continues to climb.

Most ISPs won’t make a loud splash about killing discounts but will just quietly change policies. After a few years, I would expect customer expectations will reset after they realize that they can no longer extract discounts by threatening to drop service.

I’ve always advised my fiber overbuilder customers to not play this game. I ask clients if they really want to fight hard to win that slice of the market of customers that will change ISPs for a discount. Such customers flop back and forth between ISPs every two years, and in my opinion, companies are better off without such customers. Churn is expensive, and it’s even more expensive if an ISP provides a substantial discount to stop a customer from churning. Not all of my client agree with this philosophy, but if the big ISPs stop providing promotional discounts, then over time the need to do this for competitors will lessen.

This is certainly a practice I’d love to see slip into history. I’ve never liked it as a customer because I despise the idea of having to play the game of renegotiating with an ISP every few years. I’ve also hated this as a consultant. Too many times I’ve seen clients give away a huge amount of margin through these practices, giving away revenue that is needed to meet their forecasts and budgets. It’s dangerous to let marketing folks determine the bottom line because they’ve never met a discount they don’t like – particularly if they can make a bonus for selling or retaining customers.

Consider Rural Health Care Funding

One of the sources of the Universal Service Fund that often is forgotten is the Rural Health Care Program. The FCC recently carried forward $83.2 million that was unspent in 2018 into the 2019 funding pool. In June Chairman Ajit Pai proposed to raise the annual cap on this fund from $400 million to $571 million. That’s where this fund would have been today had the original fund been indexed by inflation since it was started in 1997. He also proposes that the cap on this Fund grow by inflation in the future.

I have a lot of clients who help their customers benefit from the Schools and Libraries Fund, but many of them never think about doing the same thing with the Rural Health Care Fund.

The Rural Health Care Program provides funding to eligible health care providers for broadband and voice services. Eligible health care providers must be either a public or a non-profit entity. The funds can be used for entities such as 1) educational institutions offering post-secondary medical instruction, teaching hospitals and medical schools; 2) community health centers providing care to migrants; 3) local health departments; 4) community mental health centers; 5) non-profit hospitals; 6) rural health clinics; 7) skilled nursing facilities; and 8) consortiums of providers that include one or more of the preceding list.

This program is comprised of two programs: The Healthcare Connect Fund Program and the Telecommunications Program. The Healthcare Connect Program provides support for high-speed broadband connections. Eligible entities can receive as much as a 65% discount on monthly broadband bills for services like Internet access, dark fiber, or traditional telco data services. This works a lot like the E-Rate program for Schools and Library program. The health care facility pays the reduced rate for service and the partner ISP can collect the discount from the Universal Service Fund.

The health care providers can also ask for assistance with telecommunications equipment and can use the funds to help pay for the construction of fiber facilities. This funding can be an interesting way for a rural ISP to get some assistance for paying for a fiber route to reach a health care facility (and then use that fiber to also serve other customers).

The Telecommunications Program works a little differently. In that program the health care facility can buy broadband and telecommunication services at rates that are reasonably comparable to rates charged for similar services in nearby urban areas. That’s likely to mean discounts smaller than the 65% in the Healthcare Connect program. Functionally this still works the same and the ISP can collect the difference between the urban rates and the rural rates.

Just like with E-Rate, the health care provider must apply for this funding. But also like E-Rate, it’s typical for an ISP to help prepare the paperwork. The paperwork will feel familiar to any ISP already participating in an E-Rate situation.

It’s obvious that since $83.2 million is being carried over from 2018 that rural health care providers are not all taking full advantage of this program. I see articles all of the time decrying a crisis in rural health care due to the high costs of providing services in rural America. This program can bring subsidized broadband connection to health care facilities at a time when that is likely a welcome relief.

This funding has been available for a long time, yet I rarely hear clients talking about it. I’m guessing most rural ISPs have never participated although there are likely eligible health care facilities nearby. This likely will require some training for potential customers. School and library associations have done a good job at alerting their members that this subsidy exists – but I’m guessing the same has not been done with rural health care providers. An ISP willing to tackle the filings can gain a great customer while also benefitting their community.

Predicting Financial Success

I’m often asked to provide a rule-of-thumb metric to predict the financial success of a broadband business plan. The two most commonly requested metrics are customer density (how many households are needed per mile of road) or the percentage of customers needed (penetration rate) to make a fiber business plan work.

After having done hundreds of feasibility studies I’ve stopped boiling success down to any simple metric – it’s never that simple. The reality is that there are a number of important variables that have a major impact on operating a successful broadband business plan. Every ISP and every market is different, and one or two variables can have a huge positive or negative impact on a given business plan.

Following are the major variables that can make a difference when building fiber. A similar list can be made for deploying fixed wireless or other technologies.

  • Customer penetration rate. An area with low density might still have great financial results if the penetration rates are high enough. I’ve seen expected penetration rates vary from 40% in some large markets to over 90% in markets with no existing broadband. Changing the expected penetration just a few percentage points can have a big impact on cash flow. This is why we think it’s mandatory to do a survey to understand customer interest in fiber broadband.
  • Labor rates. The cost of staffing varies widely across the country and between companies. and there are places where labor costs twice as much as in other parts of the country. Labor costs also include taxes and benefits which vary widely by state and between ISPs. The staffing structure of the ISP also comes into play since companies vary between lean and staff heavy.
  • Borrowing costs. The interest rates and the term of a loan (15-years versus 25-years) can have a huge impact on a fiber project since the size of the borrowing is usually significant. Things that mitigate borrowing costs such using some equity, getting grants, etc. can have a big positive impact.
  • Prices. Broadband prices can have a big impact. We know that most customers will buy the lowest priced broadband that has a reasonable speed. There is a big difference if this primary product is at $50 versus $60.
  • Cost of the Network. The metric I’m often asked about is the minimum number of households needed per road mile. While customer density is an important factor, there are many other issues that can have a big impact. The cost of building fiber varies widely across the country due to some of the following:
    • The mix of aerial and buried fiber has a giant impact.
    • For buried fiber, the type of soil matters, because the presence of rock adds big costs.
    • Again labor rates, meaning the cost of construction crews. We’ve also seen projects that took federal money that had to pay prevailing wages for rural construction that killed the project.
    • The condition of the poles and the effort and cost needed for make-ready can be a huge factor.
    • The difference between building in the power space versus the communications space on poles can be significant.
    • Choosing PON versus active Ethernet can have a difference, with Active E having larger fiber bundles needing more splicing.
    • One of the biggest impacts is the cost of fiber drops – the two important factors are 1) average distance customers are from the road, and 2) who builds the drops (we’ve seen the labor costs for drops vary by several hundred percent).
    • Building in phases versus building as quickly as possible can sometimes make a big difference.
    • Customer density is important, but the above factors can matter a lot more. Density can also be a tricky number. Consider two examples of companies that would have the same average density but significantly different costs: Company A has no towns and the rural areas average 10 households per road mile. Company B includes one decent sized town but is surrounded by big farms but still averages 10 households per road mile.

Clients always want me to predict the outcome of a business plan before we undertake the needed business models. I’ve learned to not predict. I’ve worked on projects that look to be far more profitable than I would have expected and looked at others that don’t look feasible for some reason. As an example, I recently finished a business plan model where it turns out that the existing poles in the new market were nearly unusable and the alternative of going underground was impractical because of rock. This one factor made it hard to justify building fiber in a market that otherwise would have passed the sniff test using high-level metrics.