Improving Your Business Regulation - What is it Good For?

In-kind Contributions for BEAD Grants

The process of winning BEAD grants is expensive, and grant applicants should do everything possible to lower out-of-pocket costs for winning the grant. Of the most interesting ways to lower the cost of accepting a grant is through the use of in-kind matches. In-kind contributions recognize non-cash benefits of property, goods, or services that will benefit a BEAD project. In-kind matches can be used as part of the process of calculating the matching funds being provided by a BEAD grant applicant, and many other grant programs also allow for in-kind matches.

To use a simple example, if a grant applicant must provide a 25% grant match, then any approved in-kind matches can be used to satisfy a portion of that match requirement. If a grant applicant can justify 5% of the cost of the project as in-kind contributions, then the cash matching in this example would be reduced to 20%.

The BEAD grant process explicitly allows for in-kind matches. The use of in-kind matches for any federal program is described in federal regulation § 200.306 – Cost Sharing or Matching. I must warn you that the federal rules for in-kind matches are confusing, even for accountants.

In-kind matches can be contributed by the grant applicant or by a third party like the local government. The Frequently Asked Questions for BEAD provides a list of examples of costs that might be considered as an in-kind match:

  • Employee or volunteer services
  • Equipment
  • Supplies
  • Indirect costs (this one has me scratching my head)
  • Computer hardware and software
  • Use of facilities
  • Access to rights-of-way
  • Pole attachments
  • Conduits
  • Easements
  • Access to other types of infrastructure

How might an in-kind match work? Here are a few examples.

  • There might already be empty conduits in the BEAD grant area that can be used by the BEAD grant winner to save money on construction. If the BEAD grant winner or some other owner of the conduit, like a local government, doesn’t charge for the use of the conduit, a value can be calculated for the benefit from the conduit and used as an in-kind match.
  • A grant applicant might have already obtained rights-of-ways inside the BEAD grant area. Or perhaps a local government is willing to provide the rights-of-ways for free to encourage the construction of fiber. Some of that past or current value of contributed rights-of-way can be recognized as an in-kind contribution.
  • A grant applicant might have made a significant investment in mapping or engineering software in the past. If it can use that software for the BEAD process without a new large charge, then some portion of the value of the software might be considered as an in-kind contribution.
  • A local government might provide free permitting, location services, or traffic control as a way to encourage the construction of a fiber network. The imputed value of those services at market rates can be an in-kind contribution.
  • An ISP might have multiple reels of fiber already in inventory. The cost of that fiber can be used as an in-kind contribution as long as it is not also billed as material for the construction process.

I must note that these examples are all subject to being approved by the State Broadband Office that will be administering a given BEAD grant. No in-kind contribution is automatic, and the normal process is to negotiate the use and the value of each in-kind contribution with the party awarding the grant. But since it looks like State Broadband Offices are going to be rushing the grant application process, it’s worth claiming as many legitimate in-kind matches as possible to help with the initial grant scoring.

Calculating in-kind contributions is worth pursuing because almost every BEAD grant project will benefit from some existing assets or services that can be classified as in-kind contributions. Every dollar recognized as an in-kind contribution reduces the cash contribution needed for the grant matching.

I’ve also note that there are a number of states that are giving extra grant scoring points for applicants who have local contributions towards a BEAd project. Many local governments will be unable to make cash contributions towards BEAD projects, but it’s well worth talking to them now about contributing in-kind matches.

Improving Your Business The Industry

Bundling Cellular with Broadband

The biggest cable companies have been successful in recent years in bundling cellular service with broadband and cable TV. Comcast and Charter have been at this the longest, but most of the next tier of cable companies are also now offering cellular service.

The cable companies launched their cellular products by operating as an MVNO (Mobile Virtual Network Operator). That’s another industry acronym to remember that means that the cable companies purchase and resell cellular minutes, texts, and data from one of the big cellular carriers.

This MVNO business plan works for cable companies for two reasons. First, they know that a huge percentage of cellular usage is made from home. When  a customer is at home with a cellphone, the outgoing cellular calls, texts, and data can use the customer’s WiFi to connect to the cable company broadband – meaning the cable company doesn’t have to pay for the usage to the underlying cellular company.

The biggest cable companies have also selectively started to install their own cell sites in their busiest neighborhoods to totally bypass the cellular carriers. For example, Comcast purchased a lot of spectrum that can be used for its own cellular service. Over time, they will probably move a lot of cellular traffic directly to their own network – although they will always need the MVNO service to cover customers who make connections outside the reach of a cable company cell tower.

The cable companies have collectively been very successful. They are selling cellular service at a low price, with the primary advantage to use cellular bundling to reduce churn – a customer who wants to drop broadband also has to find a new cellular service.

Smaller ISPs are now being offered the same bundling opportunity. The National Content & Technology Cooperative (NCTC) has been offering white-label cellular service to members. This uses an MVNO arrangement that buys cellular minutes, text, and data from AT&T.

Small ISPs share the same primary advantage as cable companies in that they can hand a lot of cellular traffic through the landline network. However, smaller ISPs who buy this service are not likely to ever be able to find the spectrum needed to directly get into the cellular business with their own towers.

Today’s blog is to warn small ISPs about the risks of this business plan. One of the advantages of having been in the industry for a long time is that I have seen similar arrangements come and go several times over the years. Where the big cable companies probably have the economic power to keep these contractual arrangements for many years, smaller ISPs, even collectively, have no negotiating power with the big cellular carriers.

I refer to the MVNO business as arbitrage. This means that an ISP offering the resold cellular services has zero network to back up the business. The small ISP is completely at the mercy of the big cellular companies to continue the relationship – and that cannot be guaranteed.

I recall twenty five years ago that a lot of my clients had AT&T cellular stores and resold AT&T cellular service – until the day when AT&T decided to pull the plug on the business line and stranded my clients with a big inventory of cellphones. I recall numerous clients that had a similar arrangement with Sprint, and some of them went so far as to jointly build towers with Sprint. That relationship also came to an abrupt end. I recall that even before Spring pulled the plug on the MVNO business, it changed the profit-sharing arrangement to the point where small ISP partners made no profit.

My advice to an ISP that enters the MVNO business is to not make it central to your business plan. Use cellular as a bundling opportunity, but know that it’s almost inevitable that the relationship and product will end some day. It might be two years or ten years, but arbitrage opportunities inevitably come to an end – I can’t recall one with staying power. At some point an executive at the underlying cellular company will decide the profits from the arrangement don’t justify the cost and effort and will pull the plug.

Rural carriers should be particularly cautious about putting their name on a cellular network with poor coverage. In much of the country the cellular coverage in rural areas is abysmal. Putting your brand name on a lousy cellular network can hurt your brand name more than the benefit of picking up the cellular bundle.

I am not recommending that ISPs should avoid the cellular opportunity. If it makes money and helps to sell broadband then give it a hard look. My caution is that a small ISP in an arbitrage arrangement has zero market power, and that the arbitrage opportunity can stop abruptly at any time. The folks trying to talk you into the opportunity probably won’t mention this possibility.

Improving Your Business The Industry

Community-Wide WIFI

Somebody sent me an article from BocaNewsNow that talks about the trend that Hotwire is seeing in communities that want broadband everywhere. Residential communities in Florida are investing in outdoor WiFi networks that allow residents to connect to broadband from everywhere on a property, including tennis courts, lakefronts, and common community areas.

Communities are advertising ubiquitous broadband as an attractive amenity, and homeowners associations are investing in the technology at the prompting of residents.

It’s an interesting idea, but not a new one. Folks might remember the municipal WiFi craze of twenty years ago when cities everywhere were considering installing massive outdoor WiFi networks as a way to provide broadband to everybody. This was such a hot topic that there was even a magazine for municipal WiFi and conventions where folks came to learn about it. The largest such experiment was in Philadelphia, but there were many other cities that tried this on a smaller scale.

All of the early attempts for creating massive outdoor WiFi failed. The main reason for the failure was technical. The technology required deploying large numbers of pole or building-mounted radios that operated in a mesh network. The radios were mounted fairly close to each other so that there was a radio every several blocks in all directions. The advantage of a giant mesh network was that a customer walking around a community never left the network and didn’t have to keep logging in to keep the same connection.

But there was a giant downside that was never solved. The mesh radios constantly communicated with neighboring radios so the network could reconfigure to avoid a faulty or overloaded radio. It turns out that large early mesh networks spent more bandwidth communicating between neighboring radios than in providing bandwidth to users. The whole concept crumbled once a few cities tried this on any scale.

The other issue that killed the idea was that home broadband was improving drastically during this same time period. Speeds were climbing from cable companies and telcos, and folks were suddenly able to buy speeds of 6 Mbps to 12 Mbps, which quickly made the 1-2 Mbps speeds on wireless mesh networks feel glacial.

Over the years, outdoor WiFi technology has improved dramatically like other technologies. Since the early days of the technology, the FCC approved the 5 GHz, and more recently the 6 GHz bands of spectrum for use in WiFi networks. Outdoor hotspots that are fed with significant backhaul can now easily deliver speeds that are adequate for most of the kinds of uses of broadband that would be expected outdoors. Folks can watch videos, join Zoom calls, and use the outdoor WiFi network to stay connected.

Hotwire claims that the demand for outdoor WiFi has also grown due to people now working from home. It’s attractive for employees to take a laptop to the pool or a park rather than be tied to a desk all day.

I’ve talked to a lot of cities that have already expanded or are considering expanding public WiFi to parks and other public areas. The pandemic showed a lot of city officials that there are a lot of folks who need broadband access and don’t have it at home for some reason. It’s one of those amenities that, once you have it, you wonder how you lived without it.

Improving Your Business

Creating Brand Awareness

ISPs are entering new broadband markets at an unprecedented rate. There have always been ISPs expanding into new markets, but I’m seeing ISP expansion at a far greater rate than ever before. A large percentage of new ISPs are entering markets where they have never served and are operating under brand names that may not be familiar to potential customers. Today I want to talk about some basic Marketing 101 concepts that any ISP entering a new market should be aware of.

It’s easy for somebody bringing fiber to a market to assume that the folks in a new market will flock to the new opportunity – but market research has shown that this is not the case. No matter how much folks might want a better broadband alternative, they also need to be convinced that they can trust the new ISP.

Local ISPs that already operate near a new market have some advantage if folks in the community already know their name. But I think ISPs often overestimate how well they are known in a nearby community – it’s likely that a significant percentage of a community will not know them even if they’ve operated in the region for many years. People tend not to pay attention to brand names for companies and products that are not available to them.

Nielsen has been doing market research for many years and offers up some interesting statistics about the effectiveness of advertising aimed at building a brand identity. The two characteristics that Nielsen says are mandatory for somebody entering a new market are baseline brand awareness and brand recall. These metrics measure how well the residents of any community recognize a brand name (brand awareness) and know what the company behind the brand name sells (brand recall). One other important characteristics is how many folks in a community have a negative opinion of the brand name. This last characteristic defines the uphill battle that the big telcos must overcome in rural markets where a large percentage of folks have an ingrained negative opinion of them.

One of the most interesting statistics from Nielsen is a measure of the effectiveness of brand advertising. In a market where less than half of residents have heard of a brand name, a good brand advertisement can raise awareness of the brand by 8% for those folks that hear or read the ad. The effectiveness of brand advertising decreases with the familiarity of the brand. For instance, if 75% of folks in a community already know a brand, then there is only a 3% bump in positive brand building among those viewing an ad.

These statistics point out a few things that an ISP entering a market should consider. First, how well do the folks in the community already know you? When residents hear your brand name, do they know you are an ISP and think of broadband? Do the residents have a positive or negative opinion of your company? These are things that can be measured in statistically valid surveys.

But many ISPs take the conservative approach that folks do not know their brand name and reputation. Even in communities where a significant number of residents might know them, they feel that they need to build brand name awareness among folks that do not know them.

The relatively low success rate of a single brand-building ad should remind an ISP that it has to find multiple ways to get the word out about them entering the market. The percentage of folks that will see any advertisement is small, and the incremental impact of brand-building only applies to those that see your ads. This means that a new ISP should leave no stone unturned. On top of the normal ad channels, ISPs should work hard to get stories about entering the market in the newspaper, on social media, and local TV. New ISPs shouldn’t miss opportunities to have a presence at any local events where lots of people gather.

The bottom line is that an ISP should assume that most people in a new market don’t know who they are. Even if they do, they probably won’t have an opinion if you are a good or bad ISP. In fact, if the community has experience with poorly performing incumbents, a new ISP should assume that folks will be skeptical of all ISPs.

It’s too easy to bring a fiber network to a new market and assume that folks will automatically flock to it. I’ve known ISPs who are shocked that they don’t get the flood of new customers they expected. ISPs need to take a page from Marketing 101 and build awareness of their brand name and plant the seed that it is not the same as the incumbents. ISPs that can make that connection with the public usually fare well.

Improving Your Business

Safe Software Upgrades

We’ve had some spectacular recent failures of software upgrades gone wrong. The one that got the most press was a software problem at the FAA that knocked out nationwide flights by corrupting the NOTAM system that transmits real-time information to pilots about flight hazards and airspace restrictions. The FCC said the outage was created when personnel unintentionally deleted files while working to correct synchronization between the live primary database and a backup database.

There seem to regularly be outages of Internet platforms caused by software issues. In the last year, there have been outages at Google, Facebook, Twitter, and dozens of other software platforms. The telecom industry has had plenty of outages caused by similar issues that have knocked out large chunks of the Internet backbone or various data centers. Any of these outages that were software-related have one thing in common – with good software upgrade procedures, the outages likely could have been prevented.

Telephone companies have the longest history working with software upgrades that are capable of knocking out networks. The possibility of big voice outages crept into the industry when we replaced electromechanical switches with electronic switches. The big telephone companies developed software upgrade protocols that were designed to minimize outages due to software upgrades. Even when upgrades went poorly, smart telcos adopted processes for quickly flipping back to the original configuration. The frequency and the size of the software outages we keep seeing today are good indicators that a lot of companies are not following the safe practice that have been around for decades.

One of the first things that anybody that touches a core of a network should understand is that there is no such thing as a casual upgrade or casual maintenance of a mission critical system. It’s obvious there are bad practices in place when one technician can delete or modify a file and cause a major outage – it should be impossible for somebody to have access to casually do that.

The processes for safe software upgrades are well known. They require a lot more discipline than many network engineers want to use – but they are safe. The tried-and-true way to make a software upgrade is as follows:

Have a Project Manager for the Upgrade. It is vital to have one person in charge of the upgrade. They can get assistance in planning and doing the upgrade, but they need to be ready and authorized to react if things don’t go as planned.

Develop a Checklist. There should be a step-by-step checklist of all aspects of the upgrade. Make sure to understand every piece of equipment and software that will be affected by the upgrade. Then, most importantly, develop a step-by-step list of the steps required to perform the upgrade.

Break the Upgrade into Manageable Steps. If possible, the upgrade should be done in stages where progress can be measured and tested after each step.

Establish a Baseline / Establish a Go-Back Process. Establishing a baseline means understanding the current network configuration in detail. It means understanding the exact settings of every piece of software and equipment. Once the baseline is in place there should be a go-back process. This is the process of returning software and hardware to the original configuration if something goes wrong during the upgrade. Ideally, the go-back would be something that can be implemented quickly, and if designed well, can be done in minutes.

Make Sure to have Vendor Support. It’s worth considering having a vendor representative on site for major upgrades, or on alert for minor ones. I have seen clients schedule an upgrade over a holiday, not thinking that the needed expertise at the vendor is probably not going to be available.

Pre-test Every Component before the Cut. Safe practices establish a test lab for a complicated upgrade where the new software and/or hardware is tested first in a lab setting instead of live.

Take Every Upgrade Seriously. I often see companies follow most of the above steps for major upgrades only to see them knock out their network for what they think of as simple upgrades or routine maintenance.

It’s easy to define a bad upgrade process as one where a single technician can unilaterally change files and setting in a mission critical system without going through any of the above processes. Every time there is a bad outage we hear reasons for the outage like a corrupted file or bad hardware – nobody ever admits they were too casual with an upgrade, although that’s probably the real reason for the outage.

Improving Your Business

Competing Against Big Cable Companies

I’m asked at least twenty times a year how a small ISP can compete against the big cable companies. The question comes from several sources – a newly-formed ISP that is nervous about competing against a giant company, a rural ISP that is entering a larger market to compete, or investors thinking of funding a new ISP. These folks are rightfully nervous about competing against the big cable companies. Comcast and Charter together have roughly 55% of all broadband customers in the country, so the assumption is that they are formidable competitors.

It’s more realistic to say that they are decent competitors. They have slick marketing materials to try to lure customers. They have persuasive online marketing campaigns to snag the attention of new customers. They have good win-back programs to try to keep customers from leaving them.

But the two big cable companies have one obvious weakness – their prices are significantly higher than everybody else in their markets. Every marketing push by these companies involves giving temporary low special prices to lure customers – but those prices eventually revert to much higher list prices.

There is a great example of this in the market today. Both Verizon and T-Mobile have been adding large numbers of broadband customers to their fixed wireless FWA products that deliver home broadband using cellular spectrum. The two cellular companies have been highly successful in the marketplace, adding over 2.6 million new broadband customers through the first three quarters of 2022, while Comcast and Charter added about half a million customers during that same time period – mostly at the start of the year.

The FWA wireless product is clearly competing on price. The FWA broadband is not as fast or robust as cable company broadband, but the prices are attractive to a lot of consumers. For example, T-Mobile offers 100 Mbps broadband for a $50 monthly fee for customers willing to use autopay – a price T-Mobile says will never increase. This is far below the prices of the cable companies, which are in the range of $90 per month for standalone broadband.

I thought I’d take a look at how Comcast is competing against the lower-price FWA products. Comcast has two special offers in January 2023 for standalone broadband.

  • In a special offer that ends February 1, Comcast will provide 400 Mbps broadband for $30 per month, which requires autopay. The special price is under a contract for one year, but the special price extends for two years (meaning that if a customer terminates during the first year they have to pay for the remaining months of the contract). The special price for this product was higher in the past and likely has been lowered to compete against FWA.
  • The other offer is ongoing and doesn’t end on February 1. Comcast will provide 800 Mbps download speeds for $60 per month, which requires autopay. This is also a two-year term, with the first year under a contract.

Comcast then adds hidden fees to the special price. Unless a customer brings their own modem, Comcast charges $15 per month for a WiFi modem, a price that was increase by $1 this month. In many markets, Comcast also has data caps, and customers that exceed 1.2 terabytes of usage per month are charged $10 for each additional 50 gigabytes of data used in a month.

For the 400 Mbps product, a customer who brings a modem and who doesn’t exceed the data caps will pay $30 per month if using a bank debit and $35 per month with a credit card debit. Using the Comcast WiFi modem (which most customers do), raises the monthly price to $45 or $50 – right in line with the T-Mobile FWA product. But the kicker comes at the end of the term when the price, before a cable modem, jumps to $92 per month, and $107 with the modem. The result at the end of the 800 Mbps special is similar, with the price rising to $97 per month before a WiFi modem. Anybody buying the special today must also worry about whatever rate increases Comcast adds to the base broadband price by 2025.

The special prices offered by the big cable companies are alluring – customers can get a significant discount for a year or two. But inevitably, the prices will skyrocket – and in the case of the 400 Mbps special will more than double at the end of the discounted special.

ISPs that compete against the big cable companies have learned that all they have to do to compete is to offer fair prices and wait out the specials. Over time, customers who get tired of the pricing yoyo will come around. ISPs with fiber tell me that customers that come to them from a cable company almost never go back to cable. Customers appreciate fair pricing with no games and a reliable broadband product that delivers the promised speeds – that’s how you compete against the big ISPs.

Improving Your Business

Should You Be Benchmarking?

As recently as fifteen years ago, I was often asked by many of my clients to help them benchmark their ISP against their peers. By this, they wanted to know if they had the right number of employees for their customer base, if their revenues and expenses were in line with other similar ISPs, if they had too much expense from overheads, etc.

I always tried to help them, and I would gather statistics from other ISPs and share it with everybody who contributed information. But after a while, I found something that didn’t surprise me but which surprised most of my clients. It turns out that ISPs were not particularly comparable. They seemed to differ in most of the statistics that my clients wanted to understand. Interestingly, a lot of the folks with significantly different metrics considered themselves to be successful.

I started to dig into these differences, and that’s when I realized that, at least for relatively small ISPs, that benchmarking and comparing metrics between peers had little relevance to overall success. What I found on deeper examination was something I already knew but could now prove – that every ISP is unique.

Some of the reasons that ISPs differed in metrics was due to the way they purposefully operated.

  • ISPs differed significantly in their commitment to fix customer problems. Some of my clients didn’t react to customer outages after hours and on weekends, while some had a philosophy of not going home for the day until customer issues were resolved.
  • Some clients purposefully kept functions in-house rather than outsource for a lower cost due to a commitment to keep jobs for long-time employees.
  • Some ISPs set rates as low as possible to benefit the public, while others strove to maximize profits.
  • Some of my clients used software to automate processes as much as possible, while others kept the same methods in place that had worked for decades.
  • Some clients spent extra money to have pension plans and top-notch health insurance for employees while others were less generous.
  • Some of my clients were fully leveraged with debt to take advantage of growth opportunities, while others took pride in being debt free.
  • Some clients served highly rural areas where a truck toll to visit any customer was a huge time-eater.

These kinds of differences make it nearly impossible to make a side-by-side comparison of two ISPs, even ones with the same number of customers.

There was a time when rural independent telephone companies shared so many common characteristics that it was possible to gather benchmarking data that they found useful. But once these companies started to build networks outside of the regulated core areas, the companies changed. Growth outside the company meant competing without subsidies and only tackling growth that looked both manageable and profitable.

Today there is such a wide variety of ISPs that it’s even more difficult to compare them. Is it even possible to compare an ISP associated with an independent telco, one started by an electric coop, one created by a municipality, and one that is an overbuilder not associated with any other business?

This is not to say that mall ISPs don’t have a lot to learn from each other – but benchmarking is probably the least useful approach to understanding the business. ISPs all benefit from comparing technical solutions, software systems, marketing techniques, and how they market against large competitors. But none of that is benchmarking and just means small ISPs benefit from sharing information with similar peers.

Improving Your Business

Should ISPs Consider Open-Access?

There are suddenly a lot of open-access networks springing up around the country. Traditionally, open-access networks have been built by local governments such as the PUDs in Washington, the small cities in Utah that are part of Utopia, or cities in states like Colorado. Today, there are also open-access networks being built by commercial network owners.

I’ve been asked by several ISPs if they should consider operating on an open access network. Like with any decision of this magnitude, there are no easy right or wrong answer, but instead a lot of pluses and minuses to consider. Following are a few of the most important factors to consider about operating on an open-access network.

Capital Expenditures. One of the primary reasons to think about using somebody else’s network is the savings from not having to fund and built a new network. For small ISPs without a lot of borrowing capacity, an open-access network might be one of the easiest ways to get more customers.

But there is a flip-side to not spending money on capital. If the ISP plans on eventually selling the business, there is a lot more long-term value created by owning a network than by riding somebody else’s. There might be far more corporate value created by building a small fiber network with a few thousand customers than by serving 10,000 customers on an open-access network. If you pursue open-access, it has to strictly be about the cash flow generated today rather than about the value created in the future.

Economy-of-scale. Another reason to consider operating on somebody else’s network is that anything that makes your ISP larger adds to economy-of-scale. There is a big benefit to spreading the costs of overheads like OSS/BSS systems and corporate staff costs over as many customers as possible. Any costs you can shuffle off to an open-access expansion should make your other markets more profitable.

But economy-of-scale savings can diluted if you decide to tackle a open-access network that is far away from your existing operations. It’s never as cost-efficient to open and operate in a new distant market compared to one that is next door.

Trust. One of the scary parts of being on an open access network is being captive to the processes and prices charged by the network owner. An ISP is taking a leap of faith that the network owner will always perform as promised.

If the network owner decides to increase wholesale rates, there is no option but to go along. While a rate increase would also apply to the other ISPs on the open-access network, it’s possible for rates to get too high compared to other competitors like the cable company.

It can also be a problem having to rely on somebody else’s processes. For example, in most open-access networks, the network owner builds new fiber drops and installs customer electronics. It can be devastating for a marketing plan if the network owner can’t deliver customer installations on time, or decides it has a limited budget to add more customers. An ISP is also a captive of all other processes of the network owner like trouble reporting and resolution, timely network upgrades, network monitoring, and the ordering process. Even if the processes are good today, the network owner can change the way they do anything. This is possibly the biggest reservation for an ISP that is used to working on its own network.

No Technology Advantage. It’s an odd situation for an ISP to be operating on a fiber network and yet have no technology advantages over many of your competitors. Every ISP on the open-access network has the identical capabilities as you. This means that an ISP on an open-access network must distinguish themselves through either price or customer service. Open-access can turn into a race to the bottom if one of the ISPs on the network decides to deeply slash prices.

This blog wasn’t meant to scare ISPs away from working on an open-access network. There are ISPs that are thriving in this environment. But it’s not for everybody, particularly for ISPs that want to control the customer experience from beginning to end.

Improving Your Business

Economy-of-Scale for ISPs

I’ve worked with a number of small communities that want to explore the idea of having a community-owned ISP. My advice to small communities is the same as with all clients – economy-of-scale really matters for ISPs.

Economy-of-scale is the economic term for describing how businesses get more efficient as they get larger. It’s fairly easy to understand, and the classic example is to look at the impact of the salary and costs of the general manager of an ISP. Consider the example where the all-in cost of salary and benefits of the general manager is $200,000 per year. If the ISP has 200 customers, that cost works out to $82 per month per customer – obviously impossible to cover. At 2,000 customers, that’s a cost of $8.33 per month per customer – probably doable, but a big strain on being profitable. At 20,000 customers, the cost is reduced to $0.83 per month – a cost that is easy to absorb. With a customer base of 200,000, this cost is only 8 cents per customer per month.

A large percentage of the costs of operating an ISP are fixed or nearly fixed. Any fixed cost acts in the same manner as the general manager’s salary. The larger the size of the ISP, the easier it is to cover fixed costs and the better the chance of being profitable.

It’s possible for a small ISP to break even, but doing so requires the operator to be extremely frugal – any unexpected expense can throw a tiny ISP into a loss. Operating a small ISP of a few hundred customers is best described as a labor of love – because it is not going to be profitable for the owner.

For many years I’ve said that the bare minimum number of customers to enable an ISP to be full-function was around 2,000. That’s enough revenue to cover the labor for a few employees, along with other operating expenses. An ISP with 2,000 customers still needs to keep an eye on expenses because it doesn’t take much to tip the business into losing money. However, with current inflation, I think the minimum size to be effective has probably grown closer to 3,000 customers.

In building business plans, I’ve always seen the real benefits of economy-of-scale kick in around 20,000 customers. That’s enough customers to be able to operate a full-function ISP that can deliver superior customer service. There is enough revenue to hire all of the needed staff and pay them well, including good benefits. ISPs smaller than 20,000 have to forego some of the benefits that come with size.

Interestingly, economy-of-scale doesn’t scale forever. In my experience in the industry, I see that ISPs of a certain size start getting less efficient. It’s going to be unique to the specific company, but ISPs larger than 200,000 or 250,000 start being less efficient.

I’ve always credited this with the phenomenon where the span of management control gets too broad. At some size, the core management team doesn’t know what is going on at the street level. When that happens, it’s inevitable to start seeing bureaucracy creep in, which is the curse of the giant ISPs. Local or regional management starts determining policies, often to the detriment of the overall business. The largest companies manage through a process of pitting regions against each other to earn bonuses. That’s far different than running an ISP with 20,000 customers. Almost all of the horror stories we’ve heard over the years about the poor treatment of Comcast customers can be attributed to regional managers who made cuts or implemented policies that benefitted their bonuses rather than benefitting the customers.

Try as they might, the giant ISPs are never going to have the same level of customer service as the smaller ISPs they compete against. Witness the many decades of duopoly competition between Comcast and Verizon FiOS. They are both big companies, and customers don’t love either of them in the way that I see customers being loyal to smaller ISPs.

Of course, size isn’t everything, and there are small ISPs who are terrible at the day-to-day operations of the business. Economy-of-scale refers to the scaling of costs and has nothing to do with the philosophy of how an ISP treats employees or customers.

My advice to any ISP with under 5,000 customers is to consider how much easier it would be to operate the company if it grew to 10,000 or 20,000 customers.

Improving Your Business

Subsidized Interest Rates

The recent increase in interest rates suddenly makes it more attractive to pursue subsidized government interest rates to build broadband. Meeting debt payments is one of the primary hurdles to launching a successful broadband expansion.

We’ve been lucky over the last decade that interest rates have remained historically low. At a few points, the Federal Reserve rate almost got to zero. In a cycle that I’ve seen many times during my career, businesses get so used to low interest rates that they begin believing that interest rates will stay low forever.

But historically, interest rates have risen and dropped in response to changes in the economy. Over the last decade, the federal government made the deliberate decision to keep interest rates lower than where the market would have normally taken them.

But this year, the reemergence of inflation has forced the Federal Reserve to raise its core federal funds rate several times, and it’s up to 2.5% after starting this year at around 0.25%. There are strong indications that the rate might be raised more, although some of the inflationary pressure is starting to ease. The Federal Reserve rate is important because it is the rate at which large banks borrow from the government, and so increases in the Federal Reserve rate translate instantly into higher bank loan rates and ultimately into higher municipal bond rates.

Suddenly, federally subsidized interest rates look attractive again. The primary federally subsidized interest rate for broadband comes from the Rural Utility Service (RUS) which is part of the USDA. The RUS has always had the ability to offer low-interest-rate loans for projects that hit its target profile of bringing broadband infrastructure to rural locations. The agency currently has several billion in available loans at its disposal.

There are a few other federal programs that can offer lower rates through loan guarantees. In these situations, a borrower works with a bank, and the loan repayments are guaranteed by a federal agency, which generally translates into a lower interest rate. The HUD 108 program can guarantee loans that are used to build infrastructure in areas with lower-than-average incomes. The SBA 504 Loan Program can guarantee loans to start-up businesses, with half of the loan coming from a bank and half loaned or guaranteed by the SBA. The USDA Business and Industry Guaranteed Loans (B&I) can be used to subsidize loans that spur economic development.

Many ISPs don’t like using federal loans for a number of reasons. Applying for federal loans requires a lot of paperwork and cost to prepare, and the loan approval process is not quick. Federal loans often come with harsher requirements for borrower surety, meaning a borrower often has to pledge the entire business to get the loan. Government loans often don’t mix well with other kinds of financing since the federal loan generally requires first priority for repayment. Federal loans sometimes restrict dividends from the loan project until the loan is retired. Finally, federal loans require more reporting.

But even with all of these restrictions, the lower interest rates start to look attractive when a project doesn’t pencil in at normal bank interest rates. An RUS loan at 2% might be worth all of the extra hassle if market interest rates are 5% or 6%.

I know many ISPs who purposefully weaned themselves from federal loans over the last decade to avoid the extra work and inconvenience. This was relatively painless when there wasn’t a big difference between bank rates and the interest rates offered by federal programs.

We have no way to know if today’s higher interest rates are a temporary blip or if interest rates will stay high and return to the traditional up-and-down fluctuation that has been more historically normal. One of the bets you’re making when you pursue a federal loan is that rates will stay high and that the benefits of the lower rates will provide a long-term advantage. ISPs all over the country are likely doing the math to consider the options, and I’m sure that in many of these deliberations that federal loans are back on the table.

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