Always Online Customers

Computer Weekly recently compared the behavior of cellular customers in the UK from before the pandemic and after the pandemic. The analysis compared cellular customer usage from November 2019 to November 2021. Ookla took the findings and also looked at Switzerland and the U.S. to see if there were similar trends. The analysis revealed some interesting trends in mobile broadband usage that I think have implications for ISPs.

The percentage of consumers who describe themselves as always online grew from 30% to 69% during the pandemic. The analysis looked deeper at the reasons customers considered themselves as always online. Users who were always online for economic reasons (employment, traffic, remote working, social media, and information sharing) dropped from 16% of all users to 7%. However, the percentage of users who were always online for lifestyle reasons (parenting, caregiving, health and fitness, and gaming) grew from 3% to 32%. There has been an obvious shift in the reasons people are using the Internet.

By 2021, users who identified as always online were twice as likely to have reported an issue to customer service. About one-third of cellular customers are unhappy with customer service. The study looked at a wide range of the expectation that customers have for a customer service interaction, including the clarity of communications, the feeling that the carrier valued users as customers, the availability of multiple options for communicating with customer service, and how quickly issues were resolved.

Always online consumers have a higher expectation for the customer service interaction. They were more bothered by things like long wait times or customer service staff that doesn’t have the expertise to resolve a problem immediately.

One of the most interesting findings is that almost half (47%) of customers who had a customer service issue in the past 18 months either have switched or want to switch to another cellular carrier. I don’t recall a major survey that had a similar finding from before the pandemic and I wonder if people’s expectations have changed during the last few years. It’s certainly possible that the isolation of the pandemic made folks more dependent on broadband, which translates into a lower tolerance for poor service.

This finding is probably not news to cellular carriers – but it’s clear that carriers that want to keep the most active users need to step up the customer service game. I’ve heard several presentations in recent years that claimed that cellular companies spend as much as $350 on average to get a new customer. That’s a large number, especially considering that all it takes to lose many customers is a single negative customer service interaction.

How might all of this apply to broadband? First, it’s becoming clear that people are using broadband more, and I’m sure that the percentage of people who would say they use broadband for most of the day has also increased during the pandemic.

It’s probably not a big stretch to say that the customers who use broadband the most have the highest expectations for the performance of an ISP network and for the ability of customer service to resolve issues. Unfortunately, the large cable companies and telcos have the lowest-rated customer service in the country. To be ranked at the bottom can only be due to an accumulation of poor customer service experiences with customers.

It’s not as easy for most customers to change ISPs as it is to change a cellular carrier since in many markets there is only one ISP with a network fast enough to satisfy the heavy broadband users. But that doesn’t mean that customers don’t want to leave – and they will leave if they get another broadband choice. My consulting firm does surveys, and I invariably find that at least 30% of the public in every market are ready to change to a theoretical new fiber ISP, meaning that they are unhappy with the incumbent cable company. In some markets, this is much higher, and during the last year, I’ve worked in a few cities where more than 60% of existing broadband users said they were ready to change to a new ISP.

Many markets are going to see new competitors in the next few years. There will be almost ubiquitous FWA cellular broadband in most cable markets. It will be interesting to see how many people will bail on the existing cable company to change to 100 Mbps cellular broadband. If we believe all of the press releases of the big telcos and others, there is also a huge amount of fiber overbuilding underway across the country. It’s going to be interesting to see how many people will bail from a cable company to a fiber ISP. It can’t be good news for the cable companies if the trend for landline broadband is similar to cellular broadband, where half of its customers are ready to bail after a bad customer service experience.

Is a Fiber Roll-up Coming?

When I look at all of the new market entrants into the broadband industry and the frenetic pace that ISPs of all sizes are building fiber, one of the first thoughts that come to my mind is this is an industry that is headed for a roll-up. I have to imagine that in the not-too-distant future that we’re going to see companies making offers to buy smaller ISPs that will be too good to refuse.

When I first joined the industry, there was a huge roll-up of small independent telephone companies. Companies like TDS, General Telephone, Consolidated, and a few others were competing nationwide to buy small family telcos. I think over a decade that probably four or five hundred of these companies sold to the bigger telcos. Interestingly, all of these companies except TDS eventually got rolled into even larger telcos that are now CenturyLink, Frontier, and Windstream.

The next big roll-up was in the cable industry. I can remember a few years when I heard of a purchase of a small cable company almost weekly. In this case, many of the companies doing the initial roll-ups eventually got bought by Comcast or Charter.

One of the most rapid roll-ups I can remember was when a few companies were gobbling up dial-up ISPs. This happened over just a few years.

I’m currently seeing a roll-up in the WISP industry with some of the large WISPs buying out small successful WISPs.

There have been a few less dramatic but still significant roll-ups. Companies like Level 3, Zayo, and others have been buying middle-mile and long-haul fiber networks. While many big CLECs crashed after the 2000 telecom implosion, the largest of the remaining successful CLECs were absorbed by the big telcos.

There has already been some consolidation of last-mile fiber networks, with some municipal ISPs and private overbuilders getting purchased by larger ISPs. But the handful of networks that have been purchased will pale against the big roll-ups that I think will be coming in a few years.

The industry will be ripe for roll-ups for several reasons. Probably the most important is that the private equity that is being invested in fiber today is not going to be satisfied with the slow but steady utility-like earnings made by last-mile ISPs. ISPs can become great cash cows and eventually spin off cash, but the long-term returns from operating a last-mile network are generally under 10% – not the kind of returns that private equity usually chases. The big return for private equity investors comes from the big bump that comes from selling the business at a high multiple.

I also think that the day-to-day hard work of operating an ISP will set in at some point. Growing ISPs into new markets is exciting. But as the huge amounts of fiber construction on the horizon come to fruition, the opportunities for additional expansion are going to quickly disappear. That’s the point when industries consolidate – because growing by acquisition can be profitable when organic growth is not possible.

The other reason for eventual roll-ups is that operating fiber-based networks is an economy-of-scale business. The overheads per customer are a lot less in an ISP with 200,000 customers compared to one with 20,000. Size also brings operational improvements in areas like customer service and software systems that favor big ISPs over small ones.

I could be wrong about this, but the evidence all points to an eventual roll-up. I’ve worked with several cities lately looking to attract an ISP to build a fiber network, and each got several responses from newly-formed ISPs that seem to have been assembled for the purpose of taking advantage of the current fiber land grab. I seriously doubt that these many fledging investor-backed ISPs intend to operate last-mile networks for the next fifty years.

Grants and Upload Speeds

The NTIA set a new definition of broadband at 100/20 Mbps for purposes of the BEAD grants – if a customer fails that test they are considered either unserved or underserved. Everybody nationwide has been so focused on download speeds that we are largely ignoring the fact that a huge number of nationwide broadband customers are not getting upload speeds of 20 Mbps. All of the speed test efforts I’ve seen have focused on whether homes and businesses are receiving 100 Mbps download and have largely ignored any implications of customers not achieving the NTIA’s 20 Mbps upload stream to qualify for a broadband grant.

My consulting firm helps clients conduct a lot of speed tests, and I also have been poring through the large number of speed tests gathered by Ookla and MLabs. I mostly work in rural counties, county seats, and suburban cities. I would venture to say that the vast majority of speed tests we see from cable customers do not meet the upload speed. The same is true for a large percentage of WISPs.

Sometimes the evidence is overwhelming. I recently worked with a county seat of about 20,000 people and the only customer in the community seeing upload speeds of 20 Mbps or faster were those who subscribed to the cable company’s gigabit product. Not one other cable customer had a 20 Mbps, and most weren’t even close, with an average of 11 Mbps. This was true for customers buying both a 100 Mbps, 200 Mbps, and 400 Mbps download product.

This raises an interesting question, which I’m sure is going to be the core of the cable company’s response to this question. In that particular city, the gigabit customers were getting upload speeds between 30 Mbps and 40 Mbps. I’m sure the cable company will argue that since a few customers are getting speeds over 20 Mbps that the network is capable of faster speeds.

I’ve talked to several knowledgeable engineers on the topic, and they tell me that the cable company in this case could not give faster speeds to everybody – or they would. The cable company is somehow giving a preference for gigabit customers at the expense of everybody else. If the cable operator opened the gates for everybody to get the fastest upload speed possible, the likely outcome would be that the gigabit customer speeds would drop to match everybody else’s speeds – the other customers would not get any faster.

This is an interesting question for state broadband grant offices to consider because it’s inevitable that people are going to seek grants where there is a cable company operating, using the argument that the cable company doesn’t meet the NTIA’s definition of broadband.

It makes sense to me that an ISP must meet both components of the speed definition to be considered as served. It shouldn’t matter if an ISP misses on the download or upload speed – if it fails one of the two benchmarks, it is not meeting the NTIA’s definition of served. If you don’t believe that logic, consider an ISP that is delivering 50/20 Mbps on licensed fixed wireless. I think there would be a consensus that this customer is not served since it is achieving only half of the definition of download speeds. But isn’t the same true for an ISP that is delivering 120/10 Mbps broadband?

To be fair to cable companies, they deliver speeds greater than 20 Mbps in many markets. I buy 400 Mbps download from Charter and routinely see upload speeds of 30 Mbps. But we all know that the performance of cable companies varies widely from town to town, and often inside of a town.

I had to laugh last year when the big cable companies fought so hard to reduce the definition of served from 100/100 Mbps to 100/20 Mbps. I knew then that this battle would be coming since the majority of cable customers, at least in the markets I have studied, are not seeing upload speeds of 20 Mbps.

One thing I think we can all count on is that if any grant office awards funding to overbuild a cable company because of this issue, we’re going to see the cable industry go ape. They’ve been quiet about the poor upload speeds, but they won’t stay that way if they see grant money coming to overbuild them.

Is Broadband Recession-proof?

It’s been a while since I’ve been asked this question of whether broadband is recession-proof. The question was prompted for me when I saw recent quotes from Lumen and Altice executives saying they don’t fear any downside of fiber broadband customers during an economic slowdown. The last ‘normal’ recession we had was from 2007 to 2009, and I remember this being a topic of conversation then. We recently made it through one of the most unusual recessions ever during the pandemic, but this question didn’t seem relevant then since the pandemic forced everybody to shelter, work, and school from home, making broadband subscriptions soar.

But there are new predictions of a possible coming recession, and it’s fair to ask if ISPs should be worried about it. There are some businesses that have always been cited as recession-proof, like grocery stores, health care facilities, liquor stores, discount retailers, pet food makers, and candy companies. Has broadband joined that list of recession-proof businesses? If people start losing jobs, do they now consider broadband to be a necessity that they hang onto over other expenses?

I heard some talk of broadband being recession-proof during the 2009 recession. I think the question was prompted by new services hitting the web – Spotify had started in 2006, and Netflix had moved content online starting in 2007. People suddenly had more uses for broadband than just social media and email. Since 2009, broadband has grown in importance in many people’s daily life. A huge percentage of people now watch video online, and music has largely moved online. Gaming has largely moved online. Video calls have become commonplace, and not just for work. A lot of people get news and weather online. We use digital assistants to play music, turn on the lights, and to answer basic questions. Our appliances have all gone online, although I’m still trying to figure out why. We deploy security cameras outdoors and nanny and pet cameras indoors to check on our homes when we are away. Shopping has largely gone online for a lot of households. Schoolwork, including homework, advanced placement classes, and undergraduate and graduate college courses are now online. Telemedicine has gone online, particularly meetings with counselors and therapists. Many millions of people now make a living working at home and sitting at a computer – more than ever before.

The question of whether broadband is recession-proof is really asking if people will willingly give up the many things that they do online. Is there a point in people’s lives where broadband becomes a necessity that they will fight to keep when times get tough?

Even if broadband is recession-proof doesn’t mean that people will continue to pay high prices for broadband. I wonder about the big ISPs who think that fiber is safe. It’s not hard to imagine a lot of people downsizing to cellular FWA service as long as it is good enough to get by.

Will homes drop traditional cable TV before they ditch broadband? A recession might drive another nail in the coffin for traditional cable TV. One of the best ways to save money is to drop the $100 cable plan. The overall cable industry penetration rate is now just barely over 50% and dropping like a rocket. I have to think that a recession will drive even more millions to drop cable – especially if that enables them to keep good broadband.

Of course, a recession is not inevitable and may not happen this year or next. The post-pandemic economy looks to be something new with a lot of people making a living in non-traditional ways. It’s possible that the traditional paradigms of what defines a recession no longer apply. If the economy retracts, it’s likely to do so in new ways we haven’t seen before.

I suspect most of the people who read this blog think that broadband is essential for daily life. But the big question that will have to be answered is how many others find broadband to be indispensable. It’s easy for those of us live and breathe broadband to suppose that more people each year are finding broadband to be a necessity – but that still doesn’t mean that enough people feel that way that we can declare broadband to be recession-proof.

ACA Connects Plea – Don’t Regulate Us

I’m starting to wonder if big cable companies and telcos are assuming that a fifth FCC Commissioner will soon be seated because the lobbying arms of these companies have been publishing documents that are an open plea to not regulate them. The latest comes in the form of a whitepaper from ACA Connects, which represents the mid-sized ISPs like Cable ONE, WOW! Internet, Mediacom, TDS, Armstrong, Hotwire, and ISPs of a similar size.

You might recall that the giant ISPs put out a whitepaper through USTelecom that made the silly argument that broadband is getting cheaper, with the punch line being, “Don’t regulate us”. The ACA paper takes a different tactic and argues that most of the country already is, or will soon have competition, with the same punch line. It’s important to understand that these papers are not written for the general public so much as for the politicians in Washington D.C. The average consumer knows that broadband is not getting cheaper, and most know they have only one realistic choice of fast ISP.

The opening sentence sums up the point of the whitepaper clearly: ACA Connects uses FCC data to demonstrate that fixed broadband competition is thriving in the United States and will become only more intense in the near future. Industry insiders instantly go on the alert with any statements drawn from the faulty FCC mapping data. It’s clear that data significantly overstates broadband speeds and availability in the country.

The paper then marches out arguments about the current effectiveness of competition. Let’s start with the facts touted in the paper. The whitepaper suggests the following statistics for June 2022:

  • 93.6% of homes have access today to at least two ISPs that offer speeds of 25/3. The key word in that definition is that the speeds are offered, which is far different than what is being delivered. We know there is still a huge amount of DSL and fixed wireless in the country that is reported to the FCC as capable of 25/3 Mbps but which delivers far slower speeds.
  • 91% of households today have one provider that offers speeds of at least 100/20 Mbps and another that offers 25/3 Mbps. The 100/20 provider in most markets is the cable company or a fiber provider. This conveniently doesn’t acknowledge that most cable subscribers don’t receive upload speeds of 20 Mbps.
  • 63.6% of homes today have at least two providers that offer speeds of at least 100/20 Mbps. For most of these homes, one provider is a cable company, and the other provider is either a fiber provider or an FWA wireless provider like T-Mobile, or a WISP offering fast speeds. I have no doubt that this is probably close to what the current FCC data shows. I just know that in every county where I’ve dug deeper, the FCC speeds and coverage are overexaggerated.

The whitepaper goes on to claim that the vast amounts of investments that are pouring into the industry are going to increase these numbers significantly. The paper says that the number of homes with one ISP offering at least 100/20 Mbps will grow to 95%, while the percentage of folks who will have two providers offering 100/20 Mbps will grow to 73.9%.

The timing was right to publish this paper now before we get new FCC maps. While I think the new maps might need a cycle or two to get rid of the worst exaggerations, it’s not going to produce nearly as high of numbers for 2022 as cited by the ACA.

There is one statement in the whitepaper that accidentally told the truth (oops). It says that ISPs have very powerful incentive to steal customers from one another, because almost all of the incremental revenue associated with a new customer is profit. This is something that industry insiders understood well but never say out loud. If a new customer is almost all profit, that means that existing ISP customers are also almost all profit. I don’t know that I’ve ever seen a trade association make such a strong case for price regulation.

One last argument made against regulation is that the ACP program is giving a $30 discount to low-income households, thus taking the pressure off of the big ISPs to have affordable rates.

I could write twenty pages commenting on the many things said in the whitepaper that stretch the truth a bit – but it seems unnecessary since the whole point of the paper is to plant that seed that ISPs are taking care of the business of broadband and don’t need to be regulated. The conclusion of the paper aimed at Washington D.C. is there is no need to impose additional heavy-handed common-carrier-style regulation on fixed broadband providers as a whole. Doing so would yield few, if any, tangible benefits while discouraging entry, investment, and innovations, to the detriment of consumers. Finally, a strong case can be made for exempting smaller providers from such regulation even if it were to be imposed on larger providers. I love the sentiment – the large carriers in ACA Connects are willing to throw Comcast, Charter, AT&T, and Verizon under the bus if needed.

Cable Subscriptions Continue to Dive

Leichtman Research Group recently released the cable customer counts for the largest providers of traditional cable service at the end of the first quarter of 2022. LRG compiles most of these numbers from the statistics provided to stockholders, except for Cox, which is privately held and estimated. Leichtman says this group of companies represents 96% of all traditional U.S. cable customers.

The industry continues to bleed customers, losing over 1.4 million customers in the fourth quarter, up from 1.3 million customers the previous quarter. Overall, the traditional cable providers lost almost 15,900 customers every day during the quarter.

1Q 2022 Change Change
Comcast 17,664,000 (512,000) -2.8%
Charter 15,721,000 (112,000) -0.7%
DirecTV 14,300,000 (300,000) -2.1%
Dish Network 7,993,000 (228,000) -2.8%
Verizon 3,566,000 (78,000) -2.1%
Cox 3,310,000 (80,000) -2.4%
Altice 2,658,700 (73,600) -2.7%
Mediacom 555,000 (17,000) -3.0%
Frontier 363,000 (17,000) -4.5%
Breezeline 339,021 (7,708) -2.2%
Cable ONE 238,000 (23,000) -8.8%
   Total 66,707,721 (1,448,308) -2.1%
Hulu Live 4,100,000 (200,000) -4.7%
Sling TV 2,252,000 (234,000) -9.4%
FuboTV 1,056,245 (73,562) -6.5%
Total Cable 40,485,721 (825,308) -2.0%
Total Telco / Satellite 26,222,000 (623,000) -2.3%
Total vMvPD 7,408,245 (507,562) -6.4%

It doesn’t look like people are replacing traditional cable with an online alternative like Hulu and Sling TV – which are also losing customers. A few major online alternatives like YouTube TV aren’t on the list, but the loss in traditional cable far surpasses any net gain for the online cable alternatives.

Charter is still losing customers at a slower rate than everybody else in the industry and has for the past several years. Charter CEO Tom Rutledge explains this by Charter’s willingness to move cable subscribers to less expensive tiers, such as the $44.99 Spectrum TV Select product. He says that Charter actively points out to customers that the online alternatives cost more. The rest of the industry seems resigned to letting cable customers go.

This drops the overall penetration rate of traditional TV to just above 51% of households. The industry has lost over fifteen million customers since the end of 2017 when traditional cable was in over 73% of homes.

One of the consequences of the rapid drop in cable customers is that cable companies are losing the power of the bundle. The traditional cable industry has lost almost one-third of all cable customers since 2017, greatly reducing opportunities to retain customers with bundling discounts.

No Love for the Big ISPs

It’s the time of the year when the results come out for the American Customer Satisfaction Index that asks customers to rate their satisfaction with a wide range of industries and the larger companies within those industries. This is a huge nationwide poll that ranks the public’s satisfaction with 400 large companies in 45 sectors.

As has been happening for many years, the large Internet Service Providers come in dead last when comparing ISPs to 44 other industries. ISPs were given an overall customer service ranking of 64. The industries ranked just above ISPs at the bottom were related, with subscription TV services (66) and video-on-demand services (68). This puts ISPs below gas stations (68), hospitals (69), and the U.S. Post Office (70).

Following are the specific rankings for the ISPs included in the survey:

2021 2022
Verizon FiOS 71 72
T-Mobile N/A 71
AT&T Internet 71 69
Xfinity (Comcast) 67 66
Spectrum (Charter) 63 63
Windstream 61 62
Cox 63 61
Frontier 57 61
CenturyLink 62 60
MediaCom 60 60
Optimum (Altice) 60 59
Suddenlink (Altice) 55 53

I’ve been following the ASCI results for many years, and it’s normal to see the ranking score vary by a small amount from year to year. But it looks like a significant change to see Frontier’s leap from a 57 ranking to 61. Perhaps the message that Frontier has changed coming out of bankruptcy is reaching customers. The most interesting number is the ranking for T-Mobile, which has been added to this survey for the first time. The company came in second, just below Verizon FiOS. Verizon has been at the top of the survey ranking for many years.

At the bottom are the two Altice companies, with Suddenlink ranked at the bottom again with a ranking of 53. Interestingly, Altice announced recently that it is relabeling Suddenlink as Optimum – which is second worse in ranking. From there, other ISPs are ranked slightly higher than Altice, such as MediaCom, CenturyLink, and Cox.

Companies can change rankings within the industry, but it’s hard. A decade ago, Comcast was nearer the bottom of the rankings and has slowly climbed closer to the top. I’m not a Comcast customer (I once was), and I don’t know what they’ve done to change, but I’ve noticed that I no longer read what used to be almost monthly news articles talking of specific ways the company mistreated customers.

What I find most amazing about this ranking is how politicians have fought so hard and often to protect these companies from regulation. Maybe it’s just me, but I’ve always thought that a state politician running to strongly regulate the biggest cable company in a state would gain a lot of votes.

Get Ready for Higher Interest Rates

The Federal Reserve recently raised its benchmark interest rate by 0.75%, the biggest increase since 1994. The interest rate is still low by historical standards, with the fed rate now at 1.75%. But there is a lot of talk among economists that the fed rate will likely increase to as much as 3.5% this year and possibly 4% next year.

The federal benchmark rate is the rate at which the Federal Reserve loans money to large banks, and the higher interest rates quickly permeate through the economy in the form of higher interest rates for commercial lending, car loans, mortgages, etc.

Refer to the graph below to see why I refer to current rates as still low. The federal reserve rate dropped to near to zero at the beginning of 2009 and has stayed incredibly low since then, other than a blip upward to 2.4% at the beginning of 2019. But the last time the fed rate was this low was in 1958, so the recent low rates have been an historical anomaly. After having enjoyed low interest rates for thirteen years, I think it’s obvious that most of the economy has come to take low rates for granted.

This is a particularly germane issue today because a lot of ISPs are considering borrowing large amounts of matching funds for broadband grants. Higher interest rates mean larger annual debt payments, and that can easily make the difference between a business plan being feasible and not feasible. For a new project to cash flow, the new customer revenues must be large enough to cover operating expenses plus the cost of debt.

Below is a simple table showing the annual debt costs for a $10 million loan – which would represent a 25% grant matching for a $40 million broadband grant project. Down the left are interest rates. Across the top is the loan term, in years. The values in the table are the annual debt payments. This makes it easy to grasp the impact of an interest rate increase. If you were hoping for a 15-year loan for $10 million at 4% and the interest rate increases to 6%, the annual debt payment climbs by $128,000.

Loan Term
Rate 10 15 20 25
3% 1,424,564 940,295 727,087 608,139
4% 1,485,278 1,001,437 789,933 673,091
5% 1,547,218 1,064,558 855,462 741,368
6% 1,610,359 1,129,601 923,565 812,785
7% 1,674,678 1,196,508 994,126 887,139

The chart also suggests the strategy to offset interest rate increases, which is to find longer-term debt. If that same 15-year loan at 4% can instead be financed for twenty years at the higher 6% interest rate, the annual debt payments would decrease by almost $78,000, even with the higher interest rate.

This is not to suggest that finding longer-term loans is easy. Most commercial banks don’t like making loans for longer than 10 or 12 years in length. There are specialty banks like CoBank and RTFC that will give out longer-term loans, but even they are not going to make long-term loans available to everybody. Most banks dislike tying up their equity in long-term loans.

The only group of borrowers that have a relatively easy time getting longer-term loans are municipalities. Federal bond law allows financing for terms up to the economic life of the assets being financed. I’ve routinely seen municipal bonds for fiber networks financed for terms as long as 25 or 30 years.

The bottom-line advice in a time of increasing interest rates is to make sure that you understand the implications for whatever project you’re thinking of funding. In past decades I can remember many times when increasing interest rates put projects on hold since they became impossible to pencil in. As you can see by the long-term fed chart, if you wait long enough, interest rates that go up will eventually come back down.

Unfortunately, grant projects are not going to allow borrowers to wait out a bad cycle of interest rates. You either take the higher-rate loan or you pass on the project. As an aside, the rising interest rates are another reason against asking for irrevocable letters of credit. Banks are not going to guarantee or lock in interests today if the money is going to be needed a year or two from now. An irrevocable letter of credit is worthless if the interest rate rises and the borrower can no longer afford the debt.

Economists have been saying for a number of years that interest rates need to return to the normal cycle. Much of the reason for low interest rates has been meddling b the government to force interest rates lower. But this return to normal rates couldn’t happen at a worse time for purposes of funding BEAD matching. It’s one more factor that is going to make accepting a big grant that much more expensive.

Bringing Broadband to the Arctic

The Arctic region has largely been left out of the broadband arena in the past due to the high cost of building last-mile broadband infrastructure. The primary broadband available in the region has been provided for decades by Iridium Communications, which provided only low-bandwidth connections capable of supporting satellite phones and low-bandwidth monitoring devices. The lack of broadband looks to be changing as multiple satellite companies are targeting the region as a good business opportunity.

Starlink and OneWeb already have polar-orbiting satellites that can serve the region. In fact, the original OneWeb business plan focused on the Arctic as its first priority due to the lack of competition.

Telesat has negotiated to connect to indigenous communities in the Arctic through a partnership with the Canadian government. The government has already provided some grants and last year announced a financing deal that will invest $690 million in preferred equity and $790 million in loans to enable Telesat Lightspeed to complete its low-orbit satellite constellation. The government will also receive warrants that can be exchanged in the future for additional shares of Telesat stock. This adds to the $400 million provided by the government of Quebec. The low-orbit constellation will begin with 298 satellites positioned to deliver speeds up to a gigabit across Canada.

SES plans to serve the Arctic with a fleet of medium-earth-orbit satellites that should start launching by the end of the year. MEO satellites deploy in orbits higher than 1,200 miles but closer than the geostationary satellites at 22,000 miles above the earth. The biggest challenge for these satellites is finding orbits that avoid the high-energy Van Allen radiation belts. The SES business plan is to provide high-bandwidth connections to remote places and in addition to the Arctic, will be pursuing broadband for cruise ships, cellular towers, and government networks.

The Arctic Satellite Broadband Mission (ASBM) is being built by Northop Grumman and is a joint venture between Inmarsat, the British satellite operator, the Norwegian Ministry of Defense, and the U.S. Air Force. These satellites are aimed at providing cellular telephone service and also supporting the military. Two satellites are scheduled to launch by the end of this year and will have highly elliptical orbits that will vary between 5,000 and 27,000 miles above the earth. The orbits can be changed to avoid radiation storms.

The Russian Satellite Communications Company (RSCC) announced plans to launch four satellites in highly elliptical paths within a few years to serve the far north polar regions. I have to wonder if these plans are on hold due to the severe economic sanctions in place against the country.

Satellite broadband is an awesome solution for places where there are likely to be no alternatives. I understand why rural residents of the U.S. are flocking to Starlink since, for many of them, it’s the only workable broadband solution on the horizon. I continue to wonder how satellite broadband will stay competitive in the lower forty-eight after the many grant-funded networks are finally built. But there will always be homes in the U.S. out of reach of landline networks or customers that don’t like the landline ISPs, so it would not be surprising to see the satellite companies with a small but steady customer base south of the Arctic for the long-haul.

But satellite broadband ought to dominate the Arctic for decades to come. It can bring decent bandwidth to remote places that may never be candidates for building landline networks. It will be an interesting change for the area as it goes from barely connected to fully connected.

Should You Pursue the BEAD Grants?

I took part in a webinar last week for the NRTC that talked about the good, the bad, and the money issues with the upcoming BEAD grants. It was one of the better webinars I’ve participated in, and the panelists were full of great ideas and perspectives. At the end of the session, the last question asked, “How do you reconcile some of the impractical aspects of the BEAD grant processes with the reality of the market?” That question referred to the long list of issues with accepting the BEAD grant funding that was highlighted during the webinar. To mention just a few of them:

  • There are a number of grant provisions that are going to increase the cost of the grant. This includes things like getting an irrevocable letter of credit, having to pay prevailing wages, having to conduct an environmental and historical review, having to comply with Buy America, and an extensive (and probably expensive) grant preparation process. These might significantly increase the amount needed for matching funds.
  • The grant NOFO rules encourage States to award grants that offer the highest amount of matching funds. This brings in a reverse auction feel to the grants where ISPs willing to contribute more can likely win the grants.
  • There is a possibility of big issues with the FCC mapping that an applicant will have to navigate.
  • Grant funds are considered to be taxable income.

Any potential applicant is going to have a problem with these or other aspects of the grants. The question is really asking how far an applicant ought to go out of their comfort zone.

My response to the question was to get immediately get involved with your State broadband grant office. The various State broadband grant offices are in communication, and there is hope that if enough States push back that the NTIA might soften some of the most troubling aspects of the grant rules. States also have another option, which is to build friendlier rules into the State grant rules since, at the end of the day, each State gets to decide who wins the grant funding. ISPs need to provide specific feedback to State grant offices now so that they understand how troubling some of the grant rules are for potential applicants.

I still stand by that advice, but the instant the webinar was over, I realized that is only half of the answer. At some point, an ISP is going to have to determine if it can live with all of the grant requirements.

I haven’t talked to any ISP that isn’t uneasy about some aspect of the grant rules. My first advice to an ISP considering the BEAD grants is to take the time to consider the aspects of the grants that you find troublesome – then categorize them. Some grant issues are just annoyances that will make it harder to ask for the grants. But other issues are more serious, and every ISP will have its own list. You should separate the troubling issues into two categories – issues that will cause big headaches and issues that are potential deal stoppers and might make you decide not to bother with the BEAD grants.

Obviously, an ISP needs to publicly communicate about the issues that might cause you to bow out of the grant program. The States and the NTIA need to hear this because it will be a national embarrassment if good ISPs don’t ask for the grant money. The NTIA does not want to be labeled as having created the next RDOF plan.

But this list also means that an ISP is going to have some hard decisions to make. I already know ISPs that have decided that it’s not going to be worth jumping through all of the hoops to pursue BEAD grants. I’ve advised them to at least wait until their State files a plan that might take the edges off of the provisions that are troubling.

But at the end of the day, an ISP should not take grant money that will ultimately harm your business. For example, you can’t take a grant if you know the math doesn’t work. There are plenty of examples of ISPs that have gone south because they bit off more than they could chew by entering a market where they were not successful. If the numbers look bad, don’t assume that some future magic will somehow turn that around.

The final gut check before saying no to the grant funding is to understand what happens if the grant goes to somebody else. For example, if you are an electric cooperative, will you be okay if the grant instead goes to AT&T, Frontier, or a giant wireless carrier? It’s highly likely that somebody is going to pursue and win the grants in most of rural America. If you are a rural ISP and you don’t take part in the BEAD grant, you may never have another chance to expand your rural footprint. This is what makes this such a hard decision – for many ISPs it’s going to be either take grant money that includes a lot of problems and issues or else be locked out expansion in the areas around you.