Get Ready for Middle-mile Grants

Alan Davidson, the Administrator of NTIA, recently held a press conference and webcast talking about the $1 billion middle-mile grant program. The biggest takeaway from that conversation is that the NTIA is likely to make these awards much sooner than the awards from the $42.5 billion BEAD grants for last-mile broadband. Mr. Davidson was not specific about the dates of these grants, but anybody wanting to request one of these grants should start getting ready.

It’s worth noting that the last-mile BEAD grants will not fund middle-mile fiber. The early NTIA rules indicate that the grants will expect any constructed fiber to have closely-spaced and regular access points. This is what distinguished last-mile fiber from middle-mile fiber. Middle-mile fiber is aimed at connecting two points, be that fiber huts, electric substations, core fiber sites, or two communities. It’s a lot more expensive to build fiber that has a lot of access points. It costs labor and extra materials every place that fiber is spliced off to a handhole or MST. While a fiber route can be built to serve both purposes, the assumption of the BEAD grants is that the fiber is used to serve those living close to a fiber route.

Recent experience from both state and federal grants shows that the entities awarding grants are allowing for a relatively short window from the date of announcement of a grant until grants are due. On state grants, I’m seeing grant requests that are due within six weeks of the announced opening of a grant. The NTIA grant window will likely be a little, but probably not a lot longer.

This means anybody interesting in the grants should already be figuring out the engineered cost of the desired middle-miles routes. You are not going to have time once the grants are announced to determine costs.

More importantly, anybody wanting the middle-mile grants needs to craft a good story about why a specific middle-mile grant is needed. $1 billion might sound like a lot of money, but on the national scale, it’s not a lot. This works out to an average of only $20 million per state. If you assume an average cost of middle-mile fiber at between $35,000 and $50,000, that’s only 400 – 575 miles of new fiber, on average, per state. To put this grant program into perspective, California has established a $3.5 billion middle-mile grant program just for within the state.

Another thing that must be considered is that the NTIA has a history of making fewer numbers of larger grants rather than a lot of little grants. It’s hard to picture the agency awarding hundreds of grants because the work needed to administer the grant is nearly the same for a small grant and a large grant. If that history holds true, these funds are more likely to go to larger projects that connect distant rural communities than to projects that connect places relatively close together in a middle-mile project. I picture grants that connect a dozen communities being far more attractive to the NTIA than a project connecting a dozen local fiber nodes or electric substations.

Finally, it’s fairly clear that the NTIA is currently favoring non-profit entities more than commercial ISPs. I’m sure some of this grant will go to commercial entities, but I’m going to bet that collaborations of local governments will have a better chance of winning these grants. I’ve written a few times about project THOR in northwest Colorado, which is a consortium of local governments that built middle-mile to connect 14 communities with fiber. The benefits of this fiber for anchor institutions like hospitals were seen almost immediately after the first fiber routes were connected.

https://www.nwccog.org/programs/broadband-program/project-thor/

I envision that the projects with the biggest chance of success will be similar to Project Thor, which was organized by local communities, or to projects done by states to reach remote areas like is being done by ConnectMaine.

https://www.maine.gov/connectme/home

People are often surprised about the lack of middle-mile fiber in rural places. It’s hard to justify building last-mile fiber to an unserved rural community if there is no affordable way to connect that community to the Internet. I’m guessing that the NTIA will look hardest at projects that can make these connections.

Estimating Broadband Customers

For years, I was safe using what I called the 80:20 rule for predicting broadband customers in a new market. This meant that in most markets, 80% of customers would buy the lowest-priced broadband option. I’d sometimes run into a market where that dipped as low as 70%, but I found it extremely rare to find a neighborhood where fewer than 70% of customers bought the lowest-price option.

Price alone didn’t seem to be the driver behind the 80:20 rule, and I found the same behavior in markets with high and low-income households. If somebody purchased broadband, they mostly chose the most affordable option. I always assumed that as long as the minimum speed sounded fast enough that households didn’t think they needed faster broadband speeds.

This is no longer true. Consider the following numbers that come from OpenVault that show the percentage of American homes subscribed to various download speed tiers.

Speeds Jun-20 Jun-21 Dec-21
Under 50 Mbps 18.40% 10.50% 9.40%
50 – 99 Mbps 20.40% 9.60% 7.60%
100 – 199 Mbps 37.80% 47.50% 36.90%
200 – 499 Mbps 13.50% 17.20% 28.50%
500 – 999 Mbps 5.00% 4.70% 5.50%
1 Gbps 4.90% 10.50% 12.20%

There has been a huge shift from early in the pandemic until the end of 2021. It’s obvious that a lot of people have upgraded their broadband subscription during the eighteen months. I’ve heard a lot of anecdotal evidence to support this from my ISP clients. My consulting firm does a lot of surveys and interviews, and we’ve been seeing this shift everywhere. Not that it matters much in the big picture, but I also upgraded my own broadband from 100 Mbps to 400 Mbps download.

It’s fair to note that some of these shifts didn’t come from changes made by subscribers but from changes made by ISPs. Many of the big cable companies are now defining their minimum broadband product to be 200 Mbps. Several made this change last year, and a few more announced this recently. When that change is universal, we’re going to see an additional shift from the 100 Mbps tier to the 200 Mbps tier.

Much of this change came from people deciding to make the change. People worked at home and found their broadband to be inadequate. Our surveys have consistently shown that over one-third of homes in urban markets found broadband to be inadequate when working or schooling from home, and many of them decided to upgrade.

Unfortunately, for some households, changing to a faster download speed didn’t bring any relief if their real problem was upload speed – but they upgraded and are not likely going to back to the slower speed tiers. Of particular note is the big shift of homes that used to subscribe to speeds under 100 Mbps. In just 18 months, that dropped from 29% of all households down to 17%. A shift that large sticks a fork into the idea that the public is interested in any broadband product under 100 Mbps. The public is defining the definition of broadband even if the FCC won’t.

This big shift creates a challenge for any ISP that is creating a forecast for a new market expansion. ISPs used to be able to build a business plan that assumed an 80% penetration for the first broadband product and knew they would be close. I’ve worked for various bankers over the years to review business plans from potential ISP borrowers and would laugh when I saw somebody predict high penetration of gigabit broadband as a way to justify getting a loan.

But today, all bets are off. I don’t have any advice to give to an ISP building forecasts other than to tell them that the 80:20 rule is dead. I think a new ISP needs to dig in and do the market research through surveys to get a better feel for how a given market will act. It’s a new world for anybody that wants to accurately predict how their business will fare – but the good news is that customers seem willing to pay extra for faster speeds. The 80:20 rule is clearly dead, but there is no rule to take its place.

Who’s the Fastest?

It’s always interesting to see broadband speed comparisons between different parts of the world, the country, and technologies. There is no more interesting report for a broadband nerd than the speed test results reported by Ookla. The company compiles the results of speed tests from all around the world and the country and provides some interesting results.

Any analysis of speed tests comes with some big caveats. There are plenty of individual cases where a speed test result is slow due to issues at the user end. My house is a great example. My wife gets 3 – 4 times faster broadband in her office located with the incoming broadband modem than does my office upstairs at the far end of a long house. The difference in our speed tests results is related to our WiFi network and not to our ISP.

But ISP data speeds are also variable. I look at speed test results regularly, and I see a variance of several magnitudes during a day or a week. My ISP is Charter, and there are obviously things happening in the City which cause the Charter network to slow down at times. Because of the wide range of speeds I see at my house, it’s impossible for anybody to use a single number to define my broadband speed. I’m sure Charter would define my broadband speed to be the fastest speed we can get, but there are times when we see only a fraction of that number.

With that warning, the Ookla speed test results are still interesting because these same factors affect all ISPs – meaning that a comparison between ISPs should be fairly instructive.

In looking at the median download speeds of the major landline ISPs, Verizon is the fastest at 184 Mbps, followed closely by Comcast at 179 Mbps and Cox at 174 Mbps. The other major ISPs tracked by Ookla are Charter at 166 Mbps, AT&T at 141 Mbps, and CenturyLink at 41 Mbps. It’s obvious that the AT&T and CenturyLink speeds are held lower because of DSL. Note that median means that half of customers are faster than these speeds and half are slower. These numbers are not average speeds.

One of the more interesting things reported by Ookla is a consistency score. Ookla defines consistency as the percentage of traffic that provides a consistent quality of service, and where a customer connection produces expected minimum levels of both upload and download speeds. Comcast, Charter, and Verizon all have roughly identical consistency rates of 89% to 90%. Cox is at 84%, AT&T at 80%, and CenturyLink at 57%.

Ookla also ranked states by the median download speeds. Topping the list at 195 Mbps is New Jersey, with New York next at 179 Mbps. The next fastest states are Rhode Island, Maryland, Delaware, and Massachusetts – all states that have significant Verizon FiOS. The two states with the lowest median broadband speeds are Wyoming at 70 Mbps and Montana at 74 Mbps, followed by New Mexico, Alaska, Vermont, Idaho, and Arkansas. There are a dozen major U.S. cities with median broadband speeds over 200 Mbps. Topping the list is Jersey City, NJ (216 Mbps) and Raleigh, NC (214 Mbps).

Median upload speeds tell a different story. The leaders are four states with Verizon FiOS: Maryland (38 Mbps), New Jersey (36 Mbps), Rhode Island (34 Mbps), and Virginia (32 Mbps). But next is North Dakota at 32 Mbps and Iowa at 27 Mbps. For download speeds, those two states come in 39th and 42nd. The states with the worst median upload speeds are Arizona (10 Mbps), Montana (11 Mbps), Wyoming (11 Mbps), and Maine (12 Mbps).

Ookla also ranks broadband speeds by country. The fastest are Singapore (198 Mbps), Chile (197 Mbps), Thailand (188 Mbps), and Denmark (170 Mbps). The U.S. has moved up this chart over the last few years, and is now eighth at 151 Mbps.

The report also looks at cellular speeds. The median download speeds for March 2022 are T-Mobile (118 Mbps), Verizon (63 Mbps), and AT&T (56 Mbps).  Ookla also reports 5G speeds (meaning using the new frequency bands for each company) as T-Mobile (191 Mbps), Verizon (107 Mbps), and AT&T (68 Mbps). Ookla says that T-Mobile 5G is available for 65% of connections, AT&T for 49% of connections, and Verizon for 28% of connections.

Broadband for Communities

When talking about the benefits of broadband, it’s easy to overlook how broadband has become the glue that brings people and communities together. This is becoming particularly important for rural communities but matters to people everywhere.

Rural communities have been rapidly losing other forms of media that were the focal point in the past. 2004 was the peak of the newspaper business in terms of readership and revenues. Since then, the number of journalists has been cut in half. In the last fifteen years, we’ve lost more than 20% of all newspapers, and many remaining papers are just barely hanging on financially. Over half of the 3,143 counties in the country now only have one newspaper, which in the majority of cases means only a small weekly paper. In a recent count, over 200 counties have no newspaper.

We’ve also lost a huge number of local radio stations. Lost is not entirely the right word since many stations haven’t gone off the air but stopped being local. Local radio stations became endangered when Congress introduced deregulation into the radio business in the Telecommunications Act of 1996. Since that time, two-thirds of all radio stations are owned by ten parent companies that have gobbled up local radio stations. Instead of local news and content, the conglomerates pipe in national content, which also allows them to eliminate almost all of the staff at local stations. The big companies seek national advertisers, and communities don’t even hear ads for local businesses any longer.

The Internet has stepped in to fill some of this void. I see this directly when I help communities conduct broadband surveys and see how they go to get the word out. A lot of rural communities now have local Facebook forums (I note that I haven’t yet met anybody who has started to use the new name Meta). The local social media groups are popular, and I’ve seen communities drive a thousand survey responses through a local Facebook page. But not every local community has taken this approach, probably due to some of the downsides with social media.

Community life in one community I worked in recently all used a website created by the local radio station. I’ve worked in communities where church websites seem to be the predominant forum for local news.

In cities, we have more ways to keep up with local events. My own city has several newspapers, a few local radio stations, and one local TV station. In cities, the trend for the Internet is to get hyperlocal news directly in the neighborhood. There are a lot of people who use the Nextdoor app. While this is like other social media in that there’s a lot of gossip and squabbles, this is also the place to find out about crimes or events that you’d never know about otherwise.

One of the benefits of the Internet that is rarely talked about is the ability to become part of a larger community. I have a good friend I met strictly through the Internet who lives in Salt Lake City. I have a friend whose son is a competitive gamer, and his daily community is other gamers in Japan, Korea, Thailand, Vietnam, China, and Ukraine. My wife has developed friendships across the country when participating in forums on her various hobbies and interests. I’m not sure why we don’t mention ‘finding one’s tribe’ as one of the most important aspects of the Internet.

It’s easy to be cynical, and write off social media as being entertainment, but doing so ignores the real connections people make on the Internet. And yet, I’ve never seen any list of Internet benefits that includes the power of the Internet to provide local news and a sense of community.

What Happens After ACP?

It seems that almost every ISP going for broadband grants is promising to offer a low-income program by promising to take part in the Affordable Connectivity Program (ACP), which provides a $30 monthly discount on broadband rates for qualifying households. The discount is available for households earning less than 200% of the federal poverty level.

I love the idea of the ACP program. It certainly makes a bigger difference for households than the $9.25 Lifeline subsidy provided by the FCC. But I think it’s already time to start the discussion of what happens when the ACP program runs out of money.

Congress put $14.2 billion into the ACP fund effective January 1, 2022. That money was bolstered by about $2.2 billion left over from the Emergency Broadband Benefit program that came out of the CARES Act funding. I did a little math to see how long the funds will last. By my quick math, the ACP fund will have paid out about $1.3 billion by the end of this April 2022.

As of April 16, there are almost 11.6 million enrollees in the ACP program. That equates to a monthly draw of $348 million per month. And the draw is growing. This year the number of plan participants has been growing by over 700,000 per month. If fund participants keep growing at that rate, then the ACP fund will run dry in 25 months. If growth in fund participants slows to 500,000 per month, the ACP only last two additional months. If I had to make a bet, I would think that the number of new participants per month will accelerate even more than the current 700,000 per month. Even if nobody new enrolls in the ACP, the funding will be gone in a little less than four years.

If the ACP fund runs out of money, the subsidy will stop. If the fund participants grow at the current rate, then 28 million homes would see an immediate $30 rate increase – one that, by definition, most of them can’t afford. The only way for the ACP to continue is for Congress to continue to fund it. If there are 20 million ACP participants, that’s a new annual federal subsidy program of $7.2 billion per year. At 30 million participants, it’s $10.8 billion per year.

This sounds like the kind of subsidy that will draw a lot of political controversy. There have been major critics in Congress for years about the FCC’s Lifeline program, which costs only a fraction of the ACP numbers.

This also creates a dilemma for ISPs. Most ISPs will tell you that the cost to connect a new household to a fiber network can cost between $1,000 and $1,500 in cities depending upon whether drops are aerial or buried, and even more in rural areas with longer drops. Can an ISP justify making that kind of investment for a home getting the ACP discount if that discount will disappear in two years? Obviously, not everybody getting an ACP discount would drop service without the subsidy, but a lot will have no choice.

What’s also ironic is that the ACP program was designed as part of the Investment, Infrastructure, and Jobs Act and was meant to provide a subsidy to go along with the $42.5 billion in broadband grants in the BEAD grant program. My best guess of the timeline is that the ACP will be out of money by the time that BEAD grant households start coming online.

There are a whole lot of folks putting energy today into digital equity, and many of them tell me that the $30 discount really makes a difference to families. I’m sure many of them have done the same math as me and must be worried about what happens when the ACP runs out of money. Two years is almost no time in political terms, and anybody who wants the ACP fund to last more than two years needs to already be lobbying for the replacement funding.

The History of Broadband Price Competition

It’s sometimes easy to forget that the broadband business is just over twenty-five years old. The telephone companies had a monopoly on copper-based technologies until Congress passed the Telecommunication Act of 1996 which forced the big telephone companies to allow competition for copper-based broadband services. The telephone companies vigorously resisted the emerging CLEC business, but eventually, the country was flooded with competitors selling cheaper T1s over telephone company copper lines. For a list of reasons too long to repeat here, most of the big CLECs crashed, but some of these traditional CLECs persevered, and there are still a few today making money by selling service over telephone copper.

The late 1990s saw the introduction of DSL over copper lines and cable modems provided by cable companies – both technologies offering broadband download speeds of around 1 Mbps. Cable companies and telephone companies slugged it out and competed fiercely for a few years. However, over time we saw the broadband market settle into duopoly competition – a term used by economists to describe a market with only a few competitors. After only two or three years of real competition, we saw the marketing rhetoric cool down as both sides reached a steady equilibrium share of the broadband market. In duopoly competition, both sides stop competing on price and instead compete with rhetoric describing their advantages as a company. Both sides charged relatively high prices for the time, and cable companies and telcos were largely happy with the market.

The duopoly equilibrium didn’t last long when cable modem technology improved more quickly than DSL. It became clear by 2005 – 2006 that the cable companies were going to win the speed battle. Since that time, the cable companies have gained market share every year at the expense of DSL. The conversion of DSL customers to cable modems accelerated in recent years when homes found DSL speeds to be inadequate. This exploded during the pandemic, and the cable companies are now capturing millions of DSL customers each year. From a pricing perspective, the telcos went after the low end of the market, chasing those that didn’t want to spend too much for broadband. The cable companies cautiously raised rates for a few years until they realized that people didn’t drop cable modem service to return to DSL – and they started to regulatory jack up broadband prices.

There was one exception to the DSL/cable modem duopoly when Verizon started building FiOS fiber in the Northeast. With FiOS, Verizon was clearly the fastest technology and was far ahead of the cable modem technology of the time. As would be expected, Verizon and the cable companies also reached a duopoly equilibrium after a few years of fierce marketing, and both sides seemed to be happy to be making good profits.

The cable companies reacted differently to competition from anybody who was not a telephone company. We saw a fierce reaction by the cable companies when municipalities built fiber. I think the cable companies knew that the public would prefer broadband from a city instead of a large unresponsive cable company. In the first few markets with a municipal provider, the incumbent cable company engaged in what can only be called predatory pricing. The cable companies dropped rates extraordinarily low, hoping to cause large losses for the new municipal providers. While this happened in only a few places, the reaction by the cable companies was so extreme that the FCC warned that it would investigate the predatory pricing issue. Predatory pricing died as a strategy and I can’t remember a case of an incumbent dropping prices far below a competitor in over fifteen years.

The more common practice for cable companies is to drop rates to match or almost match any new competitor. Bigger cable companies have nationwide rates and don’t want to establish different rates in different markets, so they started to compete with promotional discounts that bring prices down to the level of the new competitor in each market. Over time, the cable companies adopted this philosophy for competing with any new fiber builder, not just municipal ones.

The cable companies never got this quite right. They offer lower rates for a year or two to compete with a fiber provider, but at the end of the contracts, the rates return to normal. Customers can usually still get the lower prices by calling and negotiating, but over time we see the public tiring of the rate game and eventually moving to the company with the permanently lower rates.

Cable companies adopted another interesting way to compete through what is called hidden fees, which are fees that are not clearly identified when new customers sign for service. Hidden fees have been around a long time, but in recent years have become gigantic. The motivation for having hidden fees is clear – it lets a cable company advertise a low price for basic service by not mentioning the hidden fees. It’s an odd tactic since customers find out about all of the hidden fees when they get the first bill.

The FCC has proposed to make it harder to use hidden fees by using a report card that will require ISPs to report all of their charges. It’s going to be interesting to see how the report card changes the pricing strategies of the big ISPs. I have no doubt that it will force some changes, but as they’ve always done in the past, the big cable companies will find new ways to look like they have low rates while extracting as much money out of customers as possible.

Broadband Now or Later?

I just heard about a County that is using its ARPA funds to build fixed wireless broadband. This is a traditional fixed wireless broadband technology that will probably deliver speeds of 100 Mbps to those close to the towers, slower speeds to homes further away, and which will not reach all homes in the County.

I understand why they did this. The County is listening to residents who want a broadband solution right now – and an ISP knocked on their door and offered a quick solution. I can’t fault them for this decision. But the wireless company they are partnering with is one of the larger ones and is not known for great customer service. The WISP doesn’t have any customers in the area today, and one hopes the WISP will hire a few local technicians to make this work.

The County had an alternative. It could follow the lead of other counties and used its ARPA money to instead attract an ISP to build fiber to everybody in the rural parts of the county. There are several regional ISPs close to this county that would probably jump at the chance to build a fiber network that is funded by both BEAD grants and local matching grants. It’s my firm belief that counties that form such a partnership with an ISP and also bring local cash to the deal will be the ones that will win the BEAD grants.

But this is not an easy choice. For an area that doesn’t have broadband today, the BEAD grants sound like a far distant opportunity. It’s hard to think that any recipients of BEAD grants will be constructing networks any sooner than 2024 – assuming by then that they’ll be able to get the needed fiber and electronics. Building fiber to a whole county can easily take two or three years, meaning that the last household in this county might not see fiber broadband until late 2026 – or even later with supply chain issues.

The BEAD grant program is feeling agonizingly glacial to anybody in the industry. To some degree, it’s good that the grants weren’t awarded right away since most communities needed time to prepare for grants. To win the grants, somebody has to estimate the cost of building a new network, and the community must choose an ISP partner to fulfill the broadband goal. These are not things that can happen overnight.

But the processes described in the legislation to release BEAD funding are slow and cumbersome. The cynical part of my brain suspects that some of the slow pace of the BEAD grant program was inserted into the legislation through influence from some of the big ISPs. I’ve heard that lobbying is why the grant process insists on using only the FCC maps to determine areas with grant availability. Color me cynical, but a big ISP can use that rule to show poor broadband to the FCC in areas where it wants to pursue grants and show good broadband in areas it would rather protect against competition.

The decision is easy for some counties that have already been approached by local ISPs they know and trust, like small telcos or cooperatives. Such counties know that they are going to get a solution they like, provided by somebody they know will do a good job. But even for these counties, having to wait for fiber construction is torturous. What does a county official say to the family of an eighth-grader who needs home broadband now but may not see it until senior year?

And what about all of the counties that don’t have these trustworthy local ISP partners? Can they just assume that somebody will step in and ask for the BEAD grant funds for their area? What if the ISP winning BEAD grants is one of the giant telcos they don’t trust or some new venture capital firm that is only chasing grants to build and flip the networks? Can a county even assume that anybody will be funded in their area? $42.5 billion sounds like a lot of money, but I’m certain that there are still going to be areas with no broadband solution after all of the smoke clears from the grant awards.

There will be great long-term benefits for a county that is willing to wait to get a fiber network. It’s an asset that is going to be good for the rest of the century, and that can provide as much broadband as homes and businesses are ever going to need. I know some of the WISPs are telling communities to let them build wireless now and that they’ll take the profits and roll that back into fiber eventually. If the ISP telling you that is somebody other than an electric or telephone cooperative, the chances of them self-funding the future conversion to fiber is basically zero. It takes about five minutes of math to show that there will ever be enough profits to fund that promise.

What makes the decision harder is that there will be some WISPS who will do a great job. They’ll start with the best electronics on the market, will build fiber backhaul to towers, and will invest in every coming decade to upgrade radios to keep up with the state of the art. A county that gets this kind of WISP probably is in great hands and made a good decision to get broadband now and not wait. But there are other WISPs who will take the grant money and never invest another dime. It’s hard for a community to know what to believe since both kinds of WISPs will likely make the identical sales pitch.

Stock Buybacks

All of the big ISPs brag to the public about how much they spend on their networks. There is barely a press release when they don’t remind the public how much money they are pouring back into making their networks better. Even at the local level, it’s rare to ask a big ISP to a local government meeting where they don’t open the conversation by reminding local politicians how much money they have spent in a given town or county.

The story is often just the opposite when problems with networks are pointed out, and communities ask the ISPs to beef up networks and improve service. That’s when we hear that money for capital spending is tight, but an ISP will make upgrades a priority in the future.

What’s never heard in conversation about capital spending is how much big ISPs spend to buy back shares of their own stock. This is a practice where big ISPs (and many other large corporations) use profits to purchase and retire stock. The transaction reduces the number of shares of outstanding stock and consequently nudges up the announced earnings per share. The first time I encountered the practice, I was flabbergasted.

Let’s consider the Comcast stock buybacks. Comcast paused stock buybacks in 2019, but in 2021 repurchased 73.2 million shares of stock for $4 billion. The company has over 4.5 billion outstanding shares of stock, so the buyback reduced the shares of outstanding stock by 1.6%. Comcast earnings for 2021 were announced as $3.06 per share for the year. Without the stock buyback, the earnings would have been $3.01.

The theory is this small nudge is good for investors. But it’s hard to envision a worse use for cash. Comcast could have gotten a far better return for investors from using that money to extend networks around their current markets, upgrading older networks to keep customers loyal, or marketing to add new customers. Those kinds of changes would result in long-term value gain for shareholders. Comcast recently announced that it is increasing the stock buyback in 2022 to $10 billion. To put that into perspective, Comcast’s capital spending for the last two years was $11.6 and $12.1 billion.

ISPs vary in the amount put towards stock buybacks according to their current cash situation and Board philosophy. Here are a few other stock buyback plans for large ISPs.

  • Charter has actively been buying back its stock. The company repurchased $15.4 billion of its own stock in 2021 and $11.2 billion in 2020.
  • T-Mobile has plans to really step up stock buybacks and plans to repurchase $60 billion of its own stock between 2023 and 2025.
  • AT&T is not currently buying back stock and only repurchased $104 million of stock in 2021.
  • Verizon told investors it would buy back 100 million shares of stock in 2022 – the stock is currently trading at $54 per share.
  • The one that is hardest to understand is Lumen. The company generated $700 million in free cash flow in 2021 and spent $1 billion to buy back its stock. That probably demonstrates the pressure that Wall Street is exerting for stock buybacks.

This makes me wonder if corporations that are engaging in stock buybacks should be allowed to get federal grants. For example, should we have allowed a company like Charter to get $1.2 billion in RDOF funding in 2020 at a time when the company was spending $11 billion to buy back its own stock? Did Charter really need a federal subsidy, or does grant funding just allow a company to even further increase stock buybacks? I don’t have an answer for that other than it just doesn’t feel right.

Following the Rules When Choosing an ISP Partner

Local governments all over the country are choosing ISP partners and making grants from ARPA funds to help bring better broadband. Today’s blog is a warning to handle the awards of such monies in a way as to be safe from challenges from ISPs you don’t choose to fund. I’ve already heard of a few cases where such challenges have been mounted.

The reason for issuing this warning is that ISPs that don’t get funded can ask to see all of the records that are part of the process of choosing a partner and can sue a local government if they don’t believe the review and award process gave them a fair chance to win the awards.

It’s important to remember that although ARPA money came to local governments from a federal grant program, this is still local government money, and the process of spending the money is subject to at least some portion of government procurement rules and certainly is subject to all rules having to do with openness and transparency of records. An ISP merely needs to ask and can see all emails, correspondence, and any document created as part of the process of choosing who to fund.

What complicates this more than other government spending is that local governments are including broadband committees in the decision-making process of picking partners. These are folks who are not officially part of the government and are probably not familiar with government procurement rules. They probably don’t know that things they say in an email or things they write in notes can possibly be discovered by others.

This is an unusual circumstance because governments don’t normally include citizens directly in the process of spending government money. But local broadband committees have put so much energy into bringing a better broadband solution that it wouldn’t seem right to not have them be part of the process of deciding who will be the funding ISP in the community. It’s fairly obvious that whatever ISP is given funding to bring fiber to a rural area will effectively be the broadband monopoly provider there for many decades to come – so it’s an important decision.

One of the things I see a lot is local communities issuing invitations for ISPs to propose to get the funding. These might be in the form of an RFQ (request for qualification), an RFI (request for information, or an RFP (request for proposal). Be careful how you write these invitation documents because the government is going to be bound by whatever you tell ISPs about the selection process. My advice is to say nothing about how winners will be chosen.

For instance, if an RFI says that ISP winners will be chosen by a ranking scale based upon certain criteria, then the local government is bound to follow that ranking process. A local government can’t say it will pick somebody in a certain manner and then do something different. If ISPs are ranked on a grading scale, be aware that ISPs can later ask to see how they were graded – and that is where the chance comes that an ISP will take exception to the scoring process.

The worst thing that can happen is to have already chosen the winner before going through the process. There is a good chance in such a case that there are emails or other evidence that the choice was made before the process even began.

I strongly advise local governments to include an attorney and perhaps a trusted consultant who has been through this before in the process. A selection committee needs to get the speech about being fair, open, and transparent and warned not to create written records that are derogatory to any of the ISPs in the process. Governments have a legal obligation to be fair and aboveboard when choosing anybody who will receive public funding. I know that picking ISP partners feels like it is an extraordinary thing, but it is not somehow outside the normal government procurement processes.

A New Source of Financing

Buried deep in the Infrastructure Investment and Jobs Act is the opportunity for broadband projects to use a different form of financing. Section 80401 of the new law allows for the use of private activity bond financing for qualified broadband projects.

For those unfamiliar with that terminology, a private activity bond is a bond issued by somebody other than a government entity. Rather than borrowing money from a bank, bonds are sold directly to investors. Most bonds are purchased these days by Wall Street bond funds, although individual investors can also buy bonds.

It’s an interesting new form of financing that has never been easily available to commercial ISPs before. Before talking more about the bond process, I want to discuss what the law means by ‘qualified projects”. This bond funding can only be used for projects that fit the criteria for broadband projects that are covered by the other provisions of the IILJ. Specifically, the bonds can only be used to finance a project that:

A.  Is designed to provide broadband service solely to 1 or more census block groups in which more than 50% of residential households do not have access to fixed, terrestrial broadband service which delivers at least 25 Mbps downstream and at least 3 Mbps upstream, and

B.  Results in internet access to residential locations, commercial locations, or a combination of residential ad commercial locations at speeds not less than 100 Mbps for download and 20 Mbps for uploads, but only if at least 90% of the locations provided such access under the project are locations where, before the project, a broadband provider did not provide service, or did not provide service meeting the minimum speed requirement described in paragraph A.   

This means the projects can only be used for areas that have at least 50% coverage of homes with current broadband of 25/3 or less. That’s likely to mean that this bond funding is going to have a relatively short shelf life – once BEAD grants are done, there may not be a whole lot of the U.S. left that will meet this test. The bond option is clearly aimed at providing the matching funds for the upcoming BEAD grants. But this law would allow bond financing to be used for projects funded by state broadband grants or projects partially funded by ARPA funds.

There is an interesting hoop to jump through. Anybody who wants to use the bonds must query all incumbent providers in the grant area to see if they have plans to build a gigabit-capable network. There is no guidance on what happens if a current ISP says yes. This funding also is not available for incumbents to use in existing service territories.

What are the potential benefits of this funding option for an ISP?

  • It’s easier with bonds to finance projects over a longer time. It should be possible to get 25 or 30-year funding through bond financing.
  • The bonds can provide 100% financing, whereas many other funding sources require at least some equity.
  • Bond financing can also provide a cushion for the first few years by having no debt payments. This is done by deferring principal payments and by pre-borrowing the interest payment for the first few years of a project.
  • It’s possible that bond funding might have a lower interest rate – but that is strictly going to depend on the creditworthiness of the borrower. For instance, a cooperative with a great balance sheet might get a rock bottom interest rate while somebody else might pay a high rate.
  • There generally is less ongoing reporting as long as the borrower is able to make bond payments.
  • Finally, there is a chance that the bonds could be tax-free for bond purchasers, but that would be subject to IRS rules outside of this new law.

There are a few other provisions of the rule worth noting. Getting bond funding requires structuring the bond through a conduit borrower. That means that a state, a county government, or perhaps somebody like a government-based economic development agency would have to agree to sponsor the bonds. The government entity would have no ownership of the bond project, but would instead lend its name to the project to enable a project to qualify for using the bond market.

For those not familiar with the bond process, a borrower would work with a bond agent expert who is familiar with bond financing. You’d create an official statement, which is essentially the offering document that is shown to prospective bond buyers that would describe the project and describe the benefits and risks. This is similar to a document that is created by public companies before selling stocks to the public. The bond agent would circulate the official statement and solicit purchase offers from bond buyers. The bond market can work quickly, and assuming it’s an attractive bond offering that meets industry expectations, the bond sale is generally transacted within a relatively short period of time.

This is something worth considering for somebody who is looking to fund the matching portion of the various grants that are floating around the industry. It’s an interesting alternative to a traditional bank loan. The main reasons to consider it include 100% financing, possibly lower interest rates, a long term for repayment, and a period upfront with no debt payments. For some projects, those items can make a big difference in the willingness to pursue a grant.