Taking Advantage of the $9B 5G Fund

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

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

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

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

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

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

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

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

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

AT&T Cutting Capital Spending

AT&T announced it will be reducing capital spending in 2020. That news is significant for several reasons. AT&T’s capital plans are always big news because they have the largest annual capital budget of the big telcos and cable companies. The AT&T capital budget for 2019 was $23 billion. It’s big news when they are only planning on spending $20 billion in 2020.

It’s worth noting that some of AT&T’s capital spending is not being done with their own money. In 2020 they will be receiving the final installment of $428 million for the sixth year of the CAF II program. AT&T recently announced that they are 75% finished the construction of the FirstNet network for first responders, so the company should be receiving the last 25% of the $6.5 billion of federal funding next year. In future years AT&T will likely be collecting some significant share of the recently announced $9 billion 5G Fund paid out of the Universal Service Fund to bring better cellular service for the most rural parts of the country.

There are ripples throughout the telecom sector when AT&T increases or decreases its capital budget. For example, a significant slash of AT&T spending has a significant impact on the various major electronics vendors that will now have to lower their revenue expectations for 2020. While the whole telecom sector is busy, this still means lower revenues for the major telecom vendors.

This reduction in AT&T spending makes me wonder about the 5G war we are supposedly having with China. If you listen to the carrier-driven rhetoric in Washington DC, you would think that there is an urgent need to spend huge amounts of capital immediately on 5G infrastructure. It was that rhetoric that gave the FCC cover to double the size of the recently announced 5G Fund to $9 billion.

It’s hard to imagine that AT&T would be cutting its capital budget if 5G implementation was truly a national priority and a crisis. The truth about 5G can be seen by how the cellular carrier CEOs communicate with their stockholders – the big carriers are struggling right now to find an immediate business case that justifies huge spending on 5G. It turns out that much of the public isn’t willing to pay more for faster cellular broadband. Every carrier has a list of future benefits from 5G, but there are no applications that will create the quick revenues that would prompt AT&T to keep spending capital at historic levels.

This is not to say that AT&T and the other wireless carriers aren’t spending money on 5G – but AT&T is fitting 5G expansion into its shrinking capital budget. Contrary to everything that the carriers have been telling Washington DC, the carriers are not planning on spending massive amounts of their own money on 5G just yet.

Lower capital spending by AT&T also takes the wind out of the sails of the FCC’s argument that net neutrality was holding back the big ISPs from making capital expenditures. This was the primary reason cited by FCC Chairman Ajit Pai for killing net neutrality and Title II regulation. He argued that overregulation was stopping the big carriers from investing, and he’s still making this same argument today to justify his decision. If Chairman Pai was right, we should be seeing AT&T increase capital spending rather than cutting it.

The idea that there is a direct correlation between capital spending and regulation was always fictional. Big ISPs spend money on capital that they think will increase future returns – it’s hard to imagine regulations that would stop the big companies from pursuing good business ideas. AT&T’s capital spending is much more related to what its competitors like Verizon, T-Mobile, and Comcast are doing. When the FCC killed Title II regulation and net neutrality, the agency was removing the last regulations major from a broadband industry that was already barely regulated. It’s hard to think that change had much impact in the Board room or the business development groups at the big ISPs.

It’s worth noting that AT&T has now joined many other big US corporations and is using free cash to buy back its own stock. The company already announced plans to buy back $4 billion of its own stock in the first quarter of 2020 – retiring roughly 100 million shares. I’m sure that decision had some impact on the capital budget. This might mean that AT&T upper management values stock buy-backs to increase earnings per share more than they value capital spending.

FCC to Create 5G Fund

On December 4, FCC Chairman Ajit Pai announced a plan to create what he is calling the 5G Fund. This new fund will replace the already planned $4.5 billion Mobility Fund Phase II Fund and adds another $4.5 billion. The fund has been renamed to suggest that 5G will bring faster broadband to rural America.

The original goal of the Mobility Fund II was to expand 4G LTE coverage to the most rural parts of the country where there is no cellular coverage today. While preparing to award that fund, the FCC figured out that the 4G coverage maps for the biggest cellular companies were significantly overstated. This caused the FCC to pause the Mobility Fund Phase II awards, and they are now rolling that money into this larger new fund. There are things to both love and hate about this announcement.

Some of the Things to Hate:

I hate that the 5G hype got rolled into this announcement. Consider the following from Pai’s announcement:

5G has the potential to bring many benefits to American consumers and businesses, including wireless networks that are more responsive, more secure, and up to 100 times faster than today’s 4G LTE networks. . . . We want to make sure that rural Americans enjoy these benefits, just as residents of large urban areas will. In order to do that, the Universal Service Fund must be forward-looking and support the networks of tomorrow.

That statement is incredibly misleading. The only new technology that is 100 times faster than 4G LTE is the use of millimeter wave spectrum. Millimeter wave spectrum is only faster when the transmitters are fiber-fed. This fund is not going to be used to build the fiber needed to bring millimeter wave hot spots to the most rural parts of America. That technology only broadcasts fast broadband for less than 1,000 feet, so it’s likely to never be economically viable to bring this technology to remote places. Unfortunately, the Chairman’s statement is going to make rural people think they might be getting broadband that is 100 times faster.

I also hate that Chairman Pai used this same announcement to announce that AT&T and Verizon have massively overstated their 4G coverage maps. One would expect there to be some sort of regulatory repercussion for those companies exaggerating their coverage areas. The big carriers have been accused of overstating coverage to limit how much of the Mobility Fund Phase II went to smaller carriers. Instead of punishing the big carriers, this announcement glossed over the bad behavior and instead rewards them by doubling the size of the fund. I’m guessing that the fund doubled in size to cover the areas that the carriers had erroneously claimed as having cell coverage. At the end of the day, this fund is another big dollar giveaway to the biggest carriers in the country. I know this money should greatly improve rural cellular coverage – it’s just getting a bit tiresome watching this FCC hand everything imaginable to the biggest carriers.

I also hate that this order is not likely going to require that any new fiber built using federal money be made available to others. These billions will be used to construct a lot of fiber to rural cell towers and that fiber would be a great launching point for competitiors that want to bring better broadband to rural areas. You might recall that the broadband grants that came from the stimulus program required all fiber constructed with federal funds be made available to ISPs at affordable rates. However, when money is given to the big carriers – in this program and in the CAF II program – there is no such requirement.

Some of the Things to Like:

This reconstituted fund still keeps the primary goal of the original Mobility Fund Phase II, which is to bring better cellular coverage to areas that don’t have it today. I visit rural America regularly and it’s not hard in rural places to drive out of cellular coverage. Hopefully, this fund fills many of those coverage gaps. I’m always amazed when I come upon a small community in an area with zero cellphone coverage. We talk all of the time about the broadband gap, but for many folks, there is a more fundamental connectivity gap.

I also like that some of this money will go to the smaller cellular carriers that already serve in rural America. I have faith that they’ll use the money more wisely than the big carriers. The fund will operate as a reverse auction, and I hope that the many smaller cellular carriers can win the money in places where they already have better networks than the big carriers.