The Big Telco Problem

A few weeks ago I made the observation in a blog that we don’t really have a rural broadband problem – we instead have a rural big telco problem. As I work around the country helping communities that are looking for broadband solutions it finally struck me that the telcos in almost all of these areas are the big companies – AT&T, CenturyLink, Verizon, Frontier, Windstream, etc.

I don’t see these same problems in areas served by smaller telephone companies. These smaller telcos have either upgraded networks to deliver faster broadband or have plans to do so over the next few years. I know of numerous rural telcos that are currently building fiber to rural areas, and those networks are going to serve those areas for many decades to come. There are undoubtably a few small telcos that are not making the needed upgrades, but for the most part the smaller telcos are doing the right thing – they are reinvesting into the rural areas and making the upgrades needed for the future.

The large telcos have done just the opposite. Most of them have been ignoring rural America for decades. They yanked customer service centers from smaller communities many years ago. They drastically cut back on rural technical staffs and it often takes weeks for customers to get repairs. They stopped investing in rural networks and have not upgraded electronics or networks for decades.

There is currently a burst of activity in these rural areas for those big telcos that accepted the billions of dollars of CAF II funding. This funding requires them to upgrade rural broadband to a measly and inadequate broadband speed of at least 10/1 Mbps. However, the rules in the CAF program are weak and there are no repercussions for not meeting the goals and I’ve always expected they will spend the FCC’s money until it’s gone, and then stop the upgrades. This means while some rural customers will get speeds even a little faster than 10 Mbps that there are likely to be many customers who will so no upgrades. I don’t expect the big telcos to spend a dime of their own in rural America once the CAF II upgrades are finished.

While I call this a big telco problem I might just as easily have called it a regulator problem. The FCC and the various state commissions largely deregulated telephone service, and the FCC recently washed their hands of broadband regulation. The big telcos have been milking big profits out of the rural copper networks for decades and have not reinvested any of those profits back into the networks. That’s how big companies act if regulators don’t require them to spend some of their profits on service and upgrades.

By contrast the smaller telcos were not required to upgrade networks, but they have done so anyway. The small companies got a big boost recently from the ACAM program – a different FCC plan that encourages building forward-looking broadband networks. Many of these companies had already upgraded to fiber before the FCC money was available. These smaller telcos are part of the rural community and feel an obligation to do the right thing – and the right thing is to find a way to bring broadband that rural customers need.

Regulators have let us down by not forcing the big telcos to act responsibly. The big telcos now want to walk away from rural copper that they claim is obsolete and in bad shape. But that copper would be in much better shape had these telcos done routine maintenance for the last thirty years. We built a great nationwide copper network due to the simple regulatory principle of universal service. Regulators at both the state and local level believed that the role of government was to ensure that everybody got access to the communications networks that ties us together as a nation. They know that universal service was good for people, but also good for the economy and good for the country as a whole. It’s something that very few other countries did and set America apart from the rest of the world.

I worked at Southwestern Bell pre-divestiture and it was a source of company pride that the company served every customer to the best of our ability. But along came competition and any sense of obligation to the public went out the door and the big telcos instead concentrated on satisfying Wall Street’s demand for ever-higher profits. There have been big benefits from this competition that are hard to deny, but what was missed in the transition to a competitive telecom world was that competition was never going to benefit rural America in the same way it benefits urban areas. We should have foreseen this and kept the universal service policy in place for rural America.

I get angry when I hear politicians and regulators say that municipalities shouldn’t be in the broadband business because the commercial sector will take care of our broadband needs. That is obviously not true and one only has to look at the big telco networks ten miles outside any urban area to see how the big telcos have abandoned customers in higher cost areas.

The big telcos are still milking big profits out of rural America and are still not reinvesting any of their own capital there. I don’t know if there is a way to put the genie back into the bottle and reintroduce regulation for rural America. If we don’t then we are only a few years away from having third-world telecom networks in rural America that will be a major drag on our society and economy.

Why I am Thankful – 2017

Every year at Thanksgiving I take a pause to look at the positive things happening with the small carrier industry. This is not the easiest year to make a list because we currently have an FCC that clearly is in the pocket of the big ISPs like Verizon, AT&T and Comcast. While some of the new FCC policies supporting those big companies will benefit all ISPs, in many cases the FCC decisions are given the big ISPs a leg up over competition. But there are still things to be thankful about in our industry:

Demand for Broadband Intensifies. In the work I have been doing in rural communities it’s becoming clear that broadband has moved from a nice-to-have feature to a must-have commodity. I see evidence of this in several different ways. First, rural communities and their citizens are making a lot of noise to politicians about not having broadband. The broadband issue has become the top priority in many communities. I also see evidence of rural broadband demand when looking at the high penetration rates that come from projects being built in areas that didn’t have good broadband. Over the last few years I’ve seen such projects getting customer penetration rates between 65% and 85%. I call this a good news topic for rural carriers since it means there are still lots of opportunities for expansion, and enough customer demand to help pay for broadband projects. It’s not a positive that there are still so many communities with no broadband, but the positive here is that communities are making demands, which is the first step towards finding a solution.

Public Private Partnerships are Thriving. Very few government entities want to be an ISP and they are instead hoping to find commercial partners to bring better broadband to their communities. In just this last year I’ve worked with half a dozen local governments that have contributed funding to public private partnerships, where the government acts like the bank and the ISP owns and operates the network. Since rural broadband projects are often a challenge to finance this is a promising new trend.

ACAM Money is Financing Fiber. The ACAM money from the Universal Service Fund is being used to expand fiber and advance broadband in rural areas all over the country. The fact that some rural communities are getting fiber is helping to drive the demand for other who want the same thing. We’ll have to wait until next year to see of the CAF II reverse auctions drive similar results.

Wireless Technology Getting a Lot Better. I have a lot of clients who are now deploying point-to-multipoint radios for broadband deployment. Over the last three years these radios have improved dramatically. They are more reliable, almost approaching plug-and-play. By combining multiple frequency bands they deliver bigger broadband pipes, faster speeds and a much-improved customer experience. Depending on customer density the networks can be designed to deliver 25 Mbps to a lot of customers with some speeds as fast as 100 Mbps. There are still big issues with the technology in heavily wooded or hilly areas, but there are a lot of places where the technology is now delivering a great broadband connection.

New Revenue Opportunities Materializing. While voice revenues continue to decline and many of clients are getting clobbered on cable TV, I see a number of them doing well with new products. I have clients getting decent penetration rates with managed WiFi. I have some clients doing well with security. And I have clients making some good margins on smart home technologies. Selling new products is out of the comfort zone for many small ISPs and it requires some new thinking to successfully sell a new product – but I’ve seen enough success stories to see that it can work.

Means Testing for FCC Funding – Part I

A recent blog by FCC Commissioners Michael O’Rielly and Mignon Clyburn asks if there should be a means test in federal high cost programs. This blog is something every telco, school, library or health care provider that gets any form of Universal Service funding needs to read.

There is already some means testing in the Universal Service Fund. For instance, the Lifeline program brings subsidized voice and broadband only to households that meet certain poverty tests. And the Schools and Libraries program uses a mean test to make certain that subsidies go to schools with the most low-income students. The FCC blog talks about now applying a means test to the Universal Service Funds that are used to promote rural broadband. There are several of these programs, with the biggest dollar ones being the CAF II funding for large telcos and the ACAM program for small telcos to expand rural broadband networks.

The blog brings up the latest buzzword at the FCC, which is reverse auction. The FCC embraces the concept that there should be a competition to get federal money to expand broadband networks, with the funding going to the carrier that is willing to accept the lowest amount of funding to expand broadband into an area. On the surface that sounds like a reasonable suggestion in that it would give money to the company that is the most efficient.

But in real-life practice reverse auctions don’t work, at least for building rural broadband networks. Today these FCC infrastructure programs are aimed at bringing broadband to places that don’t have it. And the reason they don’t have it is because the areas are largely rural and sparsely populated, meaning costly for building broadband infrastructure. In most of these places nobody is willing to build without significant government subsidy because there is no reasonable business plan using commercial financing.

If there was a reverse auction between two companies willing to bring fiber to a given rural area, then in my experience there wouldn’t be much difference between them in terms of the cost to build the network. They have to deploy the same technology over the same roads to reach the same customers. One might be slightly lower in cost, but not enough to justify going through the reverse auction process.

And that is the big gotcha with the preference for reverse auctions. A reverse auction will always favor somebody using a cheaper technology. And in rural broadband, a cheaper technology means an inferior technology. It means using federal funding to expand DSL or cellular wireless as is being done with big telco CAF II money instead of building fiber, as is being done by the small telcos accepting ACAM money.

Whether intentional or not, the FCC’s penchant for favoring reverse auctions would shift money from fiber projects – mostly being done by small telcos – to the wireless carriers. It’s clear that building cellular technology in rural areas is far cheaper than building fiber. But to use federal money to build inferior technology means relegating rural areas to dreadfully inadequate broadband for decades to come.

Forget all of the hype about how 5G cellular is going to bring amazing broadband speeds – and I hope the FCC Commissioners have not bought into cellular company’s press releases. Because in rural areas fast 5G requires bringing fiber very close to customers – and that means constructing nearly the same fiber networks needed to provide fiber into homes. The big cellular companies are not going to invest in rural 5G any more than the big telcos have ever invested in rural fiber. So a reverse auction would divert federal funds to Verizon and AT&T to extend traditional cellular networks, not for super-fast wireless networks.

We already know what it looks like to expand rural cellular broadband. It means building networks that deliver perhaps 20 Mbps to those living close to cell towers and something slower as you move away from the towers. That is exactly what AT&T is building with their CAF II funding today. AT&T is taking $426 million per year for six years, or $2.5 billion in total to expand cellular broadband in rural areas. As I’ve said many times in the past this is perhaps the worse use of federal telecom funding I have ever seen. Customers on these cellular networks are getting broadband on day one that is too slow and that doesn’t even meet the current FCC’s definition of broadband. And in the future these customers and rural communities are going to be light-years behind the rest of the country as household demand for broadband continues to grow at a torrid pace while these customers are stuck with an inadequate technology.

The FCC blog also mentions the concept of possibly re-directing future USF payments, and if I am a small telco that scares me to death. This sounds like the FCC may consider redirecting this already-committed ACAM funding. Numerous small telcos just accepted a 10-year commitment to receive ACAM funding from the USF Fund to expand broadband in rural areas, and many are already borrowing matching funds from banks based upon that commitment. Should that funding be redirected into a reverse auction these small companies will not be able to complete their planned expansion, and if they already borrowed money based upon the promise of that ACAM funding they could find themselves in deep financial trouble.