FCC Speed Tests for ISPs

ISPs awarded CAF II funding in the recent auction need to be aware that they will be subject to compliance testing for both latency and speeds on their new broadband networks. There are financial penalties for those failing to successfully meet these tests. The FCC revised the testing standards in July in Docket DA 18-710. These new testing standards become effective with testing starting in the third quarter of 2019. There new standards will replace the standards already in place for ISPs that receive funding from earlier rounds of the CAF program as well as ISPs getting A-CAM or other rate-of-return USF funding.

ISPs can choose between three methods for testing. First, they may elect what the FCC calls the MBA program, which uses an external vendor, approved by the FCC, to perform the testing. This firm has been testing speeds for the network built by large telcos for many years. ISPs can also use existing network tools if they are built into the customer CPE that allow test pinging and other testing methodologies. Finally, an ISP can install ‘white boxes’ that provide the ability to perform the tests.

The households to be tested are chosen at random by the ISP every two years. The FCC doesn’t describe a specific method for ensuring that the selections are truly random, but the ISP must describe to the FCC how this is done. It wouldn’t be hard for an ISP to fudge the results of the testing if they make sure that customers from slow parts of their network are not in the testing sample.

The number of tests to be conducted varies by the number of customers for which a recipient is getting CAF support; if the number is CAF households is 50 or fewer they must test 5 customers; if there are 51-500 CAF households they must test 10% of households. For 500 or greater CAF households they must test 50. ISPs that declare a high latency must test more locations with the maximum being 370.

ISPs must conduct the tests for a solid week, including weekends in every quarter to eliminate seasonality. Tests must be conducted in the evenings between 6:00 PM and 12:00 PM. Latency tests must be done every minute during the six-hour testing window. Speed tests – run separately for upload speeds and download speeds – must be done once per hour during the 6-hour testing window.

The FCC has set expected standards for the speed tests. These standards are based upon the required speeds of a specific program – such as the first CAF II program that required speeds of at least 10/1 Mbps. In the latest CAF program the testing will be based upon the speeds that the ISP declared they could meet when entering the action – speeds that can be as fast as 1 Gbps.

ISPs are expected to meet latency standards 95% of the time. Speed tests must achieve 80% of the expected upland and download speed 80% of the time. This might surprise people living in the original CAF II areas, because the big telcos only need to achieve download speeds of 8 Mbps for 80% of customers to meet the CAF standard. The 10/1 Mbps standard was low enough, but this lets the ISPs off the hook for underperforming even for that incredibly slow speed. This requirement means that an ISP guaranteeing gigabit download speeds needs to achieve 800 Mbps 80% of the time. ISPs that meet the speeds and latencies for 100% of customers are excused from quarterly testing and only have to test once per year.

There are financial penalties for ISPs that don’t meet these tests.

  • ISPs that have between 85% and 100% of households that meet the test standards lose 5% of their FCC support.
  • ISPs that have between 70% and 85% of households that meet the test standards lose 10% of their FCC support.
  • ISPs that have between 55% and 75% of households that meet the test standards lose 15% of their FCC support.
  • ISPs with less than 55% of compliant households lose 25% of their support.

For CAF II auction winners these reductions in funding would only be applied to the remaining time periods after they fail the tests. This particular auction covers a 10-year period of time and the testing would start once the new networks are operational, which is required to be completed between years 3 and 6 after funding.

This will have the biggest impact on ISPs that overstated their network capability. For instance, there were numerous ISPs that claimed the ability in the CAF auction to deliver 100 Mbps and they are going to lose 25% of the funding if they deliver speeds slower than 80 Mbps.

Winners of the CAF II Auction

The FCC CAF II reverse auction recently closed with an award of $1.488 billion to build broadband in rural America. This funding was awarded to 103 recipients that will collect the money over ten years. The funded projects must be 40% complete by the end of three years and 100% complete by the end of six years. The original money slated for the auction was almost $2 billion, but the reverse auction reduced the amount of awards and some census blocks got no bidders.

The FCC claims that 713,176 rural homes will be getting better broadband, but the real number of homes with a benefit from the auction is 513,000 since the auction funded Viasat to provide already-existing satellite broadband to 190,000 homes in the auction.

The FCC claims that 19% of the homes covered by the grants will be offered gigabit speeds, 53% will be offered speeds of at least 100 Mbps and 99.75% will be offered speeds of at least 25 Mbps. These statistics have me scratching my head. The 19% of the homes that will be offered gigabit speeds are obviously going to be getting fiber. I know a number of the winners who will be using the funds to help pay for fiber expansion. I can’t figure what technology accounts for the rest of the 53% of homes that supposedly will be able to get 100 Mbps speeds.

As I look through the filings I note that many of the fixed wireless providers claim that they can serve speeds over 100 Mbps. It’s true that fixed wireless can be used to deliver 100 Mbps speeds. To achieve that speed customers either need to be close to the tower or else a wireless carrier has to dedicate extra resources to that customer to achieve that speed – meaning less of that tower can be used to serve other customers. I’m not aware of any WISPs that offer ubiquitous 100 Mbps speeds, because to do so means serving a relatively small number of customers from a given tower. To be fair to the WISPs, their CAF II filings also say they will be offering slower speeds like 25 Mbps and 50 Mbps. The FCC exaggerated the results of the auction by claiming that any recipient capable of delivering 100 Mbps to a few customers will be delivering it to all customers – something that isn’t true. The fact is that not many of the households over the 19% getting fiber will ever buy 100 Mbps broadband. I know the FCC wants to get credit for improving rural broadband, but there is no reason to hype the results to be better than they are.

I also scratch my head wondering why Viasat was awarded $122 million in the auction. The company is the winner of funding for 190,595 households, or 26.7% of the households covered by the entire auction. Satellite broadband is every rural customer’s last choice for broadband. The latency is so poor on satellite broadband that it can’t be used for any real time applications like watching live video, making a Skype call, connecting to school networks to do homework or for connecting to a corporate WAN to work from home. Why does satellite broadband even qualify for the CAF II funding? Viasat had to fight to get into the auction and their entry was opposed by groups like the American Cable Association. The Viasat satellites are already available to all of the households in the awarded footprint, so this seems like a huge government giveaway that won’t bring any new broadband option to the 190,000 homes.

Overall the outcome of the auction was positive. Over 135,000 rural households will be getting fiber. Another 387,000 homes will be getting broadband of at least 25 Mbps, mostly using fixed wireless, with the remaining 190,000 homes getting the same satellite option they already have today.

It’s easy to compare this to the original CAF II program that gave billions to the big telcos and only required speeds of 10/1 Mbps. That original CAF II program was originally intended to be a reverse auction open to anybody, but at the last minute the FCC gave all of the money to the big telcos. One has to imagine there was a huge amount of lobbying done to achieve that giant giveaway.

Most of the areas covered by the first CAF II program had higher household density than this auction pool, and a reverse auction would have attracted a lot of ISPs willing to invest in faster technologies than the telcos. The results of this auction show that most of those millions of homes would have gotten broadband of at least 25 Mbps instead of the beefed-up DSL or cellular broadband they are getting through the big telcos.

Subsidizing Rural Broadband

In a rare joint undertaking involving the big and small telcos, the trade groups USTelecom and NTCA—The Rural Broadband Association sponsored a whitepaper titled, Rural Broadband Economics: A Review of Rural Subsidies.

The paper describes why it’s expensive to build broadband networks in rural areas, with high costs mostly driven by low customer density. This is something that is largely universally understood, but this describes the situation for politicians and others who might not be familiar with our industry.

The paper goes on to describe how other kinds of public infrastructure – such roads, electric grids, water and natural gas systems – deal with the higher costs in rural areas. Both natural gas and water systems share the same characteristics as cable TV networks in this country and they are rarely constructed in rural areas. Rural customers must use alternatives like wells for water or propane instead of natural gas.

The electric grid is the most analogous to the historic telephone network in the country. The government decided that everybody should be connected to the electric grid, and various kinds of government subsidies have been used to help pay for rural electric systems. Where the bigger commercial companies wouldn’t build a number of rural electric cooperatives and municipal electric companies filled the gap. The federal government developed subsidy programs, such as low-cost loans to help construct and maintain the rural electric grids. There was no attempt to create universal electric rates across the country and areas lucky enough to have hydroelectric power have electric rates that are significantly lower than regions with more expensive methods of power generation.

Roads are the ultimate example of government subsidies for infrastructure. There are both federal and state fuel taxes used to fund roads. Since most drivers live in urban areas, their fuel taxes heavily subsidize rural roads.

The paper explains that there are only a few alternatives to fund rural infrastructure:

  • Charge higher rates to account for the higher costs of operating in rural areas. This is why small town water rates are often higher than rates in larger towns in the same region.
  • Don’t build the infrastructure since it’s too expensive. This is seen everywhere when cable TV networks, natural gas distribution and water and sewer systems are rarely built outside of towns.
  • Finally, rural infrastructure can be built using subsidies of some kind.

Subsidies can come from several different sources:

  • Cross-subsidies within the same firm. For example, telephone regulators long ago accepted the idea that businesses rates should be set higher to subsidize residential rates.
  • Cross subsidies between firms. An example would be access rates charged to long distance carriers that were used for many years to subsidize local telephone companies. There are also a number of electric companies that have subsidized the creation of broadband networks using profits from the electric business.
  • Philanthropic donations. This happens to a small extent. For example, I recently heard where Microsoft had contributed money to help build fiber to a small town.
  • Government subsidies. There have been a wide range of these in the telecom industry, with the latest big ones being the CAF II grants that contribute towards building rural broadband.

Interestingly the paper doesn’t draw many strong conclusions other than to say that rural broadband will require government subsidies of some kind. It concludes that other kinds of subsidies are not reasonably available.

I suspect there are no policy recommendations in the paper because the small and large companies probably have a different vision of rural broadband subsidies. This paper is more generic and serves to define how subsidies function and to compare broadband subsidies to other kinds of infrastructure.

Using USDA’s New $600 Million

Earlier this year Congress passed an Omnibus Budget bill that okayed the US budget until this September. Buried in that bill was $600 million for rural broadband expansion, to be administered by the USDA. The USDA has dressed this up as an ‘E-Connectivity pilot program’ and is asking current borrowers and others for feedback on how to use the money. Comments are due to them by September 10.

This new program will be allowed to supply grants for up to 85% of the cost of building in an area. That might create a viable business case in rural areas if the loan recipient only has to come up with 15% matching funds.

However, Congress made it challenging for the USDA to use the money. Normal USDA programs broadband loans can be used to cover areas where as few as 15% of the homes in the coverage area don’t have access today to 10/1 Mbps broadband. It looks like big ISP lobbyists got to the author of the bill and this new $600 million flips that around and can only be used in areas where 90% of homes don’t have access to 10/1 Mbps.

That’s a difficult hurdle to overcome for a number of reasons. First, the big cellular companies report widespread coverage of cellular broadband that meets that threshold. Many such areas don’t really have that speed, and in many cases can’t even get a cell signal, but the presumption will be that such areas can get broadband. Second, the big telcos are supposedly busy implementing the CAF II program which will bring 10/1 Mbps speeds to millions of rural homes. Those homes will be counted as having sufficient broadband.

The CAF II reverse auction is underway and it’s going to fund building in the most remote places that were not covered by the CAF II program. Most of the reverse auction census blocks will not pass the 90% no-broadband test.

In most places in the country it’s going to be challenging to draw a contiguous study area that meets the 90% test. It doesn’t take too many homes with good cellular broadband or with a CAF II upgrade to fail the eligibility test. I’m sure such areas exist, but almost by definition somebody is going to have to ask for funding for small pockets of homes, or else jerry-rig a service footprint to try to meet the 90% test.

I have a hard time even seeing the big incumbent telcos meeting the 90% test in many places. There might be small telcos that didn’t accept ACAM money that might still have such pockets – but most small telcos upgraded to speeds greater than 10.1 Mbps many years ago.

The USDA is asking for the following feedback:

  • How to evaluate if rural homes have sufficient access to 10/1 Mbps speeds today. I think this gets at the heart of the FCC databases where homes are incorrectly shown to have broadband availability.
  • How to consider affordability and pricing.
  • How to demonstrate the benefits of projects using publicly available data.

The USDA didn’t ask about the speeds that must be provided to customers and I’d be surprised if they exceed the 10/1 Mbps speeds required by CAF II.

It’s possible I’m being pessimistic. It’s possible that this funding will make sense for building to small pockets of rural homes that meet the 90% no-broadband test. Perhaps the right strategy for an applicant is to apply for the funds for small clusters of ten or twenty homes – although that makes it hard to justify the overwhelming paperwork that must accompany a federal funding request.

Anybody that knows of areas that will meet this test ought to consider asking for the funds. I imagine the USDA will issue the rules near the end of this year. Getting what is effectively an 85% grant sounds attractive – but anybody who has asked for federal funding knows there will be nothing easy about the application process.

Looking Closer at CAF II Broadband

AT&T is making the rounds in rural Kentucky, not too far from where I live, and is announcing the introduction of their residential wireless broadband product that is the result of the FCC’s CAF II program. Today I’m looking at more detail at that product.

AT&T was required under the CAF II rules to deliver broadband speeds of at least 10 Mbps download and 1 Mbps upload. AT&T says Kentucky announcement that they will be delivering products with at least that much speed, so it’s possible that customers might see something a little faster. Or the company could cap speeds at 10 Mbps and we’ll have to wait for reports from customers about actual speeds.

AT&T accepted nearly $186 million in FCC funds to bring CAF II broadband capabilities to 84,333 households in the state, or $2,203 per household. They say all of those homes will have the broadband available by the end of 2020 (although there is no penalty if some of the homes don’t get covered – which one would expect since many homes are likely to be too far from a cell tower).

AT&T will be delivering the broadband in Kentucky using LTE broadband from cellphone towers. This is delivered to homes by placing a small antenna box (not a dish) on the exterior of a home. They say that they will be using a different set of frequencies for CAF II broadband than what is used for cellular service, meaning there should be no degradation of normal cellular service.

I saw a news article in Kentucky that says the price will be $50 per month, but that’s a special one-year price offer for customers also willing to sign up for DirecTV. Following are more specific details of the normal product and pricing:

  • Customers can get a price of $60 per month for 1-year by signing a 12-month contract. After the year the price increases to $70 per month and is set at $70 per month for those not willing to agree to a contract.
  • Customers signing a contract see no installation charge, but otherwise there is a $99 one-time fee to connect.
  • There is an early termination charge for customers that break the one-year contract of $10 for each remaining month of the contract.
  • There is a $150 fee for customers who don’t return the antenna box.
  • There is a monthly data cap of 170 Gigabytes of downloaded data. Customers pay $10 for each additional 50 GB of download up to a maximum of $200 per month. AT&T is offering a 340 GB monthly data cap right now for customers who bundle with DirecTV – but that’s a temporary offer until October 1.
  • AT&T also will layer on a monthly $1.99 administrative fee that they pocket.

I think the pricing is far too high considering that the $186 million given to AT&T probably paid for all, or nearly all of the cost of the upgrades needed to deliver the service. Some of that money probably was used to bolster fiber to rural cell sites and the funding would have been used to add the new electronics to cell sites. AT&T used free federal money to create a $72 monthly broadband product, and before even considering the data cap is a product with a huge margin return since AT&T doesn’t have to recover the cost of the underlying network.

The small data cap is going to generate a lot of additional revenue for AT&T. The monthly data cap of 170 GB is already too small. Comcast just reported in June that the average download for all of their 23 million broadband customers was 151 GB per month. That means there are already a significant number of homes that want to use more than AT&T’s monthly 170 GB cap. We know that monthly home demand for broadband keeps growing and the Comcast average just a year ago was 128 GB per month. With that growth, within a year the average customer will want more than AT&T’s cap.

A few years ago when I was on Comcast they measured my 3-person home as using nearly 700 GB per month. On the AT&T plan my monthly bill would be $180 per month. Within a few years most homes will want to use more data than AT&T’s cap. The FCC really screwed the public when they didn’t insist that carriers taking the funding should provide unlimited downloads, or at least some high data cap like 1 terabyte. That stingy data cap gives AT&T permission to print money in rural America.

The 10 Mbps speed is also a big problem. That speed today is already inadequate for most households who now want to engage in multiple simultaneous streams. I’ve written many times about the huge inefficiencies in home WiFi and a 10 Mbps connection is just barely adequate for two video streams as long as there are no other broadband uses in the home at the same time. A typical home with kids these days is going to want to simultaneously watch video, do homework, play games, browse the web, download files or work from home. A home with a 10 Mbps speed is not close to equivalent to much faster urban broadband connections. You don’t have to look forward more than a few years to know that a 10 Mbps data caps is soon going to feel glacially slow.

Finally, cellular data has a higher latency than landline broadband, with latency as high as 100 msec. Customers might have problems at times on this product maintaining video streams, making VoIP calls or staying connected to a school or work server.

I’m sure that a home that has never had broadband is going to welcome this product. But it’s not going to take them long to realize that this is not the same broadband available to most homes. They are also going to realize that it’s possibly the last speed upgrade they are going to see for a long time since AT&T and the FCC want to check off these homes as now having broadband.

Getting Militant for Broadband

My job takes me to many rural counties where huge geographic areas don’t have broadband. I’ve seen a big change over the last two years in the expectations of rural residents who are now demanding that somebody find them a broadband solution. There have been a number of rural residents calling for better broadband for a decade, but recently I’ve seen the cries for broadband grow into strident demands. As the title of this blog suggests, people are getting militant for broadband (but not carrying guns in doing so!)

The perceived need for broadband has changed a lot since the turn of this new century. In 2000 only 43% of homes had a broadband connection – and in those days that meant they had a connection that was faster than dial-up. In 2000 DSL was king and a lot of homes had upgraded to speeds of 1 Mbps. There have always been homes that require broadband, and I’m a good example since I work from home, and when I moved fifteen years ago my offer on a new house was contingent on the home having broadband installed before closing. My real estate agent at the time said that was the first time she’d ever heard about broadband related to home ownership.

As I’ve cited many times, the need for broadband has continued to grow steadily and has been doubling every three years. By 2010 the number of homes with broadband grew to 71%, and by then the cable companies were beginning to dominate the market. By then DSL speeds had gotten better, with the average speeds at about 6 Mbps, but with some lucky customers seeing speeds of around 15 Mbps. But as DOCSIS 3.0 was implemented in cable networks we started seeing speeds up to 100 Mbps available on cable systems. It was a good time to be a cable company, because their rapid revenue growth was fueled almost entirely by adding broadband customers.

Broadband in urban areas has continued to improve. We’re now seeing Comcast, Charter, Cox and other cable company upgrade to DOCSIS 3.1 and offer speeds of up to 1 Gbps. DSL that can deliver 50 Mbps over two bonded copper lines is becoming old technology. Even urban cellular speeds are becoming decent with average speeds of 12 – 15 Mbps.

But during all of these upgrades to urban broadband, huge swaths of rural America is still stuck at 2000 or earlier. Some rural homes have had access to slow DSL of 1 – 2 Mbps at most. Rural cellular speeds are typically half of urban speeds and are incredibly expensive as a home broadband solution. Satellite broadband has been available the whole time, but the high prices, gigantic latency and stingy data caps have made most homes swear off satellite broadband.

Rural homes look with envy at their urban counterparts. They know urban homes who have seen half a dozen major speed upgrades over twenty years while they still have the same lousy choices of twenty years ago. Some rural homes are seeing an upgrade to DSL due to the CAF II program of speeds of perhaps 10 Mbps. While that will be a relief to a home that has had no broadband – it doesn’t let a home use broadband in the same way as the rest of the country.

To make matters feel worse, rural customers without broadband see some parts of rural America get fiber broadband being built by independent telephone companies, electric cooperatives or municipalities. It’s hard for them to understand why there is funding that can make fiber work in some places, but not where they live. The most strident rural residents these days are those who live in a county where other rural customers have fiber and they are being told they are likely to never see it.

This disparity between rural haves and have nots is all due to FCC policy. The FCC decided to make funds available to rural telcos to upgrade to better broadband, but at the same time copped out and handed billions to the giant telcos to instead upgrade to 10 Mbps DSL or wireless. To make matters worse, it’s becoming clear that AT&T and Verizon are intent in eventually tearing down rural copper, which will leave homes with poor cellular coverage without any connection to the outside world.

The FCC laments that they cannot possibly afford to fund fiber everywhere. But they missed a huge opportunity to bring fiber to millions when they caved to lobbyists and gave the CAF II funding to the big telcos. Recall that these funds were originally going to be awarded by a reverse auction and that numerous companies had plans to ask for the funding to build rural fiber.

It’s no wonder that rural areas are furious and desperate for better broadband. Their kids are at a big disadvantage to those living in towns with broadband. Farmers without broadband are competing with those using agricultural IoT. Realtors report that they are having a hard time selling homes with no broadband access. People without broadband can’t work from home. And rural America is being left behind from taking part in American culture without access to the huge amount of content now available on the web.

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.

Restricting RUS Funding

The major large ISP lobbyists have asked Congress to block the use of Rural Utility Service (RUS) funding to overbuild areas that have only rudimentary broadband today. The heads of the National Cable & Telecommunications Association, the American Cable Association, USTelecom and the ITTA – the major lobbyists for the big ISPs – wrote a joint letter to the chair of the Senate Agricultural Committee. The letter requests that the upcoming Farm Bill restrict funding from the RUS to be only used for overbuilding to rural areas where at least 90% of homes don’t have access to 10/1 broadband. There are almost no such places left in the country, at least on paper, so this would effectively gut RUS funding from being used to improve rural broadband.

In the original CAF II program the FCC gave the big telcos billions of dollars to upgrade a lot of rural areas to speeds of at least 10/1 Mbps. In the upcoming CAF II reverse auction the places that weren’t included in the original CAF II program are slated to get upgrades to the same 10/1 Mbps speed. On paper this means there will be few  places that don’t have access to 10/1 Mbps broadband. Even where the telcos have supposedly upgraded to 10/1 there are likely to be large number of homes that don’t even get that rudimentary speed. Unfortunately the big telcos control the rural agenda since they are the ones that report consumer speeds on the broadband maps – and those maps are going to show that the telcos did a good job with upgrades, even when they didn’t.

Meanwhile these same big telcos have made it clear that they aren’t going to be investing in rural America.

  • CenturyLink’s new CEO recently said the company was no longer going to invest in infrastructure with low returns, meaning that they won’t be making any more investments in their last mile networks.
  • AT&T and Verizon both have asked the FCC to make it easier for them to walk away from rural copper lines, and both companies are pursuing a fixed cellular solution for providing rural voice and broadband.

These giant telcos are not willing to invest in their own networks – but they also don’t want anybody else building there. These companies took billions in free federal money to nudge rural broadband speeds up to a crappy 10/1 Mbps, and they are now basically telling the people that live in these areas that 10/1 Mbps is all of the broadband they will ever need or are ever going to get.

The RUS money is largely being used by smaller independent telcos, rural electric cooperatives and Indian tribes that want to invest in better broadband in rural America. A lot of RUS funding is being used to build fiber, the ultimate broadband upgrade. I imagine a number of companies bidding in the CAF II auction are planning on using RUS funding to complete those builds – but if this makes it into the Farm bill  that won’t be possible.

The only other entities interested in building rural fiber are rural governments. In states where it’s allowed they are looking for broadband solutions for their rural towns and counties and are often willing to make significant investments to make sure that their communities don’t get left behind. Most rural communities don’t want to be ISPs and they are helping to fund public / private partnerships with these same small telcos and electric coops to get better broadband – and those partners often look to the RUS to complete the funding.

The big telcos have political smarts and are trying to get this buried into the Farm Bill – something that will inevitably pass. This will allow politicians to vote for this provision while not having gone on record as siding with the big telcos. But make no mistake about it – any politician that supports this idea is choosing the big telcos over their rural constituents. Politicians only need to visit any rural part of their state to understand that broadband is now at the top of the priority list for most rural communities. These communities understand that those places that don’t soon get broadband are going to become economically irrelevant and will eventually wither away.

This letter was prompted by the fact that Congress recently awarded $600 million for expansion of rural broadband through the Ray Baum’s Act of 2018 that reauthorized the FCC budget. Those funds will be administered by the RUS. I predicted when that bill was passed that the big telcos would look for a way to make sure that most of that new money goes to them. It looks like I’m right, because if the Farm Bill passes with the requested change, then little or none of the $600 million will be of use to anybody else for building better broadband.

I hope that the small telcos and electric cooperatives react promptly and loudly to this proposed bill amendment, because it effectively guts RUS funding. This funding has been used for decades for overbuilding better broadband networks in areas served by the big telcos – and this one change would kill that.

I spend a lot of time talking about the ‘rural broadband problem’. But as I look at this lobbying effort I need to start talking about the ‘big telco problem’. All of the rural places that still don’t have good broadband are served by these big telcos. The rest of telcos and other companies that operate in rural America are finding solutions for better rural broadband. These big telcos have refused to reinvest the billions of profits they have made back into rural America and are now trying to make sure that nobody else makes those investments. The big telcos want to milk every last penny they can out of rural America.

AT&T’s Fiber Strategy

On the most recent earnings call with investors, AT&T’s EVP and CFO John Stevens reported that AT&T has only 800,000 customers nationwide remaining on traditional DSL. That’s down from 4.5 million DSL customers just four years ago. The company has been working hard to work its way out of the older technology.

The company overall has 15.8 million total broadband customers including a net gain of 82,000 customers in the first quarter. This compares to overall net growth for the year of 2017 of only 114,000 customers. The company has obviously turned the corner and after years of stagnant growth is adding broadband customers again. The overall number of AT&T broadband customers has been stagnant for many years, and if you go nearly a decade the company had 15 million broadband customers, with 14 million on traditional DSL.

The 15 million customers not served by traditional DSL are served directly by fiber-to-the-premises (FTTP) or fiber-to-the-node (FTTN) – the company doesn’t disclose the number on each technology. The FTTN customers in AT&T are served with newer DSL technologies that bond two copper pairs. This technology generally has relatively short copper drops of less than 3,000 feet and can deliver broadband download speeds above 40 Mbps download. AT&T still has a goal to pass 12.5 million possible customers with fiber by the end of 2019, with an eventual goal to pass around 14 million customers.

The AT&T fiber buildout differs drastically from that done by Verizon FiOS. Verizon built to serve large contiguous neighborhoods to enable mass marketing. AT&T instead is concentrating on three different customer segments to reach the desired passings. They are building fiber to business corridors, building fiber to apartment complexes and finally, offering fiber to homes and businesses that are close to their many existing fiber nodes. Homes close enough to one of these nodes can get fiber while those only a block away probably can’t. It’s an interesting strategy that doesn’t lend itself to mass marketing, which is probably why the press has not been flooded with stories of the company’s fiber expansion. With this buildout strategy I assume the company has a highly targeted marketing effort that reaches out only to locations it can easily reach with fiber.

To a large degree AT&T’s entire fiber strategy is one of cherry picking. They are staying disciplined and are extending fiber to locations that are near to their huge existing fiber networks that were built to reach large businesses, cell sites, schools, etc. I work across the country and I’ve encountered small pockets of AT&T fiber customers in towns of all sizes. The cherry picking strategy makes it impossible to map their fiber footprint since it consists of an apartment complex here and a small cluster of homes there. Interestingly, when AT&T reports these various pockets they end up distorting the FCC’s broadband maps, since those maps count a whole census block as having gigabit fiber speeds if even only one customer can actually get fiber.

Another part of AT&T’s strategy for eliminating traditional DSL is to tear down rural copper and replace DSL with cellular broadband. That effort is being funded to a large extent by the FCC’s CAF II program. The company took $427 million in federal funding to bring broadband to over 1.1 million rural homes and businesses. The CAF II program only requires AT&T and the other telcos to deliver speeds of 10/1 Mbps. Many of these 1.1 million customers had slow DSL with typical speeds in the range of 1 Mbps or even less.

AT&T recently said that they are not pursuing 5G wireless local loops. They’ve looked at the technology that uses 5G wireless links to reach from poles to nearby homes and said that they can’t make a reasonable business case for the technology. They say that it’s just as affordable in their expansion model to build fiber directly to customers. They also know that fiber provides a quality connection but are unsure of the quality of a 5G wireless connection. That announcement takes some of the wind out of the sails for the FCC and legislators who are pressing hard to mandate cheap pole connections for 5G. There are only a few companies that have the capital dollars and footprint to pursue widespread 5G, and if AT&T isn’t pursuing this technology then the whole argument that 5G is the future of residential broadband is suspect.

This is one of the first times that AT&T has clearly described their fiber strategy. Over the last few years I wrote blogs that wondered where AT&T was building fiber, because outside of a few markets where they are competing with companies like Google Fiber it was hard to find any evidence of fiber construction. Instead of large fiber roll-outs across whole markets it turns out that the company has been quietly building a fiber network that adds pockets of fiber customer across their whole footprint. One interesting aspect of this strategy is that those who don’t live close to an AT&T fiber node are not likely to ever get their fiber.

CenturyLink and Residential Broadband

CenturyLink is in the midst of a corporate reorganization that is going to result is a major shift in the focus of the company. The company merged with Level 3 in 2016 and the management team from Level 3 will soon be in charge of the combined business. Long-time CEO Glen Post is being pushed out of day-to-day management of the company and Jeff Storey, the former CEO of Level 3 will become the new CEO of CenturyLink. Storey was originally slated to take the top spot in 2019, but the transition has been accelerated and will happen this month.

It’s a shift that makes good financial sense for the company. Mr. Storey had huge success at Level 3 and dramatically boosted earnings and stock prices over the last four years. Mr. Storey and CenturyLink CFO Sunit Patel have both made it clear that they are going to focus on the more profitable enterprise business opportunities and that they will judge any investments in last-mile broadband in terms of the expected returns. This differs drastically from Mr. Post who comes from a background as an independent telephone company owner. As recently as a year ago Mr. Post publicly pledged to make the capital investments needed to improve CenturyLink’s last-mile broadband networks.

This is going to mean a drastic shift in the way that CenturyLink views residential broadband. The company lost 283,000 broadband customers for the year ending in December 2017, dropping them to 5.7 million broadband customers. The company blames the losses on the continued success of the cable companies to woo away DSL customers.

This size of the customer losses is a bit surprising. CenturyLink said at the end of 2017 that they were roughly 60% through their CAF II upgrades which is bringing better broadband to over 1.1 million rural households. Additionally, the company built FTTP past 900,000 potential business and residential customers in 2017. If the company was having even a modest amount of success with those two new ventures it’s hard to understand how they lost so many broadband customers.

What might all of this mean for CenturyLink broadband customers? For rural customers it means that any upgrades that are being made using CAF II funding are likely the last upgrades they will ever see. Customers in these rural areas are already used to being neglected and their copper networks are in lousy condition due to decades of neglect by former owner Qwest.

CenturyLink is required by the CAF II program to upgrade broadband speeds in the rural areas to at least 10/1 Mbps. The company says that over half of the upgraded customers are seeing speeds of at least twice that. I’ve always had a concern about any of the big telcos reaching the whole CAF II footprint, and I suspect that when the CAF II money is gone, anybody that was not upgraded as promised will never see upgrades. I’ve also always felt that the CAF II money was a waste of money –  if CenturyLink walks away from the cost of maintaining these newly upgraded DSL networks they will quickly slide back into poor condition.

There are already speculation on Wall Street that CenturyLink might try to find a buyer for their rural networks. After looking at the problems experienced by Frontier and Fairpoint after buying rural telco copper networks one has to wonder if there is a buyer for these properties. But in today’s world of big-deal corporate finance it’s not impossible to imagine some group of investors willing to tackle this. The company could also take a shot at selling rural exchanges to independent telcos – something US West did over twenty years ago.

It’s also likely that the company’s foray into building widespread FTTP in urban areas is done. This effort is capital intensive and only earns infrastructure returns that are not going to be attractive to the new management. I wouldn’t even be surprised to see the company sell off these new FTTP assets to raise cash.

The company will continue to build fiber, but with the emphasis on enterprise opportunities. They are likely to adopt a philosophy similar to AT&T’s which has been building residential fiber only to large apartment complexes and to households that are within short distances from existing fiber pops. This might bring fiber broadband to a lucky few, but mostly the new management team has made it clear they are deemphasizing residential broadband.

This management transition probably closes the book on CenturyLink as a last-mile ISP. If they are unable to find a buyer for these properties it might take a decade or more for their broadband business to quietly die. This is bad news for existing broadband customers because the company is unlikely to invest in keeping the networks in operational shape. They only ones who might perceive this as good news are those who have been thinking about overbuilding the company – they are not going to see any resistance.