New Connect America Funds

auction-845x321Our regulatory world is messed up sometimes – that’s the only way to describe it. The FCC last week announced that there would be an auction for the Connect America Fund to provide $2 billion of funding to build rural broadband. The funds are for places where the large telcos elected to not take the Connect America Funds. Verizon seems to have largely just decided that they aren’t interested in upgrading their rural networks. But I have to imagine that places that were not selected by the other large telcos like Windstream have to be because the cost of building those places is too high.

The new funding will be awarded by reverse auction, meaning the company willing to take the least amount of money for a given service area will be awarded the funds. And this is the first area where this whole process is messed up. The FCC handed out $6 billion to the large telcos with no auction and no such low bid requirement and so the big companies get every penny of that FCC funding, without contention.

But any company bidding in this new reverse auction is going to worry that somebody will bid slightly lower than them to get the funding, and so most bidders are likely to bid for less than the full potential funding. The bottom line of this is that the big telcos got every penny of funding available to them without having to worry about somebody else wanting to use it while the remaining companies are likely to get something less.

The original award of funds should have also been a reverse auction. There are plenty of smaller telcos, electric coops and local governments that would have vigorously bid on the original $6 billion, and in doing so would have brought real broadband to the millions of people in those areas that are going to instead get a lousy DSL upgrade to speeds that aren’t even broadband by today’s standards. The FCC is only requiring speeds of 10 Mbps download and 1 Mbps upload, and even then allows the big telcos six years to get this done.

The original $6 billion award of the Connect America Fund was basically a hand-out to the big telcos. There’s really no other way to characterize it. I saw right after these awards that companies like Frontier got a big bump in stock valuation since they are claiming the Connect America Fund as revenue. I know a number of people who speculate that the big telcos will not upgrade everywhere they are supposed with this funding and will just shrug and weakly apologize. And there is likely to be no penalty for that.

To make matters even worse, the new funding (as well as the old) allows carriers to impose a 150 GB monthly data usage cap on customers covered by the funding. This is telling rural people, “Here’s the broadband you’ve been waiting many years for, but now, don’t actually use it”. My many clients report to me that the average residential monthly download is already somewhere between 150 GB and 200 GB per month, so that cap is already too low even by today’s standards. And we all know that broadband usage in homes keeps increasing exponentially and has been doubling every three years.

So there is already $6 billion being used to provide inadequate DSL upgrades from the large incumbent telcos. And when the people in those areas finally get upgraded to 10 Mbps bandwidth sometime during the next five years they will be told there is a 150 GB monthly data cap on monthly usage. We could have instead used that $6 billion to seed hundreds of rural fiber projects that would have brought real broadband to a lot of homes. That is my definition of messed up.

Big Telcos Take CAF II Funding

USF-logoThe biggest telcos have claimed most of the available CAF II funding to extend broadband to rural areas that the FCC defines as unserved or underserved.

The money that has been accepted is as follows:

‘                                            Customers                  CAF II Funds

AT&T                                      1.1 M                           $427M

Cincinnati Bell                      7,084                            $2.2M

CenturyLink                           1.2M                           $506M

Consolidated Tel                 24,698                            $14M

Fairpoint                                105k                             $37M

Frontier                                  660k                           $283M

Hawaiian Tel                        11,081                           $4.4M

Micronesian Tel                  11,143                            $2.6M

Verizon                                   115k                             $49M

Windstream                           405k                           $175M

Total                                        3.6M                            $1.5B

This money will be paid out evenly over 6 years from the Connect America Fund which is part of the larger Universal Service Fund. This is the second round of such funding with smaller amounts given out a year ago.

While Verizon took $49 million they didn’t claim an additional $550 million of CAF funds that could have been used to upgrade 270,000 rural customers. This just further confirms that Verizon is not interested in extending the life of their rural copper by extending DSL. That has been clear for a decade as they have been selling off rural properties, mostly to Frontier.

The CAF II upgrades require the large telcos to upgrade broadband to a minimum of 10 Mbps download and 1 mbps upload. That is far below the current definition of broadband which is 25 Mbps download and 3 Mbps upload. This was obviously a huge political compromise because this allows the telcos to upgrade DSL in these areas rather than provide faster options.

For any areas that were not claimed by the large carriers, the FCC will hold a reverse auction sometime next spring. A reverse auction means that whoever asks for the least amount of money for a given service area will get the funding.

It’s a real shame that the FCC let the big telcos grab the money without challenge. There are many communities that were hoping to get this money to help pay to build fiber to these same customers. But instead, by giving the money for slow DSL, the FCC has probably precluded at least some of these communities from getting the funding to build fiber. This should have been an open auction from the beginning with anybody who wants the money able to bid on it. It’s obvious that the large telcos have very good lobbyists.

I am sure that households that have no broadband today are going to be happy to get this DSL. But it’s not necessarily coming quickly. The telcos have 2 years to spend 40% of the funding, 4 years to spend 60% of the funding and 6 years to spend it all. That means at least some of the covered areas aren’t going to see the upgrade for 6 years.

And in my opinion this is nothing more than a gigantic temporary band-aid. Where 10 Mbps is great compared to dial-up or cellular data in the rural areas, this is far slower than what urban areas can get, particularly when we look forward 6 years. These upgrades will be obsolete before they are even installed and households that get this speed bump still will not be able to use broadband in the same way as urban households.

It would be really ironic if at the end of the 6 years the FCC then allocated more Universal Service Funds to finally bring fiber to these same places. Sadly, at least some of these folks could have gotten fiber now if this had been done fairly.

The Connect America Fund Dilemma

USACI doubt that this is what the FCC had in mind, but they are creating an impediment to building new rural networks with the Connect America Fund. I know that sounds exactly the opposite of what they are intending, but consider the following.

The large telcos get first crack at taking the Connect America Funding in their service territories. Frontier and Fairpoint, for example, have already claimed this money for a lot of their rural service territory. The other large companies must elect this by the end of this month. In the places where they take the funding a large telco will get support for seven years to help pay for broadband upgrades in those areas.

Most of the places that are covered by the Connect America Fund have either abysmal broadband, or no broadband at all. Where they have any semblance of broadband there will be customers on very slow rural DSL, generally 1 Mbps or much slower down to speeds close to dial-up. Customers can also get satellite data or, which surprises me, many rural households are making do with their cellphone data and the associated tiny data caps.

The large telcos are almost universally going to use the Connect America Fund money to upgrade DSL. In order to do that they will have to extend fiber further into the rural areas and then place rural DSLAMs in cabinets that are closer to customers.

That sounds good on the surface and a lot of rural people are going to get faster Internet service. So where is the dilemma? The dilemma is two-fold. First, the incumbents have up to seven years to build all of the new infrastructure. Households at the far end of that timeline are going to view seven years as an interminable future date.

But the real dilemma comes in how this affects rural communities that are looking at their own broadband solutions. Most of the DSL built under the Connect America Fund is going to 10 Mbps or less download speeds, something that is not even broadband by the FCC’s definition. And not every customer in these areas will get that much speed – many of them are going to live at the ends of the new DSL routes and will still get very slow speeds.

The dilemma is that for areas without any broadband today, customers are going to find 10 Mbps to be wonderful. If your house has been living with dial-up or cellular data, then this is going to feel great, particularly since the usage will not be capped. You’ll be able to watch Netflix for the first time and partake in a lot of things you couldn’t do before on the Internet.

But it is not going to take too many years until those speeds feel as slow as dial-up feels today. And this is going to be the last upgrade these areas are ever going to get from the big telcos. And the copper is going to keep aging and the DSL will get worse and worse over time. So while most urban areas today already have download speeds far faster than 10 Mbps, these rural areas are going to be stuck at 10 Mbps while the rest of the world gets faster and faster every year. When other homes in the US have 100 Mbps or a gigabit connection, these rural areas are going to be stuck with something far slower. There will be many future applications that need the higher bandwidth, and so the rural areas will again be shut out from what everyone else has.

But the real killer is that when any area getting these funds is going to have a much harder justifying building a fiber network that is faster than the DSL. I’ve helped rural areas get fiber networks and those business plans often need 60% or more of the homes in an area to take service to work. By creating this bandaid approach the FCC’s program means that there will be be just enough people who are happy with this faster DSL that these areas will probably not be able to get the support needed for a community-based solution. While the FCC has good intentions, they are going to be damning a lot of US counties to having crappy DSL for decades to come using copper wires that are already ancient today. The Connect America Fund money should have been used only for building real broadband rather than letting the big telcos put a bandaid on an aging copper network. The FCC is going to feel good about bringing broadband to rural America, when in fact they will have damned large chunks of the country from getting real broadband. 

The Law of Accelerating Returns

exponential-growth-graph-1Ray Kurzweil, the chief engineer at Google, was hired because of his history of predicting the future of technology. According to Kurzweil, his predictions are common sense once one understands what he calls the Law of Accelerating Returns. That law simply says that information technology follows a predictable and exponential trajectory.

This is demonstrated elegantly by Moore’s Law, in which Intel cofounder Gordon Moore predicted in the mid-60s that the number of transistors incorporated in a chip will double every 24 months. His prediction has held true since then.

But this idea doesn’t stop with Moore’s Law. The Law of Accelerating Returns says that this same phenomenon holds true for anything related to information technology and computers. In the ISP world we see evidence of exponential growth everywhere. For example, most ISPs have seen the the amount of data downloaded by the average household double every four years, stretching back to the dial-up days.

What I find somewhat amazing is that a lot of people the telecom industry, and certainly some of our regulators, think linearly while the industry they are working in is progressing exponentially. You can see evidence of this everywhere.

As an example, I see engineers designing new networks to handle today’s network demands ‘plus a little more for growth’. In doing so they almost automatically undersize the network capacity because they don’t grasp the multiplicative effect of exponential growth. If data demand is doubling every four years, and if you buy electronics that you expect to last for ten to twelve years, then you need to design for roughly eight times the data that the network is carrying today. Yet that much future demand just somehow feels intuitively wrong and so the typical engineer will design for something smaller than that.

We certainly see this with policy makers. The FCC recently set the new definition of broadband at 25 Mbps. When I look around at the demand in the world today at how households use broadband services, this feels about right. But at the same time, the FCC has agreed to pour billions of dollars through the Connect America Fund to assist the largest telcos in upgrading their rural DSL to 15 Mbps. Not only is that speed not even as fast as today’s definition of broadband, but the telcos have up to seven years to deploy the upgraded technology, during which time the broadband needs of the customers this is intended for will have increased to four times higher than today’s needs. And likely, once the subsidy stops the telcos will say that they are finished upgrading and this will probably be the last broadband upgrade in those areas for another twenty years, at which point the average household’s broadband needs will be 32 times higher than today.

People see evidence of exponential growth all of the time without it registering as such. Take the example of our cellphones. The broadband and computing power demands expected from our cellphones is growing so quickly today that a two-year-old cellphone starts to feel totally inadequate. A lot of people view this as their phone wearing out. But the phones are not deteriorating in two years and instead, we all download new and bigger apps and we are always asking our phones to work harder.

I laud Google and a few others for pushing the idea of gigabit networks. This concept says that we should leap over the exponential curve and build a network today that is already future-proofed. I see networks all over the country that have the capacity to provide much faster speeds than are being sold to customers. I still see cable company networks with tons of customers still sitting at 3 Mbps to 6 Mbps as the basic download speed and fiber networks with customers being sold 10 Mbps to 20 Mbps products. And I have to ask: why?

If the customer demand for broadband is growing exponentially, then the smart carrier will increase speeds to keep up with customer demand. I talk to a lot of carriers who think that it’s fundamentally a mistake to ‘give’ people more broadband speed without charging them more. That is linear thinking in an exponential world. The larger carriers seem to finally be getting this. It wasn’t too many years ago when the CEO of Comcast said that they were only giving people as much broadband speed as they needed, as an excuse for why the company had slow basic data speeds on their networks. But today I see Comcast, Verizon, and a number of other large ISPs increasing speeds across the board as a way to keep customers happy with their product.

Wireless is Not a Substitute for Wireline

Cell-TowerAny time there is talk about government funding for broadband, arguments arise that wireless broadband is just as good as wireline broadband. But it is not the same and is not a substitute. I love wireless broadband and it is a great complement to having a home or business broadband connection, but there are numerous reasons why wireless broadband ought not to be funded by government broadband programs.

The most recent argument for wireless broadband comes the Minnesota House which is currently in session. In last year’s legislative session, Minnesota approved a $20 million grant program to help expand broadband in rural areas of the state. That grant was distributed to a number of broadband projects, all wireline, which required a significant matching fund from an entity building the wireline facilities. The 2014 funding, which mostly went to independent telephone companies, is being used to bring broadband to thousands of rural residents as well as 150 rural businesses and 83 rural schools and libraries.

But the chairman of the House Job Growth and Energy Affordability Committee in Minnesota killed an additional state grant; it’s been left out of this year’s House budget. Rep. Pat Garofalo, R-Farmington, said that wired broadband is too costly in sparsely populated areas and believes that wireless and satellite technologies are more financially effective.

In another case, Verizon recently got the New Jersey State Board of Public Utilities to agree that it could use LTE data plans as substitutes for homes that are losing their copper or DSL services.

Another place where this same argument is being made concerns the upcoming funding from the Connect America Fund, which is part of the federal Universal Service Fund, and that is being directed towards expanding rural broadband. As written several years ago, the Fund is allowed to consider investing in wireless as well as wireline broadband networks.

There have been numerous parties lobbying to try to get these billions get directed towards landline networks and not towards wireless networks. The NTCA, which is now called the Rural Broadband Association, sponsored a report from Vantage Point Solutions that compares wireless and wireline technologies, and which argues that government funding should only be used to fund wireline networks. This whitepaper makes many of the same arguments I have been making for years about the topic, and included a few I had not considered. Here are some of the major arguments made by the whitepaper:

  • Even without considering the cost of spectrum, it costs far more to build a wireless network when comparing construction cost per megabit that can be delivered to end users. Modern fiber networks rarely cost more than $10 per Mbps capacity created, and often far less than that, while it costs several hundred dollars per effective megabit to construct a wireless network using any of the common technologies like LTE.
  • From a physics perspective, the amount of frequency available through US allocated spectrum is not large enough to deliver large symmetrical bandwidth, which is the goal of the National Broadband Plan. This limitation is a matter of physics and not of technology. That limitation is still going to be there with 5G or later wireless technology unless the FCC massively reworks the way it allows frequency to be used.
  • At least in today’s world, the prices charged to customers are drastically different for wireless and wireline data. Already today, 25% of residences are downloading more than 100 gigabits per month in total data. That can be affordable on wireline, but almost every current wireless provider has monthly data caps that range upward from just a few gigabits per month. A customer on a capped data plan who uses 100 gigabits in a month would face an astronomical monthly bill.
  • The report also made the economic argument that the shelf-life for wireless equipment and networks is relatively short, in the range of seven years, while fiber networks can have an incredibly long economic life. The report argues that the Connect America Fund should not be investing in technology that will obsolete and potentially unusable just a few years after it’s built. There certainly is no guarantee that the large wireless carriers will make needed future investments once they stop getting a federal subsidy.
  • The report also made all of the normal comparisons between the two technologies in terms of operating characteristics such as available bandwidth, latency times, and high reliability, all of which tilt in favor of landline.

I agree with this report wholeheartedly. I know that when I first read the language in the Connect America Fund my initial reaction was that the money would all go to cellular companies who would use the money to build rural cell towers. But fiber technology has gotten far more efficient in just the few years since that order. Also, the wireless businesses of Verizon and AT&T are the two most profitable entities in telecom, by far, and it makes no sense to flow billions of federal dollars to them to build what they will probably build anyway with their own money.

Certainly, expanding rural LTE would get some broadband to more people, but in the long run we would be better off directing that same money to bring a permanent solution to some rural areas rather than a poor solution for all of it.

You Want a Piece of the $9 Billion CAF Fund?

USACI have been asked by several clients if they will be eligible to go after the new CAF II universal service funding that will be disbursed by the Connect America Fund. Over the next 5 – 7 years the fund will be paying out over $9 billion in support of rural broadband. And the answer to them all is – maybe. It’s somewhat complicated and also involves waiting a while to see how certain events play out.

The first issue to consider is who the incumbent telephone area is in the area you might want to compete. Rate of return carriers, meaning all of the small independent telephone companies, are going to continue to receive CAF funding, although the amounts they get are going to be severely phased down over the next five years. But competitors cannot go after the CAF funds in areas served by these rate of return carriers.

So the only places where CAF funding might be available is in areas served by the price cap carriers. That is AT&T, Verizon, CenturyLink, Cincinnati Bell, Consolidated Communications, Fairpoint, Frontier, Windstream and the phone companies in the US territories like Puerto Rico. So if you want to compete in one of these areas there is a chance of getting the funding.

But first, each of these large carriers gets a chance to say that they will take the CAF funding. If they do, then they have to upgrade their rural areas to have broadband that delivers at least 10 Mbps download and 1 Mbps upload to everyone in the supported areas. They have to meet milestones of completing percentages of the construction each year or lose the funding. They are also going to have to do speed tests to verify the upgrades.

The large carriers can take funding for a whole state or just for certain census blocks within the state. The amount of CAF funding that is available by census block is summarized on a CAF map published by the FCC. This shows each area that is eligible for CAF and the amount of money that will be available for that block. These amounts were determined by the use of a very complicated and controversial cost model that purported to calculate the cost of providing service in every part of the country. It considers things like population density, geography and regional labor costs.

So the large incumbents are considering which areas of their service territory they are willing to upgrade through the help of the money available through the CAF models. These subsidies are not intended to pay for the entire cost of upgrading, but rather to be enough to entice the big carriers to make the needed investments.

So if you are interested in the funds, you will need to wait a few months until the big carriers announce their intentions. They will get all of the funding listed on the map for any area they decide to upgrade.

The CAF funding for areas where the price cap carriers elect to not upgrade will then be available to other companies. As you would expect the process to get those funds is complicated. You must be willing to meet or beat the 10/1 data speeds. In addition to data you must provide voice service. You must be willing to serve every customer in a census block where you are getting the CAF funding, not just the ones that are easy to reach. And you must become an Eligible Telecommunications Carrier (ETC) and for areas where you get CAF you become the carrier of last resort.

Competitors will win the ability to do this through what is being called a reverse auction. If more than one carrier files for a given census block, then the one willing to take the least amount of funding will be awarded the CAF funding. But it’s not an auction where you repeatedly bid against each other. Instead you submit a bid once and the low one wins.

Like any federal money this money then comes with a lot of strings. First, you don’t get the money in a lump sum up front to help pay for the construction. Instead you will collect it spread over the five years. Second, like any federal money there will be a mountain of paperwork both before and after taking the money and your project is going to get audited multiple times. There also might be requirements for such things as doing environmental impact studies or complying with prevailing wage laws. These details have not yet been announced.

Going after CAF funds is not going to be an easy choice for most companies. When you look at rural census blocks they generally include a decent percentage of residences that are remote and hard to reach. By taking the funding you will be agreeing to become the carrier of last resort for all of the farms and rural homes in a given census block. That alone is a scary obligation, so before you go after the funds you ought to determine exactly what your state expects these days out of a carrier of last resort. Do you have to build to anybody who builds a new home in your areas regardless of the cost, or are there limits on who you must serve?

Another Regulatory Gotcha

FCC_New_LogoThe FCC recently went through the process of eliciting stories about ideas for rural broadband. I had a bit of a problem with how they went about it because they made it sound like anybody who would tell them their story was eligible to be chosen to get funding for a rural broadband experiment. And this wasn’t true, and the FCC really was just gathering stories. The actual applications to get funded will come later this year.

There is another thing that the FCC didn’t make very obvious to possible applicants. Any entity that wants to get money out of the Connect America Fund must be an Eligible Telecommunications Carrier (ETC). To be fair, the FCC says that companies that request funding don’t have to be an ETC at the time of filing, but that they must achieve that status before they can actually receive funds. The FCC language makes it clear that it expects ETC status to be obtained rather quickly.

What the FCC doesn’t seem to understand is that it can be very time consuming to become an ETC and in some cases impossible for some of the entities who are interested in the broadband experiments.

In most states there is a two-step process to become an ETC. First you must be certified as a carrier in your home state. The type of certification required varies by state. In some states you would have to obtain a Certificate for Public Convenience and Necessity (CPCN) and in other state you would have to become a CLEC or some other form of carrier.

Getting that kind of certification is not a slam dunk for start-ups and municipalities. Generally somebody wanting to get these certifications needs to pass three tests – that they are financially capable, managerially capable and technically capable of being a carrier. A start-up trying to get the FCC funding might fail one of these tests. For instance, a City might not be able to demonstrate technical capability because that is something they were going to hire after they got the funding. And in some states start-ups have trouble meeting the financial capability test set by their state regulatory commission. The process of getting certified can take anywhere from 90 days to 180 days in most states assuming you can meet all of the requirements.

Then, after getting the certification as a carrier, an entity can file to become an ETC. There are some very specific requirements in becoming an ETC that are going to stop some filers. For instance, an ETC must be willing and able to serve everybody in an existing ‘exchange’. An exchange is the service areas of the incumbent telcos and most rural exchanges have a town in the center surrounded by a sizable rural area. So anybody who wants to be an ETC must agree to serve that whole area. In some states a municipality is prohibited from or has a very difficult time serving anybody outside their City borders. And let’s face it, serving broadband to farms is expensive, and so having to agree to serve those areas can break a start-up business plan. So even if a City or ISP gets certified, it’s no slam dunk that they will meet the requirements to become an ETC. And even if they can, I know that there are many states where the ETC process can take a year.

Additionally, in both of these steps, the process can be further delayed if somebody intervenes in the regulatory process. The local telco or cable company can (and often does) intervene in the certification and/or ETC process as a delaying tactic to slow down potential competition. It’s not hard for the whole process end-to-end of becoming a carrier and then an ETC to take two years. And that will not work for the funding process. So many of those who are thinking about asking for this money have no idea that the regulatory cards are stacked against them.

At the end of the day, all that is proven by getting an ETC status is that you are good at the paperwork process of regulation. The status really has no other practical benefit. And I say this as somebody who gets paid to obtain these kinds of certifications. Some regulation is good, but I hate regulation for regulation’s sake. And this requirement of having to be an ETC to bring broadband to rural places is a stupid dinosaur kind of regulatory requirement.