The Status of the CAF II Deployments

The Benton Foundation noted last month that both CenturyLink and Frontier have not met all of their milestones for deployment of CAF II. This funding from the FCC is supposed to be used to improve rural broadband to speeds of at least 10/1 Mbps. As of the end of 2018, the CAF II recipients were to have completed upgrades to at least 60% of the customers in each state covered by the funding.

CenturyLink took funding to improve broadband in 33 states covering over 1 million homes and businesses. CenturyLink claims to have met the 60% milestone in twenty-three states but didn’t make the goal in eleven states: Colorado, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, Ohio, Oregon, Washington, and Wisconsin.

Frontier received CAF II funding to improve broadband to over 774,000 locations in 29 states. Frontier says they’ve met the milestone in 27 states but haven’t reached the 60% deployment milestone in Nebraska and New Mexico.  There were a number of other large telcos that took CAF Ii funding like AT&T, Windstream, and Consolidated, and I have to assume that they’ve reported meeting the 60% milestone.

Back in 2014 when it looked like the CAF II program might be awarded by reverse auction, we helped a number of clients take a look at the CAF II service areas. In many cases, these are large rural areas that cover 50% or more of most of the rural counties in the country. Most of my clients were interested in the CAF II money as a funding mechanism to help pay for rural fiber, but all of the big telcos other than AT&T announced originally that they planned to upgrade existing DSL. AT&T announced a strategy early on to used fixed cellular wireless to satisfy their CAF II requirements. Since then a few big telcos like Frontier and Windstream have said that they are also using fixed wireless to meet their obligations.

To us, the announcement that the telcos were going to upgrade DSL set off red flag alarms. In a lot of rural counties there are only a small number of towns, and those towns are the only places where the big telcos have DSLAMs (the DSL hub). Rural telephone exchanges tend to be large and the vast majority of rural customers have always been far out of range of DSL that originates in the small towns. One only has to go a few miles – barely outside the towns – to see DSL speeds fall off to nothing.

The only way to make DSL work in the CAF II areas would be to build fiber to rural locations and establish new DSL hub sites. As any independent telco can tell you who deployed DSL the right way, this is expensive because it takes a lot of the rural DSLAMs to get within range of every customer. By electing DSL upgrades, the big telcos like CenturyLink and Frontier had essentially agreed to build a dozen or more fiber DSLAMs in each of the rural counties covered by CAF II. My back-of-the-envelope math showed that was going to cost a lot more than what the companies were receiving from the CAF fund. Since I knew these telcos didn’t want to spend their own money in rural America, I predicted execution failures for many of the planned DSL deployments.

I believe the big telcos are now facing a huge dilemma. They’ve reached 60% of customers in many places (but not all). However, it is going to cost two to three times more per home to reach the remaining 40% of homes. The remaining customers are the ones on extremely long copper loops and DSL is an expensive technology use for reaching these last customers. A DSLAM built to serve the customers at the ends of these loops might only serve a few customers – and it’s hard to justify the cost of the fiber and electronics needed to reach them.

I’ve believed from the beginning that the big telcos building DSL for the CAF II program would take the approach of covering the low hanging fruit – those customers that can be reached by the deployment of a few DSLAMs in a given rural area. If that’s true, then the big telcos aren’t going to spend the money to reach the most remote customers, meaning a huge number of CAF II customers are going to see zero improvements in broadband. The telcos mostly met their 60% targets by serving the low-hanging fruit. They are going to have a huge challenge meeting the next milestones of 80% and 100%.

Probably because I write this blog, I hear from folks at all levels of the industry about rural broadband. I’ve heard a lot of stories from technicians telling me that some of the big telcos have only tackled the low-hanging fruit in the CAF builds. I’ve heard from others that some telcos aren’t spending more than a fraction of the CAF II money they got from the FCC and are pocketing much of it. I’ve heard from rural customers who supposedly already got a CAF II upgrade and aren’t seeing speeds improved to the 10/1 threshold.

The CAF II program will be finished soon and I’m already wondering how the telcos are going to report the results to the FCC if they took shortcuts and didn’t make all of the CAF II upgrades. Will they say they’ve covered everybody when some homes saw no improvement? Will they claim 10/1 Mbps speeds when many households were upgraded to something slower? If they come clean, how will the FCC react? Will the FCC try to find the truth or sweep it under the rug?

When Big ISPs Fail

It’s obvious from reading the press that Frontier Communications is in trouble. The company visibly bungled the integration of the properties most recently purchased from Verizon, including some FiOS properties. The company was already experiencing customer losses, which have accelerated in the last year. Frontier is already looking to raise cash by finding a buyer for some of the properties they just purchased from Verizon.

I have no idea if Frontier is going to declare bankruptcy or fail. Watching them struggle, though, brings back memories of other big telcos that have struggled badly in the past. We’ve seen this scenario enough times to understand what poor performance will mean.

Not every telco that has struggled has gone through bankruptcy. Probably the best example of a company that almost went under, but which instead struggled for years was Qwest, which is now owned by CenturyLink. Within a few years after Qwest took over U.S. West the company fell on hard times. The company carried too much debt, and they didn’t do as well as expected in the long-line transport business that Qwest brought into the newly formed venture. The company was even fined $250 million by the Security and Exchange Commission for shady deals made with Enron’s broadband business.

We saw the consequences of Qwest’s financial struggles. They company had little money for capital and let the copper plant deteriorate a lot faster than would be expected. There were widespread reports of rural outages that were repeatedly patched rather than fixed while the company focused its limited resources on the major urban markets. Qwest lost huge numbers of broadband customers to the cable companies and also got clobbered in enterprise sales.

We saw something similar with Charter Communications. The company filed for bankruptcy protection in 2009. They pared back on capital spending and went for a number of years without making the upgrades we saw from Comcast, Cox and Mediacom. Much of the company’s footprint was stuck with first generation cable modems with slow broadband speeds.

Frontier looks to on a similar path to Fairpoint Communications after they purchased Verizon properties. Fairpoint took on massive debt to buy the New England properties from Verizon and struggled after adding 1.4 million customers to a relatively small company. Within two years after the purchase Fairpoint went through bankruptcy reorganization and continued to struggle since then due to lack of cash. They were recently purchased by Consolidated Communications.

What we’ve most learned from big ISPs that struggle is that the customers pay the price. All of these companies dealt with cash shortages by reducing staff and slashing capital expenditures. I remember Qwest staffing being reduced so much that there were entire rural counties that had only one Qwest technician. Qwest shuttered local business offices and lost the local touch in communities. Customers reported major delays in getting installations and repairs, with many reports of problems that were never solved.

We saw from Qwest and Charter that the first thing that goes in tight times is upgrades of technology. When those companies got into trouble they froze technology investment and innovation during a time when broadband speeds were climbing everywhere else.

The struggles of the big ISP invited in competition and many communities served by Qwest and Charter saw competitors build new networks. I know of some towns where the new competitors got practically every customer, showing how fed up customers were with being neglected by their big ISP. Unfortunately, the majority of communities served by such ISPs saw no competition and suffered with poor service.

Sometimes companies that struggle eventually right the ship. We see Charter now making upgrades that are a decade or more late. CenturyLink is under new management and is trying hard to make things better, but still doesn’t have enough capital to fix decades of neglect to the network. CenturyLink even got more than a billion dollar subsidy through the CAF II program to try to revitalize old rural copper. We’re going to have to wait to see if these big ISPs can make enough amends for communities to forgive them for decades of neglect.

My guess is that Frontier is not going to get the chance to reinvent themselves. They are struggling at a time when most of their rural communities are screaming for better broadband. It’s hard to imagine them somehow fixing their many problems.

CAF II and Wireless

Frontier Communications just announced that they are testing the use of wireless spectrum to complete the most rural portions of their CAF II build-out requirement. The company accepted $283 million per year for six years ($1.7 billion total) to upgrade broadband to 650,000 rural homes and businesses. That’s a little over $2,600 per location passed. The CAF II program requires that fund recipients increase broadband to speeds of at least 10 Mbps down and 1 Mbps up.

Frontier will be using point-to-multipoint radios where a transmitter is mounted on a tower with the broadband signal then sent to a small antenna at each customer’s location. Frontier hasn’t said what spectrum they are using, but in today’s environment it’s probably a mix of 2.4 GHz and 5 GHz WiFi spectrum and perhaps also some 3.65 GHz licensed spectrum. Frontier, along with CenturyLink and Consolidated told the FCC a year ago that they would be interested in using the spectrum in the ‘citizens’ radio band’ between 3.7 MHz and 4.2 MHz for this purpose. The FCC opened a docket looking into this spectrum in August and comments in that docket were due to the FCC last week.

I have mixed feelings about using federal dollars to launch this technology. On the plus side, if this is done right this technology can be used to deliver bandwidth up to 100 Mbps, but in a full deployment speeds can be engineered to deliver consistent 25 Mbps download speeds. But those kinds of speeds require an open line-of-sight to customers, tall towers that are relatively close to customers (within 3 – 4 miles) and towers that are fiber fed.

But when done poorly the technology delivers much slower broadband. There are WISPs using the technology to deliver speeds that don’t come close to the FCC’s 10/1 Mbps requirement. They often can’t get fiber to their towers and they will often serve customers that are much further than the ideal distance from a tower. Luckily there are many other WISPs using the technology to deliver great rural broadband.

The line-of-sight issue is a big one and this technology is a lot harder to make work in places with lots of trees and hills, making it a difficult delivery platform in Appalachia and much of the Rockies. But the technology is being used effectively in the plains and open desert parts of the country today.

I see downsides to funding this technology with federal dollars. The primary concern is that the technology is not long-lived. The electronics are not generally expected to last more than seven years and then the radios must be replaced. Frontier is using federal dollars to get this installed, and I am sure that the $2,600 per passing is enough to completely fund the deployment. But are they going to keep pouring capital into replacing radios regularly over time? If not, these deployments would be a sick joke to play on rural homes – giving them broadband for a few years until the technology degrades. It’s hard to think of a worse use of federal funds.

Plus, in many of areas where the technology is useful there are already WISPs deploying point-to-multipoint radios. It seems unfair to use federal dollars to compete against firms who have made private investments to build the identical technology. The CAF money ought to be used to provide something better.

I understand Frontier’s dilemma. In the areas where they took CAF II money they are required to serve everybody who doesn’t have broadband today. My back-of-the envelope calculations tells me that the CAF money was not enough for them to extend DSL into the most rural parts of the CAF areas since extending DSL means building fiber to feed the DSLAMs.

As I have written many times I find the whole CAF program to be largely a huge waste of federal dollars. Using up to $10 billion to expand DSL, point-to-multipoint, and in the case of AT&T cellular wireless is a poor use of our money. That same amount of money could have seeded matching broadband that could be building a lot of fiber to these same customers. We only have to look at state initiatives like the DEED grants in Minnesota to see that government grant money induces significant private investment in fiber. And as much as the FCC doesn’t want to acknowledge it, building anything less than fiber is nothing more than a Band-aid. We can and should do better.

Two Tales of DSL

DSL modemI had to chuckle the other day when I saw two articles about DSL that were going in opposite directions. In the first announcement AT&T announced that they are phasing the TV product out of their U-verse product. The same day I saw an announcement from Frontier that they are entering the video-over-DSL business in a big way.

The technology that is being used in both cases is paired DSL. This means putting DSL onto two copper phone lines and then using them together to create one data path. Under ideal conditions, meaning perfect copper, the technology can deliver about 40 Mbps through about 7,000 feet of copper. But of course, there is very little perfect copper in the real world and so actual speeds are typically somewhat slower than that.

In AT&T’s case this change makes sense. They purchased DirecTV and they are going to use the satellite platform to deliver the cable TV signal. This will free up the DSL pipe to be used strictly for data and VoIP, and this will extend the competitive ability of the DSL technology. In most cases the company can deliver 20 Mbps – 40 Mbps to homes that are close enough to a DSLAM. I’m sure that AT&T has been finding it increasingly difficult to deliver data and cable together on one DSL pipe.

The downside for AT&T is that not everybody can get DirecTV. Some people live where they can’t see the satellite and many people in apartments aren’t allowed to stick up a dish. So this isn’t a perfect solution for AT&T, but the increased data speeds probably mean a bigger potential customer base for the U-verse product.

Frontier is coming at this from a different direction. The company has seen declines in revenue as voice customers continue to drop off the network and as they continue to lose DSL customers to cable companies. The company saw a 1% decline in revenue just in the fourth quarter of 2015.

To try to generate new sales the company just announced this week that they are entering the business that AT&T is abandoning. The company launched IPTV in the 4th quarter of last year and announced that they are going to extend this to 40 other markets and pass 3 million customers with the product. They are going to use the same paired DSL as AT&T U-verse and will offer video on the DSL.

Frontier is hoping that this move, which will give them the triple play bundle will bring in more broadband customers and bolster both revenues and the bottom line. The company also expects to get a nice bump from finally closing on their purchase of Verizon properties in Texas, Florida and California. It is going to be a busy year for the company as they also hope to add 100,000 new broadband customers this year for the first of six years of an expansion funded by the CAF II funds from the FCC.

I have a lot of sympathy for a company like Frontier. They have purchased a lot of rural markets that have been neglected for years by Verizon and which don’t have very good copper. Where many smaller telcos are converting all of their rural areas to fiber, Frontier does not have access to the capital needed to do that, nor would they want to suffer through the earnings hit that comes from spending huge amounts on capital.

But the problem for all DSL providers is that within a few years the demand for broadband speed is going to exceed their capabilities. The statistic that I always like to quote is that household demand for broadband speeds doubles about every three years. This has happened since the earliest days of dial-up. One doesn’t have to chart out too many years in the future when the speeds that can be delivered on DSL are not going to satisfy anybody. The CAF II money is only requiring DSL that will be at least 10 Mbps download, which is already inadequate today for most families. But even the 20 – 40 Mbps paired-DSL is going to feel very slow when cable companies have upgraded to minimum speeds of 100 Mbps or faster. And if that DSL is also carrying video along with the data it’s going to feel really slow. I would not want to be one of the companies still trying to make copper work for broadband a decade from now.

Lifeline and Rural America

FCC_New_LogoEarlier this year Chairman Tom Wheeler of the FCC proposed to change the Lifeline program to support broadband in addition to voice. In that proposal he suggested that a household should get at least 10 Mbps download and 1 Mbps upload in order to qualify for a Lifeline subsidy.

Here is where it gets weird. Frontier has filed comments that the 10/1 Mbps threshold is too high and that using such a high standard will stop a lot of rural households from getting Lifeline assistance. They are right, of course, but their solution is to lower the Lifeline threshold to whatever level is necessary to meet actual speeds in a given rural market.

Meanwhile, Frontier has taken a huge amount of money recently from the Connect America Fund for the purpose of raising rural DSL up to the 10/1 Mbps level. But they have six years to get to those speeds, and most of us in the industry think that even after all of their upgrades a lot of the rural households in the upgraded areas still won’t get 10/1 speeds. It’s going to be very hard for Frontier to do that with DSL in a rural setting where people are on scattered farms or back long lanes. I find it unlikely that Frontier, or any of the big telcos, are going to put enough fiber in the rural areas to actually achieve that goal.

But far more importantly, 10/1 DSL is not broadband. It’s not broadband by today’s current FCC definition that says broadband must be at least 25/3 Mbps, and it’s not broadband for real life applications.

I use my own household as the first example. There are two adults and one teenager. We work at home and we are cord cutters and get all of our video online. We have a 50 Mbps cable modem, and as cable modems tend to do, sometimes it slows down. When our speed hits 25 Mbps we’re all asking what is wrong with the Internet. So our household needs something greater than 25 Mbps for normal functioning. If we get less than that we have to cut back on something.

I have a friend with two teenage boys who are both gamers. He has a 100 Mbps Verizon FiOS connection on fiber, and when there are multiple games running everything else in the house comes to a screeching halt. For his household even 100 Mbps is not enough speed to meet his normal expected usage.

And yet here we are having discussion at the federal level of setting up two major programs that are using 10/1 Mbps as the standard goal of Internet speed. As a nation we are pouring billions of dollars into a project to improve rural DSL up to a speed that is already inadequate and by the time it is finally finished in six years will be massively below standard. It won’t take very many years for the average household to need 100 Mbps and we are instead taking six years to bring a huge amount of the rural parts of American up to 10/1 DSL.

I know that the FCC is trying to help. But it’s sad to see them crowing about having ‘fixed’ the rural broadband problem when instead they are condemning millions of households to have nearly worthless broadband for the next couple of decades. Imagine if they had instead allowed those billions of dollars to become matching funds for communities willing to invest in real broadband? Communities wanting to do this are out there and many of them were hoping to get some federal help to bring broadband to their areas. Building rural fiber is expensive, and even a little federal help would be enough to allow many rural areas to find the rest of the funding needed to build their own solutions.

And the problems are going to get worse, not better. Verizon didn’t even bother to take the federal subsidies to improve DSL because they don’t want to invest anything in rural copper. AT&T has told the FCC repeatedly that they want to tear down copper to millions of households and put rural households on cellular data. And while Frontier is going to try to make their rural copper plant better, how much can they realistically accomplish with 50–70 year-old copper that was neglected for decades before they bought it?

I just shake my head when I see that Frontier and the FCC are going to be wrangling about households getting Lifeline subsidies for speeds slower than 10/1 Mbps. The FCC has already decided that they are going to throw billions at rural copper and call it job done. It’s about time that we instead start having a conversation about bringing real broadband to rural America.