What Happens to Unused CAF II Funds?

Fiber CableI look around rural America and I see fiber projects being proposed or built in a lot of places by small companies. Some of these are new initiatives like the new RS Fiber Cooperative that is underway in Sibley and Renville counties in Minnesota. And a lot of these new projects are being built by rural telcos and telephone cooperatives into areas adjacent to where they have always served.

While these small companies are building fiber the FCC is giving nearly $9 billion to the largest telephone companies to expand rural broadband. This was done under a program called CAF II that is part of the Universal Service Fund. The largest recipients of the funding are CenturyLink, Frontier and AT&T.

The CAF II funding has embarrassingly modest goals and only requires that the money be used to bring rural broadband speeds up to 10 Mbps download and 1 Mbps upload. The big telcos have a very relaxed six years to get this done. The telcos are mostly going to accomplish this by extending fiber from rural towns, into the country to support rural DSL.

I’m sure since most of my readers are knowledgeable about broadband that they realize how pathetically slow the 10 Mbps goal is. Already today 10 Mbps is not really broadband, even by the FCC’s own definition. A household that gets upgraded to 10 Mbps is probably going to be happy to get off dial-up, but they will soon realize that they are still far worse off than most of the rest of the country.

And while 10 Mbps is slow at today’s demand it’s been clear for decades that household demand for broadband has been doubling about every three years, back to the earliest days of the slowest dial-up. The folks at the tail-end of the six-year upgrades are going to be two more doublings of demand behind, meaning that in six years that 10 Mbps will feel basically four times worse than it does today.

In looking around at rural fiber projects I see fiber being built in areas where the telcos are going to get the CAF II subsidies. I wonder what will happen to the CAF II funding being used for those areas? Will the large telcos build DSL anyway even though nobody is going to buy it? Or will they just pocket the federal money and do nothing in those areas?

I don’t see anything in the CAF II rules that makes the large telcos give back any of the money, and so I suppose they will just keep it. This whole program is one of the worst uses of public funding I have ever seen. It’s easy to imagine the hundreds of rural fiber projects this money could have seeded. But instead the big telcos will be building DSL and will likely be loading up the claimed costs of the upgrades so they can get by with the least amount of actual upgrades possible.

Since the telcos already own wires in the places that will get upgraded they will be able to build fiber by overlashing. That is a process of tying fiber to existing copper lines and was the primary technique used by Verizon to build their FiOS fiber network. Overlashing is the lowest cost method of fiber construction and shouldn’t cost more than $15,000 to $20,000 per mile. If the whole $9 billion was used to build fiber that would mean building between 450,000 and 600,000 road miles of fiber. Wikipedia says that the US has less than 3 million miles of roads in the US including city streets, so this money could bring fiber to a significant percentage of rural areas. Of course, probably half of the money needs to be used for electronics, but that still means that the telcos ought to be using the CAF II money to build more than 200,000 miles of rural fiber.

If this money had instead been used to seed fiber innovators it could have brought fiber to millions of rural customers. If used as matching grants the $9 billion could have been leveraged to build $40 billion or $50 billion of rural fiber. Instead, every place that gets upgraded to the slow DSL is still going to need fiber and, for all practical purposes will be no closer to a true broadband solution than they are today.

New Skinny Bundles on the Horizon

television-sony-en-casa-de-mis-padresAll of a sudden I am seeing the term skinny bundle all over industry press. The term refers to web video programming offered by a company that is already somehow in the telecom business, with the inference that it’s probably only available to their own customers. The line between skinny bundles and OTT programming like Netflix is likely to get blurred over the next year as a few of the skinny bundle providers make their packages available to everybody.

It seems like all of the largest cable companies and telcos either have skinny bundles or are working on them. In a recent blog I talked about the Comcast skinny bundle they are calling Stream TV. It’s a lineup containing mostly major network channels plus HBO. It’s likely to be controversial because Comcast wants to exclude usage on the bundle from any data caps while counting data usage for watching Netflix and other OTT offerings.

As has been anticipated since they bought DirecTV, AT&T plans to launch their skinny bundle in January. The company hasn’t released the details yet but recently gave some hints about what might be in it. For one thing, through DirecTV the company has the ability to air current season shows, including the latest episodes. AT&T may be offering different options to wireless and wireline customers. CEO Randall Stephenson was quoted recently saying that the bundle will “turn some heads”, but I guess we’ll have to wait until January to see what that means.

Their chief rival Verizon Wireless launched Go90 earlier this year. The package is an interesting mix that Verizon says is aimed at Millennials. Verizon describes the package as halfway between YouTube and Netflix. It has a lot of unique content produced by YouTube stars but also carries some traditional programming content. The service is currently free to Verizon wireless subscribers but is expected to soon have a premium tier.

On the landline side, Verizon offers a package called Custom TV. That bundle is sold in combination with 25 Mbps Internet service for $65 a month, and includes a lineup of about 35 channels plus a few additional add-ons options available. The package has been so popular that Verizon reports that one third of their new customers in the second quarter of this year opted for the skinny bundle. While Verizon says that might hurt revenue targets, they affirmed what many have thought in that they expect sales of skinny bundles to increase the bottom line. It makes sense that the skinny bundles, while smaller, are more profitable than the giant bundles of hundreds of channels.

CenturyLink has also announced that they will launch a skinny bundle in early 2016. They say that their main motivation is to sign up new customers without the need for a truck roll, and so they might offer both a skinny bundle as well as the full TV line-up over the web. This will save them on settop boxes and other costs associated with being a full-service video provider.

There are other companies also considering skinny bundles. For instance, Frontier has reported that they are talking to programmers about skinny bundle options. There was an announcement in October that Tim Warner Cable was trialing a skinny bundle but I haven’t seen any press on that since then. CEO Rob Marcus has been quoted several times in the last six months saying that he doesn’t think his customers are looking for a cheaper alternative.

We’ll have to wait a while to see what kind of interest the public has in the skinny bundles. The companies like Verizon that have already launched skinny bundles are not reporting customers counts for the new products, making it hard for the rest of the industry to understand the customer demand.

The skinny bundles are clearly an attempt to try to keep cord cutters on the big company networks. But just about all of these big companies publicly say that cord cutting is not a concern for them. There has to be some concern that offering smaller bundles will invite customers to downsize, but if what Verizon admits is true, it might be that there is more profit in skinny bundles than in the giant cable packages – in which case you can expect to see more skinny bundle options.

State Commissions and Broadband

California PUCFrontier and the California commission have been negotiating a deal that lays out the terms that will allow Frontier to buy a pile of California customers from Verizon. Basically, as will be detailed below, the CPUC will require Frontier to upgrade broadband for over a third of the customers it has in the state as part of the deal.

Occasionally, state commissions get the chance to come down on the side of broadband, mostly during these times of mergers, sales, and acquisitions. There are a handful of state commissions, such as California, New York, Illinois and a few others, that have always been aggressive in these circumstances. There are a whole lot of other commissions who seem to be friendlier to the big carriers and let these kinds of deals slide through without much comment.

It’s good to see commissions take an aggressive stand to improve broadband. But looking back on some similar past deals one has to wonder how effective such arrangements really are. For example, I recall an arrangement between the Pennsylvania commission and Verizon in 1993 that freed Verizon from rate-of-return regulation as long as Verizon would bring DSL to hundreds of rural communities. But Verizon never built that DSL and rural Pennsylvania today still has some of the worst broadband in the country.

There also have been deals made by other government entities and carriers that have not brought any results. For instance, dozens of eastern cities gave Verizon franchise agreements to sell cable TV for an agreement that the company would bring FiOS fiber to their whole city. Verizon never built that extra fiber in any of these communities and earlier this year finally admitted that it was never going to expand FiOS fiber any further.

The FCC just made a deal with AT&T to greatly expand their fiber product as part of the agreement to buy DirecTV. We’ll have to wait and see if the company meets this obligation, and most of the industry is still trying to figure out if AT&T is serious about fiber.

So these deals sound great, but one has to wonder how much teeth they have. In this case, if Frontier doesn’t come through over time it’s not like the California commission can undo the purchase of the Verizon properties. There really is not a lot that any regulatory commission can do these days with a carrier that chooses not to comply with such an agreement. There was a time when commissions held a lot of power over carriers. They controlled rate increases and had many other levers to influence carrier behavior. But in a world where all three of the triple play products are largely deregulated there is only so much that any government agency can do to a rogue carrier.

Back to the details of the Frontier deal. The agreement, which is still to be signed by the California commission, would have Frontier do the following:

  • Provide 25 Mbps downstream and 2-3 Mbps upstream to an additional 400,000 households in California by December 31, 2022.
  • Provide 10 Mbps downstream and 1 Mbps upstream to an additional 100,000 unserved households beyond its CAF II commitments by December 31, 2020
  • Deploy 10 Mbps downstream and 1 Mbps upstream to 77,402 households in accordance with the CAF II requirements in the census blocks identified by the FCC
  • Deploy 6 Mbps downstream and 1 to 1.5 Mbps upstream to an additional 250,000 households in California

Altogether this would bring better broadband to over 800,000 California homes. But I feel sorry for the homes that are being upgraded to 6 Mbps. This will likely be their last upgrade before their copper gets torn down in the not-too-distant future.

Getting Access to Existing Fiber

Fiber CableFrontier, the incumbent in West Virginia that bought the property from Verizon, is fighting publicly with Citynet, the biggest competitive telco in the state, about whether they should have to share dark fiber.

Dark fiber is just what it sounds like – fiber that has not been lit with electronics. Most fibers that have been built have extra pairs that are not used. Every fiber provider needs some extra pairs for future use in case some of the existing lit pairs go bad or get damaged too badly to repair. And some other pairs are often reserved for future construction and expansion needs. But any pairs above some reasonable safety margin for future maintenance and growth are fiber pairs that are likely never going to be used.

The FCC has wrangled with dark fiber in the past. The Telecommunications Act of 1996 included language that required the largest telcos to lease dark fiber to competitors. The FCC implemented this a few years later and for a while other carriers were able to lease dark fiber between telephone exchanges. But the Bell companies attacked these rules continuously and got them so watered down that it became nearly impossible to put together a network this way. But it is still possible to lease dark fiber using those rules if somebody is determined enough to fight through a horrid ordering process from a phone company that is determined not to lease the dark fiber.

The stimulus grant rules also required that any long-haul fibers built with free federal money must provide for inexpensive access to competitors willing to build the last mile. I don’t know the specific facts of the Citynet dispute, but I would guess that the stimulus fiber is part of what they are fighting over.

The stimulus grants in West Virginia are about the oddest and most corrupt of all of the stimulus grants that were awarded. The stimulus grant went originally to the State of West Virginia to build a fiber line that would connect most counties with a fiber backbone. There were similar fiber programs in other states. But in West Virginia, halfway through construction, the network was just ‘given’ to Verizon, who was the phone company at the time. The grant was controversial thereafter. For instance, the project was reduced from 915 miles to 675 miles, yet the grant was not reduced from the original $42 million. This means the final grant cost a whopping $57,800 per mile compared to similar stimulus grants that cost $30,000 per mile.

According to the federal rules that built the fiber, Citynet and any other competitor is supposed to get very cheap access to that fiber if they want to use it for last mile projects. If they don’t get reasonable access those grants allowed for the right to appeal to the FCC or the NTIA. However, the stimulus grants were not specific about whether this was to be dark fiber or bandwidth on lit fiber.

But this fight raises a more interesting question. Almost every long-haul fiber that has been built contains a lot of extra pairs of fiber. As I just noted in another recent blog, most rural counties already are home to half a dozen or more fiber networks that almost all contain empty and un-used fiber.

We have a rural bandwidth problem in the country due to the fact that it’s relatively expensive to build fiber in rural places. Perhaps if the FCC really wants to solve the rural bandwidth shortage they ought to take a look at all of the dark fiber that is already sitting idle in rural places.

It would be really nice if the FCC could force any incumbent – be that a cable company, telco, school system, state government, etc.– that has dark fibers in rural counties to be forced to lease it to others for a fair price. This is something that could be made to only apply to those places where there is a lot of households that don’t have access to FCC-defined broadband.

We don’t actually have a fiber shortage in a lot of places – what we have instead is a whole lot of fiber that has been built on public rights-of-way that is not being used and that is not being made available to those who could use it. It’s easy to point the finger at companies like Frontier, but a lot of the idle fiber sitting in rural places has been built by government entities like a school district or a Department of Transportation, that is not willing to share it with others. That sort of gross waste of a precious resource is shameful and there ought to be a solution that would make truly idle fiber available to those who would use it to bring broadband to households that need it.

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. 

Large Telcos and DSL

Copper wireThere has been a spate of articles recently talking about how the number of cable customers at the large cable companies took their first big dip last quarter. This was the first time when the cable industry as a whole saw an overall significant customer loss, and this raises the question the question if cord cutting is real.

But there was another significant statistic in these same press releases. AT&T and Verizon together lost 474,000 DSL customers in the second quarter of 2015. The two made up some of these losses by adding 313,000 data customers to their FiOS and U-verse networks, so certainly some of the losses are offset by customers who shifted from DSL to something faster.

But this continues the trend that these two largest telcos are shedding DSL customers. The numbers just keep growing and this is the first time that number approached half a million customers.

Verizon has made it clear for years that they have no love for their copper networks. They have been selling significant chunks of the older networks to Frontier. They have been pestering the FCC for years to be able to turn down the copper in neighborhoods where they already have FiOS fiber.

Perhaps more surprising is that Verizon recently sold a significant number of FiOS customers to Frontier, and I have speculated before that Verizon doesn’t want to stay in any landline business. When you read their annual reports, any mention of their landline business is buried deep inside and they obviously have put all of their emphasis on the wireless business.

AT&T is a bit more perplexing. They have not been selling copper customers. But they have told the FCC a number of times that they would like to walk away from millions of customers on rural copper networks. AT&T recently promised the FCC as part of the DirectTV deal that they would aggressively add new broadband customers. While they have insinuated to the FCC that the new customers would all be on fiber, I would not be surprised to see a lot of them on U-Verse.

Many people speculate why AT&T bought DirectTV. My guess is that they want to get out of the business of delivering video over wires. U-Verse becomes a much better data product  if it doesn’t have to carry video so that all of the bandwidth would be used for data. There must already be a lot of current U-Verse customers bumping up against their bandwidth and wanting faster data connections.

It’s also interesting that AT&T hasn’t divested of rural copper networks in the same manner as Verizon. Again, I am only speculating, but my guess is that they don’t want those networks to be revitalized and then compete against their wireless networks. I think AT&T has a long term plan to serve rural areas with wireless only.

The one shame about cutting down the copper networks, particularly in urban and suburban neighborhoods, is that those networks could be upgraded relatively inexpensively with G.fast to deliver much faster speeds. CenturyLink just announced that they are testing 100 Mbps copper in Salt Lake City. Some of the copper networks in Europe are doing this with even faster speeds and the technology is generally referred to there as fiber-to-the-curb.

But obviously both companies have decided that G.fast is not a technological path they want to follow, and both are going to be aggressively decommissioning copper over the next five years.

I don’t feel too bad about a customer who is told they have to move from a copper network to a FIOS fiber network. But I am really worried about rural customers if somebody cuts down the only telecommunications wire to their home when the copper comes down. At that point those folks are going to be paying cellphone prices for both voice and data, and for some millions of them there is not enough coverage to provide those services over cellular. I predict we are going to be cutting customers off from communications and moving parts of the country back seventy-five years. I hope I am wrong.

Verizon’s Strategy

Verizon2The news coming out of Verizon lately is really interesting and set me to musing about their long-term strategy.

First, they are selling off $10 billion in landlines in Texas, California, and Florida to Frontier. These properties include 3.7 million voice lines, 2.2 million high-speed data customers, and around 1.6 million FiOS customers. This divests their FiOS service everywhere except the east coast. The 1.6 million customers represents a very significant 24% of the reported 6.6 million FiOS customers at the end of 2014. A few weeks ago Verizon had also announced an end to any further expansion of FiOS.

It’s been clear for years that Verizon has wanted out of the copper business. They first sold off large portions of New England to Fairpoint. Then in 2010 they sold a huge swath of lines in fourteen states to Frontier including the whole state of West Virginia. And now comes this sale. It’s starting to look like Verizon doesn’t want to be in the landline business at all, perhaps not even in the fiber business.

After all, this latest selloff was done to finance another big chunk of wireless spectrum. When Verizon CEO Lowell McAdam announced the landline sale he said that the company would be focusing on its 108 million wireless customers. One can see the emphasis on wireless in the company just by looking at their annual reports. One has to go many pages deep to see a discussion of the landline business and most of the report talk about the wireless business.

McAdam said that the company was going to put its emphasis on selling data and video to LTE customers. McAdam repeated a past announcement that Verizon would be rolling out an online video package later this summer and he hinted that the service would include a significant number of networks when launched. They plan to sell the new video packages to both their wireless customers and to anybody online.

I find several things about Verizon’s decisions to be very interesting:

  • One has to wonder how Verizon will deliver a lot of video programming through the cellular network. Certainly LTE has enough speed to deliver video, and most urban LTE network tests come in between 10 Mbps and 20 Mbps. But the issue in the cellular network is not speed, but overall capacity from a given cell site. Perhaps some of the new spectrum they are buying will be used strictly for this purpose to beef up capacity. But I find it a bit ironic that Verizon would now be pushing such a data-heavy network application when just a few short years ago they claimed that network congestion was the reason they needed to impose skimpy monthly data caps.
  • You also have to wonder how they are going to reconcile this product with their existing data caps. An hour of video streaming can use a gigabit of bandwidth and so it won’t take very much video viewing to hit the existing data caps. Verizon stopped selling unlimited data plans in 2012. They throttle the top 5% of unlimited 3G users and threatened last fall to do the same thing to LTE customers, but backed down after a lot of pushback. The majority of their customers have low caps that are not going to match up well with cellular video products.
  • Perhaps they were hoping to exempt their own video product from data caps, but that would violate the impending new net neutrality rules which won’t allow favoring your own product over those from other video providers. So perhaps Verizon is going to go back to unlimited data plans or at least raise the caps significantly. But doing that will allow Netflix and others to compete on cellphones.
  • One also has to wonder how they will keep up with the inevitable trend for bigger bandwidth video. Will wireless networks really be able to deliver 4k video and the even bigger 8k bandwidth products that will inevitably follow?
  • In general, one has to be curious about their obvious desire to be only a wireless company. The general trend in the cellular industry is towards lower prices. I know I was able to cut my own cellphone plan price almost in half this past year, and the trend is for prices to keep going lower. Certainly having companies like Google enter the market is going to push prices lower. Also, Cablevision announced a cellphone plan that mostly uses WiFi and that will only dip into the cellular network as a fallback. Comcast and others are considering this and it could produce significant competition for Verizon.
  • This announcement also tells me that they see profits in selling over-the-top video. It’s well known that nobody makes much money selling the huge traditional cable lineups, but Verizon obviously sees better margins in selling smaller packages of programming. But will margins remain good for online video if a lot of companies jump into that business?

I scratch my head over selling off FiOS. Verizon reports an overall 41% market penetration for its data product on FiOS networks. Data has such a high profit margin that it’s hard to think that FiOS is not extremely profitable for them. The trend has been for the amount of data used by households to double every three years, and one doesn’t have to project that trend forward very far to see that future bandwidth needs are only going to be met by fiber or by significantly upgraded cable networks. Landline networks today deliver virtually all of the bandwidth that people use. There are now more cellular data dips than landline data dips, but people rely on their landline connection for any application that uses significant bandwidth.

Verizon was a market leader getting into the fiber business. FiOS was a bold move at the time. It’s another bold move to essentially walk away from the fiber business and concentrate on wireless. They obviously think that wireless has a better future than wireline. But since they are already at the top of pile in cellular one has to wonder where they see future growth? One has to admit that they have been right a lot in the past and I guess we’ll have to wait a while to see if this is the right move.

Who Will Go after the CAF II Funds?

USF-logoLast week the FCC announced the broadband guidelines that will be used to fund the Connect America Fund (CAF) Phase II filings that will be awarded in 2015. The FCC has set aside a little over $9 billion dollars of new CAF funding to be paid out of the next five to seven years. That’s five years for smaller recipients and up to seven years for some of the large telcos.

The new broadband goal is that any landline broadband connection built with these funds must be able to deliver at least 10 Mbps download and 1 Mbps upload. This increases the speed from the old threshold from 4 Mbps download and 1 Mbps upload. This is a really low threshold compared to the recent experimental grant program where the FCC only funded projects that delivered at least 25 Mbps download in unserved areas and 100 Mbps in underserved areas.

But setting the speed goal at only 10 Mbps download will enable rural telcos and cable companies to go after the funding if they are willing to use the funds to help to pay for extending their networks.

The telcos can use DSL to satisfy the CAF requirements, but in order to bring that DSL to rural areas they are going to have to expand fiber in their networks significantly. Current single-pair DSL technologies can deliver 10 Mbps to only about 7,000 feet of copper. That is not as the crow flies, but rather as the copper is wired. That provides  little more than a one mile circle around any given DSL distribution point (called a DSLAM).

Rural cable companies that already offer speeds of at least 10 Mbps only need to string more coaxial cable, or if they are going to new neighborhood may need additional fiber as well. However, some rural cable companies still use the first generation of DOCSIS equipment and they might need a significant upgrade of their network plus a replacement of cable modems in order to meet the new speed requirement.

Not unexpectedly, the large telcos are not happy with the increase from 4 Mbps to 10 Mbps. Many of them still deploy older  generation DSL equipment with maximum speeds between 1 Mbps to 6 Mbps. But to meet the CAF requirements they can use newer DSL for the new customers and don’t have to necessarily upgrade the older ones. It would be a bit ironic if the farms around rural towns end up with faster DSL than is available in the nearby towns.

We already know that AT&T and Verizon are trying hard to ditch their rural copper. Verizon already sold off most of their rural properties and wants to walk away from what they have left. AT&T has said that they want to walk away from “millions of lines of copper” by 2018 if the FCC will let them. Both companies want to replace landlines with wireless service, which costs more for a household and has severe data caps. So it is unlikely that these two companies are going to be seeking much CAF funding.

But there are a number of other large telcos who can’t walk away from copper because that is basically all they own. Companies like CenturyLink, Windstream and Frontier will be operating copper networks for many years to come. CenturyLink and Windstream are both expected to be major players in this second round of CAF funding.

Both Windstream and CenturyLink have complained about the new 10/1 Mbps requirement. I think this is because it is going to force them to do real upgrades to get the funding. In order to deliver that much bandwidth to rural areas they will have to move DSLAMs much further out into the field, and that is going to mean building fiber to connect to the DSLAM cabinets. And of course, typically the further away you get from a town, the fewer customers are on any given route to help pay for these new investments, especially the parts that the CAF isn’t going to fund.

One of the most interesting aspects of the new CAF fund is that that the subsidy can go to anybody who can bring the bandwidth. And so these large carriers must compete for the funds against players like electric cooperatives and wireless ISPs (WISPS). The funds are being awarded by a process called a reverse auction, because the company that asks for the least amount of support per customer in a given area will get the CAF funding. The only major requirement is that a CAF winner has to be able to deliver the required data speeds plus voice over the whole area to get the funding. They can’t just pick off pockets of customers like they might with a normal overbuild business plan.

The FCC is hoping that the CAF funding is going to bring broadband to at least several million more homes. But because of the reverse auction it’s really hard to predict how effective the funding will be. Further, if the bigger companies figure out that it’s not worth taking the funding, then much of the funding might go unclaimed. The old High Cost Fund was based upon providing service to rural places that had high costs by definition. If you built a network in one of the designated high cost places you got the subsidy to help keep it operating. But the reverse auction adds a lot of uncertainty to the process. It’s certainly possible that the large telcos might decide that the whole process is too risky to worry with and could send the FCC back to the drawing board.

Challenging CAF Funding

USAC LogoLast week the FCC accepted a challenge by OnlyInternet Broadband and Wireless that had been filed against Frontier Communications. Frontier had filed to get Connect America Funds (CAF) to spend capital to enhance broadband to some rural areas that were either unserved or underserved. The FCC agreed that OnlyInternet already served the area in question with broadband.

There have only been a few of these challenges, but there is going to be a lot more coming since the FCC is expected to expand possible recipients of the funds this month. In the past few years the major recipients of CAF funding for construction have been a handful of very large telephone companies like Frontier. However, the FCC is expected to broaden the list of recipients to include other companies like rural electric utilities.

Today a company must be certified as an Eligible Telecommunications Provider (ETC) by their state Commission to be eligible for CAF funding. But as the FCC expands the definition they also are thinking about changing this requirement.

The CAF funding is intended to provide support for constructing broadband facilities in unserved or underserved areas. An area either has to have no broadband today (unserved) or a majority of residents that can’t get broadband that meets the federal broadband definition of 3 Mbps  download / 768 Mbps upload (underserved). The FCC is expected to increase this threshold in the future, although they will probably never do anything so bold as to set the threshold to something that would be really considered as broadband. But I guess they think that if households have no broadband that they will be grateful to get 3 Mbps.

This FCC ruling is worth pointing out because other large companies are going to also be requesting CAF funding. For instance, Frontier has requested funding for huge rural swaths of its own service territory where it had never spent the money to put in DSL. This ruling shows that you need to be on the alert if the large companies are planning to use federal funds to bring broadband to an area where you have already made the investment. You can challenge such an attempt and win.

Interestingly, Frontier had previously challenged funding for OnlyInternet for not providing fast enough upload speeds for some other markets where they were providing broadband.

If your company is close to areas that are unserved or underserved you might want to consider applying for CAF funding. CCG has been successful in the past in getting numerous federal grant awards for clients. The CAF funding awards are going to require some capital from the grantee, and the more of your own money you are willing to put in, the higher the chance of getting a grant. But it should not be unreasonable to think that CAF funding could be used to finance a significant percentage of a network build-out, as long as you are building to unserved areas.

The bottom line is to keep your eye on the CAF funding requests. The large carriers are requesting funding for large areas and some of those areas are bound to already have broadband. Don’t let the big companies get a foothold in your area using free federal funds.