Federal Subsidies for Satellite Broadband

In December, the FCC awarded $87 million from the CAF II Reverse auction held last summer for satellite broadband. The bulk of the satellite awards went to Viasat, which will supposedly use the money to bring broadband to 123,000 homes in seventeen states. The grant awards are meant to bring 25/3 Mbps broadband to areas that don’t have it today.

I have several problems with this award. First is that the satellite companies already cover these areas today and have been free to sell and market in these areas. The federal grant money doesn’t bring a new broadband alternative to anybody in rural America.

Second, the satellite companies aren’t required to connect any specific number of new customers as a result of the grant awards. They are largely free to just pocket the grants directly as profits. Even when they do connect a new customer, they don’t build any lasting broadband infrastructure, but only install an antenna at each new customer.

Third, rural residents don’t seem to want satellite broadband. In a large survey by the Census Bureau in 2017, 21% of people in the US described their neighborhood as rural (52% chose suburban and 27% said urban). In the quarter ending in June 2019, Viasat claimed 587,000 rural customers in the US, which represents only 2.2% of the 128 million households in the country.  If those customers are all in rural America, then the company has roughly a 10% market penetration.

CCG has been doing broadband surveys for twenty years and I don’t know that we’ve ever talked to a satellite customer who was happy with their broadband. In every survey, we seem to encounter more people who dropped satellite service than those that still have it. Customers complain that satellite costs too much – Viasat claimed in their most recent financial report that the average residential broadband bill is $84.26. Customers also hate the high latency, which can be 10 to 15 times higher than terrestrial broadband. The latency is due to the satellite which is parked almost 22,200 miles above earth – it takes a while for a round trip communication over that distance.

The primary complaints about satellite broadband are tiny monthly data caps. The company’s products that would satisfy the FCC grant speed requirements start with the Unlimited Silver 25 plan at $70 with speeds up to 25 Mbps with a monthly data cap of 60 gigabytes of data usage. The fastest plan is the Unlimited Platinum 100 plan for $150 with speeds up to 100 Mbps and a data cap if 150 gigabytes. Unlike cellular plans where a customer can buy more broadband, the Viasat plans throttle customers to speeds reported to be less than 1 Mbps once a customer reaches the data cap. To put those plans into perspective, OpenVault announced recently that the average US home uses 274 gigabytes of data per month. The average cord cutting home uses 520 gigabytes per month. The satellite broadband is impractical for anybody with school students in the home or for anybody that does even a modest amount of video streaming.

Viasat won the grant funding due to a loophole in the grant program. The program funding was available to anybody that offers broadband of at least 25 Mbps. The grant program intended to deliver a new broadband alternative to rural households – something that satellite broadband does not do. The funding was provided under a reverse auction, and the satellite companies likely placed bids for every eligible rural market – they would have been the default winner for any area that had no other bidder. Even where there was another bidder, a reverse auction goes to the lowest bidder and there is no amount that is too small for the satellite companies to accept. The satellite companies don’t have to make capital expenditures to satisfy the grants.

Giving money to satellite providers makes no sense as broadband policy. They don’t bring new broadband to anybody since the satellite plans are already available. The plans are expensive, have high latency and low monthly data caps.

The much larger RDOF grant program will award $16.4 billion in 2020 for rural broadband and the satellite companies must be ecstatic. If the FCC doesn’t find a way to keep the satellite companies out of this coming auction, the satellite companies could score a billion-dollar windfall. They can do so without offering any products that are not already available today.

To put these grants into perspective, the $87 million grant award is roughly the same size as the money that has been awarded over several years in the Minnesota Border-to-Border grant program. The Minnesota grants have helped funds dozens of projects, many of which built fiber in the state. There is no comparison between the benefits of the state grant program compared to the nearly total absence of benefit from handing federal money to the satellite companies.

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.