Tariffs and Broadband Deployment

A number of my clients are receiving letters from telecom supply houses and vendors warning them of price increases due to the tariffs recently imposed on trade with China. It’s no secret in the telecom world that much of the electronics and components used to build fiber or fixed wireless networks come from China.

The following list is from a letter sent from Power & Tel, a big telecom supply house to their customers. Other supply houses and vendors are sending similar notices. This notice lists examples of components that will receive the new tariff additives. As is usual in these situations there will be components that are in gray areas and it will take a while for the vendors to figure out the full tariff impact.

The new tariffs were imposed by the U.S. Trade Representatives (USTR) at the order of the President and are implemented by the U.S. Customs and Border Protection agencies. There have been multiple USTR lists of affected products, and following is Power & Tel’s take on the various tariff actions:

USTR Tariff List 1 – 25% tariff effective on July 6, 2018. Affects optical fiber cables, aluminum, copper, steel & iron.

USTR Tariff List 2 – 25% tariff effective on August 23, 2018. Affects fiber adapters, connectors, splice sleeves, grounding hardware.

USTR Tariff List 3 – 10% tariff effective on September 24, 2018. On January 1, 2019 the tariff increases to 25%. Affects electronics, power cables, active optical cable, direct attach cables, cable management and racks, batteries, power supplies, metal hand tools, power tools, hardware.

Included in this list are several major components that are part of every broadband deployment. This includes things like:

  • Core routers and switches for fiber and wireless networks
  • Core electronics and customer ONTs for FTTP
  • Core electronics and customer radios for fixed wireless
  • The core of central offices and huts including racks, batteries, power supplies, grounding hardware, cables, hardware, test equipment and other tools.
  • Cable settop boxes and WiFi routers
  • There are numerous sources of non-Chinese fiber optic cable, but many of the components for an outside plant network like fiber adapters, connectors, pre-connectorized drops, etc. will be affected.

I try not to be political in my blog – and it’s normally easy to do because broadband deployment is a topic that enjoys bipartisan support. I’ve always found in rural America that politicians from both parties support fiber and wireless network deployments because they understand that their local economy needs broadband to thrive and survive. I visited a number of rural counties in the last year where the elected officials say that lack of broadband access has become the number one issue of concern in their county.

However, I have no doubt when looking at the size and scope of these tariffs that the cost of building broadband just got more expensive. I won’t be surprised if this doesn’t kill or delay some pending construction projects, and it’s something that will have to be factored in to any future-looking business plans. I’m sure I share the sentiment of many in the industry and hope that these tariffs are temporary.

Stranding Fiber Investment

Fiber CableThere is one issue with fiber-to-the-home networks that doesn’t get talked about a lot. In areas with normal churn – people moving in and out – a fiber network will end up with stranded fiber drops and ONTs that have been built to homes and businesses which no longer have service.

This happens to all networks of course, but the investment from the curb to the customer is a lot more expensive in a fiber network than it is with a coaxial or copper network. The cable and phone companies normally just leave the drop in place and hope that sometime in the future that the residents at the address will want service again.

Most of these stranded investments come from a couple of causes. First are people that don’t pay their bills and have been cut off service by the fiber provider. In any given market when a new ISP opens their doors, a lot of households that can’t pay their bills will try to get service with the new company. And so if a new fiber provider doesn’t do good credit checks they tend to get flooded with the bad debt customers, and they will have invested in building fiber to a lot of places that aren’t likely to pay them.

But over time most of the stranded investments come from people who move. The new people moving into a home might not want the same service. But more often, the people moving into a home will have automatically called the incumbent cable or telco provider for service – generally not even knowing there is an alternate broadband provider available to them.

This is not an issue in those places where the incumbent is the fiber provider. But for competitive fiber providers this can turn into a sizable problem over time. I know companies that have accumulated stranded investments as large as 10% of the total passings in a market.

I have clients with different strategies for this problem. First, companies using external ONTs need to have a process for retrieving and reusing the ONT electronics at houses they no longer serve. A surprising number of companies leave the electronics in place hoping that they will get the customers back.

But the bigger issue companies face is how to reach new residents before they choose the competitor. People that move into a new town tend to automatically think of the incumbent provider when ordering the triple play, and it’s generally too late to get to them if they’ve already signed a contract for service.

One common strategy is to make deals with the most active real estate agents and rental agents in a market so that they tell new tenant about your fiber service. I have clients who give free service to such folks as a way to induce them to make sure that new tenants know about the fiber.

It’s also vital these days to keep good records on potential customers. If you miss an opportunity with a household that signs a one or two-year contract with the incumbent, you should have a software program that alerts you when that contract is going to expire so that you can make your pitch later. I’m always surprised at the number of clients that don’t capture and track this kind of information in any usable way. Over time you should know about every home in your fiber footprint. You should know who doesn’t pay bills, who doesn’t want broadband at any price, who has contracts with the incumbents, etc.

Two markets with an especially large potential for stranded investment are college towns or towns with a military base where a significant number of residents turn over every year. I have clients who have gotten very creative and work with the colleges and the military to make sure that information about them is given to new students.

But the takeaway from this discussion is that you are going to spend more money building fiber than you might have planned for in your original business plan. Fiber drops are not cheap – particularly buried ones – and you are going to build plenty of drops that never drive enough revenue to cover their costs. Your best way to fight this is to always check the credit of potential customers and to have a plan in place to be able to market to new people who move into your community.