A-CAM – A Subsidy that Works

Yesterday I compared the broadband grant programs in California and Minnesota. There are currently two federal broadband funding programs that are producing drastically different results that are worth a comparison. I’ve written a number of blogs complaining about the inadequacies of the FCC’s CAF II program for the largest telcos in the country. Companies like AT&T, Verizon, Frontier and other big telcos accepted the federal subsidies to upgrade the rural parts of their service territories. That program requires the carriers to upgrade rural facilities to be able to deliver broadband speeds of at least 10 Mbps download and 1 Mbps upload. The upgrades also need to have latency less than 100 ms (which is a dreadful latency if near to that threshold).

AT&T and Verizon say that they plan to mostly meet their obligations by converting rural copper lines to cellular connections. Most of the other telcos, which aren’t in the cellular business plan instead to upgrade rural DSL. A few, like Frontier Communications say that they plan to upgrade some customers using point-to-multipoint wireless networks.

But they key element of all of this is the 10/1 Mbps broadband speeds. The CAF II program is spending $10 billion dollars over six years to upgrade 4 million homes to at least the 10/1 Mbps speed. Since most of these households have had little or no broadband today those speeds are going to be the first time that many of these homes get any kind of a broadband connection. But the 10/1 Mbps speeds are already obsolete for any home that wants to use broadband the same as urban households, allowing multiple users and devices on the network simultaneously.

The FCC also has a lesser-known broadband subsidy program aimed at the smaller telephone companies. This program is called A-CAM (Alternate Connect America Cost Model). The A-CAM program is paying out a little over $1 billion per year for ten years and will support a broadband upgrade to 4.9 million households. Just under half of the money is aimed at upgrades to supply at least 25/3 Mbps, with the rest aimed at the same slower 10/1 threshold as the CAF II program for the bigger telcos.

The A-CAM program gets interesting when you look at what the small telcos are actually doing with this funding. While the big telcos in the CAF II program area upgrading to just enough speeds to get them over the 10/1 Mbps requirement, many small telcos are doing a lot more. All around the country there are small telcos using the A-CAM funding as the seed money to finance and build fiber to small towns, farms and other rural areas. The A-CAM money provides the basis for borrowing the money needed to build a permanent new fiber network. Even where small telcos are only upgrading DSL, I see many of them that upgrading speeds to as much as 40 Mbps.

It’s also interesting that the smaller companies are getting less funding, on average. The big telco CAF II money is providing roughly $2,470 per rural customer while the small company A-CAM money is $2,091 per customer. The amount received by each company differs, but overall the small telcos are doing a lot more with less funding.

I don’t know for sure that the big telcos in the CAF II program aren’t spending some of their own capital dollars to augment the CAF II funding, but everything I see tells me that they are not. They are using the federal money to do whatever upgrades that will fund, and no more.

We are starting to see the differences from the two programs appear in the real world. I was just looking the other day at the map for Otter Tail County, Minnesota. It’s a large county with some farmland, a lot of lakes and recreation areas and a lot of woods, trees and rough terrain. It’s comparable to many other rural places in the country. In Ottertail County it looks like about 2/3 of the rural areas are going to get fiber, much of it due to A-CAM money. These fiber areas will be sitting next door to CenturyLink areas that will get DSL upgrades that meet the 10/1 Mbps requirement.

Customers that get fiber will have seen real benefit from the FCC program that helped to fund it. But the customers in the CenturyLink areas will not see the same benefits, although they will have friends, families and neighbors that have world-class broadband. There isn’t any real difference between the two areas other than the way that the telcos decided to use the federal broadband money. The small telcos have used the federal money as a down payment for fiber while the bigger telco are just tweaking the ancient copper network or converting to cellular.

I’ve said all along that the FCC made a colossal mistake in not creating an auction for the CAF II money. Smaller companies would have leveraged the $10 billion of funding to build a lot of fiber to rural communities. They would have borrowed and expanded their businesses to bring a permanent broadband solution to millions of households.

Instead, the $10 billion CAF II money isn’t buying much of a speed increase. In some cases CAF II is going to make things worse. I think when AT&T and Verizon start tearing down rural copper that there will be homes with lousy cellular coverage that will not only not get broadband but will lose voice service. It’s fairly obvious that the CAF II program funding was a victory for the big telco lobbyists. The big telcos had a lot to lose if that funding went to smaller companies that would have built in their service territories. But this victory for the big companies is a big loss for customers who will not see real broadband because of a poorly designed federal subsidy program.