Who’s In Charge of Broadband?

On July 24, the FCC authorized a new subsidy program, Enhanced A-CAM (Alternate Connect America Cost Model). This program will extend subsidies to small, regulated telephone companies at a cost of about $1.27 billion per year for ten years. The subsidy will be paid from the FCC’s Universal Service Fund.

The funding requires recipients to deploy voice plus broadband with speeds of at least 100/20 Mbps to 100% of the areas covered by the subsidy within four years. The order is technology neutral, so telcos could elect to meet this requirement with fiber or with licensed fixed wireless technology.

According to Mike Conlow, this order will bring broadband to almost 583,000 unserved or underserved locations that are already covered by the NTIA’s BEAD grant footprint. Today’s blog talks about the absurdity of the FCC making this announcement only weeks after the NTIA announced the distribution of the $42.5 billion in BEAD funds to states. This means that two U.S. agencies both announced funding to cover the identical half-million locations within a month of each other.

Think about what this means. A state that has some of these A-CAM locations was allocated BEAD grant money to bring broadband to these areas. The FCC order is then directly funding to build broadband to the same passings. This means that a state that has a lot of unserved and underserved A-CAM passings is getting a funding windfall. Conlow estimated that this double funding is bringing a funding windfall of $180 million to Nebraska – the state with the most unserved and underserved A-CAM locations. The downside of this is that if Nebraska and other states are getting a windfall from the FCC decision, then other states are receiving less BEAD funding than they would have if these locations had been excluded from BEAD before the NTIA allocated the $42.5 billion.

The FCC’s A-CAM order was released only three weeks after the NTIA announced the BEAD allocations to states. There is no way that the FCC didn’t do this deliberately. The FCC could have asked the NTIA to take these locations out of the BEAD process so that the $42.5 billion would have been allocated fairly.

Two years ago, the Biden administration directed the FCC, the NTIA, and the USDA to coordinate everything associated with federal funding for broadband. The FCC’s actions with this decision are the exact opposite of coordination.

I speculate that the FCC did this to reclaim relevance in the discussion of who is helping America solve the rural broadband gap. The FCC has taken a lot of criticism in recent years for botching the RDOF funding process and handing out wasted billions to the big telcos in the CAF II subsidies. The FCC was also largely cut out of the biggest effort ever with BEAD grants to solve the rural broadband gap, and that had to sting. The FCC can now say to the folks living in the A-CAM areas that it provided the funding to bring better broadband instead of the NTIA. I’m picturing FCC ribbon cuttings for projects that launch fiber in these areas. I can’t think of any other reason that this order would have been released so soon after the NTIA announcements of BEAD funding for each state.

The NTIA should react to this announcement by reallocating the BEAD funding to states because for every state that got a windfall like Nebraska from the FCC’s A-CAM order, other states received less BEAD funding. Unfortunately, reopening the allocation process could open a can of worms, so that likely won’t happen.

In my mind, the FCC has become a loose cannon due to its control of the Universal Service Fund. The USF for all practical purposes is a big slush fund that gives the FCC the ability to tackle anything it wants, outside of any control by Congress or the White House. After this announcement, it wouldn’t shock me to see the FCC announce another round of RDOF funding in the middle of the BEAD grant process next year.

RDOF in Trouble?

In June, three Senators – Roger Wicker, Cindy Hyde-Smith, and J.D. Vance – sent a letter to FCC Chairperson Jessica Rosenworcel asking for relief for RDOF award winners. The Senators said that the RDOF subsidies are no longer adequate due to massive increases in construction costs to build and operate the promised RDOF networks. The Senators asked that the FCC particularly consider relief for RDOF winners that have fewer than 250,000 broadband customers.

More recently, a coalition of RDOF winners sent a similar letter pleading for relief from the same issues. The RDOF winners cited much higher costs due to both the pandemic and to actions taken by the federal government with funding programs that were not in place at the time of the RDOF awards. The Coalition of RDOF winners offered various possible solutions the FCC might consider to help the winners meet their RDOF obligations:

  • Extra funding to RDOF winners that have “affirmatively requested such funding.”
  • A short amnesty window to let RDOF winners withdraw from RDOF if the FCC is not going to provide supplemental funding.
  • Earlier payments for the RDOF funds due from years 7-10.
  • Add an additional eleventh year of RDOF subsidy.
  • Provide relief from all or some requirements related to the letter of credit requirements.

As a reminder to readers, the RDOF program provided a 10-year subsidy to cover some of the costs of deploying broadband in unserved areas. The money was awarded in a reverse auction that ended in November 2020, where the lowest bidder for the subsidy in any given Census block won the subsidy. The FCC originally considered awarding as much as $16 billion in the auction. However, Many ISPs bid the prices lower than expected, and only $9 billion was claimed at the close of the auction. Some ISPs withdrew after the auction and the FCC disqualified some large bidders like Starlink and LTD Broadband. Ultimately, only $6 billion of subsidies are now in play.

Chairwoman Rosenworcel quickly responded to the three Senators and largely closed the door on the Senator’s requests. She pointed out that the FCC reserves the funding through the Universal Service Fund each quarter to pay the $6 billion subsidy and that there is no additional funding to increase RDOF payments. She also reminded the Senators that the rules and penalties for withdrawing from RDOF were clearly known by bidders before they bid in the auction and that the penalties are in place to ensure that RDOF winners fulfill their obligations.

The entire RDOF process has been badly flawed since the beginning. Some auction winners bid down prices a lot lower than expected. The areas that were available in many places are scattered and don’t create a reasonable footprint for building a broadband solution. There clearly has been an unprecedented amount of inflation since the awards were made. And to be fair, the RDOF awards were made after the pandemic was in full force, and winners could reasonably have anticipated that there would be economic consequences of a major pandemic. Even without the last year of high inflation, it would be hard not to expect some kind of economic turmoil during a 10-year subsidy plan.

I have no doubt that many RDOF winners are now looking at a broken financial model for fulfilling their promise. They are stuck with a terrible dilemma – build the promised networks and have a losing business or pay a substantial penalty to withdraw from RDOF.

It’s disturbing that both the Senators and some RDOF winners are asking for a soft landing for anybody that wants to change their mind and withdraw from RDOF. The RDOF footprints have already been off-limits for other federal grant programs that could have brought faster broadband to these areas. It’s fully expected that the BEAD grants will start being awarded next year, and it would be a true disaster if ISPs default on RDOF after those grants have been awarded. That could strand large numbers of folks with no broadband solution.

This is a dilemma for the FCC. No matter what the agency does, there will likely be additional negative outcomes if RDOF winners are unable to fulfill the pledge to build and operate the promised networks. I’ve always expected the program to have eventual troubles since many of the winning auction bids were lower that what seemed to be needed to create a sustainable business. But I never thought that we’d be seeing requests for a major rework of the program less than three years after the end of the auction.

The Remaining RDOF Funds

The FCC originally budgeted $20.4 billion dollars for the RDOF subsidy program to be spent over ten years. The original RDOF reverse auction offered $16 billion in subsidies. But in a story that is now well known, some entities bid RDOF markets down to ridiculously low subsidy levels, and only $9.4 billion was claimed in the auction. $2.8 billion of this funding ended up in default, including some of the bidders who had driven the prices so low.

That means that only $6.4 billion of the original $20.4 billion has been allocated. The question I’m asking today is what the FCC will do with the remaining $14 billion.

It seems unlikely that there will ever be another RDOF-like reverse auction. RDOF was meant to bring broadband to areas that were unserved according to the FCC’s broadband maps at the time of the reverse auction – meaning areas where no ISP claimed broadband speeds of at least 25/3 Mbps. But since ISPs are able to claim marketing speeds under the FCC mapping rules instead of actual broadband speeds, many millions of unserved locations were left out of the RDOF process.

Since the RDOF auction, there have been many billions spent to bring broadband to unserved areas through ReConnect grants, local ARPA grants, state broadband grants, and several smaller grant programs. To understand how poor the original FCC RDOF maps were, even after these many grants, the latest FCC maps still show over 8 million unserved locations. Folks like me who look at the map at a granular level think there are even more areas that are still mistakenly claimed to have 25/3 Mbps broadband but that don’t in real life.

To be fair, the RDOF is doing some good things. A lot of electric coops, telephone coops, telephone companies, and independent fiber overbuilders are building networks using the RDOF subsidy as the basis for getting funding. Charter and a few other larger ISPs are building networks using the RDOF funding.

But the RDOF awards also left behind a lot of messes. First, it took too long to eliminate the default bidders. Areas claimed by these bidders were off-limits to other federal grants and most state grants – many of these areas would have fiber today had they not been in RDOF limbo.

The bigger problem is that the FCC made an absolute mess by awarding RDOF in what can be best called a checkerboard RDOF serving area. The following map is a good example of what this look like in a real county. In this particular county, the areas to the east have no people due to large parklands, but in the rural areas where people live, the RDOF awards covered some areas but not adjacent Census blocks. The Census blocks that were not awarded have the same lousy broadband options and were not included in the RDOF award due to the mapping problems discussed earlier.

This creates a real challenge for anybody now trying to get a BEAD or other grant to serve what is left. The areas left after RDOF don’t make a big coherent serving area, but a jumbled mess of remaining Census blocks. For somebody building a fiber network, these checkerboard areas are a nightmare because a builder must go through RDOF areas to reach the remaining areas. It’s one more factor that will drive up the cost of the BEAD grants in counties that got a lot of RDOF funding.

The FCC is dreadful at awarding grants and subsidies. The RDOF process was used so the FCC didn’t have to review traditional grants where ISPs proposed coherent grant serving areas. This is the same FCC that gave over $11 billion to the biggest telcos for CAF II to upgrade DSL to 10/1 Mbps.

Now that the states have broadband offices, the easiest way for the states to award the remaining RDOF billions would be to let state broadband offices do the heavy lifting. It would be one more tool for state broadband offices – that hopefully would not follow the complicated BEAD rules. The worst possible way to use the money would be for the FCC to take some easy path to shovel the money out the door again – please don’t give us RDOF II!

No More Underbuilding

Jonathan Chambers wrote another great blog this past week on Conexon where he addresses the issue of federal grants having waste, fraud, and abuse – the reasons given for holding hearings in the House about the upcoming BEAD broadband grants. His blog goes on to say that the real waste, fraud, and abuse came in the past when the FCC awarded federal grants and subsidies to the large telcos to build networks that were obsolete by the time they were constructed. He uses the term underbuilding to describe funding networks that are not forward-looking. This is a phrase that has been around for many years. I remember hearing it years ago from Chris Mitchell, and sure enough, a Google search showed he had a podcast on this issue in 2015.

The term underbuilding is in direct contrast to the large cable and telephone companies that constantly use the term overbuilding to mean they don’t want any grant funding to be used to build any place where they have existing customers. The big ISPs have been pounding the FCC and politicians on the overbuilding issue for well over a decade, and it’s been quite successful for them. For example, the big telcos convinced the FCC to provide them with billions of dollars in the CAF II program to make minor tweaks to rural DSL to supposedly bring speeds up to 25/3 Mbps. I’ve written extensively on the failures of that program, where it looks like the telcos often took the money and made minimal or no upgrades.

As bad as that was – and that is the best example I know of waste, fraud, and abuse – the real issue with the CAF II subsidy is that it funded underbuilding. Rural DSL networks were already dying when CAF II was awarded, mostly due to total neglect by the same big telcos that got the CAF II funding. Those billions could have instead gone to build fiber networks, and a whole lot of rural America would have gotten state-of-the-art technology years ago instead of a tweak to DSL networks that barely crawling alone due to abuse.

The FCC has been guilty of funding underbuilding over and over again. The CAF II reverse auction gave money to Viasat, gave more money for upgrades to DSL, and funded building 25/3 Mbps fixed wireless networks. The classic example of underbuilding came with RDOF, where the areas that were just finishing the CAF II subsidy were immediately rolled into a new subsidy program to provide ten more years of subsidy. Many of the areas in RDOF are going to be upgraded to fiber, but a lot of the money will go into underperforming fixed wireless networks. And, until the FCC finally came to its senses, the RDOF was going to give a billion dollars to Starlink for satellite broadband.

The blame for funding underbuilding lies directly with the FCC and any other federal grant program that funded too-slow technologies. For example, when the CAF II funding was awarded to update rural DSL, areas served by cable companies were already delivering broadband speeds of at least 100 Mbps to 80% of the folks in the country. By the time RDOF was awarded, broadband capabilities in cities had been upgraded to gigabit. The policy clearly was that rural folks didn’t need the same quality of broadband that most of America already had.

But the blame doesn’t just lie with the FCC – it lies with all of the broadband advocates in the country. When the ISPs started to talk non-stop about not allowing overbuilding, we should have been lobbying pro-broadband politicians to say that the FCC should never fund underbuilding. We’ve collectively let the big ISPs frame the discussion in a way that gives politicians and regulators a convenient way to support the big ISPs. Both at the federal and state levels the broadband discussion has often devolved into talking about why overbuilding is bad – why the government shouldn’t give money to overbuild existing ISPs.

Not allowing overbuilding is a ludicrous argument if the national goal is to get good broadband to everybody. Every broadband network that is constructed is overbuilding somebody, except in those exceptionally rare cases where folks have zero broadband options. If we accept the argument that overbuilding is a bad policy, then it’s easy to justify giving the money to incumbents to do better – something that has failed over and over again.

It’s time that we call out the overbuilding argument for what it is – pure protectionism. This is monopolies flexing political power to keep the status quo, however poorly that is working. The big ISPs would gladly roll from one subsidy program to another forever without investing any of their own capital to upgrade rural networks.

Every time a regulator or politician says that we should not be using federal money to overbuild existing networks, we need to prod pro-broadband politicians to counter that argument by saying we should not be spending any more money on underbuilding. Broadband is infrastructure, just like roads and bridges, and we should be investing any grant money into the most forward-looking technology possible. If the national goal is to make sure that everybody has good broadband, then we should be ready to overbuild anywhere the incumbents have underperformed, be that in rural areas or inner cities. It’s time we shift the conversation away from protectionism to instead prioritizing bringing broadband that will still be good a decade or two after the grant award. Let’s not spend another penny of grant money on underbuilding networks by investing in slow technologies that are inadequate and obsolete even before they are completed.

Why the Complexity?

It’s been over a year since the BEAD grant program was announced. While there has been a lot of activity on BEAD, there is still a long way to go before this grant money is used to build new broadband infrastructure. Most of the delay is due to the incredible complexity of the BEAD grant rules.

I work with a lot of different state broadband grant programs, and I can’t help but notice the tremendous difference in the complexity of the process between state and BEAD grants. The priority for state grant programs is usually to quickly get the money out the door and spent on infrastructure. State legislators that approve grant funding want to see construction started no later than the year after the grant award, and hopefully sooner. State grant offices are generally given instructions to identify worthwhile projects and get the money approved and quickly into the hands of the ISPs to build networks.

The differences between state grants and BEAD are stunning. I have one client that won a $10 million state grant based on a simple grant application of less than 20 pages. The grant reviewers asked a few follow-up questions, but the whole process was relatively easy. The grant office was relying on the challenge process by ISPs to identify grants that were asking to overbuild areas that already have broadband. The challenge process seemed to work – a number of the grants filed in this particular program were successfully challenged. But the bottom line is that the funding was made available to start construction in less than a year from the date when the grant office originally solicited grant applications.

Why are the BEAD grants so complicated? It starts with Congress, and a lot of the complexity is directly specified in the IIJA legislation that created the grants. My pet theory is that the complexity was introduced by lobbyists of the large ISPs that wanted to make the grants unfriendly to everybody other than big ISPs with the resources to tackle the complex rules. It’s unfathomable to me that congressional staffers would have invented these complex rules on their own. I knew on my first reading of the IIJA legislation that the grants favor big companies over small ones.

In the legislation, Congress decided to give the administration of the grants to the NTIA. The NTIA had a major decision to make on day one. The agency could have taken the approach of smoothing out the congressional language to make it as easy as possible for ISPs seeking the funding. The NTIA had political cover to take a light-touch approach since the legislation stressed the importance of quick action to solve the rural broadband crisis. The White House has also been urging federal agencies to speed up the process of turning IIJA funding into infrastructure projects.

Unfortunately, the NTIA didn’t take this approach. It looks like the agency did just the opposite – the agency embellished and strengthened the congressional language and made it even more complex to file for the grants.

I don’t think the NTIA had any agenda to make the grant more complicated. It’s impossible to think the agency had early discussions about how to make it harder to use the grant funding. But the agency did have an overriding desire to do these grants the right way. The general industry consensus is that the grants were given to the NTIA instead of the FCC because of the terribly botched RDOF subsidy program. It would be hard to design a federal broadband program that would have been more poorly handled than RDOF (except perhaps for CAF II, which also was done by the FCC).

I think BEAD became more complex, one topic at a time. I think folks at NTIA looked at each congressionally mandated rule and asked how they could make sure that no money went to an unqualified ISP. Instead of softening grant requirements, I think the NTIA staff instead asked how they could be positive that no unworthy ISPs sneak through BEAD process – something that clearly happened in the FCC’s RDOF process. The final NTIA BEAD rules are not a manual on how to get grant money spent efficiently – but a manual on how to make sure that only qualified ISPs win the funding.

That doesn’t sound like a bad goal. Some of the ISPs that won the RDOF funding were spectacularly unqualified – either financially, managerially, or technically. But as each of the many BEAD rules was made as safe as possible, the collective combination of all of the BEAD rules being made super-safe creates major hurdles for ISPs. Almost every ISP I know is going to have a problem with at least a few of the rules – and I think many qualified ISPs are going pass on the BEAD grants. There is something wrong with a grant program that has hundred-year-old telephone companies wondering if they can qualify for the grants.

There is still a chance for State broadband offices to smooth out the worst of the BEAD rules. A State broadband office can push back against the NTIA BEAD rules that make it too hard for ISPs to get funded. The NTIA can’t excuse any specific mandate that was created by Congress – but the NTIA can relax and compromise on its interpretation of these rules.

The big challenge facing State grant offices is how hard they are willing to push back against the NTIA. Every State is under pressure to finally get the grant process underway, and any challenge will likely add time before funding is available. Every State broadband office already knows the ISPs it would like to see win the funding – those ISPs that will be conscientious in operating the network after its built. State broadband offices need to listen and react to the concerns that these ISPs have about the grant process – because if they don’t, many of the best ISPs are going to take a pass on the grants.

The RDOF Fixed Wireless Dilemma

I’m working with a number of rural counties that are trying to come to grips with the long-term implications of RDOF awards in their counties going to ISPs that plan to deliver broadband using fixed wireless technology. Most of them are not sure what to make of the situation for a number of reasons.

First, many of these counties are pleased about the wireless RDOF winners if that means bringing a broadband solution sooner. The folks in their counties are crying out for a broadband solution. But the big worry about the RDOF award winners is that the FCC gave RDOF winners a relaxed construction obligation compared to most other grants.

An RDOF recipient has six years to build the full broadband solution – starting with the year after the award. A recipient of a 2022 RDOF award must build 40% of the network by the end of 2025, 60% of the deployment by the end of 2026, 80% of the network by the end of 2027, and 100% of the network by the end of 2028. At the end of 2028, the FCC will publish a final list of locations in the RDOF area, and the ISPs have until the end of 2030 to reach any locations that were not already covered. Counties are rightfully worried that RDOF recipients will use the full timeline, meaning some folks won’t see a solution until 2027 or 2028.

There is also a concern that the FCC has a poor history of follow-through with subsidy awards, such as the many locations that were slated to get CAF II upgrades that don’t seem to have been upgraded – with no apparent reaction or consequences from the FCC. The fear is RDOF winners will cherry-pick the easiest areas and not bother with the rest and some folks will never get served. The worst thing is that a county won’t know for sure that folks won’t be served until 2028.

Another concern I’m hearing is that, in many cases, the RDOF awards were given in counties where there is one or more local ISPs willing to build fiber with grant assistance. These might be an electric cooperative or small telco that would willingly have brought fiber to the RDOF areas. These counties feel cheated by the FCC, particularly the RDOF awards that were made by the FCC after the announcement and funding of the $42.5 billion in BEAD grants. These counties feel that the FCC snatched away a fiber solution instead of putting the RDOF awards on hold.

The concern several of them have expressed is the sustainability of fixed wireless. They understand that a fiber network is probably going to still be in place and working at the end of this century, with perhaps three or four electronics upgrades during that time. But they’ve all heard that wireless technology has a shelf life of perhaps seven years, and they worry if the RDOF winners are going to be willing and able to pay for upgrades ten or eleven times during the rest of the century.

Finally, the ISPs in these counties are dismayed at what can best be described as the checkerboard way that the RDOF was awarded. The RDOF award areas are rarely nice contiguous service areas but are scattered pockets of Census blocks. ISPs can see that it is going to be extra challenging to find other grant funding to bring a solution to other areas. In many cases, they’ll have to spend their own money to build across RDOF areas in order to create a coherent fiber network.

Finally, some counties are concerned that the RDOF winners have not reached out to them to discuss these concerns and to convey their plans for bringing the promised faster broadband. I know that many of these awards were just made this summer, but there has been sufficient time for the RDOF winners to have met with local officials to convey their plans.

To be fair, some of these same counties have a similar list of concerns if grants go to the giant ISPs instead of somebody local. The folks in most rural areas know that the current round of grant funding is probably the only chance to get the broadband solution done right, and none of them want to be the poster child as a place where the giant grants and subsidies failed.

Inflation and Grants

Diana Goovaerts wrote an article for Fierce Telecom with the headline that Inflation has doubled RDOF build costs. The article is based on interviews with three ISPs that won RDOF funding in the December 2020 reverse auction – TekWav, Nextlink, and Plains Internet. All three ISPs plan to satisfy the RDOF obligations with a combination of fixed wireless and fiber. Two of the three ISPs were quoted as saying that the cost to build the networks to satisfy the RDOF obligations has doubled since they won the award – the third said costs have risen materially. The three companies have significantly different obligations. Plains Internet is obligated to build broadband to 250 passings in Kansas, while Nextlink must build to pass 206,136 locations over twelve states.

There is a lot to unwrap in the assertion that costs have doubled. First, everybody in the industry will agree that the costs of both material and labor have increased over the last two years. But most of the ISPs I’ve been working with estimate the increase to be between 15% and 30%, differing by region and the planned technology. The article includes an interview with Jonathan Chambers of Conexon, who believes that the claims that a doubling of cost is highly unlikely.

But the interviews raised a few issues related to the cost of building broadband that aren’t talked about a lot. Clearly, materials and labor are more expensive. In the case of wireless ISPs that are obligated to deliver superfast speeds, the costs I’ve been seeing for newer radios like the ones from Tarana look to be triple or more the cost of other radios.

One issue that is not being widely discussed is the availability of loans. One of the things that always happens when interest rates increase is that banks drastically curtail making loans to new customers. They may still offer higher interest rate loans to existing customers, but an ISP looking for a new banking relationship is going to hit a stone wall. That is exactly what the Federal Reserve has in mind with interest rate increases – they want to cool off the economy by curtailing new lending. The trick for the Fed is threading the needle to cool the economy enough to slow inflation but not enough to cause a crash.

The difficulty in getting bank loans creates a dilemma for an ISP trying to fulfill an obligation to build a broadband solution with specified construction deadlines. And RDOF award winner has three years, starting with the year after the FCC finalizes the award to build 40% of the promised network. The rest must be built in the following three years. For the big RDOF winners, that probably means having to start on some of the construction right away to meet the first completion goal.

The RDOF awards suppose that recipients will fund the majority of a new network, with debt or equity – and except for the giant ISP winners like Charter, most ISPs rely on new debt. The current big grant programs like BEAD also assume an ISP will bring a significant matching fund to a project, most likely debt for most companies. It’s a huge problem for somebody trying to build a grant or subsidy project if they can’t find the loans.

The three RDOF winners didn’t cite the impact of higher interest rates. I’ve seen interest rates on infrastructure projects nearly double over the last year, and that means double the interest expense from the day of borrowing –  a huge financial hurdle to overcome for any kind of infrastructure project.

The other issue identified by Joseph McGrath of TekWav is the time lag between the cost of a new network and the revenues needed to pay for them. Most ISP have historically expanded organically in the past. They add new territory and customers each year that is partially funded by the cash flow from the existing business, supplemented with short-term loans. An ISP trying to grow fast must abandon the organic growth model. This means spending a lot of money before there is any new revenue. I’ve always referred to this as the cost of expansion, and it’s only a problem for an ISP that is trying to grow faster than what its existing financial structure can handle.

Unfortunately, anybody taking any sizable RDOF or grant projects will experience expansion costs. The ISP will be paying staff to work in the new areas and paying interest on the cost of the equipment for the new area, with far more costs to eat than would be experienced with organic growth. I have to wonder if the big RDOF winners built these costs into its plans. A company that has never tried to grow quickly before is likely to understand the cost of expansion.

The bottom line is that RDOF winners will either have to absorb these unexpected costs or default on the subsidy. There is a fairly minor penalty for defaulting on RDOF funding before any funding has flowed or construction begins. But I would suspect the FCC will level much bigger fines on somebody who has already taken funding, and the fine would likely include returning everything they’ve received. As Jonathan Chambers was quoted, there is a cost for taking federal funding – and it’s always more expensive than anticipated.

Defaulting on RDOF

Starry recently announced that it was defaulting on all of its $269 million of RDOF funding. Starry was the ninth-largest winner of the RDOF reverse auction that ended in December 2020. The FCC approved some of the Starry RDOF claims in August.

There have been other defaults of RDOF, but no others of this magnitude. For example, in the same announcement of the Starry default were additional defaults by Cal.net and GeoLinks. There were a lot of defaults in the spring of 2021 when winners defaulted on small pockets of Census blocks that weren’t large enough for a coherent business plan.

Starry is not required to disclose why it’s defaulting. In the many articles about the RDOF default, there was a lot of speculation that the company doesn’t have the needed funding to complete the required builds. Starry reported 77,400 customers at the end of the second quarter of this year – gaining 14,300 customers in the quarter. The company claimed that it now passes 5.7 million potential customers. But the company has a big burn rate with a loss for the quarter of $33.9 million plus capital expenditures of $20.8 million.

Even if funding is the issue, funding wouldn’t yet be an emergency for Starry. An RDOF winner has three years starting with the year after the awards – in this case until 2025, to cover 40% of the RDOF areas. But delaying the cancellation probably risks increasing fines from the FCC.

I’ve also heard speculation from engineers that Starry might not have been happy with the performance of its technology in rural areas. It seems like a technology best suited to areas with decent household density. The technology being deployed can best be described as a wireless mesh network. Starry brings broadband into a neighborhood and then bounces signal from customer to customer to extend the reach of the network. Over time as the company gets more customers, it can blanket a large coverage area. This is a drastically different approach than the FWA cellular wireless deployments that reply on putting a small cell site in every served neighborhood – most of them fed by fiber. The Starry deployment should need fewer fiber-fed hubs and theoretically would have a lower cost deployment.

In June 2021, Starry announced a deployment across the Columbus, Ohio metropolitan area. But there is a big difference between the densely populated suburbs of Columbus, Ohio and rural areas in RDOF where homes might not be within sight of neighbors. There are plenty of engineers that are still skeptical of wireless plans using tall towers to bring fast speeds to rural areas. It’s even hard to imagine doing it with a mesh network.

With the default, all of the RDOF areas are back in play for other federal grants. Unfortunately for the customers in these areas that thought they had a broadband solution coming, they now need another ISP to step up and claim grant funding of some sort to bring broadband.

As can be seen on the map below of the Starry award areas, the company had claimed sizable service areas in Alabama, Arizona, Mississippi, Missouri, Nevada, Ohio, Pennsylvania, and Virginia.

Starry’s default is different than the recent action by the FCC to toss the RDOF awards to LTD Broadband and Starlink. The FCC had already made some awards to Starry, and the assumption is that it would have made the rest. The bottom line is that the Starry default is one more piece of the puzzle of solving the rural broadband gap, and the ISPs located close to the Starry defaults should take a hard look at changing grant plans.

Rural America is Losing Patience

From all across the country, I’m hearing that communities without broadband are tired of waiting for a broadband solution. Local broadband advocates and politicians tell me that folks with little or no broadband are hounding them about when they are going to see a broadband solution.

A large part of the frustration is that folks have heard that broadband is coming to rural America, but they aren’t seeing any local progress or improvement. A big part of the reason for this frustration is that folks aren’t being given realistic time frames for when they might see a solution. Politicians all gladly told the public that they had voted to solve rural broadband when the IIJA infrastructure legislation was enacted in November 2021. But almost nobody told folks the actual timelines that go along with the broadband funding.

Consider the timeline to build broadband as a result of various kinds of funding:

  • There was a recent round of ReConnect funding awarded. It generally takes 4- 6 months to get the paperwork straight after accepting a ReConnect award, and then grant winners have four years to build the network. Some of the folks in areas of the ReConnect awards that were recently awarded won’t get broadband until 2026. Most won’t see any broadband until 2024 or 2025.
  • The best timelines are with state broadband grants. Most of those awards require grant recipients to complete networks in two or three years. A lot of these grant programs were either recently awarded or will be awarded in the coming spring. The winners of these state grants will have until the end of 2024 or 2025 to complete the network construction, depending on the state and the specific grant.
  • The longest timeline comes from the FCC’s RDOF program. The FCC approved a lot of RDOF recipients in 2021 and again in 2022. A 2021 RDOF recipient has six years to build the full broadband solution – starting with 2022, the year after the award. A recipient of a 2021 RDOF award must build 40% of the network by the end of 2024, 60% of the deployment by the end of 2025, 80% of the network by the end of 2026, and 100% of the network by the end of 2027. At the end of 2027, the FCC will publish a final list of locations in the RDOF area, and the ISP has until the end of 2029 to reach any locations that have not already been covered. For an RDOF award made in 2022, add a year to each of these dates.
  • The big unknown is the giant $42.5 billion BEAD grants. We know that grant recipients will have four years to construct a network. But we don’t know yet when these grants might be awarded. It’s starting to look like grant applications might be due near the end of 2023 or even into 2024. This likely means grant awards in 2024. There will likely be an administrative pause for paperwork before the four-year time clock starts. My best estimate is that the bulk of BEAD construction will occur in 2025 and 2026, but BEAD grant projects won’t have to be completed until sometime in 2028 and maybe a little later in some cases.

In all cases, ISPs can build earlier than the dates cited above. ISPs realize that the longer they delay construction, the higher the likely cost of the construction. But some grants have built-in delays, such as having to complete an environmental study before any grant funds will be released. Many ISPs are going to suffer from supply chain issues with materials and labor and might not be able to speed up a lot.

The big problem is that people without good broadband want a solution now, not years from now. A family with a freshman in high school doesn’t want to hear that a broadband solution won’t reach them until after that student graduates from high school. People are getting frustrated by announcements from state and local politicians telling them a solution is coming – especially since most announcements aren’t being truthful about the possible timeline. Unfortunately, politicians like to deliver the good news but don’t want to be the ones to announce that faster broadband might reach folks between 2025 and 2028.

Folks are further frustrated when they hear that local governments are creating partnerships or giving grants to ISPs from ARPA funding – but again, with no immediate action or disclosures of the timeline. I am the last person in the world to give advice to local politicians – but I know if I didn’t have broadband at my home, I’d want to hear the truth about when it’s coming. This has to be tough for rural politicians who have negotiated partnerships with good ISPs but who know that a broadband solution is still likely years in the future.

Starlink and RDOF

In August, the FCC denied the SpaceX (Starlink) bid to receive $885 million over ten years through the RDOF subsidy. This is something that Starlink won in a reverse auction in December 2020.

In the press release for the rejection, FCC Chairman Jessica Rosenworcel was quoted as saying, “After careful legal, technical, and policy review, we are rejecting these applications. Consumers deserve reliable and affordable high-speed broadband. We must put scarce universal service dollars to their best possible use as we move into a digital future that demands ever more powerful and faster networks. We cannot afford to subsidize ventures that are not delivering the promised speeds or are not likely to meet program requirements.”

The FCC went on to say in the order that there were several technical reasons for the Starlink rejection. First was that Starlink is a “nascent” technology, and the FCC doubted the company’s ability to deliver broadband to 642,925 locations in the RDOF areas along with serving non-RDOF areas. The FCC also cited the Ookla speed tests that show that Starlink speeds decreased from 2021 into 2022.

Not surprisingly, Starlink appealed the FCC ruling this month. In the Starlink appeal, the company argued, “This decision is so broken that it is hard not to see it as an improper attempt to undo the commission’s earlier decision, made under the previous administration, to permit satellite broadband service providers to participate in the RDOF program. It appears to have been rendered in service to a clear bias towards fiber, rather than a merits-based decision to actually connect unserved Americans”.

Rather than focus on the facts in dispute in the appeal, today’s blog looks at the implications on the broadband industry during the appeal process. Current federal grant rules don’t allow federal subsidies to be given to any area that is slated to get another federal broadband subsidy. This has meant that the RDOF areas have been off-limits to other federal grants since the end of 2020. This has included NTIA grants, USDA ReConnect grants, and others. Federal grant applicants for the last few years have had to carefully avoid the RDOF areas for Starlink and any other unresolved RDOF award areas.

As a reminder, the RDOF areas were assigned by Census block and not in large coherent contiguous areas. The RDOF award areas have often been referred to as Swiss cheese, meaning that Census blocks that were eligible for RDOF were often mixed with nearby ineligible Census blocks. A lot of the Swiss cheese pattern was caused by faulty FCC maps that excluded many rural Census blocks from RDOF that should have been eligible, but for which a telco or somebody else was probably falsely claiming speeds at least 25/3 Mbps.

ISPs that have been contemplating grant applications in the unresolved RDOF areas were relieved when Starlink and other ISPs like LTE Broadband were rejected by the FCC. It’s difficult enough to justify building rural broadband, but it’s even harder when the area to be built is not a neat contiguous study area.

The big question now is what happens with the Starlink areas during an appeal. It seems likely that these areas will go back into the holding tank and remain off-limits to other federal grants. We’re likely going to need a definitive ruling on this from grant agencies like the USDA to verify, but logic would say that these areas still need to be on hold in case Starlink wins the appeal.

Unfortunately, there is no defined timeline for the appeal process. I don’t understand the full range of possibilities of such an appeal. If Starlink loses this appeal at the FCC, can the agency take the appeal on to a court? Perhaps an FCC-savvy lawyer can weigh in on this question in the blog comments. But there is little doubt that an appeal can take some time. And during that time, ISPs operating near the widespread Starlink grant areas are probably still on hold in terms of creating plans for future grants.