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Regulation - What is it Good For? The Industry

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.

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The Industry

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.

Categories
The Industry

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.

Categories
The Industry

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.

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Regulation - What is it Good For?

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.

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Regulation - What is it Good For? The Industry

Another RDOF Auction?

There was a recent interview in FierceTelecom with FCC Commissioner Brandon Carr that covered a number of topics, including the possibility of a second round of RDOF. Commissioner Carr suggested that improvements would need to be made to RDOF before making any future awards, such as more vetting of participants upfront or looking at weighting technologies differently.

The FCC is building up a large potential pool of broadband funding. The original RDOF was set at $20 billion, with $4.4 billion set aside for a second reverse auction, along with whatever was left over from the first auction. The participants in the first RDOF auction claimed only $9.2 billion of $16 billion, leaving $6.8 billion. When the FCC recently decided not to fund LTD Broadband and Starlink, the leftover funding grew by another $2 billion. Altogether that means over $11 billion left in funds that were intended for RDOF.

We also can’t forget that around the same time as the RDOF that the FCC had planned to fund a 5G fund to enhance rural cellular coverage. Due to poor mapping and poor data from the cellular carriers, that auction never occurred. That puts the pool of unused funding at the FCC at $20 billion, plus whatever new FCC money might have accrued during the pandemic. That’s a huge pool of money equal to half of the giant BEAD grants.

The biggest question that must be asked before considering another RDOF reverse auction is how the country will be covered by the BEAD grants. It would be massively disruptive for the FCC to try to inject more broadband funding until that grant process plays out.

Commissioner Carr said that some of the FCC’s funding could go to enhance rural cellular coverage. Interestingly, once BEAD grant projects are built, that’s going to cost a lot less than was originally estimated. A lot of the money in the proposed 5G fund would have been used to build fiber backhaul to reach rural cell sites. I think the BEAD last-mile networks will probably reach most of those places without additional funding. However, there is probably still a good case to be made to fund more rural cell towers.

But there are larger questions involved in having another reverse auction. The big problem with the RDOF reverse auction was not just that the FCC didn’t screen applicants first, as Carr and others have been suggesting. The fact is that a reverse auction is a dreadful mechanism for awarding broadband grant money. A reverse auction is always going to favor lower-cost technologies like fixed wireless over fiber – it’s almost impossible to weight different technologies for an auction in a neutral way. It doesn’t seem like a smart policy to give federal subsidies to technologies with a 10-year life versus funding infrastructure that might last a century.

Reverse auctions also take state and local governments out of the picture. The upcoming BEAD funding has stirred hundred of communities to get involved in the process of seeking faster broadband. I think it’s clear that communities care about which ISP will become the new monopoly broadband provider in rural areas. If the FCC has a strict screening process up front, then future RDOF funding will only go to ISPs blessed by the FCC – and that probably means the big ISPs. I would guess that the only folks possibly lobbying for a new round of RDOF are companies like Charter and the big telcos.

The mechanism of awarding grants by Census block created a disaster in numerous counties where RDOF was awarded in what is best described as swiss cheese serving areas. The helter-skelter nature of the RDOF coverage areas makes it harder for anybody else to put together a coherent business plan to serve the rest of the surrounding rural areas. In contrast, states have been doing broadband grants the right way by awarding money to coherent and contiguous serving areas that make sense for ISPs instead of the absolute mess created by the FCC.

A reverse auction also relies on having completely accurate broadband maps – and until the FCC makes ISPs report real speeds instead of marketing speeds, the maps are going to continue to be fantasy in a lot of places.

Finally, the reverse auction is a lazy technique that allows the FCC to hand out money without having to put in the hard effort to make sure that each award makes sense. Doing grants the right way requires people and processes that the FCC doesn’t have. But we now have a broadband office and staff in every state thanks to the BEAD funding. If the FCC is going to give out more rural broadband funding, it ought to run the money through the same state broadband offices that are handling the BEAD grants. These folks know local conditions and know the local ISPs. The FCC could set overall rules about how the funds can be used, but it should let the states pick grant winners based upon demonstrated need and a viable business plan.

Of course, the simplest solution of all would be for the FCC to cut the USF rate and stop collecting Universal Service Fund revenues from the public. The FCC does not have the staff or skills needed to do broadband grants the right way. Unfortunately, that might not stop the FCC from tackling something like another RDOF auction so it can claim credit for having solved the rural digital divide. If the FCC plans on another RDOF auction I hope Congress stops them from being foolhardy again.

Categories
Technology

How Fast is Starlink Broadband?

We got a recent analysis of Starlink broadband speeds from Ookla, which gathers huge numbers of speed tests from across the country. The U.S. average download speeds on Starlink have improved over the last year, from an average of 65.72 Mbps in 1Q 2021 to 90.55 Mbps in 1Q 2022. But during that same timeframe, upload speeds got worse, dropping from an average of 16.29 Mbps in 1Q 2021 to 10.70 Mbps in 1Q 2022.

It’s likely that some of this change is intentional since ISPs have a choice for the amount of bandwidth to allocate to download versus upload. It seems likely that overall bandwidth capacity and speeds are increasing due to the continually growing size of the Starlink satellite constellation – now over 2,500. Starlink subscriptions are climbing quickly. The company reported having 145,000 customers at the start of the year and recently announced it is up to 400,000 customers worldwide. This fast growth makes me wonder when Starlink will stop calling the business a beta test.

These speed tests raise a few interesting questions. The first is if these speeds are good enough to qualify Starlink to be awarded the RDOF awards that have now been pending from the FCC for over a year and a half. While these speeds are now approaching the 100 Mbps speed promised by Starlink in its RDOF bids, it’s worth noting that the 90 Mbps number is an average. There are some customers seeing speeds of over 150 Mbps while others are seeing only 50 Mbps or even less. I’ve talked to a number of Starlink customers and what they’ve told me is that Starlink needs a view of the ‘whole sky’ from horizon to horizon to operate optimally, and many homes don’t have the needed view. This doesn’t bode well for the Starlink RDOF awards areas of heavy woods and hills like the awards in western North Carolina.

There is a lot of speculation that Starlink is limiting the number of subscribers in a given geographic area in order to not dilute speed and performance. The RDOF awards require any winning ISP to serve everybody, and there is still a big question about the kinds of speeds that can be delivered for a geographic area that has a lot of subscribers.

The BEAD grant rules also open the door for Starlink and other satellite providers to some extent. While satellite technology is not deemed reliable enough to directly be used for grant awards, the NTIA has also opened the door to using alternate technologies like satellite and fixed wireless using unlicensed spectrum in areas where landline technologies are too costly. Each state will have to decide if grants can be awarded for satellite broadband in such cases, and it seems likely that some states will allow this.

The Ookla article also shows the Starlink average speeds around the globe. Some of the average speeds are much faster than U.S. speeds, and this might be due to smaller countries that cover a smaller and less diverse terrain than the U.S. Here, speeds are likely much higher in the open plains states than for customers located in hills, mountains, and woods. There can’t be a technology difference since the same satellites serve around the globe.

There is an interesting app that shows the location of the Starlink satellites. It’s fascinating to watch how they circle the globe. What is most striking about the world map is how few satellites there are over the U.S. at any given time. The app shows a few closely packed strings of satellites that are recent launches that haven’t yet been deployed to their final orbits.

The skies are going to soon get a lot busier. The original business plan for Starlink was to deploy 11,000 satellites. Jeff Bezos and Project Kuiper have FCC permission to deploy satellites, with launches starting this year. OneWeb, which is now aiming to serve business and government customers, has much of its constellation launched but has yet to begin delivering services. Telesat is still marching slowly forward and has fallen behind due to supply chain issues and funding concerns – but still has plans to have a fleet in place in the next few years. I would imagine that in a few years, we’ll see Ookla reports comparing the different constellations.

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Regulation - What is it Good For?

The Challenge of Accepting RDOF

I’ve been wondering lately if some of the RDOF reverse auction winners are having second thoughts about accepting the RDOF awards. It’s amazing how much the broadband world has changed since the end of that auction in December 2020.

It’s gotten more expensive to build fiber projects over the last year. The supply chain has played havoc with the costs of the raw components needed to build fiber networks. Many clients tell me that the cost of fiber components like conduit are collectively up by 40% or more over the last year. As somebody who has worked through several periods of inflation in the past, there is not a big likelihood that prices will return to the old levels even after the supply chain gets back to normal.

A bigger concern is the cost of labor. The explosion in the volume of fiber construction projects is almost too hard to grasp. The demand for construction crews is going to soon outstrip the number of experienced technicians. That means big challenges for finding and keeping construction crews. Shortages always lead to higher labor costs.

The federal government also layered on a new requirement that didn’t exist at the time of the auction. The Buy American Act now applies to infrastructure projects awarded with federal funds after November 18, 2021. These rules will apply to any RDOF winner that is approved by the FCC after that date. These rules don’t automatically add to the cost of building a fiber network, but they kill any thoughts of using lower-cost foreign fiber or components. The Act makes it clear that components like fiber and conduit must be 100% sourced to U.S. manufacturers. The new rules also make it seem unlikely that there will be many waivers allowed – these new rules have teeth.

The biggest kick in the teeth to an RDOF winner are the huge new grants are offering far more funding than anybody won in the RDOF auction. The giant BEADS grants can fund up to 75% of the cost of building a network for a rural project. Grants like ReConnect also have a 75% grant option. An RDOF winner that was unopposed in the auction got 60% of the FCC’s bid price – and that price was not set at the full cost of building a network but based upon some screwball federal cost models. An electric cooperative that won the RDOF auction could get a lot more funding from ReConnect grants or the upcoming BEAD grants – but nobody in the industry knew this at the time of the RDOF auction.

Another issue to consider is that RDOF winners might have missed out on the opportunity for matching state grants. While some states might make matching grants to go along with RDOF awards, many will not. That means the RDOF funding is all such winners will see.

What I’ve never figured out is why some RDOF winners bid the awards down to ridiculously low levels. There are places where bidders accepted RDOF awards under 10% of the expected cost of building a network – in some cases as low as 1%. In one county I’m familiar with, an RDOF bidder accepted less than 5% of the cost of building the network. This is a county with some of the easiest costs in the country to bury fiber. But this county is typical of rural areas and is sparsely populated, so the cost per passing is still high. Even considering the relatively low construction costs in the area, I couldn’t make a business case in this county for accepting less than 50% outside funding to make the project viable. I’m still scratching my head, wondering how this RDOF winner expects to make a business plan out of such a low award.

It’s not hard to imagine that some RDOF winners are having second thoughts. There are penalties for walking away from RDOF, but those penalties might be a lot smaller than the downside of being forced to build a rural network that will never generate enough revenue to cover the cost of construction. I was mystified by some of the winning RDOF bids in 2020 – and those bids make a lot less sense when viewed from 2022.

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Regulation - What is it Good For?

Auditing RDOF Performance

Today’s blog covers an issue that gets my blood boiling every time I think about it. The FCC just announced increased testing for ISPs accepting funding from FCC High Cost programs, which includes CAF II and RDOF. The new rules include the following:

  • The number of audits and verifications will double in 2022 compared to 2021 and will include some on-site audits.
  • There will be more verification prior to the first required deployment milestone.
  • Large dollar funding recipients will be subject to an on-site audit in at least one state.
  • High-risk recipients will be subject to additional audits and verifications.
  • Audit results, speed tests, and latency performance will now be posted online.

That all sounds good until you look at the practical results of the testing program. The worse that can happen to an ISP for failing the FCC tests will be to lose some small portion of any remaining funding.

Under current rules, ISPs can choose between three methods for testing. They may elect what the FCC calls the MBA program, which uses an external vendor approved by the FCC to perform the testing. ISPs can also use existing network tools if they are built into the customer CPE that allows test pinging and other testing methodologies. Finally, an ISP can install ‘white boxes’ that provide the ability to perform the tests. What’s not easy to dig out of the rules is that ISPs have a hand in deciding who gets tested.

In the past, the number of required tests was as follows. For award areas with 50 or fewer households the test was for 5 customers; for 51-500 households the test was 10% of households. For 500 or more households the test was 50 households. ISPs declaring a high latency had to test more locations with the maximum being 370. Doubling the testing probably means doubling the number of locations that are tested.

Tests for a given customer are done for a full week each quarter. Tests must be conducted in the evenings between 6:00 PM and 12:00 PM. Latency tests must be done every minute during the six-hour testing window. Speed tests, run separately for upload speeds and download speeds,  must be done once per hour during the 6-hour testing window.

ISPs are expected to meet latency standards 95% of the time. Speed tests must achieve 80% of the expected upland and download speed 80% of the time. An example of this requirement is that a carrier guaranteeing a gigabit of speed must achieve 800 Mbps 80% of the time. ISPs that meet the speeds and latencies for 100% of customers are excused from quarterly testing and only have to test once per year.

The real kicker of all of this is that the penalties for failing the tests have no teeth. The following financial penalties are applied only to the remaining subsidy payments:

  • If between 85% and 100% of households meet the test standards, the ISP loses 5% of any remaining FCC support.
  • If between 70% and 85% of households meet the test standards, the ISP loses 10% of future support.
  • If between 55% and 75% of households meet the test standards, the ISP loses 15% of future FCC support.
  • If less than 55% of households meet the test standard, the ISP loses 25% of their future support.

The penalties for an ISP that doesn’t perform on RDOF are minor. Consider a WISP that accepted $100 million of RDOF to build gigabit wireless but only delivers a few hundred Mbps speeds. The first chance for testing is in the third year of RDOF, where an ISP is required to have completed 40% of the buildout. My example WISP will fail more than 55% of speed tests and will incur the maximum FCC penalty. That means the ISP will collect $10 million in the first two years and $7.5 million in years 3 – 10. By the end of the 10-year payout, the ISP will still have collected $80 million of the original $100 million RDOF award. That is not much of a penalty for massive underperformance.

I think these weak penalties emboldened ISPS to lie about the speeds of their technologies in the RDOF auction. ISPs are still paid handsomely even if they don’t come close to meeting the promised speeds. And that’s not the entire story. There were bidding penalties for ISPs promising speeds slower than gigabit. A WISP that told the truth about speeds in the auction (and many did) likely lost in the auction if bidding directly against a WISP that exaggerated speeds.

These penalties are shameful and are another example of the FCC favoring ISPs over the public.  If an ISP whiffs the test in the third year they should stop receiving all future subsidies. If an ISP fail the tests badly enough, such as delivering 200 Mbps when promising a gigabit, then they ought to be forced to return 100% of the previous RDOF awards. If those were the rules, any ISPs that lied about speed capabilities would all withdraw from RDOF tomorrow.

People will ask why it’s so bad that an ISP that overstated speed capabilities won the RDOF. This cheats the people living in the RDOF award area. Residents thought they would get gigabit broadband and will get something far less. While customers might be pleased with the initial speeds in this example, the network being built is not ready to provide good broadband for the rest of the century. There is a good chance that in a decade or two we’ll be looking at these same award areas again and asking if these areas need more federal subsidy to swap out to a faster technology.

If an ISP takes big federal money and fails to perform there should be real penalties. If that was made clear upfront, then ISPs that can’t meet speed requirements would not be tempted to apply. One only has to look back at CAF II to see how ineffective this testing is. Does anybody remember any big penalties for the big telcos not upgrading DSL?

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Regulation - What is it Good For?

FCC – Please Do the Right Thing with RDOF

The $42.5 federal BEAD broadband grants that are being funded from the Infrastructure Investment and Jobs Act should be a gamechanger for rural broadband. There will be many hundreds of millions of grants given to each state to fund the construction of broadband networks. This is likely once-in-a-generation funding, so there will only be one chance to do this right.

There is one pending issue that could really gum up the BEAD grants – there are pending RDOF awards that should not be funded. These pending RDOF grants fall into three categories.

First are RDOF auction winners that have probably bitten off more than they can chew. An example of this might be LTD Broadband. I don’t have any inside knowledge of the company, but I’ve seen estimates that the company would need to raise something north of $7 billion dollars to go along with the $1 billion RDOF award. There are likely other similar companies in the auction. The FCC has had almost a year to determine the financial ability of grant winners to fund the rest of the projects they won. If these companies don’t have the needed funding, it’s time for the FCC to cut them loose. This shouldn’t be a hard determination.

The second category is unique. Starlink won nearly a billion dollars of RDOF funding. There are still a lot of unknowns about the company’s capabilities. I know some of the RDOF areas won by Starlink are heavily wooded, and from what I hear, that’s a big problem for the technology. There are also still questions about the ability of Starlink to serve every home in a grant area – which is what the RDOF requires. I have nothing against Starlink, and if I lived in a rural area, I would have been first in line for the beta test. But the company is still an unproven technology in terms of being able to serve everybody. The company is still a start-up with no guarantee of success or longevity. At the end of the day, Starlink doesn’t meet the basic requirement that federal funding should only go to companies that can guarantee to meet the requirements of the award.

Finally, are the RDOF auction winners that claim to be able to deliver gigabit wireless technology. Like Starlink, these are not field-proven technologies and likely will never deliver what is being promised. Over the last year, I haven’t talked to a single engineer who thinks it’s possible to deliver a wireless gigabit to every customer in rural Census blocks with gigabit wireless. I have no doubt that the new wireless technologies have the capability of being a lot faster than current fixed wireless technology. But these grants weren’t awarded to deliver a few hundred megabits per second. These grant winner should be tossed for overclaiming the technology, since doing so gave them an unfair advantage in the auction. If they had bid with the ability to deliver 200 Mbps the auction results would have been very different. These companies gamed the auction rules and that alone should have invalidated the awards. Unfortunately, the FCC might be ready to make these awards, having recently awarded funding to Resound Networks to provide gigabit wireless broadband.

It’s obvious that the FCC is already wrestling with all of these issues because it’s been eleven months since the RDOF winners filed their long-form information. But the FCC must know that the BEAD grants change everything. If it had known that BEAD grants were coming, the FCC probably would not have held the reverse auction. This new federal grant money changes the equation and brings a new paradigm that should make it easier for the FCC to make up its mind about questionable RDOF awards.

If the FCC gets this wrong, then the RDOF areas in question won’t be seeing the same broadband solutions that are coming everywhere else. The BEAD grants make it easy for the FCC to reject applicants that have not demonstrated the financial wherewithal to fund the promised RDOF solution. The BEAD grants should make it easy to reject Starlink – the company is still free to market broadband to all of rural America, and it already has a huge waiting list of people willing to buy service. The BEAD grants should make it easier for the FCC to admit it erred in letting bidders overclaim technology.

It’s not going to be easy for the FCC to publicly admit that it made some big mistakes in the RDOF auction. Most of these issues could have been avoided if the FCC had pre-screened applicants. Any technology that was not already proven to work in the real world should have been excluded from the auction. Applicants should have been given a dollar limit for participation in the auction based on their balance sheet. But the FCC has a chance to set this right by rejecting the questionable awards and letting the folks that live in these areas have a chance for a better and more permanent broadband solution through BEAD grants. FCC – please do the right thing.

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