Tag: reverse auction

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Regulation - What is it Good For? The Industry

Is the Reverse Auction Right for You?

I’ve been getting a lot of questions about the FCC’s reverse auction for federal support towards building to some of the most remote households in the country. The FCC is awarding $1.98 billion to be dispersed monthly over ten years to winners of this auction.

I’m not going to repeat all of the rules of the auction. A good summary of the auction rules is at this FCC link. The FCC also released a detailed list of the areas of the country that are eligible for these awards, with the list of census groups and maps here. Finally, the FCC has released a draft of the specific auction rules which they are expected to approve at the open meeting later this month. If you are interested in joining this auction you must notify the FCC with a detailed application by March 30 for an auction to tentatively begin on July 24.

The question I’ve been getting is if it’s worthwhile to pursue this auction. My analysis of the opportunity tells me that this is only going to be of interest to specific business plans that almost need to already be underway today. Consider the following issues involved in this funding:

Coverage Areas. The minimum bidding area is a census block group. This is an area comprising 39 census blocks. These average about 1,500 households but can vary between 600 and 3,000. The locations in this auction are all rural and this the coverage areas are likely to be large – half a county or larger. And since census block groups don’t follow political boundaries, these are not going to follow county boundaries. For example, if a county was already planning on building to their whole county there is a good chance that the census block groups in the auction will bleed into neighboring counties – and a winner has to build to the whole auction areas. This will be a huge hurdle for any project that anticipates using some public money.

The Most Remote Households. The households covered by this auction are the most remote households. They are mostly the leftover households from the CAF II awards where AT&T, CenturyLink and other big telcos accepted money to build to rural households. This auction covers those households that were too far away from an existing central office and too expensive using the CAF II awards. There are no pockets of households in these coverage areas, just a smattering of remote households who are at the very ends of the existing copper networks. These households don’t create a coherent coverage area for building broadband.

Small Percentage of Households in an Area. Since these households are scattered, they represent only a small percentage of the households in any area. To reach them with broadband is going to require building broadband to everybody else – and that construction was already funded in the CAF II awards to the big telcos.

My conclusion from this is that the only sensible reason to pursue the reverse auction funding is if somebody is already building broadband to the wider rural community already. Since the households covered by this funding only are going to represent some small percentage of the total households in the area, this funding is going to only be a drop in the bucket towards funding a total broadband buildout.

The reverse auction provides a bidding advantage to somebody willing to build gigabit fiber. But because of the location and number of households that will be covered in a given area I only see two possible kinds of builders, 1) somebody that is already planning to build fiber that would cover at least a whole census block group, or 2) a WISP or cellular provider that already covers a whole census block group or who is willing to build the towers and transmitters needed to reach a whole census block group.

Finally, after all of these other issues, anybody that bids will need to demonstrate the financial wherewithal to meet the buildout requirements. This is going to make it extremely difficult for start-ups or for government entities that haven’t already raised money to build broadband for a given area. This requirement probably even makes it hard for existing providers that don’t have strong balance sheets, such as many existing WISPs.

My guess is that most of the money in this auction will go to wireless providers. But I also expect that there will be some large swaths or rural America for which nobody bids – mostly due to the fact that the awards in a given area are not going to be sufficient to create a reasonable business plan. The auction can provide a piece of the funding which can be a big benefit if somebody is already planning on building to an area. There is a lot of risk in accepting the money if you are not positive you can fund it because the FCC warns that auction winners are obligated to complete the buildout.

Categories
Regulation - What is it Good For?

New Connect America Funds

Our regulatory world is messed up sometimes – that’s the only way to describe it. The FCC last week announced that there would be an auction for the Connect America Fund to provide $2 billion of funding to build rural broadband. The funds are for places where the large telcos elected to not take the Connect America Funds. Verizon seems to have largely just decided that they aren’t interested in upgrading their rural networks. But I have to imagine that places that were not selected by the other large telcos like Windstream have to be because the cost of building those places is too high.

The new funding will be awarded by reverse auction, meaning the company willing to take the least amount of money for a given service area will be awarded the funds. And this is the first area where this whole process is messed up. The FCC handed out $6 billion to the large telcos with no auction and no such low bid requirement and so the big companies get every penny of that FCC funding, without contention.

But any company bidding in this new reverse auction is going to worry that somebody will bid slightly lower than them to get the funding, and so most bidders are likely to bid for less than the full potential funding. The bottom line of this is that the big telcos got every penny of funding available to them without having to worry about somebody else wanting to use it while the remaining companies are likely to get something less.

The original award of funds should have also been a reverse auction. There are plenty of smaller telcos, electric coops and local governments that would have vigorously bid on the original $6 billion, and in doing so would have brought real broadband to the millions of people in those areas that are going to instead get a lousy DSL upgrade to speeds that aren’t even broadband by today’s standards. The FCC is only requiring speeds of 10 Mbps download and 1 Mbps upload, and even then allows the big telcos six years to get this done.

The original $6 billion award of the Connect America Fund was basically a hand-out to the big telcos. There’s really no other way to characterize it. I saw right after these awards that companies like Frontier got a big bump in stock valuation since they are claiming the Connect America Fund as revenue. I know a number of people who speculate that the big telcos will not upgrade everywhere they are supposed with this funding and will just shrug and weakly apologize. And there is likely to be no penalty for that.

To make matters even worse, the new funding (as well as the old) allows carriers to impose a 150 GB monthly data usage cap on customers covered by the funding. This is telling rural people, “Here’s the broadband you’ve been waiting many years for, but now, don’t actually use it”. My many clients report to me that the average residential monthly download is already somewhere between 150 GB and 200 GB per month, so that cap is already too low even by today’s standards. And we all know that broadband usage in homes keeps increasing exponentially and has been doubling every three years.

So there is already $6 billion being used to provide inadequate DSL upgrades from the large incumbent telcos. And when the people in those areas finally get upgraded to 10 Mbps bandwidth sometime during the next five years they will be told there is a 150 GB monthly data cap on monthly usage. We could have instead used that $6 billion to seed hundreds of rural fiber projects that would have brought real broadband to a lot of homes. That is my definition of messed up.

Categories
Regulation - What is it Good For?

You Want a Piece of the $9 Billion CAF Fund?

I have been asked by several clients if they will be eligible to go after the new CAF II universal service funding that will be disbursed by the Connect America Fund. Over the next 5 – 7 years the fund will be paying out over $9 billion in support of rural broadband. And the answer to them all is – maybe. It’s somewhat complicated and also involves waiting a while to see how certain events play out.

The first issue to consider is who the incumbent telephone area is in the area you might want to compete. Rate of return carriers, meaning all of the small independent telephone companies, are going to continue to receive CAF funding, although the amounts they get are going to be severely phased down over the next five years. But competitors cannot go after the CAF funds in areas served by these rate of return carriers.

So the only places where CAF funding might be available is in areas served by the price cap carriers. That is AT&T, Verizon, CenturyLink, Cincinnati Bell, Consolidated Communications, Fairpoint, Frontier, Windstream and the phone companies in the US territories like Puerto Rico. So if you want to compete in one of these areas there is a chance of getting the funding.

But first, each of these large carriers gets a chance to say that they will take the CAF funding. If they do, then they have to upgrade their rural areas to have broadband that delivers at least 10 Mbps download and 1 Mbps upload to everyone in the supported areas. They have to meet milestones of completing percentages of the construction each year or lose the funding. They are also going to have to do speed tests to verify the upgrades.

The large carriers can take funding for a whole state or just for certain census blocks within the state. The amount of CAF funding that is available by census block is summarized on a CAF map published by the FCC. This shows each area that is eligible for CAF and the amount of money that will be available for that block. These amounts were determined by the use of a very complicated and controversial cost model that purported to calculate the cost of providing service in every part of the country. It considers things like population density, geography and regional labor costs.

So the large incumbents are considering which areas of their service territory they are willing to upgrade through the help of the money available through the CAF models. These subsidies are not intended to pay for the entire cost of upgrading, but rather to be enough to entice the big carriers to make the needed investments.

So if you are interested in the funds, you will need to wait a few months until the big carriers announce their intentions. They will get all of the funding listed on the map for any area they decide to upgrade.

The CAF funding for areas where the price cap carriers elect to not upgrade will then be available to other companies. As you would expect the process to get those funds is complicated. You must be willing to meet or beat the 10/1 data speeds. In addition to data you must provide voice service. You must be willing to serve every customer in a census block where you are getting the CAF funding, not just the ones that are easy to reach. And you must become an Eligible Telecommunications Carrier (ETC) and for areas where you get CAF you become the carrier of last resort.

Competitors will win the ability to do this through what is being called a reverse auction. If more than one carrier files for a given census block, then the one willing to take the least amount of funding will be awarded the CAF funding. But it’s not an auction where you repeatedly bid against each other. Instead you submit a bid once and the low one wins.

Like any federal money this money then comes with a lot of strings. First, you don’t get the money in a lump sum up front to help pay for the construction. Instead you will collect it spread over the five years. Second, like any federal money there will be a mountain of paperwork both before and after taking the money and your project is going to get audited multiple times. There also might be requirements for such things as doing environmental impact studies or complying with prevailing wage laws. These details have not yet been announced.

Going after CAF funds is not going to be an easy choice for most companies. When you look at rural census blocks they generally include a decent percentage of residences that are remote and hard to reach. By taking the funding you will be agreeing to become the carrier of last resort for all of the farms and rural homes in a given census block. That alone is a scary obligation, so before you go after the funds you ought to determine exactly what your state expects these days out of a carrier of last resort. Do you have to build to anybody who builds a new home in your areas regardless of the cost, or are there limits on who you must serve?

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