Regulation - What is it Good For? The Industry

Will the Big Telcos Pursue RDOF Grants?

One of the most intriguing questions concerning the upcoming $16.4 billion RDOF grant program is if the big telcos are going to participate. I’ve asked the question around the industry and I’ve talked to folks who think the big telcos will fully wade into the reverse auctions, while others think they’ll barely play. We’re not likely to know until the auctions begin.

The big telcos were the full beneficiaries of the original CAF II program when the FCC surprisingly decided to unilaterally award the big telcos the full $9 billion in funding. In that grant program, CenturyLink received over $3 billion, AT&T almost $2.6 billion, Frontier nearly $2 billion, and Windstream over $1 billion. The telcos were supposed to upgrade much of their most rural properties to receive broadband speeds of at least 10/1 Mbps.

CenturyLink and Frontier both recently told the FCC that they are behind in the CAF II build out and didn’t meet their obligation at the end of 2019 to be 80% finished with the upgrades. From what I hear from rural communities, I think the problem is a lot more severe than just the telcos being late. Communities across the country have been telling me that their residents aren’t seeing faster speeds and I think we’re going to eventually find out that a lot of the upgrades aren’t being made.

Regardless of the problems with the original CAF II, the FCC is now offering the $16.4 billion RDOF grant program to cover much of the same areas covered by CAF II. The big telcos are faced with several dilemmas. If they don’t participate, then others are going to get federal assistance to overbuild the traditional big telco service territories. If the big telcos do participate, they have to promise to upgrade to meet the minimum speed obligations of the RDOF of 25/3 Mbps.

Interestingly, the upgrades needed to raise DSL speeds on copper to 25/3 Mbps are not drastically different than the upgrades needed to reach 10/1 Mbps. The upgrades require building fiber deeper into last-mile networks and installing DSL transmitters (DSLAMs) in the field to be within a few miles of subscribers. Fiber must be a little closer to the customer to achieve a speed of 25/3 Mbps rather than 10/1 Mbps – but not drastically closer.

I think the big telcos encountered two problems with the CAF II DSL upgrades. First, they needed to build a lot more fiber than was being funded by CAF II to get fiber within a few miles of every customer. Second, the condition of their rural copper is dreadful and much of it probably won’t support DSL speeds. The big telcos have ignored their rural copper for decades and found themselves unable to coax faster DSL speeds from the old and mistreated copper.

This begs the question of what it even means if the big telcos decide to chase RDOF funding. Throwing more money at their lousy copper is not going to make it perform any better. If they were unable to get 10/1 speeds out of their network, then they are surely going to be unable to get speeds upgraded to 25/3 Mbps.

We can’t ignore that the big telcos have a natural advantage in the RDOF auction. They can file for the money everywhere, and any place where a faster competitor isn’t vying for the money, the big telcos will have a good chance of winning the reverse auction. There are bound to be plenty of places where nobody else bids on RDOF funding, particularly in places like Appalachia where the cost is so high to build, even with grant funding.

It would be a travesty to see any more federal grant money spent to upgrade rural DSL particularly since the FCC already spent $9 billion trying to upgrade the same copper networks. The copper networks everywhere are past their expected useful lives, and the networks operated by the big telcos are in the worst shape. I’ve known many smaller telcos that tried in the past to upgrade to 25/3 on rural DSL and failed – and those companies had networks that were well-maintained and in good condition. It would be impossible to believe the big telcos if they say they can upgrade the most remote homes in the country to 25/3 Mbps speeds. Unfortunately, with the way I read the RDOF rules, there is nothing to stop the big telcos from joining the auction and from taking big chunks of the grant money and then failing again like they did with the original CAF II.

The Industry

Small Carrier Trends for 2017

Following are the most important trends for small carriers to keep an eye on in the new year.

Now or Never for Big Broadband Funding. There is a huge tug-of-war going on right now behind the scenes for how the new administration ought to meet its goal to spend a trillion dollars on infrastructure. Nowhere is this battle more apparent than with broadband. On the one hand there are bills being proposed in Congress that would hand out broadband grants in much the same manner as was done during the stimulus a few years back. On the other extreme is the idea that this spending should be done only through public / private partnerships, and thus infrastructure spending will be prodded through tax incentives and perhaps even a National Infrastructure Bank.

The direct grant approach could promote the construction of a lot of new fiber by small carriers and communities. As I’ve written before, tax incentives are not likely to promote much investment in rural fiber. And private money is still going to want to chase only those projects with demonstrated low risks – and rural fiber does not meet that requirement. It will probably be clear by the end of the first quarter which of these approaches we might actually see, but my money is on the tax incentive path.

Rural Copper Will Come Tumbling Down. Verizon and AT&T are going to leap on the opportunity of a weakened FCC and will be tearing down rural copper as fast as they can. There has been a leak from inside AT&T that discussed reducing staff by tens of thousands in the coming year and that is only going to be possible by eliminating swaths of copper networks. Both companies will offer much more expensive wireless options to replace the copper. This will open up opportunities for those able to compete in the areas losing copper.

Big Carriers Will Get More Aggressive. The talk at the federal level is all about reducing regulation. In real life that is going to translate into the big telcos and cable companies being emboldened to use their resource advantages to try to squash competition. This could mean price wars with small fiber-overbuilders or a slew of new laws being passed to make it hard or impossible for municipalities and other fiber start-ups to compete with them.

Broadband Price Increases Begin. While the FCC has promised that Title II regulation was not going to be used to regulate prices, the big ISPs saw the FCC looking hard at practices like data caps and zero-rating. As Title II regulation is reversed, or the FCC weakened, I think we will see the big ISPs feeling free to start raising data rates in the same manner they used to raise cable TV rates. Some of this will be direct rate increases, but you can expect to see indirect revenues coming from ancillary fees that look like they might be taxes or from data overage plans for data caps. This may open upm the possibility for data rate increases for small carriers.

No Assurance of Future Subsidies. Subsidies for telephone companies have been drastically pared over the last decade. But there is still significant funding from access charges, the Universal Service Fund and other forms of subsidy that I think are now at risk. I expect a major reexamination of the whole concept of Universal Service and that could mean anything from a total re-write on how the funds are spent or even the elimination of USF, something a number of members of Congress have always supported. If you rely on subsidies, this is the year to create a plan for living without them.

Speed, Speed, Speed. Customer demand for speed and total utilized bandwidth is still growing at a torrential pace and is not likely to slow down. Carriers should have plans for eliminating bottlenecks in your network to make sure you can deliver what customers want. And you should be considering across-the-board speed increases if your current data product speeds are below market expectations.

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