Tag Archives: tariffs

Tariff Uncertainty

This is a blog about uncertainty because it’s hard to know what else to say about the impact of tariffs on the broadband industry – other than we know there will be an impact. Right now, the tariff situation is in utter turmoil. Every ISP I talked to about the issue had the same concerns. They are all hoping for certainty. They can deal with price increases, but they can’t deal with not knowing the situation for building a year from now.

ISPs generally plan a year ahead. The networks they are building now were planned in 2024, and many ISPs are paralyzed about what to plan for 2025. I’ve been through other periods of economic uncertainty during my career, and every time, the most common reaction to uncertainty from ISPs has been to take a pause until the uncertainty ended. If the tariff situation doesn’t soon become predictable, I would expect 2025 construction to slow significantly, particularly for smaller ISPs.

The first place I would normally go to get a feel about the impact of any big changes for the whole industry is to see what big ISPs have to say about it. The big ISPs have quarterly earnings calls, and Wall Street expects them to talk about expected changes in their company in the next quarter and next year. I listened to the recent earnings calls for Comcast, Charter, and T-Mobile, and the companies were all coy and noncommittal on the tariff topic.

Perhaps the easiest way to think about tariffs is by industry segment. I’ve been thinking about what will happen if tariffs settle in at something like the original announcement of 10% tariffs across the board.

Fiber ISPs would probably have the smallest impact of tariffs – but it’s not zero. Fiber is made domestically. Fiber electronics will be shielded from tariffs to some extent since the major electronics vendors established US manufacturing to prepare for BEAD grants. But those factories still rely on some imported components. Perhaps the biggest impact will come for non-grant construction since those ISPs have continued to buy cheaper imported electronics. It will be interesting to see if the new U.S. factories can supply everybody. I suspect they can’t. But even if they can, U.S. electronics are more expensive than the imported electronics before tariffs.

Cable companies are not going to be so lucky. Companies like CommScope and Vecima Networks that make cable electronics have already said they will have big hits from tariffs. We’ll have to see if this results in a slowdown of upgrades of cable networks to DOCSIS 4.0 or mid-splits. Day-to-day components like settop boxes are mostly manufactured overseas.

WISPs and cellular carriers are likely to see a hit from tariffs since most of their electronics are imported. There are American makers of towers and related equipment. Cellphone prices would increase from tariffs, but for now those tariffs have been reversed.

All ISPs are going to see a hit on WiFi gear, which is almost all imported.

ISPs and carriers buy a lot of vehicles, and it looks like the cost of new vehicles will be climbing.

The surprising increases are going to come on the little stuff like the small hardware needed for all kinds of network construction. The worry is not just that those prices might climb, but that there will be supply chain interruptions.

Any ISP that is building a network funded by grant dollars has to be worried since grants awarded in past years will not be increased, and the ISP will have to absorb the full impact of tariff increases. I have to wonder if this will put more pressure on defaults for RDOF and other previous grants if ISPs see grant projects becoming unviable. I won’t be shocked if some of the companies winning BEAD grants change their mind by the time they are asked to sign a grant contract later this year.

The bottom line is that uncertainty is not good for the industry, and I think the reactions we’ll be seeing from ISPs will be more a reaction to uncertainty than to cost increases.

Tariffs and Broadband Deployment

A number of my clients are receiving letters from telecom supply houses and vendors warning them of price increases due to the tariffs recently imposed on trade with China. It’s no secret in the telecom world that much of the electronics and components used to build fiber or fixed wireless networks come from China.

The following list is from a letter sent from Power & Tel, a big telecom supply house to their customers. Other supply houses and vendors are sending similar notices. This notice lists examples of components that will receive the new tariff additives. As is usual in these situations there will be components that are in gray areas and it will take a while for the vendors to figure out the full tariff impact.

The new tariffs were imposed by the U.S. Trade Representatives (USTR) at the order of the President and are implemented by the U.S. Customs and Border Protection agencies. There have been multiple USTR lists of affected products, and following is Power & Tel’s take on the various tariff actions:

USTR Tariff List 1 – 25% tariff effective on July 6, 2018. Affects optical fiber cables, aluminum, copper, steel & iron.

USTR Tariff List 2 – 25% tariff effective on August 23, 2018. Affects fiber adapters, connectors, splice sleeves, grounding hardware.

USTR Tariff List 3 – 10% tariff effective on September 24, 2018. On January 1, 2019 the tariff increases to 25%. Affects electronics, power cables, active optical cable, direct attach cables, cable management and racks, batteries, power supplies, metal hand tools, power tools, hardware.

Included in this list are several major components that are part of every broadband deployment. This includes things like:

  • Core routers and switches for fiber and wireless networks
  • Core electronics and customer ONTs for FTTP
  • Core electronics and customer radios for fixed wireless
  • The core of central offices and huts including racks, batteries, power supplies, grounding hardware, cables, hardware, test equipment and other tools.
  • Cable settop boxes and WiFi routers
  • There are numerous sources of non-Chinese fiber optic cable, but many of the components for an outside plant network like fiber adapters, connectors, pre-connectorized drops, etc. will be affected.

I try not to be political in my blog – and it’s normally easy to do because broadband deployment is a topic that enjoys bipartisan support. I’ve always found in rural America that politicians from both parties support fiber and wireless network deployments because they understand that their local economy needs broadband to thrive and survive. I visited a number of rural counties in the last year where the elected officials say that lack of broadband access has become the number one issue of concern in their county.

However, I have no doubt when looking at the size and scope of these tariffs that the cost of building broadband just got more expensive. I won’t be surprised if this doesn’t kill or delay some pending construction projects, and it’s something that will have to be factored in to any future-looking business plans. I’m sure I share the sentiment of many in the industry and hope that these tariffs are temporary.

What’s Wrong with Title II Regulation?

FCC_New_LogoI’ve read a lot of the comments of the big carriers and their associations that explain why Title II regulation is a terrible thing. Today’s blog will discuss some of their bigger complaints.

Rate Regulation. Many commenters say they fear rate regulation, meaning that the FCC could become involved in setting their rates. I can’t see any merit in this argument. The FCC and state commissions have relaxed regulation on telephone service over the years and in many states have deregulated rates. There has never been any rate regulation on competitive telephone companies (CLECs) or VoIP providers who are free to charge anything they want. The FCC also brought cellular voice under Title II in 2007 and there has been no regulation of those rates. Basically the FCC’s philosophy is to let the free market and competition set rates whenever possible and this has been true everywhere in the industry. The FCC only steps in when there is blatant abuse, such as when unscrupulous payphone providers were were billing people many dollars per minute.

I think the real fear of the carriers is having the FCC get involved in disputes of the charges between the large ISPs and companies like Netflix. On that count I think they are right, but that is the whole idea behind net neutrality – to not let carriers use their market power to pick winners and losers among web content providers. This is not exactly rate regulation in the historic sense, but its very likely that under Title II that the FCC will be asked to mediate differences between carriers.

Taxes. Several opponents of Title II have floated the idea that putting Internet service under regulation will mean a whole new host of taxes. At least in the short term that claim has no merit. Congress has been excluding the Internet from taxation for fifteen years and just recently renewed the law that stops states and localities from taxing Internet service. This is not to say that Internet service under Title II will never be taxed, because politicians everywhere are always looking for a new tax base. But the fact that Congress has felt the need to pass and renew this law means that taxing the Internet doesn’t require Title II regulation. States and localities have found ways to tax almost everything over the years and will tax the Internet if Congress allows it, with or without Title II.

There probably is a legitimate concern that Internet service would become subject to the Universal Service Charge. But since that FCC has frozen the size of the USF Fund, any new USF taxes on Internet service would mean lower taxes on other telecom services with no net change in tax to the public. Frankly, since the USF funding is now being used to expand broadband coverage, Internet users ought to help pay for it.

Increased Regulatory Burden. The big companies say that being under Title II will increase regulatory burden. It’s hard to say what exactly that might mean, but they are probably right because regulators like to regulate. Interestingly, the large ISPs make this argument on behalf of small ISPs and not for themselves. And here I thought they didn’t like the small ISPs that compete with them!

Pole Attachments. Cable companies fear that being under Title II will mean an increase in the rates they pay to attach to poles. Apparently today they often get cheaper attachment rates then some regulated companies. I have a hard time sympathizing with this. Cable companies love to raise the issue of level playing field when they have to compete with a municipality. But that same level playing field concept would say that every company that leases space on a pole ought to pay the same rate. They are arguing to maintain an un-level playing field that happens to be in their favor.

Tariffs. Regulated telephone companies, including the CLECs must file tariffs. These documents define the terms and conditions under which the companies will sell service to the public. In the tariff a company must define things like their policies for disconnecting a customer who doesn’t pay their bill. I suspect that many states would use Title II as a reason to impose tariffs on cable companies. And I suspect that cable companies would get dragged into some state laws that require certain levels of customer service. Considering how crappy the cable companies treat the public I suspect the public would be in favor of this.

Uncertainty. The large companies complain that requiring them to be under Title II means many years of uncertainty until all of the consequences of such a ruling are worked out. That is certainly true, but that is not a reason not to not impose net neutrality. There is a huge amount of uncertainty in the cable industry already. I am sure that Google introducing gigabit broadband into their markets, or Dish Networks launching of an OTT product that includes ESPN are causing a lot more uncertainty inside cable boardrooms than concerns about complying with regulatory rules. I really can’t picture cable company Boards spending a lot of time worrying about net neutrality.