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.