Subsidizing Rural Broadband

In a rare joint undertaking involving the big and small telcos, the trade groups USTelecom and NTCA—The Rural Broadband Association sponsored a whitepaper titled, Rural Broadband Economics: A Review of Rural Subsidies.

The paper describes why it’s expensive to build broadband networks in rural areas, with high costs mostly driven by low customer density. This is something that is largely universally understood, but this describes the situation for politicians and others who might not be familiar with our industry.

The paper goes on to describe how other kinds of public infrastructure – such roads, electric grids, water and natural gas systems – deal with the higher costs in rural areas. Both natural gas and water systems share the same characteristics as cable TV networks in this country and they are rarely constructed in rural areas. Rural customers must use alternatives like wells for water or propane instead of natural gas.

The electric grid is the most analogous to the historic telephone network in the country. The government decided that everybody should be connected to the electric grid, and various kinds of government subsidies have been used to help pay for rural electric systems. Where the bigger commercial companies wouldn’t build a number of rural electric cooperatives and municipal electric companies filled the gap. The federal government developed subsidy programs, such as low-cost loans to help construct and maintain the rural electric grids. There was no attempt to create universal electric rates across the country and areas lucky enough to have hydroelectric power have electric rates that are significantly lower than regions with more expensive methods of power generation.

Roads are the ultimate example of government subsidies for infrastructure. There are both federal and state fuel taxes used to fund roads. Since most drivers live in urban areas, their fuel taxes heavily subsidize rural roads.

The paper explains that there are only a few alternatives to fund rural infrastructure:

  • Charge higher rates to account for the higher costs of operating in rural areas. This is why small town water rates are often higher than rates in larger towns in the same region.
  • Don’t build the infrastructure since it’s too expensive. This is seen everywhere when cable TV networks, natural gas distribution and water and sewer systems are rarely built outside of towns.
  • Finally, rural infrastructure can be built using subsidies of some kind.

Subsidies can come from several different sources:

  • Cross-subsidies within the same firm. For example, telephone regulators long ago accepted the idea that businesses rates should be set higher to subsidize residential rates.
  • Cross subsidies between firms. An example would be access rates charged to long distance carriers that were used for many years to subsidize local telephone companies. There are also a number of electric companies that have subsidized the creation of broadband networks using profits from the electric business.
  • Philanthropic donations. This happens to a small extent. For example, I recently heard where Microsoft had contributed money to help build fiber to a small town.
  • Government subsidies. There have been a wide range of these in the telecom industry, with the latest big ones being the CAF II grants that contribute towards building rural broadband.

Interestingly the paper doesn’t draw many strong conclusions other than to say that rural broadband will require government subsidies of some kind. It concludes that other kinds of subsidies are not reasonably available.

I suspect there are no policy recommendations in the paper because the small and large companies probably have a different vision of rural broadband subsidies. This paper is more generic and serves to define how subsidies function and to compare broadband subsidies to other kinds of infrastructure.

Restricting RUS Funding

The major large ISP lobbyists have asked Congress to block the use of Rural Utility Service (RUS) funding to overbuild areas that have only rudimentary broadband today. The heads of the National Cable & Telecommunications Association, the American Cable Association, USTelecom and the ITTA – the major lobbyists for the big ISPs – wrote a joint letter to the chair of the Senate Agricultural Committee. The letter requests that the upcoming Farm Bill restrict funding from the RUS to be only used for overbuilding to rural areas where at least 90% of homes don’t have access to 10/1 broadband. There are almost no such places left in the country, at least on paper, so this would effectively gut RUS funding from being used to improve rural broadband.

In the original CAF II program the FCC gave the big telcos billions of dollars to upgrade a lot of rural areas to speeds of at least 10/1 Mbps. In the upcoming CAF II reverse auction the places that weren’t included in the original CAF II program are slated to get upgrades to the same 10/1 Mbps speed. On paper this means there will be few  places that don’t have access to 10/1 Mbps broadband. Even where the telcos have supposedly upgraded to 10/1 there are likely to be large number of homes that don’t even get that rudimentary speed. Unfortunately the big telcos control the rural agenda since they are the ones that report consumer speeds on the broadband maps – and those maps are going to show that the telcos did a good job with upgrades, even when they didn’t.

Meanwhile these same big telcos have made it clear that they aren’t going to be investing in rural America.

  • CenturyLink’s new CEO recently said the company was no longer going to invest in infrastructure with low returns, meaning that they won’t be making any more investments in their last mile networks.
  • AT&T and Verizon both have asked the FCC to make it easier for them to walk away from rural copper lines, and both companies are pursuing a fixed cellular solution for providing rural voice and broadband.

These giant telcos are not willing to invest in their own networks – but they also don’t want anybody else building there. These companies took billions in free federal money to nudge rural broadband speeds up to a crappy 10/1 Mbps, and they are now basically telling the people that live in these areas that 10/1 Mbps is all of the broadband they will ever need or are ever going to get.

The RUS money is largely being used by smaller independent telcos, rural electric cooperatives and Indian tribes that want to invest in better broadband in rural America. A lot of RUS funding is being used to build fiber, the ultimate broadband upgrade. I imagine a number of companies bidding in the CAF II auction are planning on using RUS funding to complete those builds – but if this makes it into the Farm bill  that won’t be possible.

The only other entities interested in building rural fiber are rural governments. In states where it’s allowed they are looking for broadband solutions for their rural towns and counties and are often willing to make significant investments to make sure that their communities don’t get left behind. Most rural communities don’t want to be ISPs and they are helping to fund public / private partnerships with these same small telcos and electric coops to get better broadband – and those partners often look to the RUS to complete the funding.

The big telcos have political smarts and are trying to get this buried into the Farm Bill – something that will inevitably pass. This will allow politicians to vote for this provision while not having gone on record as siding with the big telcos. But make no mistake about it – any politician that supports this idea is choosing the big telcos over their rural constituents. Politicians only need to visit any rural part of their state to understand that broadband is now at the top of the priority list for most rural communities. These communities understand that those places that don’t soon get broadband are going to become economically irrelevant and will eventually wither away.

This letter was prompted by the fact that Congress recently awarded $600 million for expansion of rural broadband through the Ray Baum’s Act of 2018 that reauthorized the FCC budget. Those funds will be administered by the RUS. I predicted when that bill was passed that the big telcos would look for a way to make sure that most of that new money goes to them. It looks like I’m right, because if the Farm Bill passes with the requested change, then little or none of the $600 million will be of use to anybody else for building better broadband.

I hope that the small telcos and electric cooperatives react promptly and loudly to this proposed bill amendment, because it effectively guts RUS funding. This funding has been used for decades for overbuilding better broadband networks in areas served by the big telcos – and this one change would kill that.

I spend a lot of time talking about the ‘rural broadband problem’. But as I look at this lobbying effort I need to start talking about the ‘big telco problem’. All of the rural places that still don’t have good broadband are served by these big telcos. The rest of telcos and other companies that operate in rural America are finding solutions for better rural broadband. These big telcos have refused to reinvest the billions of profits they have made back into rural America and are now trying to make sure that nobody else makes those investments. The big telcos want to milk every last penny they can out of rural America.

Eliminating Unbundled Network Elements (UNEs)

At the urging of USTelecom, the lobbying arm for the big telcos, the FCC has opened WC Docket No. 18-141 that is seeking to eliminate the requirement for the big telcos to offer unbundled network elements (UNEs) or resale for their products. Comments are due in this docket by June 7, with reply comments due June 22.

The requirement for the big telcos to unbundle their networks was one of the primary features of the Telecommunications Act of 1996. The Congress at that time recognized that there was little competition in the telecom market and decided that allowing competitors to resell or use components of the big telco networks would help to jump-start competition. The idea worked and within just a few years there were giant CLECs created that used resale and UNEs to create large competitive telecoms. I recall that at least six different CLECs salespeople visiting the CCG offices located just inside the Washington DC Beltway. Most of those big competitive companies imploded spectacularly in the big telecom collapse in 2000, but there are still numerous companies utilizing the unbundled elements of the big telco networks.

The docket talks about forbearance, which in this case means ceasing a regulatory requirement, and specifically this docket asks the FCC to forbear:

  • Section 251 and 252 of the FCC rules that require the big telcos to resale or offer unbundled network elements to competitors;
  • Section 272 of the FCC’s rules that specify timelines for the telcos to negotiate or respond to requests for service from competitors;
  • Section 271 of the FCC’s rules that lay out the rights for competitors to gain access to poles, ducts, conduits and rights-of-way.

This forbearance would be devastating to a number of competitive carriers. Consider just a few examples of how the industry still uses these sections of the FCC’s rules:

  • There is still a lot of resale of telco products. I know one Northwest rural area where a competitor resells nearly 90% of the rural DSL provided by CenturyLink. This reseller gained the business by knocking on doors and selling DSL to homes that didn’t even know it was available from the telco. In much of rural America the big telcos have almost no employees, no marketing and no customer service and resellers are making big telco products work even where the telcos don’t make any effort.
  • There are still numerous DSL providers that collocate their own DSL electronics in telco central offices and then use the unbundled telco loops to provide decent DSL to customers. These competitors offer newer generation and faster DSL where the telcos are often still only offering slow first generation DSL from twenty years ago.
  • Facility-based fiber overbuilders regularly use unbundled network elements to operate in areas where they have not yet built fiber. Or they use UNEs to serve distant branches of a fiber customer – for instance they might use UNEs to create a private network between locations of a bank with branches in several communities.
  • Any competitor that wants to offer facility-based long distance in a metropolitan market must have a physical connection to the primary big telco switching locations (tandems) in that market. These connections are needed due to requirements that the telcos have forced upon competitors since the 1996 Act to try to make it more expensive to compete. Nobody would build the massive network needed to connect these office just to provide voice and so competitors satisfy this requirement using UNEs.
  • Competitors routinely want to make connections between carriers located at the big telco hubs. They make this happen by buying UNEs that reach between carrier A and B within these hubs (might only require a few feet of fiber).

All of these situation, and the many other uses of the resale and UNEs would disappear if the FCC sides with the big telcos. The big telcos set to work to neuter the requirements of the Telecommunications Act of 1996 right after it passed. Over the years they have eliminated many forms of resale. They have made it virtually impossible for a competitor to gain access to their dark fiber. They have routinely made it harder and harder each year for competitors by introducing changes in their contracts with competitors.

This forbearance would be a huge victory for the telcos. This would have a huge chilling impact on competition and customer choice. This would mean that the only way to compete with the telcos would be by overbuilding 100% to reach customers and to interconnect networks. Numerous competitive providers would be quickly bankrupted and disappear. Huge numbers of customers, primarily businesses, would lose their vendor of choice as competitive carriers would no longer be able to serve them. This could even kill wholesale VoIP since the underlying carriers providing that service rely heavily within their networks on interconnection UNEs.

The big telcos argue that they shouldn’t have to continue to unbundle their networks because these requirements deal mostly with legacy TDM technology. But this is not only copper technology and many of the UNEs used for interconnection are on fiber. And even where this is being done on copper, it makes sense for the FCC to allow competitors to use that copper for as long as it exists. Copper UNEs will die a natural death as the copper disappears, but until then, if a competitor can use that copper better than the telco they should be allowed to do so. Competitors have used UNEs and resale to build thriving businesses that benefit consumers by providing choice and lower prices. Forbearing on resale and UNEs would be another giveaway by the FCC to the big telcos at the expense of competition and customer choice.

If you are a small carrier that relies on resale or UNEs you need to file comments in this docket by June 7. They need to hear real life stories of small carriers and the customers you serve, and hear why they should not kill UNEs. You don’t need to be a lawyer to tell the FCC your story, especially not if you have a good story to tell.

Regulation and Capital Spending

At the recent Mobile World Congress, FCC Chairman Ajit Pai said that one of his reasons he wants to reverse Title II regulation is that it has had a drastic impact on capital spending by ISPs. He says that the new regulations have been a disincentive for the ISPs to invest in broadband.

The Chairman bases that position on statistics provided by USTelecom which are based upon work done by Hal Singer, a Senior Fellow at GW Institute for Public Policy. Mr. Singer created the following table that shows the domestic capital spending for the big ISPs for 2014 through 2016. And indeed, this table shows a 5.6% drop, or $3.6 billion a year from 2014 to 2016 – which Mr. Singer attributes to Title II regulation.

2014

2015

2016

AT&T $21.1 $17.3 $17.8
Verizon $17.2 $17.8 $17.1
Comcast $6.4 $7.1 $7.7
Sprint $3.8 $3.9 $1.4
Time Warner Cable $4.1 $4.4 $3.8
T-Mobile $4.3 $4.7 $4.7
CenturyLink $3.0 $2.9 $3.0
Charter $2.2 $1.9 $3.1
Cablevision $0.9 $0.8 $0.6
Frontier $0.6 $0.7 $1.3
US Cellular $0.6 $0.5 $0.5
Suddenlink $0.3 $0.4 $0.3
   Total $64.6 $62.4 $61.0

But like with all statistics, it’s not hard to draw different conclusions from the same set of numbers. For example, all of the drop in capital spending can be attributed to AT&T and Sprint. Taking those companies out of the table shows that capital spending for the other big ISPs is up $2.1 billion or 5% from 2014 to 2016.

So what’s going on with AT&T? There are a number of reasons for their change in capital spending:

·         During these same years the company made massive capital investments in DirecTV ($3 billion over the last few years) and also on the company’s purchase and expansion of its cellular network into Mexico ($3 billion over 4 years). Those numbers are not included in the above table and it’s easy to argue that the company just set different priorities and diverted normal domestic capital to these two giant ventures. If you add those capital expenditures into the table then AT&T’s capital spending has grown – just not their ‘domestic’ spending on traditional broadband.

·         AT&T has been making a huge effort to update its cellular network using software defined networking (SDN) as described at this AT&T website. They have been decommissioning traditional hardware at cell sites and installing much less expensive, off-the-shelf routers that can now control the cell sites from centralized data centers. They have already converted over half of their cell sites and this upgrade means vastly reduced spending on traditional cell site electronics. The company has been bragging about this shift to investors for several years.

·         AT&T has also retracted from expanding traditional big tower cell sites. For a number of years AT&T has been spending money to get fiber to its more remote cell sites, and that upgrade is largely done.

Sprint can also be easily explained. This is a company in trouble and that has been well documented over the last few years. A number of attempts to find a buyer has fallen through. What’s not shown on this table is that in 2013 (the year before the table begins) Sprint spent $6.4 billion on capital in a massive system-wide upgrade to LTE. Since then the company has very publicly stated that they are cutting capital spending to conserve cash. The company is only expanding now with carefully selected small cell deployments. But the company is clearly in network maintenance mode and is spending only what is needed to keep the cell sites functioning. Also included in the drop in spending is a change in the way that Sprint treats leased cellphones – they used to capitalize the phones and they now expense them.

There are going to be further decreases in future telecom capital spending across the industry. I expect capital spending for all four big wireless companies to keep decreasing due to efficiencies from SDN. We are now seeing a burst of spending from cable companies due to upgrades to DOCSIS 3.1, but when that’s done I would expect a significant decline in their capital spending as well. We are entering a time when improvements in software will lower the need for new hardware – not just in telecom, but in many other sectors as well.

I have always been annoyed when statistics are used to falsely justify public policy. There is no evidence that the big ISPS have changed their spending habits in any drastic way due to Title II regulations. The argument that Title II has affected capital spending comes directly from constant press releases from USTelecom, and the FCC Chairman should be above repeating arguments from lobbyists. If the FCC wants to undo Title II then it should just do it – there are a number of valid reasons why this might be good policy. But it’s disingenuous to cook up false reasons for why the change is needed.

The Ongoing Fight Against Network Neutrality

Network_neutrality_poster_symbolThere was such a big ruckus over the net neutrality battle that it’s easy to think that the fight against it is over and that net neutrality is now the rule of the land. But I see news on a regular basis that indicates that the fight is not over.

First, the lawsuit filed by USTelecom is still being fought in court. A few months ago there were comments filed in that case by USTelecom, AT&T, CenturyLink, the National Cable and Telecommunications Association (NCTA), the Wireless Association (CTIA), the Wireless Internet Service Providers Association (WISPA), and the American Cable Association (ACA), all of which argued that the FCC had exceeded its authority when it adopted the net neutrality rules. AT&T subsequently dropped this suit as part of the agreement to buy DirecTV,

This is quite a diverse group and they don’t all share identical concerns about the net neutrality rules, but together these trade groups represent both the smallest and the largest telcos, cable companies, cellular providers, and ISPs in the country, all of whom would like to see net neutrality overturned.

And there is no surety that the court will uphold the net neutrality order. I’ve read legal opinions on both sides of the issue that paint a pretty good story about why the FCC ought to be upheld or overturned. Most of these arguments revolve around whether the FCC had the authority to act as they did – with obviously very different opinions on the issue.

And then there are the politicians. The politicians have gotten somewhat quiet on the issue since it has been in the court. But overturning net neutrality is still part of the Republican Party platform and one would expect this issue to come up every time Congress looks at funding the FCC. The House Energy and Commerce Committee will be ” taking a closer look at how the Commission’s net neutrality rules impact our fragile economy, as well as what can be done to foster continued deployment of broadband networks,” in the words of its chairman Rep Greg Walden (R-Ore).  And very recently, Jeb Bush came out against neutrality in one of his stump speeches.

I can understand why carriers would be against some aspects of net neutrality since it puts limitations on the things they can do to make money. But I’ve never understood why any politician would take a strong stance against it. When this is explained to people in the simplest terms – that net neutrality basically says that your ISP can’t make deals that would impede your ability to use the Internet freely – then most people think this is a good idea. I certainly understand that politicians are often beholden to the large corporations that fund them. But one would think that on a topic that is this popular with the general public that politicians would find backdoor ways to fight against something like net neutrality rather than being staunchly and publicly against it.

I’m even a little surprised that the industry is still fighting this battle as hard as they are. The one thing Wall Street hates is uncertainty, and if net neutrality is overturned we would return to a period of major regulatory uncertainty. Wall Street seems to have favored the industry since net neutrality was passed. For example, until the recent market correction the large cable companies had seen a major surge in stock prices, due at least in part to the fact that net neutrality has brought regulatory stability to the market.

There were dire predictions before net neutrality was passed that it would kill capital investments in the industry. And yet we see companies like CenturyLink pouring billions into expanding their fiber networks. And AT&T didn’t massively cut back on capital spending as they had threatened during the net neutrality debate.

As someone who partially makes my living on helping companies keep up with regulations, it seems that net neutrality hasn’t made any drastic changes so far in the way that companies do business. I find it interesting that the WISPA group is so against net neutrality, because I see their member companies expanding like crazy in rural areas and I can’t imagine that any of them have seen and drastic changes due to regulation due to net neutrality.