Tag: Windstream

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The Industry

Partners are Where You Find Them

An interesting new partnership has been formed between Windstream and Colquitt Electric Membership Corp. of Georgia to build a rural fiber network. Windstream is a large price-cap telco that recently emerged from an interesting bankruptcy. Colquitt is a rural electric cooperative.

Only high-level terms of the partnership have been released. Windstream will own the fiber network, will provide broadband and other services, and will own the customers. Colquitt will provide access and rights-of-ways on poles and Colquitt technicians will place the new fiber on poles. Colquitt will get access to some fibers on the new network to connect electric substations and other electric network components to fiber. The partnership is described as having a network that is ‘jointly built and jointly-owned’.

The area to be served is rural and is described as having around 7 people per square mile. It’s a little hard to put that statistic into perspective because the most commonly used metric in the industry for understanding density is the number of homes per mile of road – however, the area sounds sparsely populated.

The state of Georgia decided a few years ago to allow electric cooperatives to become ISPs – a restriction that was imposed years ago by legislation prompted by telco incumbents. Many states have recently lifted such restrictions in an attempt to find more solutions to solve the rural broadband gap.

Partnerships with larger price-cap telephone companies to provide fiber broadband is a new phenomenon. An argument can be made that decisions made by price-cap telcos over the years are one of the major reasons why much of rural America is still served by DSL broadband provided over old and poorly-maintained copper networks.

But we’ve seen several similar partnerships with price-cap telcos. CenturyLink has partnered with the City of Springfield, Missouri to provide fiber. Consolidated Communications has partnered with several villages in New Hampshire to build fiber. Cincinnati Bell has partnered with the Butler Rural Electric Cooperative in Ohio.

This announcement is a reminder to rural communities and electric cooperatives that broadband partners might be found in unexpected places. It’s easy for rural folks to assume that the telcos that built and have been operating the dreadful copper networks are not interested in providing better service. In this case, the network is being built in a rural community and it’s extremely unlikely that Windstream could justify investing the full cost to build fiber – the return and payback on investment would never meet corporate earnings metrics and would make no sense as an investment. However, sharing the costs with the electric cooperative must have reduced Windstream’s costs to the point where the project makes financial sense.

That is the power of partnerships. Investing all of the cost to build fiber in this case probably didn’t make financial sense to either the electric cooperative or to Windstream. Both parties have something to gain out of the transaction. Windstream gains customers who will like the broadband service on fiber. The cooperative gets a fiber network connecting substations. Both are contributing to an improved community that will benefit both companies in the long-term. We’ve seen that fiber can reinvigorate a rural community. Many people want to live in rural areas but need good broadband to work from home – having a fiber network should attract new residents and keep residents some local people from leaving the area to find better broadband.

During the last year, my advice to rural communities is to have a serious discussion with the incumbent providers. Historically I’ve always advised to not bother with the incumbents because over decades I had never seen a large incumbent telco respond to plea to improve service. This is still a rare occurrence, but this partnership, and the ones mentioned earlier illustrate that it’s worth having the discussion on the outside chance that you hit the right note and the right opportunity to get the attention of the incumbents.

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Current News The Industry

CBRS Auction Winners

The FCC held a recent auction for the  3.5GHz Citizens Band Radio Spectrum (CBRS). The auction went for 76 rounds and raised over $4.5 billion for the FCC. This auction was unique in that spectrum was licensed at the county-level awarding up to seven licensed 10 MHz channels in each county. Each PAL (Priority Access License) is good for 10 years.

CBRS spectrum can be used in several applications. The spectrum has good field operating parameters and falls in the middle between the two existing blocks of spectrum used for WiFi. This makes the spectrum ideal for rural point-to-multipoint fixed wireless broadband since it can carry a decent amount of bandwidth for a decent distance. The best aspect of this spectrum is that it’s licensed and will largely be free from interference. For the same reasons, this is also a good spectrum for cellular data.

The biggest winner in the auction was Verizon which spent $1.89 billion on the spectrum. The company landed 557 PALs licenses in 57 counties. The company needed this spectrum to fill-in mid-range spectrum for 5G. Verizon has also recently announced a fixed cellular broadband product for rural homes and this spectrum could provide an interference-free way to deliver that product from rural cell sites.

As expected, Dish networks was also a big winner and will be paying $913 million for CBRS spectrum. As the newest nationwide cellular carrier, the company needed this spectrum to fill in the holes in the cellular spectrum it already controls. The other traditional cellular companies were a no-show. AT&T didn’t buy any of the CBRS spectrum. T-Mobile only purchased 8 PALs licenses in six counties.

The largest cable companies scored big in the auction. Charter bought $464 million of spectrum, Comcast is paying $458 million for spectrum, and Cox purchased $212 million of spectrum. As the newest entrants in the cellular business, Comcast and Charter have been buying wholesale cellular broadband from Verizon – this spectrum will let them shift to their own cell sites for a lot of cellular traffic. There is also speculation that cable companies might be planning on using the new spectrum to launch a fixed-wireless product in the rural areas surrounding their cable properties. Both Charter and Cox have entered the upcoming RDOF auction that is awarding $16.4 billion for rural broadband and the companies might be planning on using this spectrum to cover any areas they can win in that reverse auction.

One of the smaller cable companies, Midcontinent Communications, spent over $8.8 million for PALs licenses. Midco already won sizable rural grants to deploy 100 Mbps broadband in Minnesota and the Dakotas. This spectrum will help the company meet those grant pledges and perhaps allow it to pursue RDOF grants.

There were a few other large bidders. One was Nextlink which provides fixed wireless broadband today in Texas, Oklahoma, Kansas, Nebraska, Iowa, and Illinois. Windstream purchased over 1,000 PALs and the traditional telco is likely going to replace aging rural copper with wireless service, while also possibly be expanding into new service territories with fixed wireless. SAL Spectrum LLC won 1,569 PALs. This company owns numerous other blocks of spectrum and it’s not clear who the user of this new spectrum might be.

The biggest news is that the auction allowed smaller bidders to win licensed spectrum. There were 228 different winners in the auction, most of which are small WISPs, telcos, and electric cooperatives. These entities benefited by the FCC’s willingness to auction the spectrum at the county level. Most previous wireless spectrum was allocated using much larger footprints, which kept small bidders from acquiring spectrum.

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The Industry

Who’s Chasing RDOF Grants?

There is a veritable Who’s Who of big companies that have registered for the upcoming RDOF auction. All of the hundreds of small potential bidders to the auction have to be a bit nervous seeing the list of companies they could end up bidding against.

As a reminder, RDOF stands for Rural Digital Opportunity Fund and is an auction that starts in October that will award up to $16.4 billion in broadband funding. The money will be awarded by reverse auction in a process that favors faster technologies, but also favors those willing to take the lowest amount of grant per customer. The areas that are eligible for the funding are among the most remote places in the country, which is why the list of potential large bidders is puzzling.

There are some big cable companies on the list: Altice, Charter Communications, Cox Communications, Atlantic Broadband, Midco, and Mediacom Communications. These companies serve many of the county seats or other nearby towns to many of the RDOF areas. One has to wonder what these companies have in mind. The only one that has chased any significant federal grants in the past is Midco in Minnesota and North Dakota. Midco has been using grant money to extend fiber backhaul to connect its smallest markets, to build last-mile broadband in some tiny towns, and to build fixed wireless in rural areas surrounding its cable markets.

One has to wonder if the other cable companies have a similar plan. It’s incredibly inefficient to build traditional hybrid coaxial-fiber networks in rural areas, so it’s unlikely that the cable companies will be extending their existing networks. The RDOF auction is being done by Census blocks, which in rural areas can cover a large area. The winner of the auction for a given Census block must offer service to everybody in that block. I also have a hard time envisioning all of these big cable companies getting into the wireless business like Midco is doing, so their presence in the auction is a bit of a mystery.

Then there are the traditional large telcos including Frontier, Windstream, Consolidated Communications, and CenturyLink. These companies already serve many of the areas that are covered by the reverse auction. These are the rural areas where these companies have largely neglected the old copper wiring and either offer no broadband or dreadfully slow DSL. The minimum technology allowed to enter the auction must deliver 25/3 Mbps broadband. It’s almost painful to think that these companies would chase the funding and promise to upgrade DSL to 25/3 Mbps after these companies largely botched an upgrade to 10/1 Mbps DSL in the just-ending CAF II grants. The cynic in me says they are willing to pretend to upgrade DSL all over again if that means substantial grant money. I have to think that some of these companies are considering deploying fixed wireless. To the extent any of these companies is willing to take on new debt or use equity, they could also build fiber. None of these companies has built a substantial amount of fiber to truly rural places, but may these grants are the inducement they were waiting for.

Verizon and U.S. Cellular have registered for the auction. You have to think the cellular carriers will be deploying fixed cellular broadband like the 4G FWA product that Verizon just announced recently. These companies already have equipment on towers in many of the RDOF grant areas and would love to grab a subsidy to roll out a product they might be selling in these areas anyway.

Then there are the satellite companies SpaceX, Hughes Network Systems, and Viasat. Viasat has won federal grant money before for selling broadband from its high-altitude satellites. SpaceX is the wildcard since nobody knows anything about the pricing or real speeds they can provide. We know that Elon Musk has been lobbying the FCC to let him have a shot at the billions up for grabs in this auction.

There is another interesting wildcard with Starry. Their business plan is currently selling fixed wireless to large apartment buildings in center cities and they’ve developed a proprietary technology that’s perfect for that application. They must have something else in mind in chasing grant money in remote areas that are 180 degrees different than their normal business model. Starry founder Chet Kanojia is incredibly creative, so he probably has a new technology in mind if he wins auction funding.

There may be other big players in the auction as well since many of the registered bidders are participating under partnerships or corporations that are disguising their identity for now. I think one thing is clear and some of the rural ISPs and cooperative who think nobody else is interested in their markets will get a surprise early in the auction. These big companies didn’t register for the grant auction to sit on the sidelines.

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Current News

Windstream Adding YouTube TV

Windstream announced earlier this year that it is now offering YouTube TV to customers as an alternative to its traditional cable TV offering. The company has not yet fully ditched its traditional Kinetic TV offering, but this is a first step towards doing so. As more small cable operators look at the math of staying in the TV business, I’m expecting we’ll see a lot more ISPs considering the same transition. There are a lot of implications for converting traditional cable TV to a streaming service.

Regulatory. While regulation of traditional cable TV isn’t a massive burden, all regulatory requirements disappear with a conversion to a streaming service like YouTube TV. There are a several annual FCC filings required by cable operators that would disappear. If a cable operator is paying local franchise fees, they can avoid the monthly reporting of customers and revenues to local tax authorities.

Taxation. The biggest external change from such a conversion would be that the cable operator no longer has to collect and remit local franchise fees assessed on cable service which vary across the country between 3% and 6%. The cost of collecting taxes and fees and of dealing with tax authorities disappears for the cable operator.

The biggest implication of this change is that local communities could see franchise fees dry up overnight. I would expect a cable provider like Windstream to withdraw and cancel their franchise agreements if they fully adopt YouTube TV. If the primary cable provider in a town makes this conversion, then franchise fee payments dry up immediately. Franchise fees are an important part of balancing local government budgets, particularly in smaller towns.

Cancelling franchise agreements also means that all of the local obligations that come with a cable franchise disappear. The cable provider would no longer provide a PEG channel to show local government meetings and other local content. Any subsidies for local government iNets for bringing connectivity to city halls and schools would disappear.

Operational. There are huge operational savings for ISPs that make this conversion. Most of my clients that offer cable TV tell me that 60% or more of calls to customer service are about the cable product. Eliminating traditional cable means reducing customer service calls and reducing truck rolls.

Getting out of the traditional cable business also means getting out of the settop box business. There is a huge operational savings from not having to keep a settop box inventory and keeping boxes operational. Installations get much easier when there is no settop box to connect.

Broadcast Fees. There are also implications for the larger cable market. Online services like YouTube TV are not required to comply with FCC channel lineups and they can offer whatever packages they negotiate with programmers. This means many networks will no longer be carried and will lose the revenue for every customer that makes this conversion. This becomes cord cutting at the corporate level and as 200-channel lineups get shrunk to 70 channels, a lot of monthly fees to programmers evaporate.

If you look at the YouTube TV line-up, you’ll see the most popular networks. For example, the service includes the primary Discovery channel, but not all of the ancillary Discovery channels that come with a traditional TV subscription. This is true throughout the line-up as the service concentrates on the most-popular channels only.

Profitability. The biggest change is to profitability. I expect that if Windstream fully calculated the cost of being in the cable business that they would show no margin or a negative margin. All of the ancillary costs of extra truck rolls, dealing with settop boxes, tracking and reporting franchise fees and taxes, etc. can add up.

I don’t know what YouTube TV will pay to a cable provider like Windstream, but it can’t be much – no more than a few pennies on the dollar. Nobody would make this transition to get rich from the commission fees, but rather to avoid the costs and the hassles of remaining in the traditional cable business.

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The Industry

The Windstream / Uniti Mess

I’ve been fielding a lot of questions asking about the controversy between Windstream and Uniti. Most people seem to be fuzzy about the relationship between the companies. I’ll try my best to explain the mess that these two companies have created.

Windstream decided in January 2014 to spin off its assets into a REIT, which is a real estate investment trust, a formal kind of investment vehicle defined by law. A REIT generally owns real estate like apartment buildings, shopping malls, or perhaps specialty real estate like storage buildings or college dorms. REITs sell ownership shares to the public, similar to stocks. An investor in a REIT is making a real-estate investment while gaining safety by spreading risk across multiple properties. A REIT is generally expected to pay significant dividends.

Windstream was a traditional mostly family-owned regulated telco. Windstream moved its fiber and copper assets to a REIT owned by the newly-formed Uniti. In the split of assets, Robert Gunderman remained as CFO of Windstream while his brother Kenneth become CEO of Uniti. The Uniti REIT is attractive to investors because Windstream pays roughly $650 million per year in ‘rent’ to Uniti for use of the network. Since formation, Uniti has added other assets to the portfolio, but the Windstream assets still represent 70% of its assets.

The current mess was triggered when Aurelius Capital, a lender to Windstream, filed a lawsuit claiming that the REIT arrangement was a violation of Windstream’s corporate bonds. Windstream immediately filed for bankruptcy earlier this year when a judge ruled in favor of Aurelius Capital.

Windstream and Uniti immediately went to mediation to try to resolve the issues raised by the Aurelius Capital lawsuit. Recently it became clear that the two companies could not resolve the issues, and Windstream and Uniti are now going to court to decide the future of the REIT arrangement.

The court case is mostly going to have to resolve an accounting issue. At issue is the question of whether the payments from Windstream to Uniti are rent or if they are instead a disguised financing arrangement. This difference is vital to the survival of Windstream and Uniti. If the payments are rent, as Uniti maintains, then Windstream would have to pay rent before they make debt payments to Aurelius Capital and others. Further if the payments are rent then Wondstream would have to continue to pay Uniti to use the network. However, if the payments to Uniti are considered to be a financing arrangement, then those payments become unsecured debt and go to the end of the line in payment priority.

The ‘rent’ payments to Unity equate to a $6.9 billion long-term liability of Windstream. The company has another $4.8 billion in senior debt and $1.5 billion of unsecured debt. If a court decides that the payments to Uniti are rent, then the bankruptcy court is likely to erase some of the debt owed to Aurelius Capital and others. However, if the payment due to Uniti are unsecured debt, then a bankruptcy court is likely to erase some of the Uniti debt, which would put Uniti out of business.

Windstream would see a huge windfall if they could walk away from some or all of the Uniti payments – however, they’d be in the awkward position of not owning their networks. It’s hard to picture what happens to the networks if Uniti goes bankrupt.

There are several factors that the courts will use to determine if the Uniti payments are more like debt or rent. For example, rent is generally determined by fair market value of the property. The copper networks are nearing end-of-life and it’s hard to argue that the annual payments to rent copper shouldn’t be declining. However, the payments from Windstream to Uniti increase every year during the 35-year lease term. When examining all of the arguments made in this case, from an accounting perspective it seems that Windstream has the stronger arguments – but the courts will have to decide.

If Windstream is required to continue the full payments to Uniti, the telco will be cash-strapped for the foreseeable future. It seems that Windsteam feels confident they will win the lawsuit because they recently announced a plan to bring gigabit fiber to 60% of its customer base over the next 10 years, predicated upon getting out from under the Uniti debt payments. This means that the broadband future for a lot of communities rides upon the court deciding that the Uniti payments are debt and not rent.

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The Industry

Where’s the CAF II Success?

If you’ve read this blog you know I’ve been a big critic of the FCC’s CAF II program that gave over $10 billion in federal subsidies to the biggest telcos to improve rural broadband. My complaint is that the program set the embarrassingly low goal of improving rural broadband to speeds of at least 10/1 Mbps. My complaint is that this money could have done a huge amount of good had it been put up to reverse auction as was done with the leftover customers from this program last year – many ISPs would have used this funding to help to build rural fiber. Instead, the telcos are using the money mostly to upgrade DSL.

While I think the program was ill-conceived and was a giveaway to the big telco lobbyists, I am at least glad that it is improving rural broadband. For a household with no broadband, a 10 Mbps product might provide basic access to broadband services for the first time. We are now into the fifth year of the six-year program, so we ought to be seeing the results of these upgrades. USTelecom just published a blog saying that deployments are ahead of schedule and that CAF II is a quiet success.

The telcos have told the FCC they are largely on track – by the end of 2018 they should have upgraded broadband for at least 60% of the required households. AT&T and Windstream report that they have made at least 60% of the needed upgrades everywhere. Frontier says they are on track in 27 of the 29 states needing upgrades. CenturyLink says they are on track in only 23 of 33 states that are getting CAF II upgrades. According to USTelecom, over 2.1 million households should now be seeing faster speeds.

It’s also worth noting that the CAF II program should improve broadband for many more households that are not covered directly by the program. For example, when upgrading DSL for a CAF II area that surrounds a town, those living in the town should also see better broadband. The secondary benefit of the CAF program is that rural towns should be seeing speeds increasing from 6 Mbps or slower to as fast as 25 Mbps. By now many more millions of households should be seeing faster broadband due to CAF II.

What I find puzzling is that I would expect to see an upward burst of broadband customers for the big telcos because of CAF II. But the numbers aren’t showing that. There were four telcos that accepted more than $1 billion from the program, as follows, and three of them lost broadband customers in 2018:

Funding Households Per Household 2018 Broadband Customers
CenturyLink $3.09 B 1,190,016 $2,593 (262,000)
AT&T $2.96 B 1,265,036 $2,342 (18,000)
Frontier $1.7 B 659,587 $2,578 (203,000)
Windstream $1.07 B 413,345 $2,595 8,400
Total CAF II $10.05 B 4,075,840 $2,467

Windstream is the only telco of the four that gained customers last year. Windstream’s footprint is probably the most rural of the four telcos. We know that every telco is losing the battle for customers in towns where cable companies are increasing speeds on coaxial networks. Windstream seems to be offsetting those losses, and I can conjecture it’s because they have been selling more rural broadband.

AT&T is in a category all by itself. It’s impossible to know how AT&T is faring with CAF II. They are largely implementing CAF II using their cellular network (with the goal of tearing down rural copper). The company has also been deploying fiber past millions of homes and business in urban areas. They are clearly losing the residential broadband battle in urban markets to companies like Comcast and Charter. However, I can tell you anecdotally that AT&T hasn’t given up on urban copper. They have knocked on my door in Asheville, NC at least three times in the last year trying to sell DSL. I have to assume that they are also marketing broadband improvements in rural areas.

CenturyLink and Frontier are clearly bleeding broadband customers and each lost over 200,000 customers just in the last year. I have to wonder how hard these companies are marketing improved rural broadband. Both companies work in urban and suburban markets but also in numerous county seats situated in rural counties. Like every telco they are losing DSL customers in these markets to the cable company competitors.

Just like I have anecdotal evidence that AT&T is still pushing copper I hear stories that say the opposite for CenturyLink and Frontier. I worked in a few rural counties last year where the CAF II upgrades were reported as complete. And yet the communities seemed unaware of the improvements. Local politicians who bear the brunt of complaints from households that want better broadband weren’t aware of any upgrades – which tells me their rural constituents weren’t aware of upgrades.

I honestly don’t know what this all means. I really expected to find more positive evidence of the impact of CAF II. From what I know of rural America, households ought to leap at the opportunity to buy 10/1 Mbps DSL if they’ve had no broadband in the past. Are the upgrades being done but not being followed up with a marketing and public awareness campaign? Are actual upgraded speed not meeting the 10/1 Mbps goal? Are the upgrades really being made as reported to the FCC? We’re perhaps a year and a half away from the completion of CAF II, so I guess we’ll find out soon enough.

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The Industry

Windstream Turns Focus to Wireless

Windstream CEO Tony Thomas recently told investors that the company plans to stress wireless technology over copper going into the future. The company has been using point-to-point wireless to serve large businesses for several years. The company has more recently been using fixed point-to-multipoint wireless technology to satisfy some of it’s CAF II build-out requirements.

Thomas says that the fixed wireless technology blows away what could be provided over the old copper plant with DSL. In places with flat and open terrain like Iowa and Nebraska the company is seeing rural residential broadband speeds as fast as 100 Mbps with wireless – far faster than can be obtained with DSL.

Thomas also said that the company is also interested in fixed 5G deployments, similar to what Verizon is now starting to deploy – putting 5G transmitters on poles to serve nearby homes. He says the company is interested in the technology in places where they are ‘fiber rich’. While Windstream serves a lot of extremely rural locations, there also serve a significant number of towns and small cities in their incumbent service areas that might be good candidates for 5G.

The emphasis on wireless deployments puts Windstream on the same trajectory as AT&T. AT&T has made it clear numerous times to the FCC that they company would like to tear down rural copper wherever it can to serve customers with wireless. AT&T’s approach differs in that AT&T will be using its licensed cellular spectrum and 4G LTE in rural markets while Windstream would use unlicensed spectrum like various WISPs.

This leads me to wonder if Windstream will join the list of big telcos that will largely ignore its existing copper plant moving into the future. Verizon has done it’s best to sell rural copper to Frontier and seems to be largely ignoring its remaining copper plant – it’s the only big telcos that didn’t even bother to chase the CAF II money that could have been used to upgrade rural copper.

The new CenturyLink CEO made it clear that the company has no desire to make any additional investments that will earn ‘infrastructure returns’, meaning investing in last mile networks, both copper and fiber. You can’t say that Frontier doesn’t want to continue to support copper, but the company is clearly cash-stressed and is widely reported to be ignoring needed upgrades and repairs to rural copper networks.

The transition from copper to wireless is always scary for a rural area. It’s great that Windstream can now deliver speeds up to 100 Mbps to some customers. However, the reality of wireless networks are that there are always some customers who are out of reach of the transmitters. These customers may have physical impediments such as being in a valley or behind a hill and out of line-of-sight from towers. Or customers might just live to far away from a tower since all of the wireless technologies only work for some fixed distance from a tower, depending upon the specific spectrum being used.

It makes no sense for a rural telco to operate two networks, and one has to wonder what happens to the customers that can’t get the wireless service when the day comes when the copper network gets torn down. This has certainly been one of the concerns at the FCC when considering AT&T’s requests to tear down copper. The current FCC has relaxed the hurdles needed to tear down copper and so this situation is bound to arise. In the past the telcos had carrier of last-resort obligations for anybody living in the service area. Will they be required to somehow get wireless signal to those customers that fall between the cracks? I doubt that anybody will force them to do so. It’s not far-fetched to imagine customers living within a regulated telcos service area who can’t get telephone or broadband service from the telco.

Customers in these areas also have to be concerned with the future. We have wide experience that the current wireless technologies don’t last very long. We’ve seen electronics wear out and become functionally obsolete within seven years. Will Windstream and the other telcos chasing the wireless technology path dedicate enough capital to constantly replace electronics? We’ll have to wait for that answer – but experience says that they will cut corners to save money.

I also have to wonder what happens to the many parts of the Windstream service areas that are too hilly or too wooded for the wireless technology. As the company becomes wireless-oriented will they ignore the parts of the company stuck with copper? I just recently visited some rural counties that are heavily wooded, and which were told by local Windstream staff that the upgrades they’ve already seen on copper (which did not seem to make much difference) were the last upgrades they might ever see. If Windstream joins the other list of big telcos that will ignore rural copper, then these networks will die a natural death from neglect. The copper networks of all of the big telcos are already old and it won’t take much neglect to push these networks into the final death spiral.

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Regulation - What is it Good For?

Who Will Go after the CAF II Funds?

Last week the FCC announced the broadband guidelines that will be used to fund the Connect America Fund (CAF) Phase II filings that will be awarded in 2015. The FCC has set aside a little over $9 billion dollars of new CAF funding to be paid out of the next five to seven years. That’s five years for smaller recipients and up to seven years for some of the large telcos.

The new broadband goal is that any landline broadband connection built with these funds must be able to deliver at least 10 Mbps download and 1 Mbps upload. This increases the speed from the old threshold from 4 Mbps download and 1 Mbps upload. This is a really low threshold compared to the recent experimental grant program where the FCC only funded projects that delivered at least 25 Mbps download in unserved areas and 100 Mbps in underserved areas.

But setting the speed goal at only 10 Mbps download will enable rural telcos and cable companies to go after the funding if they are willing to use the funds to help to pay for extending their networks.

The telcos can use DSL to satisfy the CAF requirements, but in order to bring that DSL to rural areas they are going to have to expand fiber in their networks significantly. Current single-pair DSL technologies can deliver 10 Mbps to only about 7,000 feet of copper. That is not as the crow flies, but rather as the copper is wired. That provides  little more than a one mile circle around any given DSL distribution point (called a DSLAM).

Rural cable companies that already offer speeds of at least 10 Mbps only need to string more coaxial cable, or if they are going to new neighborhood may need additional fiber as well. However, some rural cable companies still use the first generation of DOCSIS equipment and they might need a significant upgrade of their network plus a replacement of cable modems in order to meet the new speed requirement.

Not unexpectedly, the large telcos are not happy with the increase from 4 Mbps to 10 Mbps. Many of them still deploy older  generation DSL equipment with maximum speeds between 1 Mbps to 6 Mbps. But to meet the CAF requirements they can use newer DSL for the new customers and don’t have to necessarily upgrade the older ones. It would be a bit ironic if the farms around rural towns end up with faster DSL than is available in the nearby towns.

We already know that AT&T and Verizon are trying hard to ditch their rural copper. Verizon already sold off most of their rural properties and wants to walk away from what they have left. AT&T has said that they want to walk away from “millions of lines of copper” by 2018 if the FCC will let them. Both companies want to replace landlines with wireless service, which costs more for a household and has severe data caps. So it is unlikely that these two companies are going to be seeking much CAF funding.

But there are a number of other large telcos who can’t walk away from copper because that is basically all they own. Companies like CenturyLink, Windstream and Frontier will be operating copper networks for many years to come. CenturyLink and Windstream are both expected to be major players in this second round of CAF funding.

Both Windstream and CenturyLink have complained about the new 10/1 Mbps requirement. I think this is because it is going to force them to do real upgrades to get the funding. In order to deliver that much bandwidth to rural areas they will have to move DSLAMs much further out into the field, and that is going to mean building fiber to connect to the DSLAM cabinets. And of course, typically the further away you get from a town, the fewer customers are on any given route to help pay for these new investments, especially the parts that the CAF isn’t going to fund.

One of the most interesting aspects of the new CAF fund is that that the subsidy can go to anybody who can bring the bandwidth. And so these large carriers must compete for the funds against players like electric cooperatives and wireless ISPs (WISPS). The funds are being awarded by a process called a reverse auction, because the company that asks for the least amount of support per customer in a given area will get the CAF funding. The only major requirement is that a CAF winner has to be able to deliver the required data speeds plus voice over the whole area to get the funding. They can’t just pick off pockets of customers like they might with a normal overbuild business plan.

The FCC is hoping that the CAF funding is going to bring broadband to at least several million more homes. But because of the reverse auction it’s really hard to predict how effective the funding will be. Further, if the bigger companies figure out that it’s not worth taking the funding, then much of the funding might go unclaimed. The old High Cost Fund was based upon providing service to rural places that had high costs by definition. If you built a network in one of the designated high cost places you got the subsidy to help keep it operating. But the reverse auction adds a lot of uncertainty to the process. It’s certainly possible that the large telcos might decide that the whole process is too risky to worry with and could send the FCC back to the drawing board.

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Current News Uncategorized

Telcos and Taxes

Windstream recently got approval from the IRS to restructure their company and spin off their copper and fiber networks as a REIT. This stands for Real Estate Investment Trust, a form of investment that has been around since 1960. REITs were created by Congress as a way to bundle together income producing real estate in such a way as to create a marketable security.

By IRS rules, REITs must invest 75% of the value of their company in real estate assets, cash and cash equivalents and government securities. What the IRS has done with this ruling is to declare that copper and fiber networks are real estate. This seems like an odd ruling since common sense would tell you that copper and fiber are not real estate in the traditional sense.

The whole purpose for Windstream to do this is to avoid taxes. They estimate that being treated as a REIT will save them about $100 million per year in income taxes. Wall Street immediately boosted Windstream’s stock and also boosted the stock of other telcos on the assumption that they will all follow suit. The stocks of telcos, CLECs and cable companies rose on the news.

The number of REITs has grown significantly in recent decades. In 1971 there were only 34 REITs and by June of this year they have grown to 210. The classification of Windstream as a REIT is not without precedent since American Tower and all of its cellphone tower assets were classified as a REIT a few years ago. The IRS had recently clarified that the definition of real estate for purposes of REITs to include land, permanent structures and structural components. One can only assume that the IRS believes that wire networks are structural components.

Large corporate tax avoidance has been in the news lately with a number of corporations undertaking ‘inversion’ to become classified as foreign corporations to avoid paying US income taxes. In the last few weeks the Walgreens drugstore chain had announced that they were going to undergo inversion but then changed their mind after they got a lot of public pressure. Congress has been looking to close the inversion loophole.

And now, all of a sudden it is the telcos that are going to be avoiding taxes. I must say that this dismays me personally. For several decades I have tried to do my best to buy local and to buy American whenever I can. In my mind, an American company that refuses to pay its fair share of income taxes might as well be a foreign company and I try to vote with my pocketbook and boycott such companies whenever I can.

I’ve always felt that American corporations ought to pay their full share of income taxes just like the rest of us. The corporations that are taking advantage of these tax loopholes all became successful due to being in the US. It’s our American laws and the American business environment that helped these companies get started and thrive. It feels un-American when a corporation suddenly turns their back on all of us to save from paying their fair share of taxes. Obviously corporations are in the business of maximizing their return to shareholders, but at the same time I think corporations have a moral obligation to be good citizens and do their fair share to support the country that supports them.

I understand that there are multinational corporations that do business all over the world. It’s not entirely clear where a company like Apple ought to pay taxes since they manufacture their phones overseas and sell many of them overseas. But there is no ambiguity with a company like Windstream. All of their poles and copper and fiber are sitting in the United States and deriving revenues that are all from the United States.

I understand that Windstream has not taken the inversion option and declared themselves to be a foreign corporation. But they might as well have done so since they instead are taking advantage of a very questionable loophole that has the same effect as being a foreign corporation. The percentage of federal tax revenues that the federal government receives from corporations has dropped precipitously over time from a high of nearly 40% during the 1940s and projected to be only 13.5% for 2015.

I say shame on Windstream. This might be good for their shareholders as witnessed by the boost in their stock price after the announcement. But in the long run this is bad for the country and bad for all of us. If Walgreens had decided to take the inversion and declare themselves to be a foreign corporation I was prepared to move my pharmacy business to CVS. I’ve always voted with my pocketbook and I wish more people would do so. But it’s going to be hard to vote with your pocketbook if all of the major telcos declare themselves as REITs. Unfortunately the vast majority of us don’t have any options for telecom services other than these giant companies.