With subsidies in sight, telcos reduce investment. There’s no firm data, but the net result of the $7B broadband stimulus may have been fewer unserved homes connected. Since 2009, carrier investment in broadband in rural areas has gone down drastically.  Ajit Pai is moving forcefully on his plan to promote rural broadband, for which I applaud him. 

Takeaway: Pai wants to spend $billions to bring broadband to the unserved. Under current plans, most of the money is likely to go where telcos would build without a subsidy, buy obsolete technology, or give the telcos two or three times what the job should cost. Any spending on wireless except where towers or backhaul is unavailable should be assumed wasteful until proven otherwise.  Realistic costs need to be developed and subsidies allocated on that basis.

Pai is putting $4.5B on the table this week to bring 4G wireless to those they project won’t be served without it. I believe Pai is honorable but is being misled by staffers and lobbyists. He proudly signed his name to a statement below that the $200M he approved for New York State would go to “the deployment of broadband infrastructure to unserved areas of rural New York.” (Emphasis added.) Most of that money will not go to unserved areas.

Some grants are going to politically connected groups. I’ve read the rules and the approved proposals. The amounts look excessive based on the limited public details, the expected response if the bidders knew they would have few rivals and inadequate oversight.  At first look, the bids show a pattern that a statistician would find suggests a breakdown in the program. (Unconfirmed, but worth a look by Jerry Ellig, the new Chief Economist.)  

Jonathan Adelstein, then Rural Utilities Administrator, provided insight into the problems here from his negotiations with Qwest. I had said to him, “25% subsidies would be enough to tip the needle on many lines.” If you assume the telcos had built only those with sufficient return, there would be many lines not far from that cutoff point. Even a 25% subsidy would be enough in those cases. (Actually, companies like Qwest, Century, and Frontier didn’t build in many places even where the numbers worked because of capex restraints.)

Adelstein knew that as well as I did, but believed his job was to spend the stimulus money despite few proposals to actually reached the unserved. To get Qwest into the program, he offered a 50% subsidy. Qwest refused, demanding 75%. That was probably twice the amount necessary and Adelstein rightly refused. They knew the government had few ways to reach those unserved without paying whatever the telcos demanded.

A few years later, Qwest is part of Centurylink. Many of those lines are now upgrading under CAF with what amounts to a greater than 100% subsidy. 

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Ellig has looked at government efficiency, including writing Government Performance and Results: An Evaluation of GPRA’s First Decade. His work on the possible harms of regulation has already been accepted by Chairman Pai, including his opposition to Net Neutrality. His time at the FCC would be much more productively spent looking at the massive waste in the broadband and universal service programs, including how microeconomics can ferret out likely problems. There are several still at the FCC with relevant experience in the empirical economics required here as well as several who worked on the broadband plan who would be great to bring back.

The waste under Democrats Strickling, Genachowski, and Wheeler was a high proportion of the over $10B spent hoping to extend broadband. After 8 years and massive spending, not even 2M of the “unserved” ~6M homes have been reached with landlines or comparable wireless. That’s fewer than would likely have been reached without any government spending, based on the company plans from 2007-2008. He needs to dig into the details of what he’s proposing. Nearly all cells with decent backhaul will be upgraded to 4G; Verizon and AT&T have already reached 98% of homes. Government money should go to building towers and backhaul where that’s missing, not filling in network holes the carriers would likely cover. 

Pai is counting on “Reverse Auctions” to keep costs reasonable. Greg Rosston and Scott Wallsten have long recommended auctions, once bringing together a petition of prominent economists. If I remember right, Nobel Laureate Ken Arrow was one of the signatories. Their contentions make sense if there are a sufficient number of entities with the necessary resources to bid. Does Pai have reason to believe sufficient bidders are likely? 

Auctions do not work well if there is only one seriously interested bidder. In many extreme rural areas, only the local telco has the ability to deliver broadband at a reasonable cost. You need to have affordable backhaul and a local staff for repairs. Because the “unserved” are in very small clusters, often less than 100 homes, it’s usually impractical for a new entrant to bring in a backhaul connection.

The telcos know this and like Qwest are finding ways to collect excess subsidies.

Ellig has the skills and resources to identify where the lack of bidders are likely driving up the subsidy demanded.  Julie Knapp and Walter Johnston at the FCC OET keep a very low profile but are deeply informed on what’s happening in the industry. Michael Ha is close to key 5G engineers and can provide perspective on how the gigabit+ technology should influence policy.  Between Ellig’s theory and others practical information, they should be able to project whether most existing towers will be upgraded.

Today’s GIg LTE has 100x the capacity of most 3G cells and the new equipment is remarkably inexpensive. Almost all cable nodes were upgraded to DOCSIS 3.0 because of low equipment prices, I expect similar on the remaining cell towers.

Avoiding overspending requires a judgment on what would be reached otherwise and how much things should cost. The Broadband Plan worked on similar problems in 2010. They performed dozens of interviews with experts in the field to estimate standard costs given different densities and topographies. (I was one, and know several practicing network engineers who gave them the straight dope.) The numbers weren’t perfect – the larger firms I’m pretty sure had noticeably lower costs – but were a good starting point. These professional estimates often were 50%-70% lower than the costs reimbursed by the stimulus.  

These professional estimates often were 50%-70% lower than the costs I found reimbursed by the stimulus.  In some cases, the high costs were appropriate, including some rough terrain in Alaska

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In 2009, the U.S. committed to a $7B Broadband Stimulus, dedicated to reaching the unserved. (Those without any choice but satellite and its latency challenges.) Both George Bush in 2004 and Barack Obama in 2008 had promised to bring affordable broadband to all Americans. The clamor to reach these last few million was so loud, telcos became confident the government would pay for it if they just stopped their own investment. They aren’t stupid and refused to spend their own money. Before 2009 and the expected huge stimulus program, most telcos expanded their networks each year, based on available capital funds

For example, the FCC under CAF is giving AT&T $hundreds of millions to upgrade existing towers, most of which already have 4G. An AT&T exec in California said communities didn’t need to worry about the impact of the CAF-funded project, since it was almost all going to be on existing towers. I don’t know what loophole AT&T is using to get the money, but it’s a pretty safe guess they would have upgraded most of them without the government paying. 

Verizon & AT&T both claim they have 4G to 98% of the country. They are probably fudging the figures a little, but 4G now reaches all but 3-5M of the 110M-126M U.S. households.  Let’s call it 5M. Probably half the < 5M targeted would soon be served without a subsidy – if the telcos knew no subsidy was likely. Before spending a penny on subsidies, the FCC needs to do a thorough assessment of what would be built without government money.

I remember AT&T/SBC Chairman Ed Whitacre and Verizon President Larry Babbio telling Wall Street “These are our plans for the next few years and we’ll continue building after that.” Whitacre in the 1999 Project Pronto announcement said 80% by a promised date and “all our customers” after that. I confirmed that with him in 2003. At the same time, Babbio told Wall Street they would go to over 90%. Both all but froze their buildouts soon after Obama was elected and proposed the stimulus.

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Some other economic analyses that could save money:

Prices of equipment and services across different school districts in USAC funding. There is essentially no oversight of whether the districts are paying too much and many are. USAC audits concentrate on whether the paperwork is correct rather than whether the amount is prudent. (My source on this is a few years old and it could be outdated. He was a senior USAC official, citing directions from the FCC Chair.)  Are districts with 90% reimbursement more careless than others getting only 20%?

Financial incentives of the USAC Board and management to control costs. 16 of the 19 members of the board “supervising” USAC represent entities getting subsidies. A former member told me the result was the Board was a total rubber stamp. He said he resigned because the board did so little the meetings were totally boring. Would board members whose primary goal is to avoid waste reduce spending? Would putting the management contract out to bid save money? Does NECA or its senior executives have financial ties with Solix, its former for-profit subsidiary, that might affect decisions? (Solix works on over $5B of government programs, many involving USAC.)

Relative cost of a mixed constellation of LEO, MEO, and geostationary satellites compared with existing USF programs. Thousands of low and mid earth satellites are being launched, many for communications. Geostationary satellites now provide much more speed and capacity, but their 22,000 mile high orbits add serious latency. LEO and MEO sats don’t have the latency problem, but I’m told have important capacity limits. Could a mixed network of satellites provide a functional equivalent of universal service programs at a lower cost?   

Professors Noam, Benkler, and Werbach did important work on the spectrum commons and the inefficiencies of monopoly licensed spectrum. Wi-Fi has shown what’s possible.  There’s no single figure for the greater efficiency, with estimates ranging from 2X to 5X. Verizon and Qualcomm have now proven that flexible spectrum usage works in the LAA testing, which means less licensed spectrum is needed. Top engineers including FCC Chief Technologist Henning Schulzrinne believe going forward shared spectrum is the way to go.  That means spectrum licensing can be one of the most harmful of FCC regulations. How should the FCC respond to that?

Readers – more suggestions welcome.

STATEMENT OF CHAIRMAN AJIT PAI

Re: Connect America Fund; ETC Annual Reports and Certifications,

WC Docket Nos. 10-90, 14-58. One of the most significant lessons I’ve learned during my time at the Federal Communications Commission is that there is a digital divide in this country—between those who have access to cutting-edge communications services and those who do not. As I stated in my first public remarks as Chairman, I believe one of the FCC’s top priorities going forward should be to close that divide. I am committed to doing what I can to ensure that all Americans benefit from the bounty of the digital age. Today, the FCC begins to deliver on that commitment. In the first week of the newly-constituted Commission, and in our first vote, we adopt measures to aid the deployment of broadband infrastructure to unserved areas of rural New York. Specifically, by granting New York State’s petition for a waiver of the Connect America Phase II auction program rules, we take common-sense, fiscally responsible steps to coordinate funding between the federal Universal Service Fund and the state’s New NY Broadband Program, which aims to “ensur[e that] all New Yorkers have access to high-speed internet.” By helping to provide Internet access to tens of thousands of locations in rural New York, we take the first of many steps toward bringing digital opportunity to all Americans. Essential to this result was close, bipartisan collaboration among many officials at the state and federal level. In particular, I am grateful to New York Governor Andrew Cuomo, Senator Charles Schumer, and Representative Chris Collins for working with me to ensure this federal-state partnership progressed from promise to paper. And I especially appreciate the hard work of the Commission’s staff—specifically, Kris Monteith, Carol Mattey, Ryan Palmer, Alex Minard, Heidi Lankau, and Dana Zelman—and the New York State Broadband Program Office for working together to ensure a brighter future for rural New York.  

Today, the FCC begins to deliver on that commitment. In the first week of the newly-constituted Commission, and in our first vote, we adopt measures to aid the deployment of broadband infrastructure to unserved areas of rural New York. Specifically, by granting New York State’s petition for a waiver of the Connect America Phase II auction program rules, we take common-sense, fiscally responsible steps to coordinate funding between the federal Universal Service Fund and the state’s New NY Broadband Program, which aims to “ensure that all New Yorkers have access to high-speed internet.” By helping to provide Internet access to tens of thousands of locations in rural New York, we take the first of many steps toward bringing digital opportunity to all Americans.

Essential to this result was close, bipartisan collaboration among many officials at the state and federal level. In particular, I am grateful to New York Governor Andrew Cuomo, Senator Charles Schumer, and Representative Chris Collins for working with me to ensure this federal-state partnership progressed from promise to paper. And I especially appreciate the hard work of the Commission’s staff—specifically, Kris Monteith, Carol Mattey, Ryan Palmer, Alex Minard, Heidi Lankau, and Dana Zelman—and the New York State Broadband Program Office for working together to ensure a brighter future for rural New York.  (Emphasis added)