Viewpoints
The demise or reduction in the Affordable Connectivity Program’s reach is by far the biggest reason for the current unexpected decline in deployer construction volume and equipment vendor sales. But tight money, high interest rates, and BEAD’s slow start, along with obsolete carrier thinking, doesn’t help.
So, what happened to the 20 percent boost in deployments BEAD was expected to bring? Wait until next year.
By: Steven S. Ross, Broadband Communities
Uncertainty breeds caution, especially when money itself costs more and is hard to get. But, with the $42 billion Broadband Equity Access and Deployment (BEAD) spigot set to turn on in about six months, deployments have actually slowed.
Financing is indeed difficult, but not just because interest rates are high. Almost everyone I talked to uses the phrase “death of a thousand little cuts,” along with one big one, the Affordable Connectivity Program (ACP) holdup.
ACP is tied to financing because it has been assured cash flow for broadband providers — $30 (up to $75 for tribal communities) a month to households with incomes below 200 percent of the poverty line. The money went directly to providers, who were often aided in marketing by local governments, the Federal Communications Commission (FCC) and nonprofits. Broadband investors and lenders liked the assured cashflow.
The program ran out of money in June. I covered the issues in January, and a bill that would extend ACP for another year, with a $6 billion price tag, is still pending.
Sen. John Fetterman (D-PA), wants to make ACP permanent by incorporating it into the Universal Service Fund, supported by taxing the ever-declining pool of voice subscribers. He sees ACP as needing $7 billion a year.
For the first three months of this year, fixed wireless subscribership grew by 879,000 compared to 925,000 in 1Q 2023. Fiber added 487,000 versus 517,000 in 1Q 2023. Cable dropped 169,000 compared to a gain of 71,000 in 1Q 2023. DSL lost 560,000 compared to slightly higher losses (571,000) in 2023. Thus, although fiber saw modest gains, total “wired” broadband subscribership, excluding cellular fixed wireless access and satellite, dropped 0.7 percent year-over-year. Including wireless, it rose just 2.3 percent, according to figures from the premium MoffettNathanson report.
But, it pales with the impact of ACP not being renewed. By the end of the quarter, ACP subscribership (phone and internet) was already declining from its peak of 22 million, so the impact this year will be considerable if, as expected, ACP is not renewed at all or renewed with tighter eligibility rates.
Obviously, this does not mean 22 million subscribers will disappear. However, maybe a quarter of ACP subscribers will. And more money will likely be spent to retain the others. For example, Virginia’s Shentel says it had about 4 percent of its 155,000 internet subscribers enrolled in ACP. About three out of every four subscribers were customers before ACP’s $30 discount. Not a huge disruption. Though, deployers in less wealthy areas might differ.
Financing
Bankers, Wall Street, and equipment vendors alike are well aware of the national overall trends.
Wall Street is happy. So far this year, through the last week of June, the S&P 500 is up about 15 percent, while the communications sector of the S&P is up 28 percent, almost double. Over the past five years, communications stocks (89 percent rise) have tracked the broader index (86 percent), lagging a bit until last year when communications did better.
But Wall Street is not the economy and new deployments tend to be in higher-cost rural and currently unserved or underserved areas. Financial firms took note of the ACP cuts. They noted that many winners of FCC Rural Digital Opportunity Fund (RDOF) have turned back some of the grants they won. They take note of (historically unreliable) Census data on declining household formation.
The data are reported with a lag of several months and are not seasonally adjusted but fell about 300,000 from 131.28 million households in December 2023 to 130.97 million in March. Census data also shows that housing stock grew by about 1.5 million from the end of 2022 to 145.3 million at the end of 2023. That’s in line with new construction, renovation of old construction to create more units, minus losses due to natural catastrophes and obsolescence.
Similarly, the regional banks also note they don’t have much money to lend.
There has been a flight of capital to the fast-rising stock market and to larger, national banks. Some depositors, especially local businesses with deposits larger than the $250,000 FDIC protection limits, have been spooked by regional bank failures, even though all large depositors have been made whole so far.
Normal bank customers see evidence of this strain when they get hefty bonus offers for shifting deposits to other banks.
In normal times, the Federal Reserve would consider increasing the money supply to match growth in economic activity… especially since most of the national media ignores that mechanism. But leery of adding to inflationary pressures, the Feds have held back.
In normal times there would be more billing flexibility among vendors looking for business as well. But many are using that tool sparingly because, they say, they see the national customer trends clearly. In addition, they also have less access to bank financing than normal.
In normal times, more banks would be strong enough to issue acceptable letters of credit (often required in federal loan/grant programs). Instead, the feds are rushing to reduce their standards for which banks qualify.
Federal budget activity
Apart from the multi-year agriculture and food/nutrition bill, the US Dept. of Agriculture (USDA) appropriation for fiscal year 2024 (ending September 30) included $100.4 million for Reconnect5, of which $10.4 million was “earmarked” ahead of time by senators and representatives – a growing, nasty trend – nasty even though the earmarked funds were added to the original appropriation requests. They skew the calculations on whether the core program provides benefits that are worth the cost.
This is also a reduction in ReConnect funding compared to rounds 3 and 4. Another $49.6 million (with $9.6 million earmarked) was appropriated for telemedicine and distance learning.
Other issues
Not one person I talked to – at banks, in Congress, in deployer and state broadband offices – complained about labor shortages. But no deployer, design, or construction firm I talked to was hiring at more than the replacement rate. This may create a bottleneck as BEAD funds start getting spent.
The BEAD provision authorizing the National Telecommunications and Information Administration to require a low-price tier in BEAD funding applications has been challenged by Republicans in Congress and some carriers in court as prohibited “rate-making” by the federal government. In normal times, this would be a sideshow. Now, the uncertainty hurts.
Deployer balance sheets are dreadful, and more expensive to carry as older debt is rolled over at higher interest rates. DOCSIS is in one of its annoying transitions, to 4.0, with passive optical networks having become a cheaper and more flexible alternative. Many deployers are still trying to figure out how to finance the replacement of Chinese equipment deemed to be a security risk.
This has led to customer care lapses and a scramble to offer lower-than-ever promotional rates. This, however, has led to more churn, thus increasing marketing costs to replace lost customers.
In my own large, Boston-area condo building, for instance, residents switch back-and-forth between RCN and Comcast as first one, then the other, offers good service and low intro rates before inevitable attempts to inch them higher after a year or so. Today, with so much carrier-independent content making switches easier, that strategy is great for customers but not for carriers.
T-Mobile, my longtime cellular provider, benefits by having most of my calls serviced through the other carriers’ Wi-Fi anyway. More than a decade ago, it decided that anyone over 55 could have a lifetime locked-in rate – about $60 a month for two lines, before taxes. It has been slowly rolling that back, claiming that since customers on the plan can quit at any time without penalty, they don’t really have a contract. But yes, they do.
There has been a lot of customer pushback. When I was told my rate would go up $10 – a 17 percent increase – I complained, despite the fact the rate is not a bad deal. Just not what was promised. Now my rate shows up as $70 a month plus taxes, minus $10! But in my area, at least, T-Mobile still advertises two lines for $60! Letting me keep the bargain and not paying extra to replace me would seem more logical.
Slim down ACP, target it better, and maybe the pressure to do silly things will decline.
Contact the Hawk with story ideas at steve@bbcmag.com. That MDU housing story from last October, referenced earlier? It was awarded second place nationally in data journalism for 2023 among all business magazines by the American Society of Business Publication Editors.
