First with fiber: Private capital maneuvers for first mover advantage

Some critics, including telecom writer Karl Bode, have characterized Tier 1 players’ sudden embrace of public-private partnerships, including those based upon an open access approach, as a strategic move to capture federal subsidies before smaller players can. In comments on Broadband Breakfast’s website, Bode said that this shift was less about promoting competition and more about securing government funding while maintaining market dominance.

“Now that there's billions of dollars of potential subsidies there for them to glom onto, they want to get a hold of this cash before a municipality, cooperative, or city-owned utility does,” Bode said. “I find the flip funny given their historical, often virulent lobbying opposition to both open access policies, open access networks, and open competition – especially municipal or cooperatives – more generally.”

https://broadbandbreakfast.com/exclusive-series-at-t-t-mobile-bet-big-on-open-access/?ref=alerts-newsletter

Bode's analysis goes to the fundamental tension between investor owned advanced telecom infrastructure and the socialization that tends to occur when the availability of private investment capital is insufficient relative to market demand for advanced telecom services. Private investment capital however realizes the long term value is in owning the fiber connection to homes and other premises as well as first mover advantage that accrues to whomever first installs it.

That's what's attracting private equity as in the case of AT&T's Gigapower joint venture with BlackRock, mentioned in this article. That infuses private capital to finance those fiber connections that AT&T couldn't otherwise without displeasing its current and future investors. AT&T gets help with the sizeable capital expenditures needed and BlackRock retains the option to sell out its stake in the future to AT&T or other network assets consolidator. 

Private capital also wants to foreclose public and consumer utility cooperative ownership since it too would benefit from first mover advantage and disadvantage private investment over the long term.

AT&T’s suggestion that edge content providers contribute to funding universal service calls for new paradigm of U.S. advanced telecom

AT&T wants to see edge content providers contribute to the cost of connecting all Americans to advanced telecommunications infrastructure. It’s a company cudgel first wielded two decades ago by then AT&T chief Ed Whitacre. Whitacre was famously quoted as saying these providers should not be able to “ride my pipes” for free.

“The seven largest and most profitable companies in the world built their franchises on the internet and the infrastructure we provide,” noted current AT&T CEO John Stankey in remarks this week to the USTelecom’s Leadership Summit posted at AT&T’s policy blog. “They stand to benefit handsomely from every home that is incrementally connected to our networks. I doubt there is anyone in this room who wouldn’t gladly swap places with the return profiles of Google, Meta, Apple and others.” Stankey continued:

“These companies make money offering today’s equivalent of yesterday’s universal voice service. Why shouldn’t they participate in ensuring affordable and equitable access to the services of today that are just as indispensable as the phone lines of yesteryear?”

Stankey however raises a broader policy issue of how universal service is to be attained and specifically the high cost of the ownership, financing, and operation of its infrastructure in the digital IP era as it was for copper cable delivered analog voice telephone service in the previous century. There is no clear, long term policy in place to do so. Policymakers have instead resorted an aspirational policy of throwing money at the challenge in a Pinata policy of competitive, one off grants, each with separate funding sources and eligibility rules, a situation decried by Stankey:

“By splitting the funding across many departments, we’ve got all these agencies examining the same problem… but they’re looking at it through the wrong end of the telescope. So what’s the solution? Streamline the design. Align agencies, widen the aperture, and focus on the larger problem we all want to solve.”

In his remarks, Stankey criticized policymakers who “have prioritized outcome-based regulatory approaches and political expedience at the expense of effective market-based capital allocation.” This goes the heart of public policy to attain universal service. By definition, universal service is a measurable outcome. Policymakers are thus right to set that as the public policy goal. But over the past three decades, the market-based scheme has been unable to reach it because the goal of universal service is misaligned with the needs of investor owned companies that own the great majority of advanced telecommunications infrastructure. 

Their mission is not to modernize the twisted pair copper that reached nearly every American doorstep in the 20th century to fiber. Rather, it’s to generate relatively rapid return on investment and generous utility dividends shareholders have received for many decades from the assured revenue stream of voice telephone service. Consequently, areas where population density and household income are not seen as good risks and sufficiently profitable are passed by. This despite billions in subsidies and trillions of dollars of investment by investor owned companies like AT&T, another long running company talking point.

Suggesting content providers contribute to the cost of creating near ubiquitous fiber as author Susan Crawford envisioned in her 2019 book Fiber: The Coming Tech Revolution—and Why America Might Miss It also suggests a wholesale reorganization is needed. One that recognizes that advanced telecommunications calls for a new paradigm providing more optimal alignment of goals, incentives, resources and rewards for Crawford’s vision to be realized.

The present misalignment generates way too much adversity, frictional costs, and posturing and protectionism instead of good public policy benefiting all Americans versus making winners of some and losers of others.

AT&T chief: BEAD goal should be universal service -- but not "devolve" to universal FTTP

AT&T CEO John Stankey said the goal of the Broadband Equity, Access, and Deployment (BEAD) Program should be universal service, leveraging $42.5 billion in tax dollar subsidies appropriated in the Infrastructure Investment and Jobs Act of 2021(IIJA) to attract private investment to attain it.

But while universal landline service was achieved for copper delivered voice telephone service in the 20th century, the program goal should not be to modernize it with fiber for the 21st as prioritized by the BEAD Notice Of Funding Opportunity (NOFO) as the best and highest use of public funds. “A project that will rely entirely on fiber-optic technology to each end-user premises will ensure that the network built by the project can easily scale speeds over time to meet the evolving connectivity needs of households and businesses and support the deployment of 5G, successor wireless technologies, and other advanced services,” a footnote in the NOFO states.

However in remarks delivered at the USTelecom’s Leadership Summit this week posted at AT&T’s policy blog, Stankey argues the program “shouldn’t devolve into building fiber to every home, which would exhaust funding before every American is connected.” Stankey also lamented the state of U.S. telecom policy. “I’ve probably been around too long, but in all my years I don’t know that I recall a time when we seemed more adrift confronting the big telecom policy issues.”

POTS, PSTN cannot afford to retire

Anybody not involved in the telephone business will probably be surprised to find that the old TDM telephone networks are still very much alive and in place. The old technologies were supposed to be phased out and replaced by digital technologies. The FCC started talking about this before 2010. In 2013, Tom Wheeler, the FCC Chairman at the time, announced an effort to force the needed changes, which was dubbed the IP Transition. The goal of the transition was to upgrade and replace the public switched telephone network that was used by every telco, CLEC, and cable company for exchanging voice traffic.

https://potsandpansbyccg.com/2024/06/27/can-we-please-kill-legacy-telephone-requirements/

Analog voice service over the legacy publicly switched telephone network (PSTN) was declared at end of life in 2009 -- around the same time the United States should have fully replaced it with Internet protocol (IP) delivered over fiber to the premise (FTTP). It wasn't because AT&T and Verizon couldn't afford to retire it as FTTP modernization lagged.

ROI challenge delayed America’s modernization of copper to fiber in 1990s. It persists in the present as demand drives crisis of access and affordability.

While copper lines account for just 5 per cent of networks in the US, Sambar noted a single copper line must be maintained all the way out to a customer’s location. There could be thousands of copper lines sheathed at a central office, which need to be maintained to serve the customer who is miles away with the single line.

The copper lines also require massive switches in central offices to provide voice services, which Sambar explained use eight to ten times the amount of energy as a server. AT&T could replace the switches with two servers in a central office, which would cut down on the energy cost, but the servers will need software, installation and rewriting all the systems that were written in the 1960s or 1970s. All of which will cost more than keeping the switches.

“The payback period is 15, 16, 18 years long so it’s not economical to do it,” Sambar said.

https://www.mobileworldlive.com/att/att-makes-case-against-keeping-copper/

The long-term ROI issue AT&T’s network chief Chris Sambar raises was as relevant in the 1990s during the Clinton administration as it is today. Had telecom policymakers done a diligent job of assessing the costs and economics, they would have asked if investor owned telcos like AT&T that must generate returns on investment over relatively short periods were up to timely modernizing the legacy POTS copper outside plant to fiber and installing optical switches in COs and field distribution equipment. Timely as by the late 2000s.

And if it was determined telcos were not, then alternatives such as public and utility cooperative ownership -- that the Biden administration noted in its original 2021 infrastructure bill don’t face the additional cost burden of earning shareholder profits -- should have been developed. None were.

Telcos were left to deploying now obsolete DSL technology over decades old copper. Given the Biden administration’s recent assessment of the merits of the public and utility coop models and the ongoing ROI challenge facing investor-owned providers, the conditions for developing those alternatives remain in place today.

The logical flaw in AT&T's claim copper telephone landlines no longer needed

"AT&T said in a statement that input and feedback from community stakeholders, including comments in public hearings held and planned “is a critical part of the process of upgrading customers from outdated copper lines to more advanced, higher speed technologies like fiber and wireless, which consumers are increasingly demanding.” (Emphasis added)

https://www.mercurynews.com/2024/02/28/opposition-mounts-to-atts-plan-to-stop-landline-service-in-most-of-bay-area/

There is a logical flaw in this reasoning that suggests modernizing the legacy copper voice telephone lines to fiber to the premises (FTTP) has and is occurring because customers demand it. Hence, the logic goes, there is no need to keep the copper landlines. 

The issue isn't customer demand but rather FTTP availability. It's absent in much if not most of AT&T's service territory because AT&T and other telcos instead of replacing it with FTTP kept it in place for decades for dialup and digital subscriber line (DSL) internet. If there had been a timely and orderly transition to FTTP from copper, the issue of whether to keep copper landlines in place wouldn't be an issue.

AT&T might reasonably argue the copper wasn't replaced with FTTP because the business case -- meeting internal ROI requirements -- wasn't there. That calls for a lower cost business model such as a consumer utility cooperative or public ownership that doesn't have to generate profits for investors and pay income taxes.  

Update 4/18/24: AT&T California offered the self evident solution: replace the copper with fiber:

[W]e are working with communities across California to upgrade our older copper networks to more resilient, advanced technologies like fiber. For rural communities, upgrading our network not only helps narrow the digital divide, but it also means improving network resiliency, which helps networks withstand and recover from natural disasters and severe weather events.

Open access fiber: Public ownership offers lower cost operating model. Private ownership less constrained capital access.

Gigapower CEO Bill Hogg – the brand name for AT&T’s joint venture with BlackRock’s Global Infrastructure Fund to build open access fiber delivery advanced telecommunications infrastructure -- boasted other open access networks would be unable to scale up like Gigapower. Gigapower will be “much larger than any other provider in the space,” Hogg declared at a webcast panel presentation last September hosted by Broadband Breakfast. “The scale at which we are going to operate will be a differentiator in the U.S. marketplace.”

Publicly owned open access networks like UTOPIA Fiber, owned and financially backed by a 20 Utah municipalities, operate with a built in cost advantage over investor owned infrastructure like Gigapower. They operate free of the need to generate profits and earnings dividends for investors and income tax liability. Those advantages should provide them the ability to match the scale of Gigapower as regional open access networks.

But that advantage could be offset by freer, ready access to expansion capital from BlackRock’s Global Infrastructure Fund. The fund includes state and local pension funds, sovereign wealth funds, and family endowments, according to Adam Walz, managing director of the fund. According to Walz, the fund is focused on investments in digital infrastructure opportunities across fiber networks, data centers, and wireless infrastructure.

AT&T and BlackRock can independently make decisions on which Gigapower projects to build and finance. By contrast, publicly owned open access networks rely on capital bonds sold on public bond markets to finance construction. Bond underwriters set the terms and conditions of bond offerings and may require additional sources of repayment security beyond network revenues from end users and lease fees paid by internet service providers to access the network. That limits the scale and pace at which they can expand.

Going forward over the long term, this boils down to a competition between private and public capital and which is most responsive to slake the nation’s deep thirst for fiber to replace outdated metallic delivery infrastructure. The competition will likely play out at least initially in densely developed areas since both forms of ownership presently prefer them over less dense areas: privately owned for more rapid ROI and publicly owned to better assure sufficient bond debt servicing.

AT&T’s two pronged fiber build out strategy

AT&T appears to be pursuing a two pronged strategy to build out fiber to the premises (FTTP) delivery infrastructure. The first is targeting densely built up metro areas with its Gigapower joint venture with BlackRock’s Global Infrastructure Fund. The second using subsidies extended to the states from the 2021 Infrastructure Investment and Jobs Act’s (IIJA) Broadband Equity, Access, and Deployment (BEAD) Program to build FTTP infrastructure in less densely developed areas that meet the program’s funding eligibility requirements.

Last fall, AT&T urged states to award the BEAD subsidies for contiguous builds that qualify as unserved (where at least 80 percent of serviceable addresses in the project are not offered throughput of 25/3 Mbps or better) and underserved (where at least 80 percent of serviceable addresses are not offered throughput of 100/20 Mbps or better). However, under BEAD, states must first exhaust their funding allocations on subsidies for projects addressing unserved locations.

As noted in the above linked blog post, AT&T’s BEAD funding appears predicated on the two generations of Digital Subscriber Line (DSL) technology that runs over its legacy copper voice telephone delivery infrastructure. The first, ADSL, will in many less densely developed areas qualify as unserved since it typically provides bandwidth lower than 25/3 Mbps. However, these areas are often adjacent to those served by its second generation VDSL technology. Those areas won’t qualify as unserved but could likely qualify as underserved.

Federal and state officials overseeing the award of BEAD funds will likely come under pressure from AT&T to liberally interpret the program rules to allow subsidization of contiguous FTTP projects spanning areas including both types of DSL technology. Expect AT&T to argue that this will provide the most efficient use of the funds and cover the greatest number of serviceable locations as well as meeting the BEAD program's preference for FTTP.

Report: GFiber parent Alphabet seeks outside investment as part of spin off strategy

Metro fiber to the premises (FTTP) player GFiber is seeking external investment to capitalize its expansion. Reuters (via yahoo! finance) reports GFiber’s parent company Alphabet has retained an investment bank to start the process of selling equity in the company, citing a source close to Alphabet's efforts.

Reuters quoted the source as saying the goal is to spin off the unit, formed in 2010 as the nation grew impatient to migrate from its legacy copper telephone service delivery infrastructure to fiber-delivered Internet protocol-based voice, video and data.

"This next step of raising external capital will enable them to scale their technical leadership, expand their reach, and provide better internet access to more communities," Ruth Porat, Alphabet's president and chief investment officer, told Reuters in a statement. 

GFiber’s debut -- branded as Google Fiber -- was enthusiastically welcomed by localities looking for a more rapid alternative to bring fiber connections than the slow walking legacy incumbent telephone companies. But the company faces the same high capital expenses that come with utility infrastructure construction. It identified no overwhelming technological or marketing advantage over the incumbents as a Google 10X project, throttling back expansion plans in 2016, most notably and somewhat embarrassingly in its Silicon Valley region headquarters. "There’s no flying-saucer shit in laying fiber," Google co-founder Larry Page later explained.

In a move similar to Alphabet’s seeking outside investment capital for GFiber, AT&T in late 2022 entered into a joint venture with private equity firm BlackRock to build fiber connectivity to an initial 1.5 million customer locations beyond AT&T’s current footprint branded as Gigapower. Gigapower CEO and retired AT&T executive Bill Hogg, asserted in 2023 that Gigapower will be “much larger than any other provider in the space. The scale at which we are going to operate will be a differentiator in the U.S. marketplace.”

GFiber parent Alphabet’s move appears aimed at rivaling Gigapower’s plans. GFiber has a presence in 18 states and plans to expand to 25 new metros, finalizing a franchise for the Las Vegas metro this week, a metro also on Gigapower’s target list. It too will be entering the metro, according to the Las Vegas Review Journal.

Coalition of California civic, advocacy groups accuse AT&T of cherry picking, gaming federal subsidy program

A broad-based coalition of civic and advocacy groups led by the California Alliance for Digital Equity are accusing AT&T of gaming a California state advanced telecommunications infrastructure subsidy grant program. The accusation was detailed in a December 11, 2023 letter to the California Public Utilities Commission (CPUC). The letter also complains the CPUC has not provided an appropriate and transparent process to comment on the projects proposed by AT&T under the CPUC’s Federal Funding Account (FFA) program. Nearly 900 objections to proposed builds were filed with the CPUC on 484 grant applications for projects in each of the state’s 58 counties totaling more than $4.6 billion -- more than double the $2 billion available.

The funding is authorized by 2021 California legislation allocating federal funding appropriated by the federal American Rescue Plan Act (ARPA). Similar to the federal Broadband Equity, Access and Deployment (BEAD) program funded under the Infrastructure Investment and Jobs Act (IIJA) of 2021, eligibility is limited to “unserved” areas for which no landline service is offered to “an entire community” of at least 25 Mbps downstream and 3 Mbps upstream. The FFA program rules also take into consideration whether proposed projects would target areas prioritized by the CPUC based on demographic and digital equity information and analysis of the number of low-income households, median household income, disadvantaged community status, and digital equity.

“After careful review of the limited information available in FFA project summaries, it is abundantly clear that incumbent ISPs, particularly AT&T, have manipulated the grant process to secure funding for projects that are inconsistent with FFA goals and are attempting to prevent potential competitors from receiving FFA funds,” the letter states.

Every AT&T application advocates reviewed includes a map of a large potential project area with tens, and in some cases dozens, of very small and widely geographically dispersed (sometimes 50 miles or more in largely urban and suburban areas) extremely small service areas. These very small service areas form no coherent whole, and in most cases, these extremely small service areas border or overlap with similarly extremely small service areas inexplicably included in separate AT&T applications. Broadly, this approach is ‘cherry picking,’ wherein a provider delineates a sizable boundary but proposes to serve a small fraction of households within it. This approach also makes collaboration or coordination with local interests impossible.”

Like the Golden State Connect Authority (GSCA), a joint powers authority of 40 counties authorized by the 2021 California legislation to build open access fiber to the premise distribution infrastructure, the groups allege the large number of projects proposed by AT&T calls into question has the financial, technical, or operational capacity to complete all the proposed projects within the timeframe required by program. The GSCA filed objections to 50 proposed AT&T projects.

Notably, Jeff Luong, AT&T’s vice president of network engineering, reportedly said at the recent Fierce Telecom U.S. Broadband Summit that even with AT&T spending about $20 billion per year on infrastructure, “we cannot build out in all the areas we deem as economical.”

The groups expressed concern that AT&T may be gaming the program rules with the numerous small projects in hopes of winning quick approval of each and then rejecting grant funding in order to delay or exclude other applicants from receiving grants.

“We wish to emphasize that it is standard industry practice for providers to claim that they intend to deploy infrastructure in specific areas (thereby preventing other entities from receiving state or federal funding to deploy infrastructure) but never actually do,” the groups wrote.

A potential point of contention suggested by the groups but not explicitly stated in their letter is since FFA program rules limit grant funding eligibility to “an entire (unserved) community,” the disparate proposed AT&T projects cannot reasonably be construed to be serving an “entire community.” The term is not specifically defined in the rules. In a footnote, the rules suggest the CPUC reserves broad discretion to make that determination using “data from a variety of services, including broadband deployment data, subscriber data, crowdsourced data, service quality data, and qualitative data.”

The questions not asked and answered during Clinton administration, leading to today's telecom infrastructure crisis

"All of the large ISPs have received considerable federal support to provide universal access over the past few decades, yet all have failed to do so."

So notes Christopher Ali, Pioneers Chair in Telecommunications and Professor of Telecommunications in the Bellisario College of Communications at Penn State University in an interview with Sarah Stonbely, director of the State of Local News Project of Northwestern University’s Medill School of Journalism on the latest federal subsidy program, Broadband Equity, Access and Deployment (BEAD).

Reflecting back on Ali's synopsis and BEAD -- and with hindsight being 20/20 -- it's clear the following questions should have been posed by public policymakers circa 1992-93 when the Clinton administration and Vice President Al Gore in particular was talking about the “information superhighway” to pave over the analog voice telephone copper roads with digital fiber freeways for the 21st century: 

• Are the telephone companies capable of modernizing the analog copper POTS infrastructure to FTTP for emerging digital, IP telecommunications in the next 15-20 years?
• If so, what regulatory policies will be needed to ensure that happens?
  
• If not, what are the best alternatives to fully relying on the telephone companies? 

As to the first point, the answer would have likely been no -- which became apparent by the end of the first decade of the next century. In a December 21, 2009 filing, AT&T asked the U.S. Federal Communications Commission to sunset the copper-based publicly switched telephone network (PSTN), noting it was in a death spiral. It urged the FCC to modernize its regulations to ensure an orderly transition from the PSTN to an Internet Protocol (IP) based system. The filing also cited the "enormous" amount of capital necessary to modernize the network with the needed infrastructure to ensure all Americans have access to IP-based services.

Incumbent strategy post 1996: Buy time, protect service territories.

As policymakers dithered since the enactment of the 1996 Telecom Act, large incumbent telcos bought time to slow their copper to fiber transition match their business models that would permit only slow, incremental construction and to protect their nominal service areas from public and utility coop owned fiber. They limited their fiber builds to select high potential areas offering sufficient density of relatively affluent households most likely to meet their internal rate of return standards and generate strong ARPU.

This was accomplished by sleight of hand, keeping the U.S. Federal Communications Commission’s policy focus on boosting “broadband speed,” while keeping policymakers’ and the media's eyes off the larger challenge of modernizing the legacy copper telephone network to fiber. They also did so by apparently influencing policymakers to dole out piecemeal, highly restricted grants nominally aimed at expanding access since their own fiber builds were very limited, leaving Americans hungry for connectivity. The hunger became acute during the public health restrictions of the COVID-19 pandemic with the need for advanced telecommunications to work, school and obtain medical care at home. The goal is to keep the issue framed as "broadband" -- a discretionary information service -- versus an essential utility.

The biggest disruptive threat came with the Biden administration’s draft language of the Infrastructure Investment and Jobs Act (IIJA) of 2021. It was initially geared toward building fiber to every American doorstep as was achieved with copper to provide voice telephone service in the 20th century. Priority was to be afforded fiber to the premises (FTTP) infrastructure owned, operated by, or affiliated with local governments, non-profits, and co-operatives. It was a wise decision since telecom like other infrastructure is a high cost undertaking that favors size and economies of scale -- something AT&T put into practice in proposing to form regional operating companies as part of its 1983 settlement of the federal government’s anti-trust action leading to its divesture. As is noted, these providers operate without the need to generate profits for investors (as well as pay income taxes) and thus can be committed toward a goal of universal service.

However, instead of standing its ground and favoring this lower cost model that would have allowed taxpayer dollars to go farther, the Biden administration went along with new IIJA language creating the Broadband Equity, Access and Deployment (BEAD) subsidy program with generous subsidies for fiber construction and geared toward investor owned incumbents looking to incrementally edge out their existing “footprints.” Decisions on how BEAD subsidies are awarded will likely result in controversy and produce more delay. Disputes over proposed subsidized projects in California offer a preview. The incumbents are likely singing Time Is on My Side.

AT&T urges states to favor contiguous BEAD funded projects serving both unserved and underserved locations

AT&T is urging states to award subsidies of up to 75 percent of construction costs allocated by the federal government’s Broadband Equity, Access and Deployment (BEAD) program for combined projects containing both unserved (where at least 80 percent of serviceable addresses in the project are not offered throughput of 25/3 Mbps or better) and underserved (where at least 80 percent of serviceable addresses are not offered throughput of 100/20 Mbps or better).

In so doing, AT&T is clearly indicating it plans to use any BEAD funding it is awarded to edge out its footprint. Some addresses could be served by VDSL over AT&T’s existing copper cable plant and qualify as underserved under BEAD program rules. As DSL signals degrade with distance, addresses farther out from its central offices and DSLAMs would likely not and be served by first generation ADSL – or no landline connections whatsoever – falling below the 25/3 Mbps cutoff and thus qualify as unserved. Some addresses in the latter category might ostensibly be designated as extremely high cost locations that AT&T would serve with fixed wireless.

A potential problem AT&T faces at least some states in urging BEAD funding for contiguous unserved/underserved projects is BEAD program rules require states to first award funds for projects reaching unserved locations. Underserved projects can only be funded if there are enough funds remaining from a state’s BEAD allocation after all unserved locations have been served.

AT&T is apparently aware. “We know that this won’t be possible in every state," writes Erin Scarborough, president of AT&T’s Broadband and Connectivity Initiatives, in a blog post. As the “next best alternative,” Scarborough urges states to group eligible locations into the smallest geographic unit possible, such as a census block, and allow providers to combine them into project areas. “This would still enable providers to design efficient deployments that maximize the use of existing infrastructure,” Scarborough wrote.

How open access model disrupts, offers potential to more rapidly scale FTTP infrastructure.

Open access infrastructure, wherein service providers lease the access layer of fiber to the premises (FTTP) networks to gain access to subscribers, offers substantial potential to alter the economics of deploying FTTP. FTTP deployment has lagged in the United States – currently passing less than half of all homes – because the business case for its deployment is based on recovering capital investment in a short term time horizon of 5-7 years from residential subscription fees. These deployers sell both access to its proprietary delivery infrastructure and bundled services delivered over a vertically integrated offering of web, email, as well as video channels and voice over internet protocol (VOIP).

Their business case analysis considers internal rate of return standards, the number of homes likely to purchase known as “take rate,” and projected average revenue per household unit or ARPU. That calculus has historically favored household density and income with the former carrying the most weight since the cost of deployment would be spread across more homes.

Open access infrastructure changes this revenue structure. Instead of solely relying on end user revenues, it derives some from leases to service providers. In the case of Utah’s UTOPIA Fiber open access network, fully 70 percent comes from service providers and the balance from end users. Open access infrastructure must attain significant scale to reach a lot of end users in order to offer an attractive market to service providers to lease access to the network.

The open access model also lengthens the investment time horizon allowing deployers to attract more patient capital that doesn’t need to hit ROI over the short term. It’s in it for the long game. The demand for FTTP is there – owing in large part to the fact that more than half of U.S. households lack access to it - and will continue to be. It’s also a long term asset with a life span of 30 to 50 years. And it’s sticky, affording deployers first mover advantage. Whoever deploys first is likely to own that end user premise customer for decades.

As one of the first open access networks formed in the early 2000s, UTOPIA Fiber has achieved the scale necessary to make the model work, serving 20 Utah municipalities that collectively own the network. The financial appeal of the open access model has also attracted private players including SiFi Networks, which according to its website is now in 11 American cities. More recently, AT&T is getting in on the open access action, forming a joint venture with BlackRock to deploy open access FTTP outside of AT&T’s existing service area.

Northern California could potentially host the nation’s largest regional open access network in terms of scale and geography, serving 40 member counties of the Rural County Representatives of California (RCRC) with the RCRC’s nascent Golden State Connect Authority, formed in 2021 as a joint powers authority. There, the open access model could provide FTTP in less densely populated areas passed over by the large, investor owned telephone and cable companies under the traditional closed access bundled services business model. Many households there are forced to rely on substandard, expensive wireless services.

Will Gigapower truly operate as open access network?

A cynical view of the investor owned open access fiber to the premises (FTTP) Gigapower build – AT&T’s joint venture with BlackRock – might hold that AT&T will end up as the sole service layer provider. AT&T will initially serve as the “anchor tenant” ISP riding on Gigapower glass.

That view is justified by the history of the unbundling of AT&T’s copper distribution network assets as well as those of other telephone companies mandated by the 1996 Telecommunications Act. The Act required the telcos to providing access to ISPs to compete with its own services. Since these competitive local exchange carriers (CLECs) were all selling the same thing – dialup access and later DSL over platforms like AOL, CompuServe and Netscape – it was difficult to for the CLECs to differentiate their service offerings from those of other ISPs and the incumbent telcos. That prompted a race to the bottom price war that AT&T and other telcos with their deep coffers would ultimately win, being able to hold out for the duration. In addition, a 2006 U.S. Court of Appeals decision held incumbent telcos were not obliged to provide CLECs access to fiber to the premises (FTTP) that was just beginning to replace the legacy copper in limited builds.

However, if AT&T were to monopolize Gigapower as the sole and not just the anchor tenant, the business model wouldn’t benefit from lease revenue paid by other ISPs leasing access to network assets Gigapower expects to defray capital and operating costs. But a cynical take there might be Gigapower will operate as a truly open access network for only the first seven to 10 years to help it finance capex and opex costs for fiber delivery infrastructure outside of its current service area that it couldn’t otherwise justify spending on its own. After which it would become exclusively AT&T’s with the Gigapower terminating and non renewing completing ISP service provider contracts.

Open access FTTP offers potential route to having edge providers defray FTTP infrastructure costs

AT&T’s joint venture with BlackRock to build and operate fiber to the premise delivery infrastructure as an open access network has implications for an issue related to how infrastructure deployment and operating costs are financed. Particularly, how revenues from internet service providers can defray the cost of planning, constructing, and operating it.

Some telecom industry trade groups have argued “big tech” edge providers such as Google, Microsoft, Amazon, and Meta should contribute to these expenses since their businesses benefit from the FTTP infrastructure providing them access to subscribers of their services and delivery platforms. The argument has been raised in a statutorily mandated U.S. Federal Communications Commission inquiry on universal service and the future of the Universal Service Fund as well as before EU regulators.

In an open access network, service providers pay to lease access from the network operator. Service provider leases could potentially offer investor owned telephone companies an indirect route to get edge providers to help defray them via contracts with ISPs offering services on open access networks. Edge providers would pay the ISPs to bundle their offerings and offer them to end users. Such an arrangement would naturally favor the scale of larger networks such as AT&T’s joint venture Gigapower hopes to attain.

Bringing ISP lease revenue to the table alters the traditional business case analysis for deploying FTTP since it provides owners/operators a revenue source independent of monthly end user or subscriber fees. Traditionally, business case analyses focus on household take rate and ARPU revenue estimates only. That has left many households effectively redlined for FTTP because a viable business case often cannot be made based solely on subscriber revenues.

Service provider lease revenue can flip the analysis, instead constituting most of the network revenues instead of end user subscriptions. For example, the publicly owned open access network UTOPIA Fiber gets 70 percent of revenues from these leases, according to a preliminary bond offering issued April 14, 2022 for $30 million in tax exempt telecommunications revenue bonds. The balance is from end user service contract fees.

More patient capital meets burgeoning demand for fiber

A shift is underway in capital investment in fiber to the premises (FTTP) advanced telecommunications infrastructure. In the United States, FTTP investment has lagged for decades due to the capital investment limitations of investor owned telephone companies. They are constrained by overleveraged balance sheets and investor expectations of traditionally high shareholder dividends that necessitate rapid returns on any capital investment. Those limitations became apparent in the late 2000s when Verizon faced a shareholder revolt, forcing it to scale back plans to modernize its legacy copper outside plant to FTTP. It later moved into fixed wireless that offered lower capital costs. Infrastructure investment is a long term proposition that requires patient capital not found in these companies.

Now AT&T is attempting a workaround to access more patient capital with its Gigapower joint venture with investment firm BlackRock to invest in open access FTTP delivery infrastructure outside of its service area. That patient capital includes state and local pension funds, sovereign wealth funds, and family endowments, Adam Walz, told a panel presentation this week by Broadband Breakfast. Walz is managing director of BlackRock’s Global Infrastructure Fund focused on investments in digital infrastructure opportunities across fiber networks, data centers, and wireless infrastructure.

Notably, other builders of open access FTTP also rely on patient capital including UTOPIA Fiber, owned and financially backed by a 20 Utah municipalities and privately owned SiFi Networks, funded by European pension fund APG. However, Gigapower CEO and retired AT&T executive Bill Hogg, said these players have “nowhere near the scale we will have,” claiming Gigapower will be “much larger than any other provider in the space. The scale at which we are going to operate will be a differentiator in the U.S. marketplace.”

But patient capital doesn’t mean it isn’t concerned about maximizing returns. All these players are targeting more densely developed areas most likely to produce strong ROI and ARPU, capitalizing on the strong demand for FTTP delivered services. Had U.S. telecom policymakers made more erudite decisions decades ago, fiber would have reached nearly all American doorsteps by 2010 at the latest instead of the estimated 40 percent currently. That gives Gigapower lots of runway as well as first mover advantage: first with fiber owns the location for the long term. “We’ve found plenty of attractive locations to build fiber where there’s no fiber today,” Hogg said, pointing to Las Vegas (Google Fiber is looking at that metro as it enters Nevada) and locales in Florida and Arizona. 

The concentration on densely developed areas will require patient capital investment by governments and consumer utility cooperatives to serve less developed areas, particularly those at the exurban edges of metro areas that have seen in migration by knowledge workers as knowledge work decentralizes out of urban cores.

AT&T likely to seek BEAD subsidies for fixed wireless serving “extremely high cost” locations

WASHINGTON, July 26, 2023 – AT&T is set to be competitive in the $42.5 billion Broadband Equity Access and Deployment subgrant process, said CEO John Stankey during the company’s second-quarter earnings call Wednesday, adding fixed-wireless technology will be key to connecting hard-to-reach areas using the subsidies.

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Stankey estimated that fixed-wireless services will be in demand following the allocation of BEAD funds despite the program’s preference for fiber connection, saying that fixed-wireless is the only way to connect every address in hard-to-reach geographies. He expects that AT&T’s fixed-wireless offerings will be a competitive offer in broadband builds for decades to come.

https://broadbandbreakfast.com/2023/07/att-expects-fixed-wireless-itself-to-be-competitive-in-bead-applications/

AT&T appears to be targeting fixed wireless access (FWA) to what are defined in the NTIA’s BEAD program guidance as “extremely high cost” locations. Those are addresses where deploying fiber would exceed a subsidy amount threshold “above which (a state) may decline to select a proposal if use of an alternative technology meeting the BEAD Program’s technical requirements would be less expensive.” (Given materials and more recently labor pool constraints, those costs are likely to be considerably higher than they would have otherwise been with a more timely and orderly migration from copper to fiber.)

Those technical requirements define “reliable” service by throughput (at least 100/20Mbps with latency less than or equal to 100 milliseconds) as well as delivery infrastructure (fiber, hybrid fiber-coaxial technology; digital subscriber line (DSL) technology or terrestrial fixed wireless technology utilizing entirely licensed spectrum or using a hybrid of licensed and unlicensed spectrum).

For extremely high cost locations, BEAD program guidance allows states to choose fiber alternatives involving a less costly technology for that location “even if that technology does not meet the definition of Reliable Broadband Service but otherwise satisfies the Program’s technical requirements.” (Emphasis in original)

That gives those proposing FWA-based BEAD deployments an out. However, as Doug Dawson writes at his POTS and PANS blog, the quality of fixed wireless service varies considerably based on the distance from the radio transmitting it and the amount of mobile wireless traffic. In addition, the challenging topography likely to exist in extremely high cost locations as well as tall trees pose propagation challenges to line of sight FWA signals.

Stankey acknowledges these limitations as he was quoted in this Light Reading analysis:

"It's going to be key in certain parts of our consumer segment as we work through the next phase of our cost-reduction efforts," Stankey said. "It is [also] a means for us to begin finding a good catch to shut down other infrastructure and still serve customers." He added that one big caveat is ensuring that there's ample wireless capacity for Internet Air to deliver the kinds of speeds that customers require.

As for shutting down “other infrastructure,” Stankey is apparently referring to its legacy copper outside plant built for voice telephone service. AT&T is petitioning state telecom regulators to relieve it of Title II Carrier of Last Resort requirements in high cost areas to get out from under the high cost of maintaining this deteriorating, decades old delivery infrastructure. They mandate telephone companies provide landline voice service over the legacy copper to all customers requesting it.

AT&T apparently hoping for BEAD subsidies to replace DSL over copper with FTTP

AT&T is apparently hoping for BEAD subsidies to replace its legacy DSL services delivered over twisted pair copper with fiber to the premise (FTTP). States should take a flexible approach in subgranting the subsidies allocated by the National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) program to afford “ISPs flexibility to identify project areas to include a mix of unserved and underserved locations will allow for the most efficient use of limited funds,” suggested Erin Scarborough, president, Broadband and Connectivity Initiatives in an April blog post. In a blog post this week, Scarborough stated that would allow providers to “identify project areas that combine unserved and underserved locations to enable the most effective and efficient deployments.” For AT&T, those would be locations served by legacy ADSL and VDSL, respectively.

That would comport with the BEAD program rules spelled out in the NTIA’s Notice of Funding Opportunity (NOFO). It permits states to subgrant up to 75 percent of construction costs to builds “constituting a single unserved or underserved broadband-serviceable location, or a grouping of broadband-serviceable locations in which not less than 80 percent of broadband-serviceable locations served by the project are unserved locations or underserved locations.” The NOFO defines “unserved” locations as those not marketed connectivity with throughput of less than 25/3 Mbps and latency exceeding 100ms. “Underserved” locations are those not offered at least 100/20 Mbps. That would encompass premises served by AT&T’s legacy DSL offerings delivered over obsolete twisted pair copper initially designed to support voice telephone service.

Whether states will have sufficient BEAD funding to subgrant subsidies for underserved locations remains to be seen after the NTIA announces state allocations next week. The BEAD NOFO requires states to award subgrants “that ensures the deployment of service to all unserved locations within the Eligible Entity’s jurisdiction.” These unserved locations are likely to be in lower density areas lacking wireline connections, requiring higher capital construction costs and subsidization.

Fiber flippers: Private equity investment in FTTP

For market-based providers, a fundamental reason why the modernization of legacy copper telecommunications delivery infrastructure to fiber has been slow is lack of patient investment capital. Shareholders of the dominant telephone and cable companies that operate as rent seeking natural monopolies are reluctant to upgrade and build out fiber in the service territories of these companies. These are risk averse, impatient investors who expect a quick return on capital investment within five years or so. They fear significant capex will erode their historically fat shareholder dividends that are a feature of these rent seeking natural monopolies. That short investment timeline is poorly aligned with investing in infrastructure with its large upfront costs and long wait for ROI, notwithstanding the lower opex costs of fiber modernization from legacy metallic plant.

In a similar vein, one would not expect relatively impatient investment capital in the form private equity and asset management firms would find investing in fiber to the premise (FTTP) infrastructure appealing. But it’s ironically occurring.

A prominent example is AT&T’s recently announced joint venture with the asset management firm Blackrock, Gigapower. Blackrock will take some of the capex burden off AT&T shareholders to allow the company to increase fiber deployments including in areas not within AT&T’s traditional service territory. Here, Blackrock is effectively serving as a bridge capital provider, stumping up capex dollars that AT&T would be reluctant to make out of its own funds in order to boost revenues. While the terms and conditions of the deal are not public, Blackrock would likely sell its stake to AT&T after several years, with AT&T paying a premium on that investment in order to capture more FTTP customers during that period than it might otherwise on its own.

Although Gigapower is nominally structured with an open access wholesale business model, AT&T will likely end up the sole service provider consistent with its current business model that recognizes owning the fiber connection to the customer means owning the customer.

Another example is playing out in the WISP space. Private investment company GI Partners recently acquired Rise Broadband with an eye on fibering its fixed wireless customer base. “GI Partners is committing meaningful new capital to improve customer experience and accelerate Rise Broadband’s rollout of fiber-to-the-home services for rural American homes and businesses,” GI Partners said in a news release this week announcing the deal. “Rise’s existing network infrastructure is uniquely positioned to execute a fiber expansion effort that will provide rural communities with next generation broadband service.” Investing in WISPs appears logical in that by definition, residential WISP customers are not passed by fiber, thus offering fiber deployers first mover advantage. That new fiber could in turn be flipped to a larger provider looking to roll up a larger customer base.

In July 2022, private equity firm Oak Hill Capital announced that it formed Omni Fiber “to bring to market a new option for high-speed Internet service in small and mid-sized markets in the Midwest that have historically been underserved by the large phone and cable companies.” The firm said its $250 million investment will “bring state-of-the-art fiber Internet, TV, and phone services to homes and businesses in communities across the Midwest.”

While some of these private FTTP investment deals will likely look to states for a share of the $43.45 billion appropriated as grants to the states in the Infrastructure Investment and Jobs Act of 2021 (IIJA) for advanced telecommunications infrastructure, Oak Hill said Omni Fiber “will not need to rely on grants or subsidies from federal, state, or local governments to build its network.”