Need for sell and buy side subsidies points up advantage of government, coop owned fiber networks

Testifying before Congress back in May, NTIA Administrator Alan Davidson confirmed that a failure to fund the ACP will negatively impact BEAD. "As we build out our broadband networks, we want providers to know that there's some certainty that they'll have customers, particularly in these rural areas, particularly in areas where there's lower-income Americans, they need to know that those Americans are going to be able to afford to get online. The ACP plays a major role there," he said.

How ACP negotiations might shake out

This statement clearly points up market failure and the need for a lower cost alternative model for advanced telecommunications infrastructure. Davidson is in effect saying without both seller subsidies -- delivery infrastructure subsidies such as the NTIA's Broadband Equity, Access and Deployment (BEAD) program and buy side subsidies based on household income (the Affordable Connectivity Program), market failure will result. In short, providers won't be able to to connect American homes and consumers won't be able to afford their monthly bills since providers have to price in a profit margin and allow for income taxes. Even then, it's hard to make it pencil out. Jeff Luong, AT&T’s vice president of network engineering, reportedly said at the recently held 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.”

This situation clearly points up the need for lower cost alternative and one more likely to avoid the problem of uneven deployment by investor owned providers that must carefully segment where they build fiber that leaves many homes unconnected: fiber optic networks owned by governmental entities and consumer utility cooperatives. Neither must generate profits or pay income taxes.

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.

Infrastructure Investment and Jobs Act (IIJA) of 2021 marked start of fundamental shift in U.S. telecom policy

The Infrastructure Investment and Jobs Act (IIJA) of 2021 marked the beginning of a fundamental shift in how the United States regards what it termed in the 1996 Telecommunications Act as advanced telecommunications based on Internet protocol (IP). It’s evolving from a commercial information service as it’s currently regarded and lightly regulated by the Federal Communications Commission to critical infrastructure.

But not fully. It’s still referred to in the IIJA as “broadband:” the incremental evolution since 1998 in throughput from narrowband dialup and changing FCC definitions of it since then. With those definitions based on the business models of the large telephone and cable companies that market bandwidth in price tiered increments.

As might be expected with evolving public policy, it reflects both old and newer thinking. Current policy regards advanced telecommunications as critical infrastructure on one hand as expressed by the IIJA and as a commercial information service -- with access to information priced on the bandwidth of the connection to access it, i.e., “broadband by the bucket” on the other. 

Authorized by the IIJA, the National Telecommunications and Information Administration’s (NTIA) Broadband Equity, Access and Deployment (BEAD) subsidy program eligibility guidance increases the bandwidth base level from 1990s narrowband dialup to first generation ADSL (i.e. <25/3 with latency > 100ms) and explicitly favors fiber to the premises (FTTP). The latter is an infrastructure versus a throughput-based standard, although the IIJA continues to utilize a minimum coaxial cable throughput standard (100Mbps down/20Mbps up). Locations not offered that level of throughput are secondarily eligible for BEAD subsidization as “underserved.”

Notably, AT&T is urging states to allow it to qualify for BEAD subsidies for contiguous projects to upgrade both generations of copper delivered Digital Subscriber Line (DSL): first generation ADSL (as unserved) and VDSL (underserved). That’s because locations in AT&T’s service area fall into both categories and are often in proximity -- a function both of the limited technological range of each generation of DSL over decades-old legacy twisted pair copper as well as AT&T’s decisions on where it deployed DSL. 

Some neighborhoods were never offered ADSL while others were, provided they were sufficiently close to telephone central offices and remote DSLAMs. Second generation VDSL is even more limited in range and was deployed to serve denser, cherry picked neighborhoods where cable is often also available. BEAD program rules would allow AT&T to propose projects comprised of a mix of "unserved" and "underserved" locations down to the individual address since the rules define an eligible project as one of just discrete number of addresses or even a single address.

In the not too distant future as advanced telecommunications becomes increasingly FTTP infrastructure-based, the notion of "broadband" bandwidth that bears relevance for legacy metallic landline delivery infrastructure will become obsolete.