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Incoming FCC chief could inherit RDOF boondoggle

There are growing concerns that the $9.2 billion in US government money earmarked late last year for telecom services in rural parts of the US will ultimately result in a digital divide trainwreck.

"We urge the FCC to validate that each provider in fact has the technical, financial, managerial, operational skills, capabilities and resources to deliver the services that they have pledged for every American they plan to serve regardless of the technology they use," wrote dozens of Republican and Democratic Senators in a letter Tuesday to outgoing FCC chief Ajit Pai.

"We also strongly encourage the FCC to make as public as possible the status of its review and consider opportunities for public input on the [provider] applications," they added. "Such transparency and accountability will be essential to ensure the success of this program and to minimize any opportunities for fraud or abuse."

At issue is the FCC's recent Rural Digital Opportunity Fund Phase I auction, which ended late last year. LTD Broadband, Charter, SpaceX, Windstream, Frontier, Starry and CenturyLink were among the big winners.

Red flags

Although the auction mostly duplicated previous auctions designed to cross the digital divide by financing the construction of telecom services in rural areas, the results of the RDOF raised a number of red flags. The most obvious was the price tag: The auction was designed to allocate up to $26 billion, but because it was a "reverse" auction where the lowest bidders received funding, it ended at just $9.2 billion in total.

The FCC has argued the figure represents a success. For example, in his list of accomplishments as FCC chief, Pai mentioned the RDOF first.

Others aren't so sure. For example, the financial analysts at New Street Research in a recent note to investors described the figure as "curious because in all previous announcements regarding subsidies to rural deployment, including for broadband and telehealth, this FCC has emphasized how much it spent, not how much it saved."

"These results suggest that the cost of fully addressing the broadband availability gap may be much less than many currently anticipate," added AT&T's Joan Marsh in a post to the company's website shortly after the release of the RDOF results. AT&T has participated in previous FCC auctions designed to finance rural network buildouts, but it skipped the RDOF. Executives from the operator have increasingly been calling for a wider overhaul of the FCC's Universal Service Fund (USF), which is designed to subsidize telephone service to low-income households and high-cost areas.

Aside from the RDOF's price tag, a bigger concern is whether some of the winners in the RDOF will be able to meet their new obligations. Specifically, mostly unknown providers like LTD Broadband and SpaceX will receive hundreds of millions of dollars to deliver services via largely untested technologies. In the case of SpaceX, that involves low Earth orbit (LEO) satellites, and in the case of LTD Broadband that may involve using fixed wireless Internet technologies to deliver up to 1Gbit/s services.

Unproven innovators

"There are several winning fixed wireless companies who won subsidies, apparently in the gigabit tier, where we immediately see several red flags," noted the New Street analysts. "We also note that LTD defaulted in a previous [FCC] auction, though the amount and number of licenses in that case was very small."

"There is far too much money at stake and far too many consumers on hold to gamble on confidential promises about unproven service capabilities that might only be found to fall short years from now," added Shirley Bloomfield, CEO of rural telecom trade group NTCA, in a statement issued Tuesday in response to the letter from the Senators.

Others, though, are voicing support for new market entrants like LTD and SpaceX.

"We are pleased that a number of our members could take advantage of the opportunities that the FCC offered via RDOF," wrote Christina Mason, VP of government affairs for the Wireless Internet Service Providers Association (WISPA), in a statement Wednesday in response to the Senators' letter to Pai. "Though WISPA would have liked to see many more of its members scale the significant barriers to participate, we will continue to work to ensure that innovators and entrepreneurs have access to the same opportunities as entrenched incumbents."

Mason added that WISPA welcomes Congressional oversight over the RDOF process. "It is important to work deliberately through that process to properly ascertain the ability of winners to perform," Mason wrote. "WISPA will continue to study the results of the RDOF auction for important lessons learned which might improve the next reverse auction and bring more, diverse players to the table. Congressional efforts to understand this are welcome, and we stand ready to work with our Congressional champions as they move forward with this important work."

Already some RDOF winners have spoken out about their plans.

"We look forward to deploying our high-capacity, low-latency, and highly-scalable broadband network," said Corey Hauer, CEO of LTD Broadband, in a release published shortly after the RDOF results were announced. The company said it would "greatly expand its fiber-optic Internet offerings to underserved areas in rural America."

To be clear, it's not only LTD and SpaceX that may fall under scrutiny. For example, according to Telecompetitor, Frontier and Lumen Technologies (formerly CenturyLink) just this week told the FCC they may not have met all deployment deadlines for 2020 for the Connect America Fund (CAF) II program, an auction held in 2018 that formed a template for the RDOF.

Building back better

Oversight of LTD, SpaceX, Frontier and other RDOF winners will fall to the incoming Biden administration. President Biden has not yet named his pick to replace Pai, but many expect it will be FCC Commissioner Jessica Rosenworcel.

If so, it's not clear how Rosenworcel might manage the RDOF. Winners of the auction are now on the hook to supply so-called "long form" applications, which will describe in detail how they plan to meet their obligations.

"We think the new FCC leadership has a choice," wrote the analysts with New Street. "It can either subject the fixed wireless winners to a significant engineering review in the long-form process, at the risk of causing a number of defaults before money is spent, or give short shrift to that process and risk significant amounts of subsidy dollars being spent on networks that ultimately will not perform as promised."

Whatever the next FCC chair decides, it will be difficult to change the trajectory of the RDOF after network buildouts begin.

"We think it important for investors to understand – as we know the bidders do – is that as time goes on, the negotiating leverage keeps shifting to the bidder and away from the FCC," explained the New Street analysts. "That is, in the early years, with the first [RDOF] build-out benchmark being in 2024, the winners have the flexibility to build out in the most attractive places. But as time goes on, with the amount of the letter of credit going down, the attractiveness of the locations also going down and the level of the penalty going down (for example, not building out the last tranche requires the return of a relatively small amount of the auction proceeds), the winners hold the most chips in any negotiation with the FCC."

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Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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