How the FCC's 'rip and replace' program may help kill some small carriersHow the FCC's 'rip and replace' program may help kill some small carriers
Chris Townson, CEO of DTC Communications, is applying for FCC money to tear ZTE equipment from his network. But he's worried costs will accelerate. 'I can't do this and operate in the red long term,' he said.
October 7, 2021
ORLANDO – Chris Townson is a NASCAR fan. He understands the strategies drivers use to get ahead. And he also knows the pitfalls that drivers may encounter as they race around the track.
As Townson tells it, one big difficulty drivers face is deciding when to head to the pit stop. If they pit at the wrong time, they might lose a winning position – through no fault of their own – if race officials put up a caution flag for other drivers.
"It's a matter of timing," he explained.
The same, Townson said, has been true of his experience in the FCC's "rip and replace" program. The effort, formalized this year, is designed to reimburse small carriers like DTC Communications, the Tennessee-based operator that Townson leads, so they can tear out network equipment from Chinese vendors like Huawei and ZTE that the US government has deemed insecure. The program's goal is to finance the replacement of that equipment with gear from "trusted" vendors. The program today has $1.9 billion in funding from Congress, and the agency is expected to begin accepting reimbursement applications in the coming months.
"It's exciting. It's a little daunting," said John Nettles, president of Alabama-based Pine Belt Communications, another carrier with Chinese equipment in its network. Pine Belt Communications hasn't started removing any of its Chinese equipment yet, but is planning to select vendors to do so as part of the FCC's "rip and replace" program (officially dubbed the "Secure and Trusted Communications Networks Reimbursement Program") in the coming months.
However – as with almost any government-orchestrated broadband program – there are plenty of concerns that the FCC's reimbursement efforts could do more harm than good.
A confluence of factors
"Who can I trust?" Townson wondered, explaining that DTC is working to select a "rip and replace" vendor for its ZTE-supplied fixed wireless network across eastern Tennessee. Should that equipment support open RAN technologies? Should it come from an American manufacturer, or will a Swedish one be OK?
It's a valid question: After all, DTC purchased ZTE's 3G equipment in 2014 partly with government financing. At the time, there were some rumblings in Washington about the potential threat posed by equipment from Chinese vendors, but there were no restrictions on the sale of that equipment to US-based companies like DTC.
In fact, as Townson explained here at the WIA's Connect (X) trade show, DTC's selection of ZTE as its vendor was partly driven by the US government's own penny-pinching broadband programs. He said DTC participated in one of the government's reverse auctions for broadband service, whereby companies like DTC submit bids to build coverage in rural areas. Similar to the FCC's recent Rural Digital Opportunity Fund, the company with the lowest bid often wins, thus forcing that winning company to find the cheapest equipment possible to provide profitable service.
In DTC's case, that equipment came from China's ZTE. According to a number of US government officials, Chinese suppliers like Huawei and ZTE were able to dramatically undercut rival vendors' pricing thanks to financing provided by the Chinese government. Beijing's ultimate goal, according to US officials, was to get Chinese-made equipment into international telecom networks to facilitate global espionage. That's why Congress appropriated $1.9 billion this year to tear out such equipment.
The lesson, according to Townson: "Don't do programs that do the lowest cost," he said. "You get what you pay for."
Also: "It's all timing," he reiterated.
Pivoting from mobile to fixed
Townson, who joined DTC in 2016, said the mobile network operator at the time was struggling with a number of other challenges, including increasing competition from established mobile operators, rising smartphone costs, and a nationwide shift to 4G Voice over LTE technology that would require significant network upgrades.
Even before the FCC's "rip and replace" program started gathering steam, "you're barely getting by in this industry anyway," Townson explained. And then former President Trump began his first and only term, and it became clear that his campaign against China could make the "Secure and Trusted Communications Networks Reimbursement Program" a reality.
Ultimately, DTC decided to exit the mobile industry in 2018. According to Townson, one of the many factors that drove the company to make the decision was the uncertainty created by the possibility of a "rip and replace" initiative. Indeed, ZTE was the subject of US government blacklisting years before an official ban was instituted against the company, making it virtually impossible for DTC to work with the vendor on upgrades to its network. Today, DTC operates a fiber network and a ZTE-supplied fixed wireless network, among other telecom offerings.
"These poor carriers have been between a rock and a hard place," explained Carri Bennet of the Rural Wireless Association (RWA). The trade group represents many of the small wireless network operators that have been caught up in the "rip and replace" drama during the past several years. In fact, the Rural Wireless Association estimated in 2018 that fully 25% of its members use equipment from Huawei and ZTE. Bennet explained that many of her group's members have been stuck in limbo for years, unable to move forward because of federal prohibitions on business with their own network vendors.
More losses on the horizon
Incredibly, even with an official rulemaking by the FCC, and Congressional funding, the "rip and replace" program isn't expected to dole out significant reimbursements for another year or so. It also won't pay for new terminals like the fixed wireless receivers DTC installs in customers' homes. And it won't cover any network-operating costs.
The idea that DTC could ultimately come out ahead financially when all is said and done "is a farce," according to Townson.
"We are counting on a lot of patience and financing from the vendors," explained Nettles, with Pine Belt Communications. He said the company is hoping to get its future "rip and replace" vendor to foot the bill while the company's reimbursement application wends its way through the FCC's program. The RWA's Bennet warned that the association isn't expecting any reimbursement checks to arrive until the second or third quarter of 2022.
"We have a pot of gold" to finance such situations, joked Jana Wallace, CEO of Panhandle Telephone Cooperative, Inc. (PTCI). The company is another RWA member with Chinese equipment. In reality, Wallace said she plans to "self finance" those costs.
And what of Townson and DTC? He said the company has begun approaching local banks to see if they can put up the money necessary for the company to begin ripping and replacing, prior to receiving refunds from the FCC. But he warned that any delays or problems with the reimbursement program could put DTC into a tailspin. Indeed, there are already worries that reimbursement requests will far outstrip the $1.9 billion Congress allocated for the program.
"That would cause us to make some really hard decisions, up to and including exiting the business," Townson said of the possibility of further delays. "I can't do this and operate in the red long term."
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