US Rural Broadband Accelerates in 2020

The New Year holds big promises for rural broadband
Yes, the rural broadband divide still amounts to a return-on-invested capital (ROIC) conundrum: In areas with insufficient residential density, ROIC is too low to make a commercially acceptable business case for broadband deployment.

Whether broadband services to a particular community fall in or outside economic feasibility depends on how you define "insufficient" and "acceptable." Public- or private-equity corporations have high thresholds for justifying capital spending, typically at least 20 homes passed per mile of roadway. Even if it meets the threshold, each rural build-out must compete internally for its cut of the same pool of available cash that also pays for financially more attractive projects… and (more importantly) the quarterly dividend. No wonder so many rural customers are stuck with crummy DSL.

But a few things have changed in the past few years that point to continued acceleration in rural broadband deployments, at least in the US.

First, viable new business models and financing alternatives have evolved and old ones have successfully adapted. These have helped rural electric cooperatives, public-private partnerships and municipal utilities build out self-sustaining -- and even cash-generating --broadband networks.

Financiers have come to consider broadband infrastructure to be an investable asset class. At the same time, public policy concern for the broadband divide has led to increases in federal and state subsidies for rural broadband deployment.

Finally, communities find lack of adequate broadband to be increasingly intolerable, to the point of taking matters into their own hands. As a result, a rapidly growing number of rural communities have gotten high-speed broadband, and more planning to follow suit.

Fiber to the field
The number of homes passed by fiber increased by 17% in 2019, the same rate as 2018, according to the latest study by RVA Associates. Much of that has been AT&T's 14-million home build-out, which is now largely finished. Small providers represented 25% of new homes passed and 41% of capital expenditures. That represents 6% growth in new passings from 2018.

Looking forward to 2020, a few new things start boosting rural broadband projects.

In September 2019, the FCC granted a total of $1.49 billion for rural broadband projects in the second phase of the Connect America Fund (CAF-II) reverse auction. All that money translates to shovels in the ground in 2020. Indeed, 53% of newly passed homes and small businesses will be able to get broadband tiers of 100/100 Mbit/s or more, with 19% able to buy gigabit service. Most of that will be served with FTTH, or HFC where CAF subsidizes MSO line extensions.

State grants in 2019 will also translate into buildouts in 2020. For example, New York State recently completed a $500 million reverse auction for grants of up to 80% of the cost of broadband deployments in rural communities.

Rural electric coops have been deploying FTTH at accelerating rates. The number of them having or deploying fiber broadband increased 32% to 111 in 2019, representing 12% of all rural coops. Homes passed by coops almost doubled in 2019 to 1.7% of total US homes passed, up from 0.5% in 2018. I expect this trend to continue for the next several years. This model of broadband deployment has proven highly successful -- and success breeds success.

I attribute this model's high level of attainment to the many synergies between electric power distribution and fiber broadband, and to customer ownership that defines the coop model.

Incumbents re-engaging with rural communities
Small operators, regional players, coops and utilities are not the only providers in rural US regions, however. Look out for more re-engagement by incumbents in rural broadband projects. Historically, neither MSOs nor incumbent telcos wanted anything to do with communities that fell outside their business case analysis. Local officials were frustrated they couldn't get incumbents' attention, even with sweeteners. Customers had to put up with expensive, slow, unreliable DSL, if they were lucky enough to have any digital service at all.

Partnering for High-Speed Broadband

The small town of Chesterfield, NH, inked a P3 with Consolidated Telecommunications to build out and operate a mixed FTTP and hybrid fiber/wireless access network.
(Source: John Phelan, Wikipedia)
(Home page image: Nextvoyage from Pexels)

• Portions of each of nine towns in Western Massachusetts have long been served by Comcast, while other parts of town were completely unserved. A 2016 deal with the state's Massachusetts Broadband Initiative subsidized expansion of Comcast's HFC infrastructure to the remaining parts of the communities. This represents a break with the MSO's past practice.
• A few miles to the north, the town of Chesterfield, NH, recently entered into a public-private partnership with incumbent telco Consolidated Telecommunications to build out and operate a mixed FTTP and hybrid fiber/wireless access network for the town. Consolidated, the owner of Verizon's former footprint in largely rural northern New England, is considering similar projects in other communities. Verizon and Fairpoint had long refused to consider buildouts with outside money.
• Tier-2 rural incumbent TDS concluded its traditional business is dying and survival depends on becoming the broadband provider of choice in its markets. More than 25% of its telco footprint has been upgraded to FTTP, and that will increase to 50% "soon."

For operators, subsidies and P3s that extend their footprints into unserved areas are a win-win. Incumbents have a powerful cost advantage over new entrants: legacy infrastructure upon which they can rapidly add fiber at minimal cost, plus buildings, equipment cabinets, technicians, trucks, back-office support and more. A new entrant would have to create all that, without the economies of scale enjoyed by incumbents. On top of all their cost advantages, new, ultra-reliable FTTP service allows incumbent telcos to retire decaying, expensive-to-maintain, heavily regulated copper infrastructure and get regulators off their backs.

If subsidies are sufficient to meet their ROI expectations, I argue these opportunities are too good for incumbents to turn down. In fact, I expect success in these projects to become contagious.

Related posts:

• By Culturing Fiber, Rural Operators Attract Investors - Report
• GAO: Rural Broadband's High-Cost Payment Program Saddled With Too Much Fraud-Risk
• USDA Sows $152M Crop of Rural Broadband Funds
• FCC OKs Almost $112.2 Million for Rural Broadband
• Illinois' $420M Broadband Program Is Part of National Trend

— Dan Grossman is a technology-forward industry analyst and consultant, specializing in fixed broadband access technology and markets. He is Principal at NetAccess Futures, and a Contributing Analyst at Heavy Reading. NetAccess Futures offers research, analysis, strategy consulting and marketing collateral to broadband operators and equipment vendors.