Rural broadband: big telcos opt out & continue to lobby against, others see opportunity

The Federal Communications Commission (FCC) is working to connect rural households to broadband through the Connect America Fund. The Fund provides capital to private sector companies in order to help shoulder the cost of building out broadband networks to those homes. However, two of the largest service providers have opted out of the the free money saying that they would prefer to focus their attention elsewhere. One provider, Frontier Communications is stepping up to the plate citing significant business value in bringing these households online, a view which raises more questions about whether AT&T, Verizon, and Comcast are creating artificial network scarcity in order to provide a better picture for shareholders at the expense of American competitiveness.

Last week, Frontier Communications hosted a series of ribbon cuttings with FCC Chairman Julius Genachowski in rural areas of Nevada and California announcing that Alpine County, California; Topaz Lodge, Gardnerville, Nevada; and Douglas County, Nevada would all see new and improved broadband access thanks to the Connect America Fund. The FCC has a goal of connecting 7 million households in rural America to broadband networks and these areas represent some of the first funded through the program. The Douglas County project was funded entirely by Frontier, which acquired the area from Verizon in 2010 and subsequently upgraded out of date lines.

Frontier Chairman and CEO Maggie Wilderotter is clear on Frontier’s view of rural broadband – “broadband services are critical to economic growth and a vital community. Our goal at Frontier is to ensure that our customers, regardless of where they reside enjoy the same advanced services as consumers in major metro areas.”

On a recent earnings call, Wilderotter further noted that the expansions are expected to provide significant value to the firm overall. “Let me shift over to the Connect America Fund, when we went through the process of looking at household availability that we can build and the costs associated with building those households, we could take $775 per household from the FCC. We had ample households in our markets where we could build for that price or less, so we felt very good about taking 100% of the money because we still have several hundred households to build out.

We have a different view from other carriers because we have so much rural property that hadn’t had broadband built in from the Verizon acquisition. So it really gave us an opportunity to take 100% of the dollars and put them to work in such a way that its a win-win for the customer, for us and also helps drive what the FCC’s trying to accomplish.” (Emphasis added)

Verizon and AT&T have opted out of the Connect America Fund. The companies were eligible for approximately $300 million. The companies noted that they prefer to focus their resources and capital into other areas. As CivSource has been reporting, those other areas appear to be creating artificial scarcity in their current market segments and lobbying against broadband expansion in places where they have chosen not to build. In several cases they’ve been successful in either passing laws against building or at least having laws prohibiting building considered.

In a recent speech, Blair Levin of the Aspen Institute and broadband strategist summed up the activities of incumbent providers – “When it comes to the wireline access network, instead of talking about upgrades, we are talking about caps and tiers. Instead of talking about investment for growth, we are talking about harvesting for dividends.”

According to a story on Smart Planet, there are currently 416,359 people without wired broadband access just in West Virginia alone. The FCC has put together an interactive map, shown here, where visitors can see the gaps in access on a state-by-state basis. There are currently 19 million underserved rural Americans. That’s a fairly significant customer base to leave on the table. However, in South Carolina, it appears to have cost incumbent providers a few thousand dollars to avoid connecting people in that state – a significantly cheaper, less time consuming option, American economic viability and global competitiveness notwithstanding.

Both AT&T and Verizon reported their own earnings last week. AT&T announced record profitability of its wireless arm, supported by forcing consumers to wait for longer periods on their paid service contracts before being allowed to upgrade their devices at a subsidized rate. The company has been on an upswing since last November when it announced plans to focus on increasing margins and extracting more revenue from high powered users. The company also offers a significant dividend and has been buying back stock – all factors that are great for shareholders and not so great for customers.

Verizon is also benefiting from its focus on margins over providing services. Its wireline business posted significantly higher returns as the company crowds out smaller providers like T-Mobile and Sprint and raises data rates for consumers. The company reported flat capital expenditure bordering on a net decrease over the same time last year. Meaning that in essence, the company is actually doing less, offering less, and charging everyone more for the opportunity.

The perennial chorus from US companies is that economic growth is coming back slowly because of a skills gap in the US labor force. US workers, companies say are undereducated, under-trained, and therefore a hard pool to hire from. We wonder exactly how the skills gap will be closed for the 400,000 people in West Virginia without the ability to be trained on new technology when US firms don’t plan to provide the infrastructure needed to train them like broadband, prohibit them from building it themselves, and still refuse to hire them.

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