Investment analysts say AT&T, Frontier, others padded bottom line with FCC broadband subsidies

by Steve Blum • , , , ,

The Federal Communications Commission is scheduled to vote today on a new ten year, $20 billion broadband subsidy program called the Rural Digital Opportunity Fund (RDOF) that will mostly benefit rural communities. The proposal on the table would set the U.S. minimum broadband standard at 25 Mbps download and 3 Mbps upload speeds. That’s a lot better than California’s pathetic standard of 6 Mbps down/1 Mbps up, and a significant improvement over the 10 Mbps down/1 Mbps up minimum that the FCC established for the Connect America Fund II program (CAF II), which RDOF will replace.

According to a story in FierceTelecom that cites research by MoffettNathanson, it appears that major telcos pocketed some of the CAF II subsidies they received over the six years of the program, which began in 2015 and ends this year. CenturyLink was the big winner with more than $3 billion total, but AT&T and Frontier Communications weren’t far behind…

Other top beneficiaries of CAF II awards include AT&T, which has received $428 million per year [$2.6 billion total] since 2015; Frontier, which has received $332 million per year [$2.0 billion] during the same time frame; and Windstream, which has received $175 million per year. In exchange for the free government money, the recipients agreed to deploy broadband service with at least 10 Mbps downstream and 1 Mbps upstream to specific rural locations. MoffettNathanson reports that the CAF II money that the incumbents received was typically more than the cost of the network builds, so the telcos ended up with extra money to pad their bottom lines.

Based on availability reports and statements by the companies, it appears that AT&T and Frontier minimised capital investment and, consequently, minimised service levels – they were required to upgrade their systems to the point that 10 Mbps down/1 Mbps up speeds were possible, but the de facto service standard they had to meet was only 8 Mbps down/800 Kbps up.

RDOF represents a second chance for the FCC to get broadband subsidies right. This time around, the plan is to conduct reverse auctions, and not simply award money to incumbent, monopoly model telcos on the basis of an arcane formula. We’ll have some idea later today what the FCC did with the draft decision that was circulated three weeks ago, and we’ll probably see the final version in the next few days.