Lessons Learned from RDOF: Some Advice for the States as They Embark on BEAD

Benton Institute for Broadband & Society

Wednesday, August 9, 2023

Digital Beat

Lessons Learned from RDOF:

Some Advice for the States as They Embark on BEAD

“Those who fail to learn from history are condemned to repeat it.” Winston Churchill

Carol Mattey

Today, many months after passage of the landmark Infrastructure Investment and Jobs Act, the states are finally on the cusp of implementing National Telecommunications and Information Administration’s $40+ billion Broadband Equity Access and Deployment program. Some states are confidently moving ahead quickly, while others are in the early days of developing concrete plans for how they will manage this historic federal investment.

Now is the time for all interested stakeholders to look carefully at past efforts to make broadband universal—what worked, what didn’t work, and why.

Looking back: For many years, the single biggest annual funding source for broadband has come from the Federal Communications Commission’s Universal Service Fund. In 2020, the FCC decided to create a $20 billion program called the Rural Digital Opportunity Fund (RDOF), to be implemented in two phases, with funding to be awarded to areas lacking broadband (defined as 25 Mbps/3 Mbps) through a competitive auction. Fundamentally, the RDOF auction was an effort to use competition to identify the company that could bring broadband to unserved areas at the lowest cost.

The FCC modelled RDOF (and the Connect America Fund Phase II auction that preceded RDOF) on its normal practice for spectrum auctions—with a short application to bid in the auction, followed by auction bidding, and then a longer application process after the auction ended to determine whether winning bidders were technically and financially qualified to be authorized to receive funding. It deliberately sought to create low barriers to entry to bid in auction under the assumption that few would be interested in deploying broadband in the areas that remain unserved. Unlike its practice for spectrum auctions, the FCC did not require applicants to make any upfront payment to be allowed to bid in the auction.

What happened: Competition in the auction drove down prices. That’s not surprising—that’s the way auctions work. Ultimately, there were winning bids for 5.2 million locations totaling $9.2 billion in funding, well under the $16 billion auction budget.

When the winning RDOF bidders were announced in December 2020, many were surprised at the results. The top winner was a company most people had ever heard of — a small fixed wireless provider called LTD Broadband—followed by Charter, a consortium of electric cooperatives, and Starlink. Several other fixed wireless providers were in the Top 10. The vast majority of winning bidders were committing to offer Gigabit speed broadband.

Under the FCC’s two-part application process, however, the real scrutiny occurs on the backend, after the auction. Ultimately, 20 months after the auction concluded, the FCC declared Starlink and LTD to be in default. To date, the FCC has authorized about $6 billion to serve about 3.5 million locations, with the remaining bids in default.

Why did many view RDOF as a failure?

Some have argued that RDOF was a race to the bottom, with participants aggressively bidding down the subsidy to unrealistic levels. But it’s worth remembering that no one forced any bidder to keep bidding to the bottom. Those that did either did so knowingly, to forestall anyone else from winning the area, or did so based on uninformed engineering assumptions. Unfortunately, we will have to wait years to find out which authorized recipients don’t deliver on their commitments.

One major failing in the auction’s implementation was the FCC’s decision to allow Starlink to bid in the 100/20 Mbps tier even though it never had commercially offered service at those speeds at the time. Likewise, the FCC’s auction design allowed bidders to bid on broad geographic areas, without any geographical or scale restrictions based on the size or capitalization of the bidder. Some bidders were bidding speculatively in the hopes they could attract outside capital based on their winning bids.

Was RDOF a failure? Yes . . . and no.

But the fact that Congress chose to provide more than $40 billion to NTIA and $10 billion to Treasury for broadband demonstrates that Congress was not happy with the outcome of RDOF.

It is not surprising that some bidders defaulted, but the tragedy is that residents in those areas were left in limbo for almost two years before the FCC completed its review of the long-form applications. And due to the RDOF six-year deployment schedule, states won’t know whether all of the authorized RDOF bidders will successfully complete their deployments before BEAD funding is awarded.

The positive story

Many have focused on the defaults as evidence of the failure of RDOF. But what about those that didn’t default? Companies that had done solid engineering in advance of bidding had a realistic idea of what it would cost to build in the areas they were bidding on, and at what point they should drop out of the bidding. The fact that bidding was under the reserve price was not a failure of the auction; that’s a fundamental design feature of any auction. Competition in an auction is supposed to force parties to reveal their true price. Companies that could leverage existing assets in a given area knew they would be able to complete a deployment for less money than a reserve price based on the estimated cost of a total greenfield build. The reserve price was a number based on a cost model—what the FCC was willing to pay for a given geography, but capped for the higher cost locations—not a prediction of what it would actually cost a specific provider to get the job done.

What was good about RDOF?

The prospect of significant funding (up to $16 billion in RDOF Phase I) motivated many non-traditional companies to evaluate whether to enter the broadband business. A diverse group of companies were authorized to receive RDOF support, including over 100 electric cooperatives.

As broadband analyst Mike Conlow recently noted, RDOF areas are already 30% served by broadband. Notably, many of the electric coop RDOF recipients are rapidly deploying broadband, blazing far ahead of the FCC’s required six-year deployment timetable.

Not only is this good for the communities they serve — these successful RDOF deployments also are demonstrating to other electric coops that there’s a viable business case to become a broadband service provider. Many more coops are now looking ahead to the BEAD funding opportunity.

Electric coops are a natural fit for this task: they rose to the occasion decades ago to serve the areas of the country where investor-owned electric utilities didn’t want to go, and they are poised to do it again with broadband. Member-owned companies can take a longer investment perspective than publicly traded companies that are ruled by Wall Street. They have access to capital with the strength of their solid balance sheets.

Electric utilities already have an existing customer relationship with their customers. They own the poles; they don’t need to negotiate make-ready with multiple pole owners. They are building fiber networks for Smart Grid. Adding broadband as an ancillary business can be done very cost effectively.

Lessons learned from RDOF that states should take into account as they implement BEAD

BEAD should ENHANCE the business plan, not BE the business plan.

In BEAD, states should carefully consider whether the projects proposed by applicants are proportional to their current capitalization and ability to execute. States should take a hard look at companies that are proposing to build projects that are grossly disproportionate to their current size and scale. Beware of firms chasing “free money” without a full appreciation of what they will be required to do.

States should do their due diligence on applicants before final selections are made.

In RDOF, the FCC required a minimal showing to get in the door to bid, with a more detailed review after winning bidders were determined in the auction. In BEAD, NTIA has specified primary and secondary selection criteria that states must use to select subgrantees. States should develop transparent processes to pre-screen the bona fides of all applicants so that only applicants with the requisite financial, managerial and technical capability are scored and evaluated.

The best predicator of future performance is past performance.

BEAD is a once-in-a-lifetime opportunity to get internet to all — truly all. States should look at which applicants have successfully completed broadband deployments in the past and whether they have done the bare minimum or have exceeded any required deployment deadlines in the past. For BEAD applicants that have not, to date, completed broadband deployments, states should carefully examine the business plans, access to capital, and their operating history to determine whether experienced professionals will be managing the deployment.

We’re going to need a variety of providers to get the job done. We only have one chance to get this right.

This article originally appeared on Medium; it is reprinted here with permission of the author.

Carol Mattey is a former senior official from the Federal Communications Commission, where she led teams working on initiatives to modernize the FCC’s $9 billion Universal Service Fund to support broadband. She is currently the principal of Mattey Consulting LLC, which provides strategic and public policy advisory services to broadband providers and other entities seeking funding for broadband. She is partnering with Irby Utilities to help achieve the vision of bringing sustainable, reliable internet to everyone in rural America.

The Benton Institute for Broadband & Society is a non-profit organization dedicated to ensuring that all people in the U.S. have access to competitive, High-Performance Broadband regardless of where they live or who they are. We believe communication policy - rooted in the values of access, equity, and diversity - has the power to deliver new opportunities and strengthen communities.

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