Just over 100 Connect America Fund II auction winners are getting set to deploy broadband service to unserved rural areas for which they won funding. We reported on the key results when the auction completed in late August. Today we take a deeper dive into the auction results and consider the long-term impact that the CAF II winners may have on the communities that they’re moving into.

With few exceptions, the company that won funding for an area is not the company that provides phone service, and possibly slow DSL service, there today. CAF II winners, however, are required to offer voice as well as broadband and are poised to be the new carriers of last resort in their new communities.

The CAF II auction awarded funding for areas where the incumbent local phone company is one of the nation’s larger price cap companies and where the cost to deploy broadband was estimated to be especially high or where the incumbent turned down funding at the level offered by the FCC. Funding went to the company that offered to provide service at the lowest level of CAF support.

The price cap carriers won’t have much of a business left in markets for which another company won CAF funding — and when the FCC planned the auction, it said the incumbent carriers in that situation could petition to withdraw from a market. None of them have done that yet, but it is likely that they will do so eventually.

Who will be the new carriers of last resort?

CAF II Winners
Telecompetitor did a deeper dive on CAF II winners, aided by press releases issued by associations representing rural electric cooperatives and fixed wireless internet service providers (WISPs).

Here’s our tally.

CAF II Auction Winners

Number of Bid Winners* Type of Company Approx. Amt. Won ($ mils)
16 Wireless ISPs $750
15 Rural Electric Companies $225
30 Rate of Return Telcos** $125
1 Satellite Provider $122.5
4 Price Cap Carriers $28.5
37 Cable Companies, Competitive Carriers, Tribal Carriers, Others $23.7

Source: Telecompetitor Analysis of FCC Data, Wireless Internet Service Provider Association, National Rural Electric Cooperative Association

* In some cases, two or more companies bid together, so the number of winning companies exceeds the number shown here.
** May be underestimated slightly, as we relied on name recognition in identifying these companies.

The cost to serve individual locations is lower for wireless ISPs and ViaSat than for fiber providers. The downside is that the speeds that WISPs and satellite can deliver are lower.

The CAF II auction used a weighting process to favor bids supporting higher speeds. Nevertheless, bids involving fixed wireless and satellite were the winning ones in many areas.

Rural electric companies also  were big CAF II winners, and many of these companies plan to deploy fiber. Rural electric company deployments are likely to be in areas to which the companies already provide electric service or to neighboring communities. These companies undoubtedly were able to win bids because they can leverage some of their existing infrastructure and because they may not be seeking a prompt return on their investment.

Initially I was surprised to see that rate of return (ROR) telcos didn’t win more money than they did. But on further thought, I realized that many of them already have deployed broadband in adjacent communities as competitive local exchange carriers, which may have impacted their decision to participate. I would expect ROR telco CAF II winners to deploy fiber  where they can get a reasonable return on their investment. They may also use some fixed wireless.

In the CAF II auction, price cap carriers were allowed to bid on portions of states for which they initially declined funding, as well as on territories where they are not the incumbent. Their relatively low winnings suggest either that they made relatively few bids or that their bids were less competitive than those of some other types of companies.

The price cap carriers demonstrated in a previous CAF program that they will deploy fiber to the home if they can do so with little or no additional investment above the amount of CAF funding they receive, but that they will deploy less costly options such as fiber-to-the-node or broadband wireless to avoid additional investment.

That’s not a surprising approach, considering that these are all publicly-held companies. (It’s also important to note that, collectively, the price cap carriers already accepted more than $1.5 billion in CAF funding.)

ROR carriers and rural electric companies are more likely than price cap carriers to contribute additional funding to their CAF II deployments beyond what the CAF II program provided and therefore, are more likely to support higher-speed services.

The New Carriers of Last Resort
Thinking about the CAF II winners as the new carriers of last resort, I would use the term “enhanced status quo” to describe anywhere that the incumbent price cap carrier won funding. Residents will still be dealing with the same provider but will get faster service than in the past.

Indeed, anywhere there was a winning bid, residents should be better off – at least in the short term – because of their improved speeds. And residents in areas won by a ROR carrier or rural electric company may be especially happy because they will be getting the highest speeds, and in many cases will also get local support that they might not have had previously.

Those served by a wireless ISP also may benefit from a local presence, although their speeds will be lower. in comparison with companies deploying fiber-to–the-home. An important consideration for WISP markets, though, is that WISPs typically upgrade their networks every five to 10 years, and I’ve got to question whether the money will be there to do that when the time comes, as the long-term feasibility of the CAF/Universal Service program is unclear.

I also have to wonder about people in areas where broadband and lifeline voice service will come from a satellite broadband provider, possibly with no option in the future of falling back on incumbent telcos. The broadband and voice service that the satellite companies provide has improved substantially in recent years, but it still has longer latency than other services and typically has a data cap. And don’t expect satellite providers to provide a local presence in rural communities any time soon.

There are also a lot of areas remaining where there was no winning bid in the CAF II auction. These areas are likely to go into another auction in which it could be increasingly difficult for anything but satellite and fixed wireless service to win, potentially expanding the pool of people in communities with a more uncertain future.

I talked to Jonathan Chambers, who helped 20 rural electric cooperatives win CAF II funding, about this recently and he said he thinks some communities will eventually take matters into their own hands by raising additional funding for better broadband service than the auction yielded.

I’d be interested to hear what readers think about this.

Join the Conversation

2 thoughts on “A Deeper Dive on CAF II Winners: The New Carriers of Last Resort

  1. As a small ILEC, we had looked at two nearby CAF II auction areas. The areas surrounded two neighboring communities, which is important to note because the areas within the city limits of each town were not eligible for the CAF II auction – only the surrounding hilly countryside. And note that each town already was served by a price cap carrier, cable modem service, and each has WISP service already. But not the surrounding rural areas.

    In our state, the auction winner, an out-of-state WISP, won most of the service areas. I predict that these two rural areas that I'm specifically referring to will be "loss leaders" for this WISP – they have no clue what they're getting into. It will be interesting to see if all areas of the auction actually get broadband deployed. Great article.

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