ruralPhase II of the Connect America Fund, targeted to get underway soon, offers substantial “financial upside” for five of the nation’s largest price cap carriers, according to telecom financial analysts at Bernstein Research. In a research note issued yesterday, Bernstein analysts estimated that the five carriers – AT&T, Verizon, CenturyLink, Frontier and Windstream – could see revenues climb by more than $700 million annually ($717 million) by 2020 without major increases to their capex as a result of the CAF program.

Bernstein analysts expect CAF II to begin in a few weeks and to offer a total of about $1.7 billion annually through 2020 to the five carriers to bring broadband to areas of their local service territories where broadband isn’t available today or is available only at low speeds. Although carriers will no longer receive traditional Universal Service funding, they will collect more money than they did previously — in most areas at least, the analysts said.

The analysts’ revenue estimates assume carriers’ average monthly revenue per user is $50, the build-out takes five years and the carriers achieve 70% take rates over four years. The 70% take rate might seem high compared to what the carriers see in large metro areas but considering that each carrier will be the only broadband provider in an eligible territory, and considering that the nationwide broadband take rate is about 70%, that could be a reasonable number.

Another assumption is that carriers will accept all of the funding they are offered, as Bernstein expects they will. As Telecompetitor has previously reported, carriers must accept or decline CAF funding on a state-by-state basis.

If declined, funding for a state will be awarded through a competitive bidding process. Participants will be allowed to bid on a more granular basis, eliminating the need to commit to building out an entire state, and the winning companies will be those that offer to deploy broadband at the lowest level of support. Incumbent carriers will have the option of turning down the funding they are initially offered, then later bidding in the reverse auction.

Connect America Fund: Impact by Carrier
AT&T and CenturyLink stand to get the most CAF II funding – about $530 million and $500 million respectively, on an annual basis, according to Bernstein. That’s about $170 million more for AT&T annually than the carrier gets in USF support today. For CenturyLink that number is about $160 million.

Frontier is expected to be offered about $300 million annually – about $155 million more than it gets in USF, while Windstream and Verizon are likely to be offered about $190 million and $150 million, respectively. Those numbers represent about $90 million and $20 million more, respectively, than each carrier currently gets in USF money.

Other notable information from the Bernstein analysts:

  • The FCC plans to hold a reverse auction by 2019 for ongoing support for the build-out territories after 2020. But although competitors theoretically could win funding in that auction, Bernstein analysts argue that the incumbents will be in the best position to win the ongoing subsidy. They added that they “would not be surprised if funding levels remain relatively constant.”
  • According to the FCC cost model upon which CAF funding will be based, the median per-location cost of providing broadband averages $26.85 monthly nationwide. Between 5% and 10% of locations nationwide have a cost-to-serve well above the median and are unlikely to receive broadband service without a subsidy.

The FCC ultimately plans to offer a CAF program for smaller rate of return carriers but details of that program have not yet been resolved.

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