The RDOF auction started with the great promise of bringing broadband to vast swatches of the U.S. that is lacking this essential utility. It ended with questions of whether that promise can be fulfilled.
The RDOF auction was established to provide government funding to deploy broadband service to all locations that could not obtain broadband service of at least 25 Mbps download speeds. The FCC defined over 53,000 CBGs (census block groups), each of which was defined by its coverage area, and the “locations” that needed to be covered by the new broadband service. There was a total of over 5 million locations included in the auction. Each CBG had a specified reserve price, which would be the government’s contribution in exchange for the reward winner’s obligation to provide broadband service to all of the designated locations in the CBG area. The auction was a reverse auction, where the bidders would bid on a “how low would you go” basis. Each round, the bidding was lowered by 10% of the reserve price. The first round started at 180%, and finished at Round 19, when the bids had be reduced to below 10%, as low as the auction could go. In addition to bidding at the reserve price for each round, bidders had to also indicate the grade of service they would comment to with their bid. It was anticipated that some bidders would commit to the highest level of service, delivering 1 Gbps to all locations in a CBG. Most of the bidding would be at a reasonable level, 100 Mbps or lower. The actual results were quite different and surprising.
The government had set aside $16 billion dollars to be paid out over 10 years in exchange for the winning bidder’s commitment to provide broadband service at all of the locations in the CBG they were bidding on. But two surprising trends overcame the auction process. Instead of the anticipated service level mix of 20% 1 Gbps service and 80% 100 Mbps service, the bid mix was reversed with over 80% of CBGs being won with commitments to provide 1 GIG service, even to the most remote users and communities. Also, the bidding was so aggressive, that competitive bids drove the auction awards down beyond the pricing levels needed to make a successful business case for deploying 1 GIG service. The bidding was so aggressive that over 15% of the CBGs were awarded at less than 10% of the reserve price, in Round 19 of the auction. In the end, there were 180 winners, with the Top 10 bidders winning 76% of the total award pot. The bidding was so low that only $9.2 billion of the original pot was awarded. The government had succeeded in getting commitments to upgrade broadband across the country at a fraction of the anticipated support payments. But now, it remains to be seen if the winning operators can fulfill the commitments they have made.
The winners of the RDOF auction fall in several categories. The largest winner was an example of a local WISP that is bidding to greatly expand their reach with the help of the RDOF funds. LTD Broadband is a WISP in the northern plains. They won a total of $1.3B over 10 years, including half a million locations in 15 states, many well outside of their current service area. Resound Networks and AMG/Nextlink are other examples of a local WISP endeavoring to greatly expand their service area with the support RDOF funding. Charter Cable was the second largest winner, winning areas that are largely adjacent to their current cable properties. Telco ISPs such as Windstream, Frontier, and Centurylink won funding to help upgrade their aging infrastructure. But to win these awards from the auction, each of these providers had to commit to providing 1 Gbps service. Of the 20% of the awards that were won at 100 Mbps service, 95% of the awards went to one company, Spacex, who intend to service their service areas with their satellite internet service. All of these winners have challenges to meet the commitments they have signed up for.
While there is a great opportunity to expand the availability of 1 Gig service throughout most of the country, deployment of either a fiber or a gigabit wireless infrastructure is expensive, especially in rural environments. The objective of the auction was to provide subsidies to improve access to broadband in all areas that lack this critical utility. But with so many operators having committed to gigabit service and low funding, the critical question for bid winners, and potentially for investors that will back these deployments is whether there is a successful business case to invest in. In rural environments, with a low density of users, deploying fiber can be a financial challenge. And in areas that are mountainous and heavily wooded, any of the available gigabit wireless would be difficult to implement successfully.
Each operator that has won funding also has a committed number of locations where they need to provide service. This critical ratio, the award dollars per location, is the key to understanding how financially challenging it might be to deploy the required gigabit service for a particular bid winner. Any operator that has an overall ratio over less than $2000/location (over 10 years) will be challenged to meet their gigabit obligations. Even with a higher ratio, areas with challenging terrain, locations that are spread apart, or where fiber backhaul is not readily available would be difficult to support in a financially viable way.
Now that the auction has been completed, one of the next critical steps is for the winning bidders to submit a Long Form 683 Application due on January 29, 2021 and obtain a letter of credit from investors to obtain their government funding. Smart investors will need to execute the necessary due diligence to discern the good opportunities from the bad. The surprising results of the auction, with the commitment to provide 1 GIG service and lower than expected funding, make this evaluation by potential investors critical. Some operators may be able to take advantage of the RDOF funding to fulfill their obligations, while others have bitten off more than they can handle and may be less investable. Wireless 20/20 has been analyzing these results with an eye toward supporting these due diligence efforts.
To analyze which areas, and which operators can meet the challenges of their obligations, it is necessary to do a thorough business case analysis. Each geography must be analyzed to understand which gigabit technology can be deployed, the actual investment required to deploy and operate the network and create the revenue targets for the available subscribers. Wireless 20/20 uses a range of tools to analyze the results of the auction for each winning operator the opportunities for RDOF winners. We have tools to analyze, and understand the award, the service level commitment, and the number of locations to serve. You also must have a business case tool to do the detailed business case analysis. In addition, we have developed mapping tools to be able to see the exact areas of the CBGs that were awarded. It is very much a case where the devil is in the details to determine which operators will be able to meet their obligation, and which will not.