Communications infrastructure upgrade - The need for deep fiber Published July 2017 - Deloitte

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Communications infrastructure upgrade - The need for deep fiber Published July 2017 - Deloitte
Communications
infrastructure upgrade
The need for deep fiber
Published July 2017
Communications infrastructure upgrade - The need for deep fiber Published July 2017 - Deloitte
Communications infrastructure upgrade | The need for deep fiber

Executive summary                                                 03
Introduction                                                      07
Fiber is the centerpiece
of wireless advancement
Section I                                                         09
Deep fiber is at the center
Section II                                                        13
Major fiber investment is needed
Section III                                                       14
Incentives to deploy fiber are lacking
Section IV                              17
Carriers and policymakers can
share the responsibility for motivating
investment in fiber infrastructure
Conclusion                                                        22
Fiber investment requires new
monetization mechanisms
Sources                                                           25

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Communications infrastructure upgrade - The need for deep fiber Published July 2017 - Deloitte
Communications infrastructure upgrade | The need for deep fiber

                     Executive summary
                     Fifth generation mobile networks (5G) are now poised
                     for field testing and launch worldwide. The technology
                     unlocks unprecedented potential to build seamless
                     digital ecosystems, reshaping the way citizens live,
                     work, and interact.

                     Wireless networks were at a similar             An equally transformative moment is
                     inflection point as 4G services launched        coming with 5G, but with two important
                     early in the decade. The United States          differences. First, the economic stakes are
                     took action as government made new              potentially much higher, where connected
                     spectrum available and carriers responded       devices, applications and business models
                     to accommodate radical, twenty-fold             could dramatically stimulate economic
                     growth in global mobile data traffic. The       productivity. Second, the United States is
                     massive investment in wireless network          not as well prepared to take full advantage
                     infrastructure rewarded the US consumer         of the potential, lacking needed fiber
                     with more coverage at affordable prices, and    infrastructure close to the end customers
                     the US economy generated up to 700,000          (deep fiber).
                     jobs as a result.1

Communications
infrastructure upgrade
The need for deep fiber                                                                                            03
Communications infrastructure upgrade - The need for deep fiber Published July 2017 - Deloitte
Communications infrastructure upgrade | The need for deep fiber

Deep fiber is the                                  To meet future                                  The current
next front in the                                  broadband                                       wireline industry
battle to lead the                                 needs, the United                               construct does
world in Internet                                  States needs an                                 not incent enough
speed and capacity                                 estimated $130–                                 fiber deployment
Unlocking the full potential of 5G in the          150 billion of fiber                            Some wireline carriers are reluctant or
United States rests on a key assumption:
the extension of fiber deep into the
                                                   infrastructure                                  unable to invest in fiber for the consumer
                                                                                                   segment despite the potential benefits.
network. Despite the demand and potential
economic benefits of fiber deployment,
                                                   investment                                      Expected wireline CAPEX ranges between
                                                                                                   14–18 percent of revenue. Wireline OPEX can
the United States lacks the fiber density in       A Deloitte Consulting LLP analysis estimates    be 80 percent of revenue.9 Fiber deployment
access networks to make the bandwidth              that the United States requires between         in access networks is only justified today if
advancements necessary to improve the              $130 and $150 billion over the next 5–7         a short payback period can be guaranteed,
pace of innovation and economic growth.            years to adequately support broadband           a new footprint is being built, repairs from
Increased speed and capacity from 5G will          competition, rural coverage and wireless        rebuilding after a storm or other event
rely on higher frequencies and network             densification. Such ambitious infrastructure    justifies replacement, or in subsidized
densification.2, 3 Carriers will deploy many       investment could derive from a variety of       geographies where Universal Service funds
more small cells, homespots, and hotspots          sources including communications service        can be used.
in higher bands, with a coverage radius            providers, financial investors and public-
measured in meters versus kilometers.              private partnerships.                           The largest US wireline carriers spend, on
Without more deep fiber, carriers will be                                                          average, five to six times more on operating
unable to support the projected four-fold          Our estimates include funding for three         expenses than capital expenditures.10
increase in mobile data traffic between            broad categories of fiber deployment:           Excessive operating expenditures caused,
2016 and 2021.4                                    fiber for wireless densification, fiber to      in part, by legacy TDM network technology
                                                   increase consumer and business broadband        restrict carriers’ ability to leverage digital
A second motivation for “deep fiber”               competition and fiber to serve rural/           technology advancements. Worse, as
deployment is to increase broadband                underserved geographies. Moreover, our          legacy TDM networks continue to descale,
service choice for residential and                 models suggest massive synergies between        the percentage of fixed costs overwhelms
business customers. Deep fiber is a                the build required for wireless densification   the cost structure leading to even greater
key tool for the national infrastructure           and adding broadband competition in urban       margin pressure.
imperative to provide consumers                    areas. There are also additional benefits
high-speed broadband connections no                between densification and underserved           In the last five years, wireline carriers
matter where they live at prices they can          communities. With more than 60 percent          have lost seven points of market share
afford, closing the “digital divide.”              of total costs for construction, permits and    in broadband access, mainly to cable
                                                   design,8 fiber providers may need to share      operators. Cable operators, who have the
Wireline broadband access supports as              last mile access routes and rights of way       advantage of a more modern coax network,
much as 90 percent5 of all Internet traffic        where possible to realize such synergies.       do not have these legacy constraints and
even though the majority of the traffic                                                            have aggressively deployed high-speed
ultimately terminates on a wireless device.                                                        broadband access using DOCSIS 3.0 and 3.1
However, twelve years after the first fiber                                                        upgrades. Cable operators currently cover
to the home (FTTH) deployments, only 38                                                            more than 85 percent percent of US homes
percent of homes have a choice of two                                                              with Internet speeds of 25 Mbps or greater.10
providers offering speeds of at least 25
Mbps.6 In rural communities, only 61 percent
of the population have access to 25 Mbps
wireline broadband, and when they do,
they can pay as much as a three times the
premium over suburban customers.7

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Communications infrastructure upgrade - The need for deep fiber Published July 2017 - Deloitte
Communications infrastructure upgrade | The need for deep fiber

                                                Carriers and
Generating sufficient cash flow to motivate                                                      Carriers should consider:
fiber upgrades means building a business
                                                                                                 •• Establishing deep fiber as a top
model based on simplicity and capital
productivity. This will not happen without
                                                policymakers                                        priority investment for the long term.

completing the migration from TDM to an         can share                                        •• Redesigning business models and
all-IP network. The complexity imposed                                                              processes based on digital sales
on IP services by legacy product iteration      responsibility                                      and care channels.

                                                for motivating
and cumbersome IT systems increases
                                                                                                 •• Providing a more limited set of
operational costs, drives up failure rates,
                                                                                                    standard IP products to substitute
and leaves customers unhappy.
                                                investment in fiber                                 legacy TDM products.
•• Mobile operators, not required to support
   legacy services, require approximately       The lack of funding and motivation to            US policymakers should consider:
   one-eighth the care staff and receive        deploy fiber leaves the future of wireless
                                                                                                 •• Eliminating regulatory barriers that
   half as many inbound calls per customer      and wireline connectivity uncertain.
                                                                                                    prevent carriers from operating a single
   compared to wireline network operators.11    Wireline telecommunications companies
                                                                                                    IP network, impede deployment of
                                                are choosing to invest in areas other than
•• A survey by Nemertes Research found a                                                            additional fiber assets, or restrict the
                                                fiber deployment including satellite TV,
   reduction in average time to repair from                                                         types of services that may be offered.
                                                advertising, content and advanced business
   21 hours to 5 hours for a single, end-to-
                                                services. Similarly, infrastructure funds        •• Avoiding regulation that limits
   end IP network.12
                                                and REITs have made few investments in              carrier innovation in creating new
•• French wireless and wireline provider,       telecommunications assets. Many wireline            monetization mechanisms or voluntary
   Iliad, operates an all IP network with       carriers depreciate 1.2x–1.3x as much               sharing of deep fiber and associated
   approximately 3 to 4 employees per           PPE as they add in a given year, leaving a          communications infrastructure such
   10,000 customers compared to 12 to 15        declining net asset base to service increased       as trenches, conduit, rights of way and
   employees per 10,000 customers for US        demand.15                                           cell sites.
   providers.13, 14
                                                                                                 •• Dispersing Universal Service support
                                                Many countries, including the United
                                                                                                    more efficiently to coordinate/
Carriers stand to gain tremendous               States, prioritize ubiquitous affordable
                                                                                                    encourage deep fiber programs.
efficiency from deploying new IP networking     broadband as a policy objective. The United
architectures like Software Defined             States ranks tenth in the world for average
                                                                                                 Reforms to the Universal Services
Networks (SDN) and Network Function             broadband speed and percentage of users
                                                                                                 Administrative Company (USAC) to improve
Virtualization (NFV). This technology is also   with over 25 Mbps.16 This is remarkable,
                                                                                                 operational efficiency is a prerequisite
important to provide the scale and elasticity   as the United States has almost six times
                                                                                                 to implement a coordinated deep fiber
required to support 5G networks in the          the cumulative land area of the nine
                                                                                                 program. Recently, USAC has come under
future. However, the requirement to operate     countries ranked above it. Removing legacy
                                                                                                 growing criticism regarding its operations
and maintain legacy networks and systems        regulations that constrain competition and
                                                                                                 and the resulting impact to end-users,
(TDM based) limits carriers’ ability to take    investment may enable market forces to
                                                                                                 such as consumers, schools, libraries and
advantage of the savings and shift capital to   solve many of the deep fiber and broadband
                                                                                                 companies. Meanwhile, USAC’s internal
deep fiber deployment.                          coverage challenges in the United States.
                                                                                                 expenses are growing approximately
                                                Furthermore, empowering market forces
                                                                                                 at 12 percent per year.17 In the past, the
                                                may enable the government to focus on a
                                                                                                 Federal Communications Commission
                                                more limited set of geographies that are
                                                                                                 (FCC) has considered putting USAC’s
                                                very expensive to serve or have low income/
                                                                                                 operations out for competitive contract to
                                                affordability issues.
                                                                                                 save costs and improve responsiveness
                                                                                                 to organizations seeking funds to close
                                                                                                 the digital divide. At minimum, reforming
                                                                                                 USAC internal operations seems warranted
                                                                                                 to meet broader goals of expanding
                                                                                                 fiber infrastructure and addressing rural
                                                                                                 Internet access.

                                                                                                                                               05
Communications infrastructure upgrade - The need for deep fiber Published July 2017 - Deloitte
Communications infrastructure upgrade | The need for deep fiber

New monetization                                   Partnership between carriers and OTT
                                                   players to fund deep fiber

mechanisms                                         As limited fiber availability constrains
                                                   increased wireless densification and fiber
needed to                                          broadband, over the top players may choose
                                                   to fund fiber deployment, including owning
encourage deep                                     assets or forming partnerships with carriers.

fiber investment                                   Deep fiber as a financial investment
                                                   Insufficient supply of deep fiber and
Important as they are, IP migration and            overwhelming demand growth are strong
regulatory reforms will not be enough to           fundamentals for fiber investment. As
create the financial case for deep fiber           interest grows from non-traditional fiber
deployment that is needed for broadband            investors, we expect shared infrastructure
and densification. Wireless, wireline and          models to emerge for last mile fiber access.
cable require creative new ways to monetize        Fiber as leased real estate could allow
“last mile” access as an incentive for massive     carriers to maximize asset utilization.
fiber deployment. We contemplate three
potential models:                                  Carrier investment and regulatory reform
                                                   can provide key ingredients to address
Synergies between deep fiber and                   the deep fiber shortage. As carriers are
adjacent services in an ‘unlimited’ world          already making 5G investment decisions,
Gartner predicts that affluent households          fiber investment is top of mind. Lack
will have up to 500 connected devices by           of action may lead carriers to commit
2022.18 In some cases, IoT services offer          to investments inconsistent with the
the prospect of new revenue, however,              goal of better densification, broadband
most connected devices will require                competition and closing the digital divide.
low bandwidth or be WiFi enabled and,
therefore, may not provide carriers with
incremental revenue. In such cases,
carriers have an opportunity to increase
revenue by offering integration, network
security, and traffic management services
within the increasingly complex mix of IoT
devices and ecosystems.

Reforming USAC’s internal
operations seems warranted
in order to meet broader
goals of expanding fiber
infrastructure and addressing
rural Internet access.

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Communications infrastructure upgrade | The need for deep fiber

Introduction

Fiber is the centerpiece
of wireless advancement
                              Wireless networks were at an inflection point as 4G
                              services launched early in the decade. “More spectrum
                              and faster networks” became the rallying cries of
                              consumers, carriers and governments alike in the global
                              competition to lead in wireless Internet speeds. The world
                              responded, increasing wireless speeds and capacity to
                              accommodate an 18-fold increase in global mobile data
                              traffic and a 21-fold increase in average mobile data speed
                              since 2011.4, 19

                              The United States, in particular, took         5G wireless has a wireline pulse
                              action. Since 2008, the US government          Another inflection point is coming with
                              has made 295MHz of licensed                    5G. But this one is different. While 5G
How the US inspires the       spectrum20 available. In the past 8 years,     standards focus on a new generation
next round of network         mobile data usage soared from 0.2 GB           of technology and capabilities for speed
                              per month to 2.5 GB per month21 and in         and flexibility to connect the “Internet of
infrastructure investment     many cases much higher. During the             things,” provide mobile broadband, and
will determine whether it     same period, the postpaid ARPUs of             supply critical communications, the
                              major US wireless carriers remained            lifeblood of its potential will come from the
continues to lead the world   relatively flat, implying price per GB         wireline network with the ultimate goal to
in achieving even greater     declined by 10–15 percent. 22, 23 As price     extend fiber deep into the network near
                              per GB has declined, carriers have added       the customer. Deep fiber also supports the
innovation.                   spectrum and made cost reductions to           national infrastructure imperatives of
                              help keep pace.                                increasing choice between providers for
                                                                             residential and business consumers and
                              Carriers and the federal government made       closing the digital divide.
                              good on economic contributions Deloitte
                              postulated in its 2011 and 2014 papers         How the United States inspires the
                              that 4G drove billions of infrastructure       next round of network infrastructure
                              investment between 2012-2016 likely            investment will likely determine whether
                              resulting in the upper bounds of the           it continues to lead the world in even
                              projected ranges of $73–151 billion in GDP     greater innovation, getting more people
                              growth and 371,000–771,000 new jobs.1          connected to faster networks, and
                                                                             bringing them the content they need
                                                                             at prices they can afford.

                                                                                                                           07
Deep fiber | The next Internet battleground

Extending fiber deeper into
communities is a critical economic
driver, promoting competition,
increasing connectivity for the rural
and underserved, and supporting
densification for wireless.

08
Communications infrastructure upgrade | The need for deep fiber

Deep fiber is at the center
Network infrastructure plays a prominent role in economic growth and innovation.

Fiber density is critical to support the next   Transmission at higher frequencies                                                                Homespots and hotspots require
round of innovation and Internet access         exhibits more limited propagation                                                                 high-speed broadband connections to
for America. Deep fiber can facilitate          characteristics than transmission at                                                              homes and business. Without deeper
high-speed access to more homes, more           lower frequencies. The signals cannot                                                             fiber deployment, carriers will be unable
businesses and support hundreds of              reach as far and have more difficulty                                                             to support the projected four-fold in
thousands of new cell sites and hot spots       penetrating walls or other barriers.                                                              mobile data traffic increase between
for 4G and 5G.                                  Therefore, network densification                                                                  2016 and 2021.4
                                                becomes an even greater imperative.
Previous generations of wireless                Such densification is challenged, given                                                           Exhibit 1 below shows how fiber is a critical
technology (i.e., 3G and 4G) relied on          current fiber deployment limitations                                                              component to realizing opportunities for
broader blocks of spectrum and improved         and the upgrade costs and deployment                                                              the economy as it expands into
spectral efficiency to generate higher          cycle times associated with traditional                                                           communities to promote competition,
speeds and increased capacity. Increased        network architecture. Small cells need                                                            increases connectivity for the rural and
speed and capacity from 5G will rely more       connections to fiber/cable backhaul to                                                            underserved, and supports densification
heavily on the use of higher frequencies        realize capacity and speed potential.                                                             for wireless.
and densification.2, 3 Deploying fiber closer
to the customers (i.e. deep fiber) can
enable efficient transport of increased         Exhibit 1
wireless traffic from that densification.       Illustrative view of deep fiber deployment

                                                                                                                                                                        Supports wireless densification,
Carriers are already purchasing and                      Current lack of deep fiber                                                                Deep fiber
                                                                                                                                                                        broadband competition, and
testing high-frequency spectrum (both                                                                                                                                   rural broadband
licensed and unlicensed) to solve capacity
constraints. Rather than building macro
towers with mid or low band spectrum,
carriers will deploy lower powered small                                             WiFi                                                                                          WiFi
cells and rely on homespots and hotspots
                                                                                                            LTE
each with a coverage radius measured in
                                                                                     WiFi                                                                                          WiFi           5G   IoT
meters versus kilometers. Densification of                                                          Small cells
                                                                                                                            $130–150 billion

access points with small coverage areas
imply that fewer users share the network
                                                                                                                                  5–7 years

capacity produced by 4G or 5G small cells,
                                                                                                      Microwave link

generating enormous performance gains.

                                                                                   Macro cell                                                                                    Macro cell
                                                Copper

                                                                Fiber

                                                                                                                                               Fiber

                                                                                                                                                              Fiber
                                                         Coax

                                                                                                                                                       Coax

                                                                                            Fiber                                                                                         Fiber

                                                  Fixed line                          Wireless core                                             Fixed line                                 Wireless core
                                                                        Internet                                                                                      Internet

                                                                                                                                                                                                             09
Communications infrastructure upgrade | The need for deep fiber

                                                   A second motivation for “deep fiber”
                                                   deployment is to increase broadband
                                                   service choice for residential and
                                                   business customers
                                                   Wireline broadband access is the unsung        of immersive media such as Augmented
                                                   hero of our nation’s communications            and Virtual Reality (AR/VR) will contribute
                                                   infrastructure. While a majority of Internet   to traffic growth estimated at 181 percent
                                                   traffic terminates on a wireless device,       CAGR through 2020.25 In addition to these
                                                   nearly all of that traffic relies on home      new use cases, there will also be a massive
                                                   WiFi access points, homespots, and             increase the number of devices, pressuring
                                                   hotspots connected to wireline broadband       both WiFi and Cellular networks to support
                                                   infrastructure services such as fiber, coax,   the massive number of simultaneous
                                                   or twisted-pair copper. Wireless networks      devices per base station. Without sufficient
                                                   only carry 11 percent of traffic, implying     fiber networks, innovation in new use cases,
                                                   wireline networks support nearly 90            new applications and new devices will likely
                                                   percent of total Internet traffic.             be stifled. Deep fiber deployment is the crux
                                                                                                  of the new capacity required, including fiber
                                                   Today the bulk of the traffic carried by       to the home/business and fiber backhaul to
                                                   these wireline broadband networks is           support wireless densification.
                                                   video for entertainment and information
                                                   purposes. Streaming video and new forms        In addition to supporting wireless capacity
                                                                                                  growth, wireline bandwidth to individual
                                                                                                  homes and businesses will likely become
                                                                                                  even more essential over the next half-
                                                   Exhibit 2
                                                                                                  decade. Fiber to the home and business
                                                   US traffic by network type24
                                                                                       CAGR
                                                                                                  will be necessary to support the future of
                                                                                                  content delivery including video, gaming,
                                                                                                  AR/VR, and other yet-to-be-invented new
                                                                                 15%   +45%
                                                                                                  content and application platforms. Fiber
                                                                                                  is anticipated to be the next front in the
                                                                                                  battle to lead the world in Internet speed
                                                                                                  and capacity, across both wireline and
                                                                   11%                            wireless networks.

                                                          7%                     68%   +20%

                                                                   66%
                                                                                                  Fiber is the next front in
                                                         60%
                                                                                                  the battle to lead the world
                                                                                                  in Internet speed and
                                                         33%       23%           17%   -0.8%      capacity, both for wireline
                                                                                                  and wireless networks.
                                                         2015     2017E      2019E

                                                           Wireline
                                                           Unlicensed wireless
                                                           Licensed wireless
10
Communications infrastructure upgrade | The need for deep fiber

                               Despite the demand and economic
                               case for deployment, the United States
                               lacks the fiber density to make the
                               capacity and bandwidth advancements
                               necessary to improve the pace of
                               innovation and economic growth
                               FTTH deployments in the United States               and competitive-choice perspective. Most
                               began in 2005 with Verizon’s introduction           homes in the United States have few options
                               of its fiber optic TV service in Keller, TX to      for broadband Internet access at speeds of
                               9,000 initial customers.26 More than 12             25 Mbps down and 3 Mbps up (25/3 Mbps),
                               years later, wireline telecom companies             as shown on the right-hand side of Exhibit 3
                               pass approximately 26 million houses with           below. Given the limited competition in most
                               fiber—less than 20 percent of total US              of the country and the resulting low pressure
                               houses.27, 28 Telecom companies serve the           on pricing, there has been limited adoption.
Carriers will not be able      remaining 70 percent with slower copper
to take advantage of WiFi      technologies, including Fiber to the Node           Existing FTTH and DOCSIS broadband
                               (FTTN) or DSL, and in some cases, offer no          networks differ from the architecture
offload to decrease wireless   broadband services at all. Cable has been           needed to support widespread small
traffic without more deep      aggressive in deployment of high-speed              cell densification. Small cells will require
                               broadband access using DOCSIS 3.0 and               dedicated fiber pairs, and thus necessitate
fiber to transport all that    3.1 upgrades. Cable companies currently             a higher fiber count. Conversely, fiber to the
potential new traffic.         cover more than 85 percent percent of US            home is architected to maximize the amount
                               homes with Internet speeds of 25 Mbps or            of fiber shared between subscribers. Without
                               greater, the FCC definition for broadband           access to additional high-speed broadband
                               communications services.29, 30, 31                  and fiber tailored for small cells, carriers
                                                                                   lack the economic incentive to deploy small
                               Although a vast majority of US homes                cells. Moreover, it is unlikely that carriers will
                               receive 25 Mbps or faster, many homes are           take advantage of WiFi offload to decrease
                               still left underserved from a speed                 wireless traffic without more deep fiber to
                                                                                   transport all that potential new traffic.
                               Exhibit 3
                               Consumer choice for 25/3 Mbps service6

                                                                                                  Low adoption rate

                                                                                            While 90 percent of the US has
                                      More than                                             access to advanced broadband
                                     one provider                                           offerings, limited competition has
                                                              One provider                  likely contributed to a relatively low
                                                                                            adoption rate of only 21 percent.

                                               No
                                            providers
                                                                                                       21%
                                                                                                                                     11
Communications infrastructure upgrade | The need for deep fiber

The digital divide continues to widen
The lack of fiber and/or competitive broadband worsens in rural
and underserved communities
Access to broadband across different                      These remaining 15,000 wire centers can                       Competitive losses to cable and CLEC
geographies is uneven at best. Urban                      be divided into rural and extremely rural                     triple play offerings often devastate ILEC
America has better access to broadband                    geographies. There are approximately                          economics in these areas, preventing them
and is improving its access at a faster rate              1,100 rural wire centers serving about                        from providing a competitive broadband
than rural and underserved communities.                   28 million households and over 13,000                         offering in the town center or addressing
On average, 90 percent of Americans have                  extremely rural wire centers serving 21                       the outlining areas of the wire center.
access to 25/3 fixed broadband; only 61                   million households. The typical rural wire                    Although fiber is not required for wireless
percent of the rural population have access               center is 100 sq. miles and serves 6,500                      densification, deep fiber is still essential to
to 25/3 fixed broadband.6 The difference in               households. The typical extremely rural wire                  serve these very rural areas with broadband
this broadband access between houses in                   center serves 200–250 sq. miles and serves                    speeds that meet the national standard, and
urban and rural communities and those who                 around 1,600 households. Generally, the                       have a choice of providers.
are traditionally underserved is what defines             layout of these geographies is a small town
the digital divide.                                       containing approximately 80 percent of all                    In the absence of competition, and given
                                                          the households and businesses in an area of                   the aging, less efficient TDM network,
There are almost 21,000 wire centers in                   2–5 sq. miles and a sparse rural population                   broadband in rural areas is typically far
the United States serving approximately                   in the remainder of the wire center.32                        more expensive than in urban and suburban
133 million households, and a territory of                                                                              environments. For example, in a sample
almost 3.5 million square miles. Most of                  In these rural or extremely rural wire                        Kansas wire center, the CLEC charges
the population live in high-density urban                 centers, if there is broadband competition,                   $45 for 15 Mbps, $135-160 for 100 Mbps
and suburban areas served by just over                    it is usually in the form of a cable company                  and $28 for voice service. This compares
6,000 wire centers that cover almost 84                   or a CLEC offering service in only the town                   to a suburban wire center served by two
million households but represent less                     center, effectively ignoring the outlying                     providers able to offer 25 Mbps or higher in
than 110,000 sq. miles. These wire centers                portions of the wire center. Usually this                     which 60Mbps is $45 and 100 Mbps is $55
typically enjoy faster broadband and more                 service has an effective monopoly as                          with voice an additional $10 more. Thus,
competition than the remaining 17,000 wire                incumbent telecom carrier (ILEC) has poor                     rural prices for 100 Mbps Internet and
centers that serve sparsely populated and                 market share and an aging network. Carrier                    voice are almost three times as much as
more remote areas.                                        of last resort obligations force ILECs to                     in the suburban example.33 This pattern of
                                                          serve the entire wire centers, while cable                    higher prices and unserved outlying areas is
                                                          companies and CLECs can focus on the                          repeated across the country.
                                                          relatively densely populated town centers
                                                          (see Exhibit 5).

Exhibit 4                                                 Exhibit 5
Broadband availability in rural and                       Wire center visual
urban areas (2016) 6
                                                          Typical rural wire centers
                                                          consist of a small town
                                                          with ~80% of the
                                                          population in ~10%
                             Nationwide

                                                          of the territory.
                                          Urban

                                                  Rural

                                                          ILECS are forced to serve
 Level of Availability                                    entire geography.

                                                          Competitive connectivity
 No provider                 10%          4%      39%     providers typically serve
                                                          only the town center.
 One provider                51%          52%     48%     Such a scenario challenges
                                                          ILEC economics and
 More than one provider      39%          44%     13%     broadband coverage
                                                          outside the town center.

                                                          *This is a representative depiction of a rural wire center,
                                                          where lighter shades indicate higher population density.
12
Communications infrastructure upgrade | The need for deep fiber

Major fiber investment
is needed
To meet future broadband needs, the United States needs an estimated $130–150
billion of fiber infrastructure investment

Deloitte Consulting LLP analysis estimates      houses.34 Our cost estimates assume that         Regardless, fiber will still play a critical role.
that the United States requires $130–150        75 percent of these 70 million homes receive     Whether to supply backhaul to wireless
billion of fiber investment in the next 5–7     fiber to the home, while the remaining           towers or to shorten copper distances,
years to support broadband competition,         25 percent receive wireless (5G) or other        closing the digital divide requires fiber
rural coverage and wireless densification.      technologies that can cost effectively           investment in these underserved areas.
Such ambitious infrastructure investment        yield broadband speeds greater than the
could derive from a variety of sources          minimum federal requirements.                    As depicted in Exhibit 6, we also account
including traditional communications service                                                     for synergies between the three categories
providers, financial investors and public-      Rural/underserved geographies                    of fiber deployment described above. For
private partnerships. Our estimates include     Approximately 10 million rural homes and         example, there are massive synergies
funding for three broad categories of fiber     3 million urban/suburban homes do not            between the build required for wireless
deployment:                                     have broadband of at least 25 Mbps.34 Given      densification and adding broadband
                                                the costs associated with deploying high         competition in urban areas. Since more
Fiber for wireless densification                speed broadband to these geographies,            than 60 percent of total costs are for
Estimated fiber costs for wireless              we have based our estimates on the use           construction, permits and design, it is
densification assume that a majority of         of alternative technologies such as fixed        imperative that fiber providers can share
densification occurs in the most populated      wireless (LTE or 5G) and fiber to the node,      last mile access routes and rights of way.
metropolitan areas, covering approximately      using advanced modulation and vectoring.
48 percent of the total US population. To
gain efficiencies, we assume that multiple
wireless carriers will share fiber backhaul
or conduit to small cells, rather than each     Exhibit 6
carrier building out its own. Our cost models   Required fiber infrastructure investment
also take into consideration the significant                                       Broadband competition
differences in construction costs based                                                $60–100 billion
on population density as we approximate
fiber deployment costs for five categories of
                                                                                                                                 Synergies
population concentration.

Fiber to increase                                                                              $75
broadband competition                                                                                                                     Rural and
                                                 Synergies
Competition between at least two providers                                                                                               underserved
                                                                                                                 $100                    $35–40 billion
that meet federal guidelines for broadband                                            Total estimated costs
of 25 Mbps downlink and 3Mbps uplink         Wireless                   $20         over 5–7 years to support
implies improving broadband speeds to      densification                         wireless densification, broadband
                                           $15–20 billion                      competition, and expanded coverage
about 55 million urban suburban houses                                                   $130–150 billion.
as well as approximately 13 million rural                            $0                                                 $150

                                                                                                                                                      13
Communications infrastructure upgrade | The need for deep fiber

Incentives to deploy
fiber are lacking
The current wireline industry construct does not incent sufficient broadband deployment

Strong demand for fiber exists from                 home.35 However, the lack of homes            substitution. Wireline carrier market share
wireless densification for 5G, improved             passed by upgraded wireline telco             of voice revenue has declined from 79
broadband access and new business                   broadband (fiber or advanced copper DSL)      percent in 2005 to less than 15 percent in
connectivity services. As established in            causes declines in voice and broadband        2015, most of which has migrated to
the previous section, such demands                  market share versus cable competition.        wireless only.38
remain either unmet or are unevenly
served across much of the United                    On average, wireline telecom carriers         This dramatic customer attrition may
States. What are the barriers preventing            account for about 37 percent of consumer      result in challenging financials for the
carriers from making the necessary                  broadband customers compared to 63            wireline telecom industry. Current and
investments to meet the demand for                  percent for cable.36 In 2012, telecom         forward-looking financials leave little room
the consumer segment?                               companies enjoyed 44 percent broadband        for fiber upgrades. Examining the revenue
                                                    market share.37 Cable competition drives      waterfall in Exhibit 7 demonstrates that
Wireless substitution and cable                     the majority of market share loss.            post obligations such as debt and interest,
competition have taken a toll on most               However, small, but persistent pressure       wireline companies generate insufficient
wireline carriers’ customer base, leading to        from alternative providers that address       cash flow to re-invest in fiber to support
challenging economics and limited funds             the most attractive markets where they        residential broadband, business services
for fiber deployment. Wireline telecom              face low entry barriers also challenge        or wireless densification.
carriers have sustainable market share in           telecom market share. Wireline carriers
areas in which they offer fiber to the              fare far worse in voice because of wireless

Exhibit 7
Average 2016 wireline financials39
(iIn thousands of dollars)

$140
                                                                                                  After fulfilling obligations
$120
                                                                                                  such as debt and interest,
$100
                                                                                                  wireline companies do not
 $80
                                                                                                  generate sufficient cash
$60
                                                                                                  flow to re-invest in fiber
 $40
                                                                                                  to support residential
 $20
                                                                                                  broadband, business
  $0
                                                                                                  services, or wireless
$(20)
                                                                                                  densification.
$(40)
        Revenue        Opex         Capex          Tax        Interest   Dividend   Cash flow

14
Communications infrastructure upgrade | The need for deep fiber

Carriers have a limited business                                                                      Why
case for fiber deployment                                                                             broadband
Based on industry interviews, the costs for      Re-build
                                                                                                      Universal
telecommunications companies to deploy           Each year, storms and other natural events           Service is
fiber in urban and suburban geographies
has traditionally been between $600
                                                 cause damage to wireline networks. If the
                                                 required repairs are extensive enough,
                                                                                                      challenging
and $1,800 per home passed, excluding            carriers opt to totally rebuild the network
customer premise equipment (CPE).40              and replace existing copper with fiber.              The concept of universal service for voice
                                                                                                      is relatively simple, as customer needs
Carriers incur and additional 20–30 percent                                                           do not materially change over time.
to connect and install a customer.               Subsidized geographies                               Broadband is much more complex as it has
                                                 Federal Universal Service Fund supports              speed, availability, error rate and latency
                                                                                                      characteristics. In the past, government
Carriers typically deploy fiber in four select   fiber deployment in geographies not                  has set minimum speed characteristics
situations in which they can generate a          covered by broadband and where                       for broadband. However, these minimum
positive business case. Collectively, these      deployment and operational costs are                 performance expectations have changed
                                                                                                      numerous times over the past 15 years,
four reasons account for most of the fiber       prohibitive. Through August 2015, ten                adding uncertainty to carrier investment
already built that comprises almost the          carriers accepted a total of $1.5 billion            decisions. Exhibit A below shows the
26 million houses passed.41 Fiber build          per year from the Connect America                    changes to the FCC’s definition of
                                                                                                      broadband downlink speeds.
motivations under the current industry           Fund (CAF) to serve approximately
construct include:                               7.7 million Americans.43                             Exhibit A
                                                                                                      FCC Broadband Speed Definition61

Short investment payback period                  Carriers fund as much FTTH as possible
                                                                                                                    Broadband
Emphasis of deployment to houses and             using a combination of the approaches                 Dates
                                                                                                                    speed definition
businesses where loop lengths and line           described above. However, limiting fiber
                                                                                                       1996–2003    200 Kbps downlink
make-up allow for relatively inexpensive         deployment to these motivations leaves
                                                                                                       2004–2010    Measured broadband in
fiber deployment costs. These include more       the United States dramatically short on                            five speed tiers ranging
densely populated areas and aerial (versus       high-speed broadband coverage to service                           from 200Kpbs to 100Mbps
buried) environments that offer shorter          broadband and wireless densification.                 2011–2014    4Mbps downlink/1Mbps
payback periods on the initial investment.                                                                          uplink
                                                                                                       2015–        25Mbps downlink/3Mbps
New build                                                                                              Present      uplink

Carriers typically deploy fiber, in lieu
of copper, to serve newly constructed                                                                 In any universal service approach, defining
neighborhoods. Labor costs for burying                                                                minimum performance thresholds and
                                                                                                      future proofing investments is key to
fiber and installing the electronics
constitute a vast majority of the                Carriers today typically                             providing services. However, government
                                                                                                      minimums could potentially risk restricting
deployment costs, implying that the cost         deploy fiber in four specific                        the technologies deployed and how they
                                                                                                      evolve to meet the changing needs of
of deploying fiber to a new house is about
equal to deploying copper. New build US          situations in which they                             customers. Market mechanisms that
                                                                                                      enable robust broadband competition
houses grow at approximately 1.5 percent         can generate a positive                              are better equipped to help ensure that
                                                                                                      performance evolves to meet demand.
per year (average since 1955),42 a rate
insufficient to address the fiber shortage       business case, given
or coverage of existing houses.                  the industry’s current
                                                 structure.

                                                                                                                                                    15
Communications infrastructure upgrade | The need for deep fiber

                                                   Excessive operating expenditures
                                                   caused by legacy network operations
                                                   restrict carriers’ ability to leverage IP
                                                   networking advancements
                                                   Motivating carriers to fund fiber              Wireline carriers have both a capital
                                                   infrastructure likely requires a method to     intensive and labor-intensive business
                                                   improve carrier margins and free up money      model. Other labor-intensive industries
                                                   for capital investment. As market share        such as construction, hospitality and
                                                   losses in both voice and broadband access      agriculture typically have capital intensities
                                                   mount, carriers have been aggressive in        below 5 percent compared to a typical
Retirement of legacy TDM                           slashing costs. However, cost reduction        wireline telecom carrier with the expected
networks would greatly                             opportunities are fundamentally limited        capital intensity of 14–18 percent.45 Shifting
                                                   without an ability to completely retire        OPEX dollars to capital investment in fiber
reduce operating expenses,                         legacy TDM products and assets. Without        deployment requires that carriers operate
freeing up funds for fiber                         the ability to shutter real estate and         one network instead of two. Retirement of
                                                   decommission support systems entirely,         legacy TDM networks could greatly reduce
investment.                                        cost cutting alone cannot keep pace with       the operating expenses to free up funds
                                                   customer loss and corresponding revenue        for fiber investment. TDM retirement
                                                   declines. As legacy TDM wireline networks      also frees up capital previously reserved
                                                   continue to descale, the percentage of fixed   for maintenance of the legacy networks
                                                   costs overwhelms the cost structure which      and systems.
                                                   could lead to even greater margin pressure.

                                                   Carriers are willing to invest in, and could
                                                   potentially gain tremendous efficiency from
                                                   deploying new IP networking architectures      Exhibit 8
                                                   like Software Defined Networks and             2016 Average OPEX to CAPEX ratios44
                                                   Network Function Virtualization (SDN NFV).
                                                   However, the requirement to operate and
                                                   maintain legacy TDM-based networks
                                                   limits carriers’ ability to take advantage
                                                   of the savings and shift capital to deep
                                                   fiber deployment.

                                                   The ratio of cash OPEX to CAPEX in Exhibit
                                                   8 depicts the predicament of operating
                                                   a legacy network given ongoing market                                           5.2X
                                                   share loss. Operating two networks
                                                   (legacy TDM and IP) forces the largest                               3.8X

                                                   wireline carriers to spend, on average,
                                                   five to six times as much on operating                   2.7X
                                                   expenses as they do capital expenditures.
                                                   High operating costs due to maintenance
                                                   of legacy products and systems consume
                                                   the vast majority of service revenues,
                                                   leaving less for capital expenditures.                 Wireless     Cable     Wireline

16
Communications infrastructure upgrade | The need for deep fiber

Carriers and policymakers
can share the responsibility
for motivating investment in
fiber infrastructure
          Carriers and policy makers share                    The current economic
          responsibility for motivating investment in
                                                              equation for fiber
          fiber infrastructure. It is important to attract
          broadband infrastructure investment from            deployment is driving
          both operators and investors. However,
                                                              operators to invest in other
          the current economic equation for fiber
          deployment is driving operators to invest in        areas, or not at all.
          other areas, or not at all. Failure to motivate
          investment in deep fiber will likely have
          three disastrous consequences:

          •• No network densification
             to support 5G and associated
             use cases.

          •• Lack of choice on providers
             of consumer broadband.

          •• Widening of the digital divide.

                                                                                                            17
Communications infrastructure upgrade | The need for deep fiber

Building a business model based on simplicity and capital
productivity can help motivate wireline carrier fiber upgrades
Migration from TDM to an all IP Network            Eliminating the need to accommodate legacy          •• Reduction in the average time to repair
improves carrier cost structure by                 infrastructure and services could also allow           from 21 hours to 5 hours.
rationalizing product iterations, simplifying      carriers to reap efficiency gains from new
                                                                                                       •• Increased availability of replacement parts,
processes and drastically reducing IT              networking architectures like SDN and NFV.
                                                                                                          as some participants complained that
costs. Moreover, without TDM retirement,           Virtualized network functions are already
                                                                                                          replacement parts could only be found
IP products must interact with legacy IT           being implemented in certain parts of the
                                                                                                          using online exchanges due to the age
systems that complicate selling, provisioning      network, like the mobile core, or using
                                                                                                          of their systems.
and billing processes. This complexity             virtualized IP platforms for voice services.
generates high failure rates and order             The savings efficiency of these topologies          •• Reduced equipment maintenance
fall-out, resulting in increased cost for          are limited if workforce processes still are           expenses by 34 percent.
the carrier and inadequate customer                required to maintain legacy systems when
                                                                                                       •• 31 percent lower costs related to moves,
experience. Exhibit 9 shows the difference in      highly automated processes could be used
                                                                                                          adds and changes.
failure rates and other operational metrics        if the services were offered on IP.
between IP wireline services and mobile
                                                                                                       French wireless and wireline provider,
services (for example, wireline customers          One study showed that there is a 60–80
                                                                                                       Iliad, provides another salient example of
call their carriers twice as frequency as a        percent reduction in real estate and power
                                                                                                       operational and cost structure changes
mobile customer). The ability to retire TDM        costs. Migrating to a fiber-based IP network
                                                                                                       feasible when operating an all-IP network
services and operate an all-IP network             allows carrier to remove equipment,
                                                                                                       and adopting a digital customer experience.
would make IP metrics more comparable              repurpose floor space and even consolidate
                                                                                                       In 2015, Iliad operated a $5 billion dollar
to mobile metrics and yield significant cost       central offices.47 A survey conducted by
                                                                                                       company with 17.8 million subscribers
savings and margin benefits.                       Nemertes Research provides indicative
                                                                                                       with only approximately 6,000 employees,
                                                   savings from a shift to a single, all IP
                                                                                                       while the traditional wireless and wireline
Eliminating the dependency on the legacy           network:12
                                                                                                       carriers operate with approximately 12–15
network can help rectify process failure
                                                                                                       employees per 10,000 customers, Iliad
rates. TDM retirement greatly simplifies
                                                                                                       operates with efficiencies much more
carrier products, processes and IT.
                                                                                                       aligned with large Internet companies at
Operating an all-IP network enables more
                                                                                                       approximately 3 to 4 employees per 10,000
efficient sales, service delivery and service
                                                                                                       customers.13,14
assurance processes through digital
channels. Order to cash processes are
no longer encumbered by inflexible and
dated systems that render inaccurate or            Exhibit 9
inconsistent data, leading to redundant            Operational inefficiencies between
data collection, time-consuming order              wireline and mobile networks46
reconciliation and inefficient process                                                                                    Number of
                                                                                                                         inbound calls
hand-offs. These legacy OSS systems
are inherently linked to the TDM network             Inbound call center calls per customer       2x               Wireline receives twice the
and severely inhibit the opportunities for                                                                         number of calls as wireless.
wireline carriers to realize the cost savings
and customer service benefits. Moreover,
committing capital to maintain compulsory
legacy TDM networks leave minimal ability
                                                   Average inbound call halling time (mins)   1.5X
                                                                                                                             2x
to fund new IP fiber builds and other access
innovations.                                                Average order entry time(mins)             3X

                                                            Care staff per 10,000 customers                              8X

18
Communications infrastructure upgrade | The need for deep fiber

Carrier actions to motivate
IP migration and fiber deployment
Carriers can enhance their ability to realize   Investing in digital                              Given the long timeframes required to
cost saving by adhering to a transformation     sales and care channels                           reach full fiber deployment, carriers should
program that creates industry standards         Digital transformation in an all IP world         consider taking advantage of shorter-term
for IP product mapping, invests in digital      has the potential to yield the cost and           alternatives in select markets. In rural
processes, and re-invests savings into deep     revenue synergies that generate cash for          areas, fiber to the node, HFC, satellite, or
fiber and/or wireless broadband.                fiber investment. By taking a synchronized        fixed wireless LTE or 5G may bring the best
                                                approach, carriers can reap benefits              alternative for broadband speeds. Many
IP product substitution                         in the front and back end of the digital          of these solutions will require deeper fiber
As addressed in previous sections,              transformation. Specifically, carriers can        deployments to allow access points located
discontinuing legacy products is a              better serve customers by improving               within range of the subscriber. However, the
prerequisite for increased fiber investment.    service metrics and customer experience.          case for network investment becomes more
However, legacy product retirement also         Moreover, carriers can generate IT savings        difficult as wireline carriers lose broadband
creates inconvenience for customers. To         by rationalizing applications and test            market share. Payback periods vary greatly
ease the transition for customers, carriers     environments, leading to faster product           based on a carrier’s position in the market,
can work together to create standard            development and provisioning cycle times.         and its ability to transition customers from
product substitutes that meet customer                                                            copper to fiber (versus winning customers
needs. Coordinating the mapping for legacy      Deployment of competitive                         away from the competition).
products to IP catch products among             broadband to 100 percent
wireline carriers can help gain buy-in from     of serving area                                   Carriers that act on these principles will
business and residential customers and          A profound and impactful action by                likely realize the potential benefits of growth
minimize the time and potential hassle of       carriers would be reinvesting the                 and innovation. Carriers that fail to act
switching. Carriers can use various industry    cash generated from the IP and digital            quickly risk degradation of their subscriber
forums or consortiums to assign a standard      transformation to build deep fiber.               base to a point that negates the benefits
IP product replacement for each legacy          Carrier benefits include subscriber and           of transformation.
product and validate their suitability. When    revenue growth from broadband as well
determining IP product replacements for         as access to wholesale backhaul revenue
TDM, it is important to note that many          from wireless densification. Potential
features from older technologies are            implications for the nation are nothing
obsolete. Therefore, duplicating prior          short of transformational to our nation’s
product capabilities and interfaces should      connectivity infrastructure including
not be a requirement.                           achieving the fiber density required for 5G
                                                wireless services, closing the digital divide
Carriers can also help ease customers’          and inspiring the next round of innovation.
transition to IP by limiting the number of
customer visits or service disruptions. This
is especially important when dealing with
business customers that likely purchase
numerous legacy products from a single                                                            Carriers that take these
carrier. Carriers should carefully craft                                                          actions quickly will be able
migration plans that transition entire
customers. The alternative of transitioning                                                       to realize the benefits of
one product at a time risks numerous                                                              growth and innovation
customer touches and service outages for
a customer. This is understandably more
complex with regards to enterprise and
carrier services given the diversity
of services and products and complexity
of contracts.
                                                                                                                                               19
Communications infrastructure upgrade | The need for deep fiber

A policy environment more favorable to IP
migration will motivate deep fiber investment
Many countries, including the United
States, prioritize ubiquitous affordable           Exhibit 10
broadband as a policy objective. The               Regulations that prevent IP migrations
United States ranks tenth in the world
for average broadband speed and the                  #   Name                     Jurisdiction                              Description
percentage of users with over 25 Mbps.16             1   Carrier of Last Resort   Federal/State •• Carriers designated as COLRs must ensure service
This is a remarkable achievement as the                  (COLR)48                                  is available for consumers before they are able to
United States has almost six times the                                                             discontinue service, even when there are alternative and
                                                                                                   competitive options
land area of the countries ranked above
                                                                                                   •• State commissions have the right to waive this
it. In many countries, there has been
                                                                                                      requirement, as a result 25+ states have removed COLR
significant government intervention                                                                   as of 2015
responding to perceived market failure.
                                                     2   Copper retirement           Federal       •• Requires public notice of network changes that would
However, much of the intervention                        and competing                                affect a competing carrier’s performance or ability to
has focused on customer segments                         exchange carriers                            provide service
                                                         180-day petition49
and geographies where the market                                                                   •• Competing carriers have the right to petition the FCC for
would have likely deployed broadband                                                                  reconsideration of approval of the changes for 180 days

regardless of government subsidy.                                                                  •• ILECs must inform customers when copper is being
                                                                                                      removed from those customers’ premises

Removing or reducing legacy regulations              3   FCC approval to             Federal       •• ILECs require a 60-day review by the FCC for
                                                         discontinue service50                        discontinuance of services
that constrain competition and investment
                                                                                                   •• FCC requires ILECs to maintain networks at full capacity
could enable market forces to solve
                                                                                                      until retiring
many of the deep fiber and broadband
                                                     4   Wholesale services51        Federal       •• To discontinue wholesale services, ILECS must file an
coverage challenges in the United States
                                                                                                      application under Section 214 of the Communications Act
Furthermore, empowering market forces                                                                 stating that “reasonably comparable” services exist after
could also allow the government to focus                                                              transition
on a more limited set of geographies that            5   Marketing                   Federal       •• Technology transition rules forbid ILECs from promoting/
are very expensive to serve or have low                  limitations52                                marketing to customers to switch to an all-fiber service
                                                                                                      that is different from their current service
income / affordability issues.
                                                     6   Legacy Compatibility53      Federal       •• Requires ILECS maintain service compatibility with a
                                                                                                      defined list of legacy service for consumers and small
Exhibit 10 references regulations relevant                                                            businesses, including home security systems, medical
to the country’s ability to lead in 5G and                                                            monitoring devices, credit card readers and fax machines
bring fast, affordable broadband to more             7   Access to poles and         Federal       •• In order to add new cables to a utility pole, each company
citizens. Examples include carrier of last               conduit54                                    that owns cables on the pole has to send out technicians
resort obligations, regulations that prevent                                                          sequentially to move existing cables (process can take
                                                                                                      several months)
carriers from migrating customers to more
                                                                                                   •• Utility providers charge rental rates/tariffs that are
cost effective IP or wireless solutions by                                                            almost 2x the cost of network construction
mandating the maintenance of legacy
                                                     8   Requirements of           Select States   •• Many states are considering to shift existing
networks and products, and requiring                     traditional service                          telephone rules (discontinuance, notification, 911
a lengthy process for access to network                  requirements on                              integration, etc.) to the VoIP Service providers—done
support structures.                                      VoIP55                                       on a state-by-state basis

                                                     9   Replacement of public     Select States   •• Requires telecom providers to conduct education and
                                                         switched telephone                           outreach before seeking withdrawal of circuit switch with
                                                         network 56                                   confirmation from client party

                                                                                                   •• Requires that alternative telephone service is available
                                                                                                      before switch

                                                                                                   •• Cannot remove or transition before Jan 1, 2020

20
Communications infrastructure upgrade | The need for deep fiber

                      Operational efficiencies to disperse
                      universal service support will likely
                      drive faster fiber deployment
                      Encouraging innovation and network                Education Week’s May report states
                      reinvestment in deep fiber by removing            “In recent weeks, according to school-
Reforming USAC’s      legacy technology and administrative              broadband advocates, more than 100
                      obstacles may assist carriers in their efforts    school districts have received letters
internal operations   to retain customers and generate the cash         questioning their plans to use federal E-Rate
seems warranted       flow needed to strengthen their networks.         funds to support construction of fiber-optic
                      To help meet ambitious fiber deployment           networks. The new inquiries, however, have
in order to meet      goals, it makes sense to evaluate both the        prompted more uncertainty to bring high-
the broader goals     objectives and operations of the Universal        speed Internet to some of the country’s
                      Service Fund (USF) and its Administrator.         hardest-to-reach students.” While these
of expanding fiber    Reforms to the Universal Services                 stakeholders are expressing frustration,
infrastructure and    Administrative Company (USAC) to improve          it has been particularly galling for some
                      operational efficiency is a prerequisite          to see the USAC’s internal expenses grow
addressing rural      to implement a coordinated deep fiber             at approximately 12 percent per year on
Internet access.      program that can help drive densification         average.17 Consequently, it is no surprise
                      and broadband competition.                        that USAC’s internal implementation of
                                                                        some of these programs has also recently
                      The FCC and Congress set policy objectives        received scathing FCC criticism. Chairman
                      for the USF. Success regarding USF policy         Pai criticized cost overruns and failure to
                      objectives relies on the operational              meet FCC deadlinesFN. And as Commissioner
                      effectiveness of USAC. However, USAC              Michael O’Reilly wrote, “The departure of
                      has come under growing criticism from             its CEO presents an opportunity for the
                      multiple areas regarding its operations and       Universal Service Administrative Company
                      the resulting impact to end-users, such as        (USAC) to clean up its actFN.”
                      schools, libraries and private companies.
                      In one case, USAC asked for records going         In 2005 and again in 2008, the FCC
                      back 15 years to 1998 before it would fund        considered putting USAC’s operations out
                      infrastructure build. More recently, the FCC      for competitive contract to save costs and
                      reversed USAC’s imposition of late fees and       improve responsiveness to organizations
                      penalties based on contribution amounts           seeking funds to close the digital divide.59
                      that had been reversed; USAC imposed              There is, in fact, precedent in government
                      fees and penalties that were over twice the       putting specific operations out to bid or
                      underlying contribution amount and took 17        prompting competition. For example,
                      years to resolve.58                               the numbering administration has been
                                                                        successfully run by commercial firms
                                                                        for over a decade. A dozen years later,
                                                                        given the critical role of broadband to our
                                                                        country’s economy and the imperative
                                                                        that our country lead in 5G, USAC reform
                                                                        is more important than ever. At minimum,
                                                                        reforming USAC internal operations
                                                                        seems warranted to meet broader goals
                                                                        of expanding fiber infrastructure and
                                                                        addressing rural Internet access.

                                                                                                                       21
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