The Most Important Thing You Know Little About – The CAF II Auction and the Future of Broadband Subsidy

Joe Gillan

joseph@gillanassociates.com

National Conference of Regulatory Attorneys

May 6, 2019

2

CAF II Auction in Context

$1.7 $1.7

$2.2

$2.6

$3.0

$3.5 $3.5

$3.8

$4.1 $4.3

$4.5 $4.3 $4.3

$4.0 $4.1

$4.2

$3.8

$4.5 $4.5 $4.7

$4.5

$0.2

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Fed

eral

Hig

h C

ost

Su

pp

ort

($

bil

lio

ns)

CAF II

3

Performance Tier Speed Usage Allowance Weight

Minimum ≥ 10/1 Mbps ≥ 150 GB 65

Baseline ≥ 25/3 Mbps ≥ 150 GB or U.S. median,

whichever is higher 45

Above Baseline ≥ 100/20 Mbps 2 TB 15

Gigabit ≥ 1 Gbps/500 Mbps 2 TB 0

Bid Components for CAF II

Latency Requirement Weight

Low Latency ≤ 100 ms 0

High Latency ≤ 750 ms & MOS of ≥4 25

Score = Bid

x 100 + Tier + Latency Reserve Price

4

Bid Annual Support by Round ($ millions)

$598.3 $607.4 $593.6

$578.5 $559.8

$537.7 $514.5

$474.7

$426.3

$364.2

$305.9

$198.0 $176.3

$161.1 $153.5 $150.9 $149.1 $148.8

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Bid Competition Between Areas

(Competition Phase)

Bid Competition Within Areas

(Contestation Phase)

Budget

CAF II Auction Winners by Provider Type

Provider Type Annual Support

($ Millions)

Locations

Satellite $12.2 8% 190,595 27%

Cable $4.1 3% 10,165 1%

Electric utility/affiliates $26.5 18% 91,852 13%

Fixed Wireless $71.8 48% 263,752 37%

Other Wireless $9.8 7% 47,870 7%

Rural LECs/Affiliates $15.2 10% 59,910 8%

Price Cap ILEC $1.1 1% 3,726 1%

Other $8.2 5% 45,306 6%

$148.8 713,176

The Auction Produced Faster Speeds than CAF II ROFR Obligation (10/1)

Minimum 10/1, 0.3%

Baseline 25/3, 46.8%

Above Baseline

100/20, 19.0%

Gigabit, 34.0%

CAF Program in Price Cap Areas

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

The Right-of-First-Refusal (RoFR) Offer

to Price Cap Carriers reduced the

estimated number of unserved locations

by approximately 74%

Before CAF After RoFR

Un

serv

ed L

oca

tio

ns

(mil

lion

s)

Two Key Metrics of CAF II – Coverage and Cost

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Auction is 70% less than Cost Model

CAF II 10 yr. Support: $1.48 billion

CAM Estimate: $ 5.0 billion

The CAF II Auction will further

reduced the estimated number of

unserved locations by

approximately 75%

Before CAF After RoFR After Auction

Un

serv

ed L

oca

tio

ns

(mil

lion

s)

Effect of Losing ViaSat on Coverage

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

The CAF II Auction would reduced

the estimated number of unserved

locations by approximately 50%

without ViaSat.

Before CAF After RoFR After Auction

Un

serv

ed L

oca

tio

ns

(mil

lion

s)

Monthly Subsidy Per Location

$53.08 $52.36

$17.39

$21.78

$0

$10

$20

$30

$40

$50

$60

Price Cap

Offered

Price Cap

Accepted

Auction

(with Viasat)

Auction

(no Viasat)

The States with the Largest Benefit (Unserved Locations in Price Cap territory)

Locations in Auction

Locations Awarded

Without

Viasat

Utah 3,820 3,817 100% 22%

Montana 6,621 6,598 100% 19%

Iowa 16,985 16,759 99%

Nebraska 9,053 8,900 98%

Idaho 11,192 10,921 98% 65%

Kansas 14,424 13,817 96%

Hawaii 4,115 3,936 96%

New Mexico 13,171 12,452 95% 70%

Oklahoma 74,980 70,727 94%

Missouri 104,865 95,130 91%

Illinois 35,582 32,124 90%

Washington 18,475 16,644 90% 31%

$ 50 million CAF II Left Over

Rural Digital Opportunity Fund

$2.04 Billion/Yr for 10 Years

CAF II Conclusions

Auction produced faster broadband at far less cost than the CAF II Cost Model claimed was necessary.

Caveat: The best-laid plans of mice and men (and CAF II Awardees) often go awry.

There are questions as to whether satellite can meet the FCC Performance Order requirements as to MOSC.

Next round will test OpEx (broadband retention) vs CapEx (broadband expansion).