Sep 5, 2023Liked by Mike Conlow

Great work! However, I think your assumptions on the dollars that private capital will bring to the table is off. I wouldn't use RDOF as an example for this, since the RDOF reverse auction was largely viewed as a failure (many RDOF recipients returned their grant awards, and 'a coalition of winners' who didn't return the grant money are openly petitioning the FCC now for relief against their obligations).

I think a better way to calculate the private capital investment would be to figure out what they can earn economically on any given passing. For these unserved/underserved homes, the annual cash flow math might look like: 50-80% penetration, $60-100 ARPU, and a 50-80% cash flow margin on revenue. This means any given property would earn $180 to $768 of cash flow annually if you take the best or worst assumptions for each input.

Given where long-term valuations are in the sector (looking at publicly traded telecom and/or cable businesses may be a good indicator), it's likely private capital would look to have a payback of around 5-7 years (or to build at a 5-7x cash flow multiple). Again assuming the best and worst variables, this means a company would pay $900 to $5,376 for that cash flow stream (5x $180 and 7x $768) . You then have the cost to connect each home that takes up a subscription, which for rural areas can be quite high (as techs may only be able to service 1-2 homes per work day); assuming a cost to connect range of ~$500-1K per home, this would leave a company willing to pay -$100 to $4,376 per passing (taking the worst case scenario of a $1K cost to connect would actually result in a company not willing to pay anything to pass that home).

Another way of putting this, is that: even under the very best scenario (very high penetration at 80%, high ARPU at $100, high margins at 80%, a very long payback of 7 years, and a low cost to connect a home at $500), a private investor is only willing to pay $4,376 per passing - they would never pay more regardless of how expensive it is to pass that home. Under a reasonable but bad scenario (average penetration of 50% - perhaps fixed wireless incumbent, perhaps low broadband penetration due to second homes/vacancy), average ARPU of $60 (very reasonable for low-income rural areas), 50% margins (again reasonable given the high costs to serve rural areas), a 5-year payback period and a $1K cost to connect, one would not pay to pass that home and the full cost must be covered with subsidies.

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I would like to second Emiy's comments below both in your tenacity on this important subject. I would however point out that given the fact that the data used is at every point controlled by the ISPs and that the hoped for data transparency has not been forthcoming we are looking at an acknowledged 30% waste, fraud and abuse figure that need to be factored in. Additionally, it now seems clear that each installment of BEAD funds to the states (20% distributed each year for the five years of the program) will have be micromanaged, that is to say, the money will have strings attached that favor the ISP particularly those deploying fiber in their proposals. So states need to take 30% off the total allotment to begin with and then factor in inflation and the cost of delays (time is money) due supply chain and labor shortages issues. The figures states put in their state plan are now off by close to 50%! Sorry to be the one brining forward the bad new but there it is. That said, with litigation ready data at hand states have the option of holding ISPs to account and by so doing provide a significant new revenue stream to off set the 30% waste, fraud and abuse and inflation.

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