CenturyLink scored billions in CAF II funds, eyes the next giveaway: RDOF

The FCC is all but certain to approve RDOF this week. RDOF is a follow-on program to CAF. (CenturyLink)

CenturyLink has benefited the most from the Connect America Fund (CAF) II, an FCC program that has awarded Universal Service Funds to telecom operators to build broadband in unserved and underserved areas of the United States, especially rural areas. According to a new report from MoffettNathanson Research, CenturyLink has received $506 million per year since 2015 in CAF II awards, which will total more than $3 billion over the six-year period from 2015 to 2020.

Other top beneficiaries of CAF II awards include AT&T, which has received $428 million per year since 2015; Frontier, which has received $332 million per year during the same time frame; and Windstream, which has received $175 million per year. In exchange for the free government money, the recipients agreed to deploy broadband service with at least 10 Mbps downstream and 1 Mbps upstream to specific rural locations. MoffettNathanson reports that the CAF II money that the incumbents received was typically more than the cost of the network builds, so the telcos ended up with extra money to pad their bottom lines.

Now, the FCC has proposed a follow-on program to CAF. This program is named the Rural Digital Opportunity Fund or RDOF (an acronym that rolls right off the tongue). The FCC is all but certain to approve RDOF this week. For CenturyLink and other incumbents, RDOF will extend their CAF II funding for one additional year, through 2021. But in the longer term, RDOF is likely to be less a boon for incumbent telcos than CAF II has been.

RDOF favorable to independents

RDOF will provide about 24% more money than the CAF II program, but the FCC has designed the program to help independent broadband providers, not just the incumbents.

RELATED: FCC Chairman Pai visits rural fixed wireless network in Ohio

Last week, FCC Chairman Ajit Pai visited a tower site of Intelliwave Broadband, a small fixed wireless broadband provider serving about 5,000 customers in rural Athens County, Ohio. Of the particular site that Pai visited, Intelliwave Broadband CEO Chris Cooper said, “We built the site last year to serve the needs of the local community because they were not getting what they needed from Frontier.”

Cooper said Pai was interested in seeing a fixed wireless installation in a rural area, and he was also interested in discussing whether Intelliwave planned to participate in the FCC’s RDOF program. Intelliwave is interested.

According to Cooper, the FCC wants to make sure the widest number of rural providers participate in RDOF, not just the traditional local exchange carriers. “In rural America it’s really the independent providers stepping into that underserved niche,” said Cooper. “We compete with Charter, Frontier, CenturyLink and AT&T —  either where they’re not providing or where the plant has been neglected for so long. We love to compete against the ILECS.”

Of course, the fixed-voice-line businesses of the ILECS have fallen on hard times as consumers cut off their landline services in favor of wireless. Windstream is in the middle of Chapter 11 bankruptcy proceedings. And Frontier is reportedly planning to file for bankruptcy by the middle of March.

As far as RDOF goes, the FCC is setting up this program differently than CAF II. The FCC will set up a reverse auction in which participants compete to underbid each other. There will be one winner awarded per geographic area. And winners will be based not just on cost but also on speed and latency requirements. Also, the incumbents will not have the right of first refusal, which they had with CAF II, showing that the FCC is interested in introducing competition from independent broadband players.

In its most recent quarterly earnings call CenturyLink CEO Jeff Storey said, “With respect to the Digital Opportunity Fund, when would we walk away from it? When it's not advantageous our company. If it doesn't make sense for us to do, we won't do it….So we will be involved in the process. We will make sure that we fully evaluate what it means for CenturyLink. And if we can do something economically that benefits our shareholders, we'll do it. And if we don't, we'll walk away.”