Cover Story: Strings Attached

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What if the government held a $7.2 billion cash giveaway and nobody came?

The deadline for the initial round of funding for the $7.2 billion broadband stimulus program is Aug. 14 and early indications are that small cable operators may sit out the program in fairly large numbers. As one long-time small cable-system operator who requested anonymity put it: “There are a lot of strings on that money.”

The broadband stimulus was carved out of the nearly $800 billion federal bailout package — officially called the American Recovery and Reinvestment Act — to help bring broadband service to rural markets. The funding is expected to be doled out in three tranches: One that expires on Aug. 14, a second towards the end of the year and a third set tentatively for the spring of 2010.

The agencies in charge of the programs — the National Telecommunications and Information Administration and the U.S. Department of Agriculture’s Rural Utilities Service — have until September 2010 to disperse all the funds.

Gigi Sohn, president of Public Knowledge, a D.C. public-interest advocacy group, has been advising some potential bidders and has heard her share of grousing over the ground rules.

“I think it is a little too soon to tell whether the stimulus package is stimulating because they haven’t given out any money yet,” Sohn said. “That being said, there is an awful lot of concern, and not just among cable operators, but among institutional providers like libraries and schools, among small municipal Wi-Fi providers and smaller network providers, there is a lot of concern that the guidelines are not helpful for the little guys.”

Many of the cable industry’s “little guys” debated the subject last month at the Independent Show, the annual get-together for small cable operators in Grapevine, Texas. The biggest buzz at the show surrounded two specific conditions — that the RUS must be granted a first lien on all of the assets associated with a project and can share that lien with other banks and the requirement that any company that wins funding cannot sell their business for 10 years, in part to prevent “flipping” participating companies.

Multichannel News cover story August 10, 2009

“I’m in the business for the long haul,” said one small-MSO executive that asked not to be named. “But what if I die? Ten years is a long time.”

At a panel discussion at the Independent Show on July 27, Wave Division Holdings chief financial officer Wayne Schattenkerk put it more bluntly. “I called our main banker about [the requirements] and she started laughing,” Schattenkerk said. “That’s a bad sign.”

Still, Schattenkerk said that Wave, which has more than 275,000 customers in California, Washington and Oregon, has applied for some funding and will continue to evaluate the situation.

“It’s still full speed ahead,” Schattenkerk said. “We have applied for projects and we will push forward.”

In the first round, about $4 billion will be available from the NTIA ($1.6 billion) and the RUS ($2.4 billion) for last-mile and middle-mile projects. Last-mile projects are where the applicant will provide a connection directly to the end-user. In middle mile projects, the applicant will serve as the middleman, hooking the last-mile provider to a larger network.

The number of applications the government receives is critical, according to some observers, because it will determine what the managers of the program will do going forward.

“If they get an overwhelming number of applications, the administration will see this [program] as a success,” American Cable Association director of regulatory affairs Ross Lieberman said at the show. “If there are not that many applicants, if there is no incumbent interest, we can expect changes to this program.”

Lieberman added that the Obama administration has already made some tweaks — lobbying restrictions have been relaxed and the RUS is expected to change some definitions of eligible service areas — which could expand the applicant universe.

For those operators who fear overbuilders will apply for funds in their service areas, Lieberman said that incumbents also can challenge other applicants for up to 30 days after the deadline — each application will be available online at BroadbandUSA.gov.

NTIA spokesman Mark Tolbert said there will be opportunities for the agency to change the guidelines for the second round of funding, as well as a tentatively planned third round.

“That procedure will allow NTIA to make any appropriate changes to the program based on previous experience,” he said. And the NOFA (notice of funds availability) for the first round makes the possibility for tweaks explicit: “The requirements for subsequent NOFAs may differ from this NOFA to better achieve the agencies’ priorities.”

New America Foundation research director Sascha Meinrath said the government also is encouraging a continuing dialogue — the NTIA has said it wants to hold public comment periods between each round. That, he said, is an unprecedented opportunity for small cable companies.

“This is one of those few opportunities where [you’re] granted to be directly involved in policy-making,” Meinrath said. “Making your voice heard is going to be really important on this.”

Many small-operator executives said privately that they may apply for funds, but would think twice about accepting the money because of the conditions. They see applying for funds as more of a defensive move — keeping a competitor from getting an award — than as helping them to extend their broadband reach.

Longtime cable executive and Buford Media Group CEO Ben Hooks said that although he is likely to file for funding through the federal programs, he isn’t without concerns.

Buford, which is a general partner and investor in Alliance Cable (which has about 4,000 customers in Arkansas), is in the process of purchasing another 6,000 customers that could be a candidate for stimulus funding.

“It [the funding] is going to go to somebody,” Hooks said. “But the rules do seem to change. We’re keeping that in mind. Be careful of what you wish for, because the rules might change.”

That sentiment seems to be backed up by an informal survey taken by the ACA during a broadband stimulus panel session at the Independent Show. Of the nearly 100 businesses that participated — by voting electronically to questions posed at the panel — 21% said they plan to file an application in the first round of funding, 22% said they would most likely file, 22% said they were not likely to file and 32% said they would not file.

About 20% of the respondents said they would file for future rounds, 28% said they were most likely to, 37% said filing again was not likely and 14% would not file again.

Of those who said they would not apply, 50% cited “onerous” government conditions.

ACA has been beating the drum for as many small operators as possible to apply for the program. And operators that decide to sit out the first round run the risk of a competitor winning funding for a project in their service territory.

“ACA members have invested private capital to construct broadband networks in rural communities across America,” CEO Matt Polka said in a statement. “It helps no one if broadband subsidies flow to 'overbuilders’ that do not want to provide broadband to the truly unserved.”

But those same operators are looking at other, possibly less onerous ways to get money to help them expand their networks.

A move is afoot to allow small cable companies to participate in the FCC’s Universal Service Fund, a $7.1 billion pot of money earmarked to expand telecommunications service to rural areas. And one congresswoman — Rep. Anna Eshoo (D-Calif.) — has introduced the Broadband Conduit Deployment Act, which would require new federal highway projects to include broadband conduits for fiber-optic communications. In the upper chamber, Sen. Amy Klobuchar (D-Minn.) is working on a similar bill that would require broadband lines be put down whenever highways are dug up.

At the Independent Show in late July, Alpine Group vice president Jared Weaver called the USF “a stimulus program every year.”

Some smaller-operator executives were intrigued by the alternative plans. One, who said he doesn’t have many highways near his operating area but has a lot of rivers, asked if the highway plan included bridges. It does.

Operators are also skeptical of the government in general — many feel they were burned by the Agriculture Department’s Rural Broadband Access program in 2002, when it was discovered that about 12% of the loans through that $1.2 billion program ($144 million) went to companies in densely populated areas.

Many small-operator executives said that they feared the broadband stimulus would create competition — one said the money would go to “charlatans who would ruin the business.”

Cable One senior vice president and chief sales and marketing officer Jerry McKenna, who after his panel session at the show said that his MSO will likely apply for two or three broadband projects, was even more direct.

“We will have government-created competition,” he said.

So, come Aug. 14, small operators across the country will be faced with a hard choice: to file or not to file.

“The dilemma is to just say: 'Look, apply now and just try to work around problems or wait until round two.’ It is a tough piece of advice to give,” Sohn said, adding that she has been telling people they might be better off waiting until the second round to apply, after some of the problems have been fixed.

“It is too late to do anything with round one,” she said.

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