Balancing "Connecting the Unconnected" with "Faster Speeds for Many"

 The new infrastructure bill is touted as making $65 billion available for demand and supply investments in U.S. broadband access. And there is an argument to be made that both supply and demand investments will change consumer behavior. The issue is how much. 

 

Many people use their smartphones--on purpose--for personal internet access, and do not buy fixed network service. That is a demand issue, not a supply failure. But look only at supply issues. 

About 44,198 Hawaii households (10 percent) are said to have “no internet access.” It never is completely clear what definition is used. Some likely define it as having no networks which provide local service. But others might use the “25 Mbps” speed as the definition of broadband. So a household might have internet access, but not broadband. 

In fact, Hawaii internet access statistics are the same as for the United States as a whole. That suggests national statistics are relevant for judging where the greatest benefit from the new demand and supply policies is to be obtained. 

There are both supply and demand issues. About seven percent of households do not own a computer. If you do not use a computer, perhaps internet access is not so relevant. Recent surveys suggest seven percent of Americans do not use the internet, by choice. 

By some estimates, 23 percent of households have internet access, but not at the 25 Mbps rate defined as “broadband.” There is, in other words, a difference between “internet access” and “broadband.”

There also are key implications for investment. A home that has internet access, but not at 25 Mbps, must be upgraded. But the cost to do that often is far less than building brand-new facilities to a location without existing access. 

For the United States as a whole, only about two percent of households or less literally have no fixed network access. That two percent is where costs will be greatest, and also the most-isolated, cases. It might only be feasible to use satellite or some other wireless technology in those cases. 

For most locations, upgrades are called for, not necessarily greenfield construction. Most of the households “not buying or not able to buy” internet access are “upgrade” situations. To be sure, telcos will have to consider ripping out copper plant and switching to optical fiber, which might require new construction. 

So the issue there is the degree of benefit an average subsidy of $339 per location represents. 

Income almost certainly affects demand as well. About 19 percent of households with an annual income less than $75,000 have no internet subscription.

As always, educational attainment also matters. Some 10 percent of individuals without a high school diploma or equivalent do not buy internet access. 

 

Assume that total funding to affect demand and supply is about $300 million for the state. If half  the funds were spent on supply and half on demand, that implies $150 million to build new facilities. 

If 44,200 households need to be connected, that also implies capital investment and construction support of about $339 for each “non-subscribing” or “high cost”  location. Some might argue that is a helpful, but relatively small change in the business case for upgrades. It might be deemed generally insufficient to incentivize new construction in very high-cost areas.  

If one assumes a monthly cost of $50 for internet access, the $30 subsidy cuts costsof such plans 60 percent. 

source: Broadband Hui 

Again, however, many existing programs provide 25 Mbps broadband access at relatively low prices for low-income customers. It is not clear how much change the $30 a month additional subsidy will change buying behavior. But it certainly is reasonable to argue that the main impact is to create incentives for purchasing of higher-priced and faster-speed plans by customers now choosing to buy 25-Mbps service. 

On the supply side, since one big pool of money in the bill is allocated for “unserved” areas, we should expect to see incremental investment in such areas. Since another pool of money is allocated for “high-cost” areas, we similarly should see additional investment in such areas. But the actual additional lines added should be more modest than some expect, simply because such access lines are so hugely expensive. 

For practical political reasons, we are likely to see significant effort to show “big numbers” where it comes to improvement. And those results can be obtained mostly in cases where speed upgrades are possible for a wide number of lines. 

So it might be reasonable to expect a relatively small improvement in total “connected homes,” but a significant increase in homes able to buy service at speeds from 50 Mbps up to a gigabit per second. 

Not only is the impact likely to be wider for such incremental upgrades, but the total impact, compared to investment, will be highest as well. Assume two thirds of the supply-focused money will be spent on unconnected or hard-to-connect locations. Still, the third of funds spent to upgrade existing facilities will likely show the biggest numbers of locations that benefit.

Why the Broadband "Problem" Cannot be Permanently "Solved"

 So long as we keep changing the definition of “broadband,” we are likely “never” to see “improvement” in the number or percentage of homes or people able to buy the product, no matter how much investment is made in facilities. 

When we change definitions of minimum speed, for example, we automatically increase the number or percentage of locations or people that cannot buy the product. Colloquially, that is known as “moving the goalposts.” Put another way, our understanding of “broadband” changes over time. 

The classic definition of broadband was that it was any service running at speeds of 1.5 Mbps. In the U.S. market the official definition of “broadband” is 25 Mbps. But most consumers buy service at speeds an order of magnitude higher than the minimum definition. Yesterday’s power user is today’s light user. 

source: Openvault

And though new platforms might help, a continuing evolution of our definitions to support an increase in minimum speeds will continue to be a challenge for any market or country with lots of rural or thinly-populated areas. In the United States, six percent of the land mass is where most of the people live. 

How we define the market also affects our analysis of the amount of competition in the consumer broadband market. The common observation in the U.S. market, for example, is that minimum service at 25 Mbps is unavailable to “millions” of people. 

Of course, that finding requires a big assumption, namely that all satellite and mobile services are excluded from the analysis. Two U.S. satellite suppliers sell broadband access across virtually the entire continental land mass, while mobile speeds already exceeded the minimum threshold in 2019 and early 2020. 

If any and all services supplying 25 Mbps or faster speeds are considered, it might be very difficult to find any U.S. locations unserved by at least two providers. 

The point is that definitions and assumptions matter. By continually increasing the speed used as the definition of “broadband,” we will almost arbitrarily keep moving the goal line on who has it, where it is available and how many competitors can sell it. 

Ignore for the moment consumer choice, which has shown that most consumers buy services in the middle of the range: not the most costly or least costly; not the fastest or slowest offerings. 

Because “typical, average or median speeds” will keep getting higher, so will our definitions be adjusted. But at a time when satellite and mobile minimum and average speeds often already exceed the minimum definitions, and where most fixed network consumers buy services an order of magnitude above the “minimum” threshold, it is hard to “close the digital divide.”

There likely will always be some statistical gaps. Where there is a serious “problem” actually is--or will be--more debatable.

Big Cities have Best Broadband; Small Towns Tend to Have the Worst:Altman Solon Report

A new report by Altman Solon likely confirms what you would suspect, namely that the largest cities, with the greatest density and population, are least likely to feature municipal-owned networks, as private internet service providers have ample incentive to provide service. Conversely, small communities are the places where the incentives for private operators are lowest, and where municipal efforts are more common. 

source: Altman Solon

In communities with fewer than 1,000 total households, about 11 percent of the communities are “unserved,” defined as places where at least half of homes cannot buy internet access at speeds of 25 Mbps downstream. There are virtually no communities among tier one cities--with at least 100,000 households--where half of homes cannot buy 250 Mbps service.

Where are All the Unserved U.S. Households?

Since the “digital divide” is closing everywhere in the world, it simply stands to reason that the divide ought to be narrowing in the United States as well. That is not to say the divide closes completely, only that clear and steady progress is being made to supply better internet access to citizens who wish to buy it. 

The Federal Communications Commission says “the number of Americans lacking access to fixed terrestrial broadband service at 25/3 Mbps continues to decline, going down by more than 14 percent in 2018 and more than 30 percent between 2016 and 2018.” 

The FCC also notes that the number of Americans without access to 4G Long Term Evolution (LTE) mobile broadband with a median speed of 10/3 Mbps fell approximately 54 percent between 2017 and 2018.

Also, more than 85 percent of U.S. residents now have access (can buy) fixed terrestrial broadband service at 250/25 Mbps, a 47 percent increase since 2017. Over the same period, the number of Americans living in rural areas with access to such service increased by 85 percent, the FCC says. 

 Inevitably, some will lament the existence of differences; decrying a lack of perfection or simply arguing that the numbers are incorrect, arguing that the number of people without broadband access is 42 million or even as high as 162 million. 

It is not clear where those higher figures come from. Looking at connected households is revealing, however. 

The Federal Reserve estimates there are about 140 million housing units., defined as “a house, an apartment, a group of rooms, or a single room occupied or intended for occupancy as separate living quarters.” 

To be more precise, we also would have to account for households that either choose not to buy, or cannot easily buy. Some of those latter cases might be boats that serve as a residence, trailers or rooms rented inside homes where the resident does not buy internet access because the owner or manager of the property supplies the access. 

More than 16 million units are vacant at any particular time, leaving a total of perhaps 124 million units, which accords well with the estimate of 121.6 million households we get if we assume the U.S. population is 304 million persons, with an average household size of 2.5. Then there are 121.6 million households. 

That is the base of total locations fixed networks must reach. But a significant number of households choose not to buy fixed network access. 

Somewhere between 15 percent and 20 percent of U.S. homes are “mobile-only” for internet access, which might represent as much between 18 million and 24 million households. Those customers choose not to buy fixed network internet access, for whatever reason they choose. 

If so, then the number of locations who might buy fixed network internet access is on the order of 97.6 million to 103.6 million sites. 

If take rates for all homes (including the vacant units) are about 80 percent, then we would expect total fixed network accounts to number about 97.3 million locations.

Leichtman Research Group estimates that the largest U.S. telcos and cable companies have about 101.2 million accounts, but that includes business accounts. That matches fairly well the estimate that total fixed network accounts should be about 97.3 million in number. 

The point is that there are very few U.S. locations that do not already buy some form of internet access--mobile or fixed or both. That is difficult to square with claims that huge numbers of peop;le literally cannot buy service at 25 Mbps. 

Consider also that internet access routinely is available from satellite and other wireless and mobile platforms. 

Satellite broadband and fixed wireless operators traditionally have targeted rural homes and small businesses as their primary market, in the past said to include as many as 35 million locations. But estimates vary widely. Some say 80 million people live in rural areas, others say 46 million do, using the U.S. Census Bureau methodology. 

 Satellite broadband providers seem to have three million subscriptions, though some estimates (wrong, in my opinion) suggest that  6.76 percent of U.S. internet subscriptions are provided by satellite. 

Assume there are 139 million U.S. housing units, the high estimate, without adjusting for vacant units or other locations that cannot be wired. That implies nine million U.S. satellite broadband subscribers. No estimate I have seen--ever--suggests there really are nine million U.S. satellite broadband accounts. 

HughesNet believes 18 million homes are its market opportunity. Rental units alone might represent 6.6 million units, although not locations, as some of those units are in multi-family complexes. 

According to Urban.org, 13 million homes are owned by rural residents. Those figures roughly accord with HughesNet estimates of market opportunity. 

A more conservative estimate is that perhaps two percent to three percent of U.S. homes are the primary target for satellite broadband. That would include the most-isolated areas, where there are no terrestrial fixed networks using cabling. In many rural areas that are slightly more dense, wireless ISPs already operate. And, of course, there are many parts of rural areas served by cable operators or telcos. 

The point is that many homes already can buy 25 Mbps service, albeit from a satellite provider. 

A big issue is the presence of fixed wireless ISPs. According to Broadband Now, some 148.4 million U.S. residents are covered by fixed wireless ISPs. Assume an average household size of 2.5. That implies some 59 million rural locations already are reached by fixed wireless ISPs. 

Add all that up and some of us cannot fathom how 42 million to 162 million people actually are not able to buy 25 Mbps internet access.

Moore's Law Matters for Rural Internet Access

At some point, Moore’s Law matters for rural internet access supply and costs. The reason is that communication networks serving low-density areas are expensive, but Moore’s Law materially reduces such costs by constantly increasing the power of computing solutions and slashing the cost of such capabilities. 

That can be seen in the cost of a transistor over time, which allows the cost of computing to decline in half every 18 months to 24 months. 

The reason we are able to use millimeter waves commercially for consumer communications is Moore’s Law, which reduced the cost of applying sophisticated signal processing so much that the formerly-unusable millimeter wave spectrum now can be used even for consumer communications and access networks. 

The Tennessee Advisory Commission on Intergovernmental Relations estimated in a 2017 report that connecting 160,000 unserved homes in areas of the state ineligible for funding through the FCC’s Connect America Fund would cost $125 million to $799 million. That works out to about $78,125 per location. Other estimates place network costs at $33,000 per customer even at 70-percent take rates. Lower take rates raise the cost per customer. 

No consumer-reaching commercial network could ever hope to break even on a network with such high costs, as even networks costing $2,500 per location often face challenging economics. 

source: NTCA

But Moore’s Law, applied to space-based network launch costs, for example, has reduced costs for low earth orbit satellites by 20-fold over the last decade. 

Moore’s Law also allows us to do sophisticated spectrum sharing and spectrum aggregation, again improving our ability to supply connectivity services at lower costs than was possible in the past. 

Moore’s Law also powers the increasing bandwidth of optical fiber and hybrid fiber coax, enables the application of artificial intelligence to voice processing and pattern recognition, all of which mean e-commerce insights and customer service capabilities grow more powerful over time. 

Moore’s Law underpins our ability to create virtualized networks that cost less to build and operate, as well. 

That is not to underestimate the importance of financial subsidies or human agency,, as in many rural areas even the most-efficient platform might fail to generate sufficient revenues to sustain operations and service. 

Lower costs per bit for mobile bandwidth as well as fixed network  capacity have been the trend for decades. Slowly, those advantages will accrue in rural areas, even if the bandwidth gap between urban and rural areas does not completely close.

Is Coverage or Demand the Big Issue for U.S., Europe Internet Access?

When assessing the degree to which internet access is unavailable to consumers, it always makes a difference whether we are considering services consumed by location, or by the person. Fixed services represent the former, mobile phone services the latter. 

The difference is important. For any service consumed by location (homes or buildings), the number of people that are unserved is inaccurate. It is the number of unconnected locations that matters, since the service is consumed by “locations,” not “persons.”

source: Intelsat

In the United States, where Intelsat estimates that about one percent of the population does not have a single supplier of internet access, the number of “locations” not connected is far lower, perhaps in the area of four tenths of one percent, since the typical number of persons per home is 2.6. 

The far bigger issue is locations that are able to buy service, but choose not to, estimated by Intelsat to represent 26 percent of people, or perhaps 10 percent of U.S. homes. Many assume the issue is supply, but a stronger argument actually is demand. 

Some households simply choose not to buy the product, even when it is available, often preferring to use mobile broadband as a substitute. 

Even in the 4G era, 15 percent to 20 percent of U.S. households have become mobile-only for internet access, while in Canada perhaps 20 percent of households already rely exclusively on mobile networks for internet access. 

In some instances, as with younger, single-person households and lower-income households, reliance on mobile-only internet access is 10 percentage points to as much as 15 percentage points higher than that.

source: Deloitte

Some argue take rates sometimes are low because the service is deemed “too expensive.” That might sometimes be the case, despite the existence of subsidized services for low-income households, especially in remote areas where the only option is satellite access. But a good argument can be made that non-buyers are making rational choices. 

They either do not value using the internet or they use the internet other ways (mobile, primarily). 

Absolute lack of coverage (no terrestrial networks or service providers) is a major issue in parts of Africa and South Asia, however.

Connecting the Unconnected in Rural U.S.

Some 700,000 U.S. rural homes and small businesses will gain access to high-speed internet access for the first time through the Federal Communications Commission’s Connect America Fund Phase II auction, auction results released today show, and more than half of those 713,176 locations will have service available with download speeds of at least 100 megabits per second.

Connecting 700,000 homes in a nation with perhaps 138.3 million housing units, that might not sound like much. But the 250,000 most-isolated rural locations account for about half the estimated cost of connecting seven million U.S. homes in rural, hard to reach areas.

Of course, the most-isolated areas likely always will be among the best candidates for satellite or other wireless access platforms. Perhaps three million rural locations already buy satellite internet access.

That “cost to reach” logically implies that the great bulk of new investment under this program will support extension of service to new locations that are not the most-isolated, as that provides the greatest efficiency. In other words, service providers logically will connect the new locations in some proximity to current networks, rather than taking on the most-difficult, most-expensive areas .

According to plan, 53 percent of all homes and businesses served with support from the auction will have broadband available with download speeds of at least 100 megabits per second. Some 19 percent will have gigabit service available. And 711,389 locations—all but 0.25 percent—will have at least 25 Mbps service.

It appears a great many of the providers are ISPs using fixed wireless.  

Providers must build out to 40 percent of the assigned homes and businesses in a state within three years of becoming authorized to receive support. Buildout must increase by 20 percent in each subsequent year, until complete buildout is reach at the end of the sixth year.

The auction allocated $1.488 billion in support to be distributed over the next 10 years to expand rural broadband service in unserved areas in 45 states. A total of 103 providers will get funds.

How Big is Market for Untethered Internet Access?

You might think it is easy to quantify the size of the consumer internet access market in rural areas of the United States or elsewhere. It is harder still to estimate the size of that market that potentially could be supplied by untethered access platforms of all types.

For starters, the actual size of the rural untethered access opportunity can vary wildly based on one’s assumptions. Is the market “all homes in rural areas” plus “some homes in suburban and urban areas that have slow speeds” or both?

Is the potential for untethered access the same once 5G launches, making mobile platforms reasonable product substitutes for fixed access in many cases? If so, what percentage of cases are we talking about?

How much market share might untethered platforms take away from fixed network providers?

Even estimates of rural need vary. Some 23 million people in rural areas of the United States are said to have no access to a fixed network, though nearly all have satellite access from at least two providers.

From a service perspective, “locations” matter more than “people at those locations,” since facilities have to be build to reach fixed locations such as houses. And that number is itself dependent on assumptions about housing stock, end user demand, pricing and speed offers.

By some estimates, 14 million U.S. locations have slow service from cable or telcos or are not served at all. That includes urban and rural locations.

Few of those locations actually have no fixed network service. On surveys of availability, about one percent of respondents say they do not have the ability to buy internet access services from any fixed services provider.

That implies, on a household base of 126 million, that about 1.3 million locations actually have zero fixed network access. The point is that market sizing estimates that postulate 23 million or more “unserved” people actually represent a rather small percentage of locations, and it is locations that must be served (mobile actually serves “people”).

Also, one problem is definitional. Some studies people who choose not to buy or people who do not wish to use the internet as “not able to buy internet access.” There is a difference between people who choose not to buy a product that is available and people who want to buy, but cannot.

U.S. internet access adoption is about 82 percent. If there are 126 million U.S. households, perhaps 95 percent of which are occupied, then 100-percent adoption would imply about 120 million locations buying internet access. That might imply a reasonable saturation level of demand at about 107 million households, or nearly the level that might be reached in 2021.

In other words, 107 million households might be the saturation level for fixed network platforms (untethered options include mobile, fixed wireless, satellite, balloons, unmanned aerial vehicles, blimps).

Of course, demand does not exist at that level. Some households (perhaps five to 10 percent simply do not wish to buy). And some percentage of households (growing in number) buy alternatives such as mobile internet access.

source: SNL Kagan

The point is that we are entering a period when older assumptions about market segments will have to be revised. Mobility-based platforms are going to take more share. Fixed wireless is going to take more share. A range of new platforms likely will emerge, also taking some share from existing providers.

Under such conditions, it is not unreasonable to expect a general shift of market share from fixed networks to untethered platforms of several types.

Mobile Internet Access Now Makes a Big Difference in "Access" Domain

If there are any certainties, it is that "everyone" agrees internet access, and faster access, are good things that "everybody" should have. That typically means "most people" approve of measures to improve access and speeds in rural areas and for poorer people.

One recent example: Tennessee Gov. Bill Haslam has signed the Tennessee Broadband Accessibility Act into law, releasing $45 million, to be disbursed over the next three years, in the form of grants and tax credits for Internet Service Providers (ISPs) making broadband service available to unserved homes and businesses.

source: StatCounter

Connected Nation says the plan allows Tennessee’s private, non-profit electric cooperatives to provide retail broadband service and make grant funding available to the state’s local libraries to help residents improve their digital literacy skills.

Observers can applaud the new efforts, while also noting that consumer preferences appear to be changing. It appears that virtually all the growth in broadband usage since about 2013 has come either from mobile or some other method of gaining access, based on a reported decline in home internet access purchasing since 2013.

There was a seven percent net gain in internet usage between 2013 and 2014, even as fixed network access dropped two percent. That suggests consumers are opting increasingly to use the internet significantly or primarily on their mobiles.

In the U.S. market, about 12 percent of all internet users relied solely on mobile only for internet access.

source: eMarketer

About six percent of Tennessee homes are unserved, studies have concluded. The bigger problem is the percentage of homes that do not have access at speeds at least 25 Mbps.

Perhaps 17 percent of Tennessee homes apparently did not have 25 Mbps access in 2014, while 66 percent did have such access.

Fixed network adoption in Tennessee seems to have peaked about 2013, even as internet access adoption climbed to 81 percent.  

That trend, reported in other earlier studies, suggests that mobile internet now is what is driving incremental subscription growth.

A related trend--faster speeds--could also affect our statistics. Some access lines using digital subscriber line could shift to fixed wireless as Verizon and AT&T turn to fixed wireless, including 5G variants, to boost access speeds.

How those lines are counted also could affect fixed access adoption figures. There is a logic to counting a fixed wireless connection as a "fixed" connection. There also is a logic to counting it as a "mobile" connection, if supplied by a mobile operator's network.

The point is that all things related to use of the internet, its apps and devices change with time. It almost does not make sense to distinguish between "broadband" access and ""internet access." It no longer makes sense to ignore the huge amount of internet access that happens in the mobile domain.

Nor, where it comes to measuring "broadband" or "internet access" progress, can be ignore the role played by mobile internet access.

source: Connected Tennessee