Revitalizing Rural America Through Broadband

Executive Summary

• There is a large gap in broadband access across the United States. Broadband connectivity has a significant positive impact through economic development, education, healthcare, and employment. However, between 19 and 55 million people do not have access to it.
• Utilities can create a new business venture. By leveraging existing assets and infrastructure used to provide power to rural parts of their service territory, utilities have an opportunity to expand their business offerings.
• An ideal partner to lead rural broadband, utilities have the physical infrastructure, IT systems, and business processes to support a broadband network, as well as extensive experience deploying overhead and underground cable.

Introduction

Our daily lives have never depended more on technology and connectivity. Data has become an essential tool for pursuing economic opportunities, accessing basic services, and maintaining personal connections.

As a result, what once seemed like a wildly ambitious goal is now gaining broad public support: ensuring that every American has access to broadband internet.

Broadband connects us to the modern world through fiber, cable modems, and Wi-Fi. The Federal Communications Commission (FCC) sums up the growing interest in universal broadband with the concept of “closing the digital divide,” a commitment aimed at connecting all Americans to the knowledge and opportunities delivered through high-speed data.

For most Americans, the “digital divide” is an abstract concept. They take “connectivity” —defined by the FCC as 25 Mbps download and 5 Mbps upload speeds (25 Mbps/5 Mbps)—for granted, sharing information with countless networks of people every day. But according to the FCC , 6% of Americans are on the other side of the divide, meaning more than 19 million people, mostly in rural areas, are at a major disadvantage.

Through West Monroe’s work in broadband feasibility, we’ve identified areas where broadband connectivity could have significant positive impact, including economic development, education, healthcare, and employment.

Economic development

Most businesses consider broadband an important resource, and communities without it have trouble attracting and retaining new businesses. According to a study by the International Telecommunications Union (ITU), a 10% increase in broadband penetration in the United States translates to nearly a 1% increase in GDP.

Education

More schools are leveraging the internet for education, resulting in a growing number of homework and supplemental lessons accessible online. A Pew Research Center study found that nearly one in five American teenagers is “often or sometimes unable to complete homework assignments because they do not have reliable access to a computer or internet connection.”

Healthcare

Use of services such as remote monitoring of patients and telemedicine are expanding, raising hopes of improved patient outcomes and reduced healthcare costs in certain regions. Researchers at the University of Mississippi estimate that if 20% of the state’s diabetic patients enrolled in the Mississippi Telehealth Diabetes Network, it would yield $189 million in Medicaid savings for the state each year.

Employment

Access to good jobs is tied to high-speed internet, and many job seekers identify online resources as the most important tool . The Center for Rural Affairs reported that 80 new jobs are created for every 1,000 new broadband subscribers, and a 4 Mbps increase in residential broadband speed translates to an annual $2,100 in additional household income .

These four areas form the economic and social backbone of our communities—and for each one, meeting basic livelihood expectations of many citizens requires broadband access. One Georgia lawmaker described it as such: “Broadband has become as important to infrastructure as roads.” The state’s secretary of agriculture called high-speed connectivity the “roads, sewers, and water” of the modern age.

By actively searching for feasible opportunities and analyzing deployment strategies, critical infrastructure providers such as utilities, internet service providers, and telecommunications companies are on the path to transform the lives of millions in the U.S. and help revitalize rural America.

There are significant obstacles on the path to bridging the digital divide, but they are not insurmountable.

Providing reliable broadband service to rural America is expensive, with a high fixed cost that makes the payback period on investments much longer than 10 years.

Individual states and the FCC have recently begun taking action to close the broadband gap.

In the case of states such as Mississippi and Virginia, they have looked to the utilities for solutions because they have the physical infrastructure, IT systems, business processes, and expertise to build and support a broadband network—and they are used to long waits for investment returns. The FCC has been making money available through their Connect America Funds (CAF) initiative to expand broadband access to communities currently without it.

This provides utilities a new business venture that allows them to grow their revenue. These efforts will likely need to be conducted through a non-regulated arm of the business, but utilities can leverage their existing assets and infrastructure—used to provide power to rural parts of their service territory—to dramatically lower the cost- to-serve of broadband.

Although most U.S. homes have download and upload speeds that meet the minimum definition of broadband, the percentage of the population with fiber connectivity underlying their broadband service is minuscule. As the definition of broadband continues to evolve and speeds increase, the legacy copper-based infrastructure providing connectivity is expected to reach the limits of its usefulness, requiring a transition to fiber-based connectivity.

Operators of public wireless networks will claim they can meet or exceed the current definition of broadband connectivity through use of their existing technologies, such as present-day LTE networks. This case is bolstered by the advent of 5G connectivity, which far exceeds the basic standard of connectivity. However, the carrier’s ability to reach rural America remains limited, primarily due to the high cost-to-serve for a limited number of customers.

While 5G is a wireless solution and wireless technology, it also relies heavily on fiber infrastructure. The wireless portion of the connection—from a user’s phone or modem to the nearest 5G antenna—is limited to a few hundred to a thousand feet.

Whether it is 4G or 5G technologies, there isn’t a strong business case to support a widespread buildout of network infrastructure across rural America. Many states, such as North Carolina, Virginia, and Alabama, are beginning to realize this and are enlisting utilities in their broadband planning.

Utilities are uniquely qualified to drive the installation of broadband solutions because of their extensive experience in deploying overhead and underground cable that forms the electric grid. They likely own the poles and other infrastructure to hang fiber, too.

However, despite their technical know-how and existing infrastructure, utilities are inclined to expand their services in more populated areas with more potential customers. Unless those internal and regulatory incentives change, closing the digital divide in rural areas will continue to be a major challenge.

The challenge of deciding what technology to build out also exists. The options include high-frequency 4G LTE, 5G, fixed wireless, television white space, and satellite. But rural America is not a one-size-fits-all. Thus, a proper analysis is required to determine the best solution for each area.

• 5G is one of the fastest growing and most powerful innovations in wireless technology. But it is most beneficial for densely populated urban areas, not sparsely populated rural ones.
• Fixed wireless is a proven technology offered by some carriers and smaller wireless companies in rural America. It can deliver broadband internet access via communication with a base station on an internet connected radio tower.
• Television white space is gaining significant attention by companies such as Microsoft, largely for its cost effectiveness in areas with population densities of between two and 200 people per square mile.
• 4G LTE could cost-effectively connect approximately 15% of the rural United States population that is currently without broadband access (areas with population densities greater than 200 people per square mile).
• Satellite broadband is becoming cheaper and faster as technology improves, and satellite arrays become more powerful. However, latency and bad weather continue to put it at a disadvantage.

There are hundreds of millions of dollars available in grants, loans, and other federal programs specifically earmarked for rural broadband initiatives such as the FCC’s (Connect America Fund (CAF).

If IOUs look to expand broadband connectivity to both the unserved and underserved, they still must financially justify their decisions. The weak ROI for these projects is not helpful when making a business case, so utilities must recover their investment in other ways.

There are three main options: Lobby state regulators to recover the costs through customer billing; create an unregulated entity able to provide telecommunication services for a fee; or partner with local telecommunications firms using a cost-sharing model.

Making the case to regulators

The societal benefits that accompany broadband connectivity—while at times difficult to quantify—are substantial. As previously referenced, studies have shown the positive impact these initiatives have on education, healthcare, and regional economic development. One report estimated that the state of Indiana could see $12 billion in net economic gains over a 20-year period, all stemming from rural broadband buildout.

Creating an unregulated entity

This strategy has been executed successfully before. One of the first instances was in 1997, when Southern Telecom became a subsidiary of Southern Company. Since then, Southern Linc has installed 1,500 miles of fiber in southeastern states including, Alabama, Georgia, Florida, and Mississippi.

Cost sharing model

Because rural broadband is capital intensive with a long ROI, and utilities are coincidentally left in the best position to leverage the open broadband model, essentially sharing costs with the private sector. The infrastructure is owned by a single entity (the utility) that wholesales parts of it to various companies (telecommunications providers) to provide retail services to subscribers. This model has gained popularity mostly in European countries, but also in some municipalities within the U.S.

Between the FCC ramping up its broadband funding and rural communities prioritizing high-speed internet, it’s imperative that available money is used effectively with detailed scopes, objectives, and timelines.

According to some rural citizens, however, the benefits expected from some previous grant-funded connectivity projects have not been realized. A telecom company in Missouri received $20 million in grant and loan money to help connect a single county, but it led to frustration after subscriber costs quadrupled for sub-standard speed. “I just want to know what happened to all the money and grant and things,” one customer said. “We didn’t see any benefits.”

There’s another reality that utilities with an eye toward broadband must face: Some people do not want to cross the digital divide.

Mississippi lawmakers, for instance, are interested in allowing electric cooperatives to expand rural broadband access in their state. But there’s also some hesitation. The chairman of the House Public Utilities Committee noted, “We need to make sure that those customers [who would opt out of broadband connectivity] are not burdened by their subsidizing the people who do want broadband.”

Whether utilities are large or small, considering the wants and needs of all customers can be tricky, especially when projects such as rural broadband seem necessary for so many. It’s impossible to please everyone, but utilities can ease public concerns through well-rounded engagement plans prior to executing a rural broadband project, making sure customers fully understand the benefits they would receive if such a transformational project were executed.

The U.S. is in many ways united around the need for rural broadband. With each passing month, the millions of people without connectivity risk falling further behind. In rural towns already fighting against urban flight, slow or non-existent internet is another reason to leave.

So why is this last mile of America proving so hard to connect? Unsurprisingly, it’s about the money.

For telecommunications giants, there just isn’t a profitable path into the rural corners of America.

The truth is nobody is going to get rich off rural broadband—at least not for quite some time. If policymakers are serious about keeping rural areas vibrant, or even livable, they need to enable firms willing to risk the required capital and possibly wait decades to make their money back.

Simply put, investor-owned utilities fit the bill. IOUs have the specific expertise needed to successfully plan, execute, and manage the daunting projects. And they have the resources and public clout to catalyze community support for new ventures.

There is an understandable fear that utilities could monopolize rural broadband if the regulatory door opens to them. But regulators in rural areas are well-practiced at managing IOUs with an effective monopoly on electricity or telephone lines: broadband is no different.

We don’t know what the broadband landscape will look like in a few years, let alone a few decades. What we do know if that too many Americans are still stuck on the wrong side of the digital divide. IOUs can help build the bridge, but not without a way to get started.