BEAD is a federal infrastructure program promising funding for broadband access. The U.S. Department of Commerce created the Broadband Equity, Access, and Deployment Program, also known as BEAD.

Officials from various states and the federal government convened in Myrtle Beach on Wednesday to deliberate the $42 billion program. The BEAD program promises enhancing broadband access, equity, and deployment.

In September, South Carolina was granted the final approval to utilize $551 million in BEAD funding.

Jim Stritzinger, director of the South Carolina Broadband Office, stated that in June 2020, when the state of South Carolina initiated its initial investment in statewide internet services, over 300,000 residences and commercial establishments were lacking access to broadband connectivity.

Currently, there are still 32,500 households and commercial establishments that do not have access to broadband services. The gathering held in Myrtle Beach involved six directors from state broadband offices, who convened to deliberate on the distribution and utilization of federal funds, focusing particularly on the BEAD program.

BEAD

While excitement around the funding is evident,  Andrej Danis and Joey Cofrancesco of AlixPartners provide 5 reasons locals should take caution. Alixpartners did a Wisconsin based study that raises concerns.

• By prioritizing the acquisition of extensive BEAD funding in the near future, chances are you have already jeopardized your prospects in the long run.

When there is an opportunity for free money, people usually rush to get as much as they can. However, if you are a FiberCo seeking BEAD funding, you should avoid doing this. Instead, it is crucial to control your excitement.

In approximately three to four years, the companies that prioritized internal rate of return (IRR) during the bidding phase of the BEAD program will likely be commended as the true winners. These companies will pragmatically seek BEAD funding, focusing on areas where they anticipate strong profitability and avoiding those that they believe will not yield significant profits.

In BEAD, similar to sports, the ultimate measure of success lies in the final score. Instead of focusing on the amount of funding received, the true measure of achievement is determined by companies’ ability to generate substantial profits in relation to their invested capital.

“Companies do not need to bid on everything. The low-hanging fruit opportunities where operators should focus are those where incumbents can secure funding to overbuild on existing and adjacent areas to where they currently operate—that happen to meet program criteria as unserved and underserved.”

• BEAD funding operates similarly to leverage in trading, where the impact of every dollar you deviate from the expected amount is significantly magnified.

The government is providing $42 billion to FiberCos primarily to facilitate the connection of unserved and underserved homes with high-speed internet. This is due to the typically high costs associated with such endeavors, which has deterred FiberCos from pursuing it independently.

BEAD funding has the potential to greatly impact the expansion of FiberCos into new areas, but it also comes with increased risks. The typical BEAD requirements stipulate that recipient companies must contribute at least 25% of the project’s capital, whereas states like Wisconsin demand a 40% capital match. Consequently, while grant money is accessible, some operators must still make a substantial financial commitment, with the possibility of some investment being in-kind contributions.

In the event that a network rollout funded by BEAD exceeds the budget, there will be no additional BEAD funding available to cover the cost overrun. Assuming a planned rollout cost of $40M (with $30M from BEAD funding and $10M from the builder), if the rollout goes over by 10% ($4M), the builder will be responsible for the extra capital. This means that a 10% cost overrun will have a 40% impact on the builder’s planned capital commitment of $10M, potentially transforming a successful deal into an unsuccessful one.

“Carefully consider your proposed match. Yes, obtaining the minimum match means you’ll have to invest less of your own capital, but operators that propose a higher match will improve their scoring and more likely receive program funding.”

• – Previous network build strategies are ineffective. – Past success methods do not apply.

“Evaluate each market with an open mind. In some geographies, it may make more sense to propose a fixed-wireless or hybrid solution rather than 100% fiber.”

• Simply constructing it doesn’t guarantee their arrival. Reduce the projected rate of home conversion by a third.

A survey by AlixPartners sought to gain insights into how Americans view their home internet. The findings highlighted two crucial points for FiberCos aiming to leverage BEAD. Firstly, the majority of consumers contemplate switching providers only when they face consistent frustrations with their current services. Secondly, price plays a significant role when they assess alternative providers.

Roughly half of the homes that qualify for BEAD lack adequate service, as they cannot access speeds exceeding 100/20 mbps. However, considering that a 100/20 mbps connection is more than sufficient for streaming Netflix on multiple devices, it surpasses the average internet speeds found in numerous developed countries globally.

Hence, the mere construction of an improved network does not guarantee an instant influx of subscribers in these regions. If your investment strategy relies on a substantial customer acquisition rate, it is necessary to lower your projections or explore options for securing additional funds. It is crucial to never underestimate the expenses associated with operating a network in underserved areas. While BEAD funding provides support for initial investments, the continuous maintenance in remote locations can significantly impact your business’s viability—which brings us to our final, uncomfortable reality.

“Elimination of the Affordable Connectivity Program will impact lower-income households. This will also likely impact the potential adoption rate in the unserved and underserved communities that the BEAD program is designed to aid.”

• The absence of BEAD funding should not be viewed negatively, as it does not indicate inadequate planning.

AlixPartners believes that FiberCos should consider BEAD as just one of several potential business prospects to assess. Provided they conduct thorough research on the necessary requirements for successful implementation in a specific region, maintain a cautious yet optimistic approach towards customer acquisition assumptions, and project a satisfactory internal rate of return (IRR) considering their intended capital investment, we advise them to proceed with applying for BEAD funding.

If they are unable to fulfill these three requirements, we recommend that they refrain from submitting an application. Investing in BEAD capital is a wise decision when the establishment of a profitable fiber network can be achieved with just a few million dollars in setup expenses. Otherwise, spending millions to construct a fiber bridge to nowhere will likely result in significant difficulties.

“The BEAD program is an exciting offering, but there are also other funding programs companies can choose—like the USDA Reconnect Program—as well as several federal and state alternatives. Operators should evaluate all potential grant and funding programs, and decide where to apply based on the markets in which they are looking to build.”