Endeavour Partners - Blog

Our post last week on applications for broadband stimulus funds received a lot of attention.  While some people disagreed with our conclusions, most found our analysis surprising and interesting:  Roughly 4x the total program funding applied for in the first round, and much of this associated with only a handful of applications.  The distribution of dollars among states was also uneven, and probably not allocated in the way you would do it to maximize the impact while minimizing the cost.

On Friday, I had the opportunity to speak with Robert Anderson, CEO of WindTalk, which sits at #7 in our ranking of top applications by size of funding request.  Mr. Anderson pointed me in the direction of an interesting new piece of analysis.  Many of the other large applications, he pointed out, are “grant only” requests while WindTalk is a pure loan application.  His belief is that loan applications will receive favorable treatment in the awards process.

The breakdown of loans vs. grants for the top ten applications (by size of funding request) is as follows:

Breakdown of top ten broadband stimulus applications by grant vs. loan amount requested

As Mr. Anderson suggested, the top ten applications are weighted toward grants, and WindTalk is the largest loan-only application.  The satellite players – EchoBlue, Satellite Broadband ARRA App LLC, and AtContact – all also have significant loan elements in their applications.  RADGOV, on the other hand, is asking for $1.3 billion in grants, while Hughes Network Systems has request $398M, and Adak Eagle has a $242M grant request representing ~98% of the cost of one of our two so-called “underwater bridges to nowhere.”  Kodak-Kenai, who we singled out in a prior post, is requesting over 50% loan funding.

The breakdown of the rest of the applicant pool is equally revealing:

Breakdown of broadband stimulus applications - grant vs. loan requests

Fully 2/3rd of applications are grant-only and nearly 60% of the requested funds are associated with these grant-only applications.  In total, 77% of the applied for dollars are for grants.

These totals stand in contrast to the government’s targets for the first round of applications, both in shear dollar amounts as well as the flavor of award (grant vs. loan).  The round one allocation was supposed to look like this:

• BIP program: $2.4 billion in loans and grants, with the application process encouraging the use of loans through self-scoring:

Extent of grant funding (Grant funds/loan funds):
(i) 0 points if this ratio equals 100%
(ii) 1 points if this ratio is between 100% and 75%
(iii) 3 points if this ratio is between 75% and 50%
(iv) 5 points if this ratio is lower than 50%
(v) 10 points if no grant funds are requested

• BTOP program: $1.6 billion in grants

Drilling deeper into the grant and loan combination applications is also interesting.  The following scatterplot shows grant requests on the x-axis and loan requests on the y-axis for each application incorporating some grant and some loan.

Most applications with both grant and loan elements fall near the 50/50 line

Here we see the BIP self-scoring guidelines having some impact as most applications fall along the 50% loan vs. grant threshold (387 out of 545 combination applications between 45% and 55% grant), and another small cluster sits around the 75% demarcation (34 applications with 70-80% grant).

As I said last week, there are a lot of applications chasing a lot more money than is available.  It will be interesting to see how it plays out.  Should loan-heavy requests be given priority over grant-heavy requests?  Or should the emphasis be on reaching the most unserved and underserved homes per dollar, regardless of type of award?

Comments appreciated.

Our recent post on the broadband stimulus package has been attracting a lot of attention, and in particular some people seem concerned about our characterization of the Kodiak-Kenai proposal as an ‘underwater bridge to nowhere‘.

Kodiak Kenai's proposal costs $344 million (image from Fierce Broadband Wireless)

It motivated Scott Slater of the Personal Broadband Industry Association to comment that:

Your post seems to miss the large point and intent of the broadband funds in the Stimulus Act…

…At PBIA we give well thought out, well designed, and scalable projects in rural Alaska, just as in other remote and rural parts of the country, the benefit of the doubt as it appears they qualify as well as anyone, if not more, for the intended uses of the rural broadband funds in the Stimulus Act. It just so happens that after our review of total reach, total design, total scalability, and total shovel readiness of the proposed Alaska projects, we think the Kodiak Kenai Cable Company’s proposal should move forward and be funded under the Stimulus Act…

…It is important to know the facts. Your post did not demonstrate this understanding. There are larger federal policies at play here and the Kodiak Kenai Cable Company’s project appears to hit all of them.

Actually, we agree 100% with a couple of the key points that Scott makes:

The rural portions of Alaska are in, in fact, the most remote and unserved in America (see our earlier post on population density and broadband economics)

[T]he broadband funds in the Stimulus Act…were designed to deploy true broadband to locations that are ”unserved” and “underserved”

But the unfortunate reality is that these funds are finite, so that one of the key considerations here must be how much the service is improved, for how many people, and at what cost. There is a huge opportunity cost to very expensive projects that serve small numbers of people; the much larger number of people who could have benefited had that spending been allocated to its highest and best use.

As my colleague Moe Kelley (the author of the original post) put it in responding to Scott’s comment:

I am struggling with how hundreds of millions of dollars for undersea fiber could possibly be the most cost effective solution to serve only thousands of customers. I am also struggling with how this investment will ever pay itself back or reap any meaningful benefit in terms of job growth, new business formation, or economic recovery.

Kodiak Kenai's 'underwater bridge to nowhere'

The question at hand is not: “How do we reach every man, woman, and child in the US with super fast broadband regardless of cost?”

The question is more like: “What is the best way to spend $7.2 billion to provide the greatest improvement in broadband service affordability and availability to unserved and underserved areas while also creating jobs and spurring economic growth?”

From that perspective, $344 million dollars to connect a few people in Western Alaska will deny the benefits of the broadband stimulus to much larger numbers of people elsewhere; rural communities somewhere else in the United States will lose out.

Here’s a quick calculation to provide some context:

• a quick search suggests that the population of Western Alaska is about 30,000 people (http://www.dced.state.ak.us/bsc/CDQ/cdq_handbook/9_cdq_chapt2.pdf)
• so with an average household size of 2.59 (http://factfinder.census.gov/servlet/SAFFFacts) there are about 11,000 households
• average US broadband penetration is about 60% (although the Broadband Stimulus will increase this)
• so we could anticipate that there would be about 7,000 or so households subscribing to broadband service

On that basis, $344 million dollars is about $50,000 per household subscribing to broadband service. That’s a very expensive underwater bridge to nowhere.

$28 billion in applications were received in the first round of an ostensibly three round process to award $7.2 billion in broadband stimulus allocated in the American Recovery and Reinvestment Act of 2009 (ARRA).  Recently, the National Telecommunications Information Administration (NTIA) and the Department of Agriculture’s Rural Utility Service (RUS) have released summary data on each of these applications at their Broadband USA site.

We have downloaded and analyzed a complete set of these summaries and have made a few initial observations:

1. There were 2,186 applications received
2. The average application size (across BIP and BTOP, loans and grants) was $12.7 million, but the median application size was significantly less:  $2.7 million
3. Alaska had the largest total dollar amount requested, at $1.3 billion
4. The largest application was from RADgov, a proposal to build and connect computer learning centers in underserved communities across the US for the staggering cost of $938 million dollars

The following charts fill out the top 10 states in terms of total funds requested as well as funds requested per capita:

Top 10 states by total broadband stimulus funds requested and funds requested per capita

In our last post on broadband policy, I highlighted the six least densely populated states:  New Mexico, South Dakota, North Dakota, Montana, Wyoming, and Alaska.  These states all have fewer than 20 people per square mile and actual broadband performance that is demonstrably lower than the US average.  Of these laggards, only Alaska makes the cut in the top 10 for total funding requests, but four out of the six are represented in the top 10 on a per capita basis – and a fifth, Montana, is ranked 11th.

This one piece of news is encouraging, at least:  Some of the money is likely to head to the markets with the greatest need.

Unfortunately, digging deeper provides reason for concern.  Three of the top 10 states ranked on funding requests per capita are in the top 10 for actual broadband performance:  Rhode Island, the District of Columbia, and Maryland.  These are all densely populated areas with meaningful broadband competition.

Looking at specific high value applications gets even more interesting.  Among the top 10 applications, four are satellite, three are unlikely to qualify, and the remaining two have a disturbing, “bridge to nowhere” feel.  These are all very large projects and most don’t seem to fit the model the architects of the broadband stimulus program had in mind.

Top 10 broadband stimulus applications by total funding request

Echostar, Hughes, and AtConnect are applying for funding to support satellite broadband deployments in spite of the fact that satellite already has nationwide coverage but does not “count” in the calculation of unserved and underserved areas.  RADgov and Edgenics are applying for funding to support e-learning, computer learning centers, and government information web portals far in excess of what is likely to be available for these non-broadband-access initiatives.  Kodak-Kenai and Adak Eagle are each proposing hundreds of millions of dollars of investments in undersea fiber to serve very few potential subscribers in remote areas of Alaska – an underwater bridge to nowhere!

Beyond the top ten, the value of applications continues to be highly concentrated, with the top 10% of the largest applications corresponding to 66% of total funds applied for and the top 20% representing roughly 80% of the total.

The top 10% of applications represent 66% of total funds applied for

It will be interesting to see how the process plays out – if awards will be made to a few large, pork barrel projects or if dollars will be carefully allocated to the rural states and areas where broadband economics break down and private sector competition is likely to remain weak.

(Update #1 – amended characterization of WindTalk following clarifying conversations with its management; Update #2 – responses and analysis of the cost per household @ Where $28 billion of broadband stimulus goes – the ‘underwater bridge to nowhere’ costs $50,000 per household)