Home internet, once such a revolution, is not an exciting topic for most people. Such is the case when technology has long been ubiquitous—according to Pew Research, 95% of Americans use the internet at home (frankly, the more shocking statistic is that 5% of Americans don’t yet have home internet). But fibre companies —and the people that work within them—are not like most. They certainly have a reason to be excited about home internet; at least 42 billion reasons to be excited.
In 2022, the National Telecommunications and Information Administration (NTIA) officially kicked off the Broadband Equity, Access, and Deployment (BEAD) Program, designed to ensure more communities gain access to the benefits of broadband connectivity. To address the digital divide, the U.S. government plans to issue more than $42B in grant money to help provide reliable, fast internet for unserved and underserved homes in the U.S and its territories.
For those in the industry—namely fiber network builders and operators—the BEAD program is well underway with perhaps up to 25 per cent of initial grant money to be awarded this year (with the remaining to being awarded in 2025). With such a large influx of cash to the market, optimism may be at an all-time high. The grant money presents an opportunity to connect to more homes, gain more customers, and ultimately make more money—all while helping to close the digital divide.
While industry excitement is understandable, it is important to remember: There is no such thing as a free lunch. Any FiberCo (and many fixed wireless providers) can participate in the BEAD program, but we believe those that do so successfully must temper their optimism.
TRUTH #1: If you focus on winning as much BEAD funding as possible in the short term, you’ve likely already lost in the long term.
Typically, when “free” money is on the table, there’s a widespread scramble to secure the largest share possible. If you are a FiberCo planning to apply for BEAD funding, this is the last thing you should do. Instead, it is critical to curb your enthusiasm.
Three-to-four years from now when we know the true winners of the BEAD program, we’ll almost certainly be praising the companies that emphasized internal rate of return (IRR) at the bid phase. These companies will apply for BEAD funding most pragmatically, avoiding areas in which they do not think they will turn a strong profit.
Just like in sports, the only meaningful score is the one at the end of the game. When it comes to BEAD, success will be defined by whether companies generate a strong profit relative to the capital they invested—not by how much funding they were awarded.
“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.”
TRUTH #2: Using BEAD funding is like trading with leverage. Every dollar you are off will hurt much more than usual.
Why is the government offering $42B to (mostly) FiberCos to connect unserved and underserved homes with high-speed internet? Because it has generally been too expensive for any FiberCo to want to do it themselves.
While BEAD funding can make a huge difference for FiberCos to build in new locations, it also raises the risks. Standard BEAD requirements assume the companies that receive funding will provide at least 25 per cent of capital for projects, while some states like Wisconsin require a 40 per cent capital match. So while grant money is available, FiberCos will still have to make a considerable financial investment (although some of the investment may be in-kind contributions).
What happens when a network rollout relying on BEAD funding goes overbudget? For an example, let’s assume a planned rollout costs $40M (with $30M from BEAD funding and $10M from the builder). If the rollout goes over by 10% (or $4M), do not expect supplemental BEAD funding to become available. The builder will be on the hook for the additional capital. Thus, a 10% cost overrun will have a 40% impact on the builder’s planned capital commitment of $10M—which can easily turn a “winning” deal into a “losing” 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.”
TRUTH #3: What made previous network builds successful won’t work here.
Given the NTIA’s definition of unserved and underserved locations, the majority of locations eligible for BEAD funding are in rural areas. As FiberCos know, rural areas present unique challenges for successfully rolling out networks: low population density, vast distances between premises, and varying topography that makes laying underground fiber a high-capital endeavor. Moreover, FiberCos may not yet operate in these geographies.
Therefore, it is imperative that FiberCos know before they go. They must meet with vendors and contractors early in the application process to gain a better understanding of build difficulties and constraints, while also engaging the municipalities to understand the permitting process and any potential restrictions. Simply put - constant, fact-based communication will drive joint success on this journey.
“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.”
TRUTH #4: “Just because you build it, doesn’t mean they will come.” Cut the estimated homes-passed conversation rate by one-third.
On-time and on-budget builds will help ensure FiberCos can “win” the BEAD program, but this alone does not guarantee financial success. Building is only half the battle - in order to achieve the planned IRR, customers must be motivated to make the switch.
AlixPartners recently conducted a survey to understand American perspectives on home internet. Two learnings stand out as especially relevant to FiberCos looking to take advantage of BEAD. First, the majority of consumers only consider switching providers if they experience constant frustrations with their existing services. Second, when they do evaluate new providers, they make decisions based on price.
About half of BEAD-eligible homes are underserved, meaning they do not have access to speeds greater than 100/20 mbps. But put into context, 100/20 is more than enough to stream Netflix on multiple devices and is well above the median internet speeds of many developed countries throughout the world.
Therefore, simply building a better network does not mean people in these areas will immediately sign up to buy. If your investment model is predicated on a high customer acquisition rate, you need to reduce your estimates or discuss how to gain additional funding. Never underestimate the costs of running a network in underserved areas. While BEAD funding helps with the investment, the ongoing maintenance in remote locations can tank your business case—which leads us to our last uncomfortable truth.
“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.”
TRUTH #5: Not getting BEAD funding may not be a bad thing—and it is not a reflection of poor planning
Our perspective is that FiberCos should view BEAD as simply one of many business opportunities to evaluate. If they do the research into what it takes to successfully build in a given area, are conservative yet confident in their customer acquisition assumptions, and still estimate an acceptable IRR based on their planned capital commitment, then our recommendation is to apply for BEAD funding.
However, if they cannot meet these three qualifiers, we believe they should forgo applying. BEAD capital makes sense when a few million dollars in setup costs is all that’s needed to enact a fully functioning, profitable fiber network. Otherwise, you will likely face a major headache by spending millions to build a fiber bridge to nowhere.
“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.”
