The $16 billion Rural Development Opportunity Fund (RDOF) Phase 1 auction opens for bidding on October 29th in what promises to be a hotly contested and lengthy process which could easily last until the end of the year. This is the first and largest round of funding from the RDOF program that is expected to allocate a total of $20.4 billion over the next ten years and bring broadband services to over 5 million underserved or unserved homes and businesses.
Building a successful business case for the deployment of voice and data services to rural geographies has never been easy. And, given an increasingly uncertain confidence interval associated with the time and costs required to complete a rural build-out, turn-up services and engage new customers, the business case for RDOF deployments becomes even more challenging. If you’re planning to bid in the upcoming auction, controlling what you can control is key. DZS offers two strategies that embrace next generation fiber and wireless broadband access networks which are both scalable and license-free to help you grow revenue, avoid unnecessary drains on scarce company resources, and accelerate the return on your RDOF investment.
If you submitted a Short Form for the RDOF auction, you have already described your current service offerings and indicated the technological capacity you have available to provide voice and data services. You were asked to assume, for the purpose of engineering your network, at least a 70% subscription rate in the areas that will be awarded funds to support. If your bid(s) are ultimately successful, you’ll be required to build out your network to enable 100% of the consumers in these areas (by year eight) to access the service. The rules-of-the-road for RDOF network deployment and timing are all well documented by the FCC. While profitably achieving these targets is undoubtedly top of mind for most applicants, it’s perhaps of even greater importance to note the choices you make in architecting your network today can vastly alter your long-term economic success in the business case for RDOF, as well as for your business overall.
To be successful, RDOF recipients should challenge their business planners, engineers and vendors to think beyond just serving a finite set of rural subscribers at service tiers required from the bidding process. And, in doing so, leverage the RDOF cost model to support network builds that are both flexible and scalable – capable of executing new and evolving business models while delivering expanded service offerings and next generation fiber and wireless services to awarded census blocks, and beyond.
If properly implemented, RDOF recipients will be uniquely positioned to inherently create optionality in their businesses to gracefully unleash and support new market opportunities that could include next generation 10 gig XGS-PON upsell opportunities, new 5G mobile backhaul and fronthaul markets, MVNO agreements, automated farming applications and Optical LAN business services (FiberLAN™) to name a few.
With the FCC’s proposed new two phase $9 billion program as a follow-on to RDOF, entitled “The 5G Fund for Rural America” – perhaps coming as soon as 2021 – architecting your network to support these new service offerings while protecting today’s investment becomes even more critical.
Microsoft expertly sums up the advantages of scalable systems, saying they are designed to embrace rapid change, large-scale, and resilience. DZS exemplifies scalability in your network, enabling you to flexibly advance your business agenda with operational ease while delivering the service quality your customers expect.
Because a winning bid represents an agreement with the FCC to provide services, you’ll want to make sure you are 100% confident your bid is sufficient to deliver the profitability you expect at the reserve price(s) you’ve bid. In the face of lack-luster valuation multiples compared to companies with more predictable recurring revenue streams, some traditional broadband access equipment vendors have increasingly monetized a relatively new business model, which not only benefits from an initial equipment sale, but further locks its customers into highly profitable, multi-year license agreements for operating systems (which should come free with the hardware) that absorb hundreds of thousands in recurring incremental annual fees. While these fees may appear as a mere annoyance today, they add up and will undoubtedly grow over time according to Teresa Mastrangelo, a well-respected analyst and industry pundit with Broadband Trends. In fact, it is expected that these fees could impact an average RDOF recipient’s EBITDA by more than $830,000 throughout the RDOF investment period. While that’s good news to a vendor who’s collecting these incremental fees, it’s bad news to your bottom line, and perhaps detrimental to your company’s efforts to meet its service level requirements while helping to close the country’s digital divide. To further illustrate this point, refer to Exhibit 2 below which assumes an average of 13,731 eligible locations per census block, a subscription rate of 80% achieved in year three and $8.25 in total annual license fees per subscriber.
Our math assumes the average RDOF recipient will serve about 10,984 subscribers by year three – residential and business. This figure simply divides the number of RDOF Phase 1 eligible locations by the number of qualified RDOF applicants listed on the FCC website at a subscription rate of 80% (~5,300,000 eligible locations ÷ 386 applicants with submitted “short forms” as of 9/13/20 x 80%). We assume ~50% of those subscribers will be reached in year one with the balance reached by the end of year three. Note, we assume no additional new subscriber growth following year three. We further estimate $5.00/month per subscriber in license fees for the ONT operating system and $3.25/month per subscriber for the OLT license throughout the life cycle of RDOF.
FCC funding is expected to complement other sources of capital you may have access to, to complete and service your buildout for each area. Don’t undermine your investment dollars or your profitability projections by paying license fees that can’t and don’t add value to your operation.
DZS has paved the way in GPON, XGS-PON, 5G mobile anyhaul, O-RAN and optical LAN (FiberLan™) innovation to meet the most demanding and complex requirements in next generation broadband access and wireless networks. Being scalable and license free, our solutions can accelerate your RDOF investment for any broadband deployment scenario. Looking for more information about how to harness the power of your RDOF investment? Get in touch with us to learn how our broadband access solutions can work for you.