Net Neutrality Friday

In my review of Calix's earnings on Wednesday, I said I would talk about CAF-II. I want to expand on that here. To start out, what the heck is CAF-II? It is Phase 2 of the Connect America Fund. You can go right to the horse's mouth at the FCC and learn more about it HERE. The big thing is that in the long term this type of funding is going to replace the Universal Service Fund (USF). That fund was put in place to help telephone companies deliver phone service to all. This became part of the trade-off within the Telecom world. When universal service was put in place, it became clear that very rural America would have to pay a lot of money to have service. My personal experience with this was with a phone line that AFC served that was 80 miles long to a single cabin. 80 miles for 1 phone. You can imagine that constructing and maintaining that line cost a lot more than $25 per month.

In comes USF. Telephone companies that had a high percentage of what were termed "High Cost Loops" could get help to keep the price of rural phone service the same as urban and suburban systems. Most large companies did not qualify for this support, since they tended to have the big cities. Think of Pacific Bell in California. How many homes are near Mount Shasta compared to the number in Los Angeles? You can see that large cities swamp the percentages for large companies. There were exceptions of course and much of this evolved as we moved from Rate Base Pricing to Rate Cap Pricing. I have reviewed this in the past, but will remind folks here. If you go back in time, you will find that Telephone companies were guaranteed a Return on Investment (ROI) by managing prices against what was called the Rate Base. The Rate Base was a summation of all the Capital Expenditures that the company put in to provide service. Rate Cap pricing means that there is a Cap (a limit) on how much a telephone company can charge for phone service. This has changed spending patterns to maximize the ROI. The right Capital Expense Level for a Rate Cap carrier is 0. Which has led to our problems with rural broadband.

To help with this transition, the FCC is managing the Connect America Fund to get broadband universally deployed. All the companies look like they are going to participate, and this is a major win for the FCC. However, it does not guarantee 100% coverage nor does it ensure that as Broadband moves forward that rural customers will recieve timely upgrades. I consider this a great step forward, but not the ultimate answer.

As it relates to Calix, the question is "So, why is the money not flowing to you?" I think the better question (as a taxpayer) is: "Are companies increasing their Capital Expenditure Budget with CAF-II or are they substituting their money with our money?" I think that is an open question, but one that Calix can not answer. This needs to come from the telephone companies.

Have a great weekend! Jim Sackman Focal Point Business Coaching Business Coaching, Executive Training, Sales Training, Marketing

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