Verizon Shuns Subsidies, Pursues Wireless Strategy

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By Tim McElgunn

August 31 — In a stark illustration of the divergence in strategy among former Bell local exchange carriers, Verizon Communications Inc. has declined all federal broadband subsidies under the Connect America Fund Phase II program (CAF II), except those impacting the states where it has agreed to sell its systems to Frontier Communications Inc.

Verizon is resisting calls that it upgrade its networks in other states, even ones where it offers its fiber-based FiOS service in some areas.

The company told the FCC last week that, while it is accepting CAF II funds of $31,978,057 a year for six years earmarked for California and the $16,576,929 annual subsidy on offer in Texas, its acceptance of those funds is conditioned not only on approval of its sale of those systems to Frontier, but on those approvals being obtained by December 31.

That stance highlights Verizon's decision not to build out higher-speed facilities in underserved and unserved markets and, as in California and Texas, markets threatened by cable competition but outside its Northeast stronghold. By contrast, AT&T, CenturyLink and most smaller incumbent local carriers are investing in plant upgrades to answer cable companies' challenges, even where subsidies are not available.

In its acceptance letter to the FCC, Verizon asked that the agency hold the funds—and other support funds allocated under the former Universal Service Fund program—for payment to Frontier only after the deal is approved. The letter also asks that any obligations under CAF II, which typically go into effect as soon as an operator accepts the funding, be suspended until the deal closes. The FCC has not yet responded publicly to the letter. Verizon declined a request for comment on whether the company continues fulfilling obligations under the USF funding already accepted by the company or if it also seeks to suspend those obligations pending a final decision on its system sale to Frontier.

Conditional Acceptance and a Deadline

“In the event that the conditions of this acceptance are not satisfied, the parties request that upon receipt of written notice from Verizon that the conditions have not been satisfied, USAC will reinstate Verizon's Connect America Fund Phase I Frozen Universal Service support in California and Texas and resume payment to Verizon of these amounts,” the company wrote in its July 26 letter to the commission. Those funds, which are replaced by CAF II monies when they are accepted, do not carry the broadband investment requirements that come with Connect America Fund program subsidies.

The company says, “when the conditions of this acceptance are satisfied, Verizon California and Verizon Texas commit to satisfy the associated service obligations and acknowledges that failure to meet such service obligations may result in penalties and/or enforcement actions,” the company wrote.

For Verizon, the Future is All-Wireless as Soon as Possible

Verizon has made it clear that it is now strategically oriented as a wireless company, repeatedly telling investors that it will not invest significant additional capital to deploy FiOS into any new markets. The company is fighting lawmakers, regulators and residents that are calling for the company to continue deploying optical fiber facilities into unserved parts of Verizon's northeastern footprint and in cities where the company claims to “pass” nearly 100 percent of residential locations with its fiber, but has yet to actually connect many buildings to its infrastructure. Verizon is waging a war of words with New York City mayor Bill de Blasio, and a number of lawmakers and their constituents who say the company has failed to live up to the commitments included in Verizon's franchise approval agreement with the city.

Verizon argues that, despite significant numbers of NYC residents without FiOS access now—and no firm plans to reach them—it has fulfilled its obligations under the NYC agreement. Similarly, in New Jersey, where Verizon and its precursor companies committed to bring broadband to all areas of the state, the company insists that, its wireless network is now a viable substitute for increasing bandwidth to towns that still have access only to the company's low-speed DSL facilities and that it will not replace its copper lines with fiber in those areas.

“Regarding New York, Verizon signs on more New York City customers every day, and while our fiber deployment continues, we have most certainly fulfilled the homes-passed requirement of the franchise agreement. In New Jersey Verizon committed to deploy broadband across the state, and Verizon can use any technology (DSL, fiber, wireless) to deliver broadband to customers,” Verizon spokesman Ed McFadden told Bloomberg BNA in an email. “Verizon New Jersey satisfied its regulatory commitments under Opportunity New Jersey, far exceeding the anticipated investments and making New Jersey one of the country’s most wired states for broadband infrastructure.”

AT&T, CTL Building, With and Without Subsidies

Verizon's approach stands in contrast to that of its peers. Both AT&T and CenturyLink are accepting the Federal Communications Commission Connect America Fund monies to help expand availability of 10 Mbps upstream and 1 Mbps downstream in unserved and underserved areas, primarily in more rural parts of the country. By the end of 2018, ISPs that accepted CAF Phase II funds are required to have built out their broadband networks to 60 percent of funded locations. By the end of 2019, 80 percent of the locations should have broadband access. The FCC requires ISPs to have completed building their networks for the promised locations by the end of 2020.

But both operators are also investing significant capital to enhance and expand broadband services in order to compete with cable operators for both the shrinking pay TV market and the still growing market of both residential and small business broadband.

AT&T is including any CAF-funded deployments in its separate DirecTV acquisition agreement. In its order approving the acquisition, the FCC said AT&T must “deploy FTTP to 12.5 million locations within four years, to capture all of AT&T's pre-transaction planned deployment, its projected deployment absent the transaction, and the deployment that the record suggests is profitable as a result of the transaction. In addition, and because it is important that competition with cable also reach public institutions, AT&T is required to offer to schools and libraries where it deploys FTTP, which is about 6,000 institutions, the ability to purchase 1 gigabit E-rate services from AT&T.”

AT&T is hedging slightly as well, however, noting in its acceptance of CAF II funds that it has “carefully analyzed a number of factors including the regulatory obligations associated with accepting the funds and whether the funding makes deployment economically feasible (including by using our advanced fixed wireless technology).” But AT&T is also deploying gigabit-capable fiber-to-the-curb infrastructure in some markets and is exploring using advanced DSL technology to boost speeds in parts of its copper distribution and access network as well.

CenturyLink's grant is the largest in the current round of CAF funding, FCC Chairman Thomas Wheeler said in an August 28 press release.

CenturyLink, AT&T and Consolidated's acceptance bring the total amount of accepted CAF II funds to more than $9 billion over six years, the FCC said in another release. Frontier Communications, Inc. accepted $1.7 billion over six years and Windstream Services, LLC, accepted $1.05 billion for the six-year period.

The funds will go toward addressing the disparity between the number of urban households that have broadband access versus the number of rural households.

According to FCC data in the agency's January Broadband Progress Report, only one in 100 urban Americans lack broadband access, but one in three rural Americans are without it. “Like telephone service in the 20th Century, broadband has become essential to life in the 21st Century,” the releases said.

CenturyLink will use the funds to deliver enhanced services to smaller and more rural communities across its footprint in the western U.S.

“These are high-cost markets with many deployment challenges,” John Jones, CenturyLink senior vice president for public policy and government relations, said in the company's Aug. 27 statement. “We believe the high-speed connectivity we will provide will bring many benefits to rural communities, including economic development and better access to education and healthcare services such as distance learning and telemedicine.”

CenturyLink is set to begin construction in early 2016 for network buildout plans, its release said.

To contact the reporter on this story: Tim McElgunn in Cherry Hill, NJ at

To contact the editor responsible for this story: Keith Perine at