The $16 billion Rural Development Opportunity Fund (RDOF) Phase I auction opens for bidding on October 29, in what promises to be a hotly contested and lengthy process that could easily last until the end of the year. This is the first and largest round of funding from the RDOF program, which is expected to allocate a total of $20.4 billion over the next ten years or more.
The RDOF auction is similar in process, if not scale, to the 2018 Connect America Fund Phase II (CAF II) auction, in which 173 organizations qualified to bid for a share of $1.5 billion. By the end of CAF II, 103 bidders won $1.49 billion to provide fixed broadband and voice services to over 700,000 locations in 45 states. As such, the CAF II auction results provide a ready roadmap for what to expect, from the standpoint of the process as well as competition, in the RDOF Phase I auction process.
The RDOF auction promises to provide more of everything that service providers experienced in CAF II – more than 10 times more money ($16 billion in RDOF vs. $1.5 billion in CAF II), nearly 800,000 census blocks grouped into 61,963 census block groups (the basis of auction bidding), more service providers bidding in the competition, and potentially more challenges from the big players all throughout the process. Charter Communications, for example, indicated in a July 8-K filing that they planned to participate, and they’re unlikely to be the only big providers joining the auction.
If you’re planning to bid in the upcoming RDOF auction, preparation is key, and there are several strategies that can help make you more successful at winning the bids at the values you want, and just as importantly, avoiding placing low bids on areas that could turn out to be underbudgeted drains on your company’s resources. Some of these strategies may require you to do some advanced modeling as well, but the work you put into preparing for your bid will pay dividends once the pace of the auction picks up, and you’re most focused on keeping track of what you and others are bidding.
Engineering to Focus Your Bidding Scope
The experience you’ve already had with building out services in other areas will be invaluable as a starting point for evaluating the costs associated with extending broadband and voice services to the rural areas that the RDOF auction is targeting. In preparation to bid on each census block group you plan to support, your engineering team will need to take into consideration all of the geographic and topographic factors that will determine the cost of the build-out for various speeds and latency configurations. From an engineering standpoint, the gaps between the speed and latency tiers that have been established by the FCC for this particular auction are significant, and you’ll want to ensure that the engineers are using the minimum speeds and latency guidelines for each tier as the basis for their calculations. You won’t get any additional benefit in the auction bidding by proposing speeds of 75/10 Mbps compared with 50/5 Mbps, and since it would cost more, both initially and on an ongoing basis, to provide 75/10, you’re better off sticking with 50/5 or trying for the 100/20 tier. But don’t go in between.
You’ll also want to engage business planners to determine how much revenue you’ll be able to generate based on the population of the areas you’ll be serving. The FCC funding is expected to complement other sources of capital you may have access to, to complete your buildout for each area. This will be especially true for later rounds of bidding when you’ll be challenged to figure in the capital and ongoing revenue you expect to help offset the funding you’re not getting buy lowering your bid.
The overall profitability projections for each area will also vary greatly, and the extent to which those numbers are negative for a given area will help you determine your minimum bid during the auction.
This would all be (relatively) easy if we know everything about every census block in the auction, but we don’t. Rather than exact numbers, your engineers and business planners will likely come back with various degrees of confidence about the time and costs that will be required to complete the build-out, turn on services, and engage customers. And since you’ll be working with independent confidence intervals for both the build-out and service provision, the overall confidence is reduced accordingly (i.e., by multiplying the confidence intervals). But even this information is useful.
Once you’ve identified your initial list of sites, and run all the numbers to come up with an overall profitability calculation for each of your initial sites, you can also eliminate sites based on a confidence interval that is too low, or which has too much potential variability. That exact threshold will be different for each service provider based on its capital structure and ability to cover cost overruns or slow consumer uptake, but anything less than an overall confidence level of 90% (arrived at, for example, by a 95% confidence in the engineering number and a 95% confidence in the business plan number) could have unpalatable downside risk. Best to focus your planning attention and time on the sites for which you have a higher degree of confidence in your numbers, statistically speaking, and set a comfortably high bidding threshold for the others (or eliminate them entirely from your bidding plans) well before the auction starts. Once October 29 rolls around, there won’t be time to re-do site surveys, and the emotional desire to win could influence already characteristically optimistic revenue projections.
The FCC’s mock auction, beginning October 26, is a great way to get to know the FCC’s Rural Digital Opportunity Fund Bidding System and Auction Bidder Line (a telephone line for questions during the auction), but you’ll want to set up simulations of your own, to consider every possible outcome for all the bids that will be moving during each round of the auction.
There are a number of tools you can use to run these simulations, and it’s best to use whichever tool you and your team are most comfortable with. Ideally, it would have multiple methods for running simulations and forecasting the results of various probabilities. Visualization is also nice to have, particularly if you have to present your plans to senior management for approval.
In its library of RDOF-related documents, the FCC has provided all of the elements you’ll need to set up your simulations, including tier and latency weights, reserve prices for each census block group, round-to-round funding reduction levels (the reverse auction process), budget clearing levels (where the total of winning bids for all the targeted areas are below the total funding the FCC has available) and other requirements for bid processing, like the requirement that you have to have bid in the prior round for a particular area in order to be able to bid in a subsequent round. For even more detail to refine your simulations, The FCC’s Office of Economics and Analytics (OEA) publishes a guide that provides further technical and mathematical detail regarding its bidding, assignment, and support amount determination procedures.
Your simulations should provide you with a reasonable expectation of where you should stop bidding, where you might want to place a mid-range bid at a specified performance tier and latency combination that is higher than a current round’s level (officially the clock percentage) but lower than the prior round, and where you might have available capital that you had planned to apply to lost bids that you can then apply toward the bids you’re still active in.
Alternatives to RDOF
Bidding in the RDOF Phase I auction is only open to those service providers who have pre-qualified through a Short Form application process that took place in July. If you missed the Short Form application window, aren’t totally prepared to make a bid in October, or just want to try another option, remember that while RDOF may be the biggest game in town, it’s certainly not the only way to get funding for broadband expansion. Furthermore, many of the alternative sources of funding don’t require voice service as part of a funded broadband project. If you’re into auctions, there’s always the smaller $4.4 billion RDOF Phase II auction, taking place sometime in 2021 or 2022, and the much anticipated $9 billion 5G Fund for Rural America, which could begin as early as 2021. There is also a litany of federal and state grant programs, available annually throughout the year with tens of billions of dollars to distribute for broadband expansion.
Pursuing federal funding for broadband does require more effort than going to the capital markets for resources, but it’s likely the only way service providers can make services to remote, less populated areas of the country economically feasible. It’s an attempt to level the playing field for rural areas, and it may provide a great opportunity to expand your market into completely new areas and do your part to help bridge the digital divide.