- Broadband rate caps could slash ISP investment by billions, according to Cartesian
- States are pushing for affordable broadband legislation post-ACP
- Such actions could strain smaller ISPs, the firm argued
As New York and other states move forward on legislation mandating affordable broadband for low-income consumers, consulting firm Cartesian argued that rate regulation could result in a significant investment slowdown from operators.
In a study commissioned by ACA Connects, Cartesian looked at how the business case for a fiber ISP entering a market would change via different rate regulation scenarios, from a $30/month low-cost broadband requirement all the way down to $15/month (which is what the New York law currently requires)
Provider capital expenditures would decline by 19%, or $6.2 billion, assuming a $30/month price cap for low-income connectivity, with broadband ARPU of $70/month for other consumers, according to the report.
Cartesian considered factors including network build costs, the potential share of subscribers a provider would gain from competitors and the "hurdle rate," which is the minimum rate of return that investors would deem acceptable before approving a project.
Cartesian compared scenarios ranging from pricing requirements exclusively for low-income connectivity to “market-wide rate regulation.” For example, a low-income price of $15/month with a $60 broadband ARPU (down from $70/month before rate regulation) could result in a 41% capex drop, amounting to about $13.6 billion.
“We would expect less investment because [providers] wouldn’t be able to offset that lost revenue from increased uptake,” said Cartesian VP Michael Drague in a Thursday webinar.
“They’re going to need to recover the lost revenue from somewhere,” which could result in higher prices on “non-broadband services,” he added.
But it's not only state regs that could put a damper on capital spend. The prospect of tariffs may also bring about increased costs for consumers along with project delays.
Status of U.S. affordable broadband
The demise of the federal government’s Affordable Connectivity Program (ACP), which offered a $30/month subsidy to about 23 million U.S. households, has prompted states to pick up the slack on addressing broadband affordability.
Brian Hurley, SVP of legal and regulatory affairs at ACA Connects, said on the webinar that while the group’s members “would welcome the adoption of a well-designed program” to replace ACP, “rate regulation is not that.”
New York’s affordable broadband law took effect in January, and states including California, Maryland and Massachusetts have proposed similar legislation that would limit how much ISPs can charge low-income consumers.
The New York law notably exempts providers with fewer than 20,000 subscribers. But Drague pointed out the proposed legislation is for the most part “broadly applicable.” Massachusetts, for example, would only exempt municipal broadband providers.
He argued because smaller ISPs typically operate in a single state with a “more concentrated” revenue base, “they’ll be heavily affected by whatever regulation happens in that state.”
Not all states are following New York’s footsteps. Tennessee enacted legislation that prohibits local governments from imposing regulations on broadband rates.
As New Street Research Policy Analyst Blair Levin has noted, state affordable broadband laws by themselves are no issue for operators “who generally have programs more generous than the state law would require.”
The concern is what would happen if states decide to change those rules.
“State regulation here is a capital markets problem for the whole industry, as it introduces the risk of a populist backlash against ISPs through changing the parameters of the mandate,” Levin wrote in a note earlier this year.