Telecommunications: Federal Broadband Deployment Programs and Small Business
Released: 2014-03-10T00:00:00

Letter

Background

Broadband Transmission Technologies

Broadband speeds are described in upload and download capabilities measured by the number of bits of data transferred per second and include kilobits (1 thousand bits per second), megabits (1 million bits per second), and gigabits (1 billion bits per second). Download speed refers to the speed at which data is transferred from the Internet to the consumer. Upload speed refers to the speed at which data is transferred from the consumer to the Internet. FCC currently considers speeds of 4 megabits per second (Mbps) download and 1 Mbps upload or greater to be broadband. The speeds required by small businesses vary depending on how the business uses its Internet connection, the number of users, and the number of applications running concurrently, among other factors. Examples of uses supported by different download speeds are described in table 1.

Broadband service is provided through a variety of technologies, including:

Digital subscriber line (DSL). This service is delivered by local telephone companies over their copper-wire telephone networks used by traditional voice service.

Cable modem. This service is delivered by cable operators through the same coaxial cables that deliver sound and pictures to television sets.

Fiber optic. Fiber optic technology converts electrical signals carrying data to light and sends the light through transparent glass fibers about the diameter of a human hair.

Satellite. This wireless service transmits data to and from subscribers through a receiver dish to a satellite in a fixed position above the equator, eliminating the need for a copper wire or coaxial cable connection.

Wireless. Land-mobile or terrestrial broadband service that connects a business or home to the Internet using a radio link.

Broadband access can be shared or dedicated. Shared access means users share the connection to the Internet, and thus speeds can be variable based on the number of users accessing the network at one time. Dedicated access provides a reliable point-to-point connection with guaranteed speeds. For some small businesses with the need to send sensitive or large amounts of data, such as financial institutions or medical centers, a dedicated connection or special access line may be beneficial. However, most small businesses do not need such a connection.

Broadband Availability and Access

Broadband Internet access is widely available throughout the United States to both residences and businesses. According to the National Broadband Map, which measures national access to broadband, as of December 2012, approximately 98 percent of the U.S. population had access to wireline or wireless broadband service of 3 Mbps download and 768 kilobits per second (kbps) upload.Office of Advocacy in 2010 similarly found that over 96 percent of urban A study completed for SBA’s small businesses and approximately 92 percent of rural small businesses reported access to wireline or wireless broadband.

Still, some areas of the United States remain underserved or unserved by broadband infrastructure. areas. For example, according to data used in the National Broadband Map, nearly 100 percent of urban residents have access to 3 Mbps or higher download speeds, and about 94 percent of nonurban residents have access to such speeds. Likewise, wireline broadband access is available to 99 percent of urban populations and 82 percent of nonurban populations. The unserved and underserved areas that remain in the United States tend to be where conditions increase the cost of broadband deployment, and the difficulty in recouping deployment costs makes it less likely that a service provider will build out or maintain a network. These conditions include: Service gaps exist primarily in nonurban

Low population. The limited number of potential subscribers in an area makes it difficult for providers to recoup the costs of building a network.

The definitions of unserved and underserved were part of a Notice of Funds Availability announced by NTIA and designed to implement grant programs under the American Recovery and Reinvestment Act of 2009 (74 Fed. Reg. 33104, July 9, 2009). The speeds in these definitions are much lower than the FCC’s broadband benchmark of 4 Mbps download and 1 Mbps upload. According to the Notice of Funds Availability, an unserved area is one in which at least 90 percent of households cannot subscribe to the minimum broadband speed and service, defined as advertised speeds of at least 768 Kbps download and at least 200 Kpbs upload. An underserved area is one in which (1) 50 percent or less of households have access to the minimum broadband speed, (2) no provider offers service speeds of at least 3 Mbps, or (3) 40 percent or less of the households choose to subscribe to a broadband service. The availability of, or adoption rates for, satellite broadband service are not considered in determining whether an area is unserved or underserved.

Difficult terrain. Challenging terrain, such as mountains, may increase construction costs for wireline service and can affect wireless service by creating physical barriers or otherwise limiting the ability to transmit data.

Natural Disasters. Areas that experience severe weather or natural disasters may lose broadband access temporarily, which increases costs because of the need to repeatedly repair or replace infrastructure. For instance, Hurricane Sandy took down a service provider’s copper lines that provided DSL service for Fire Island, New York. The service provider decided to replace the copper lines with a more costly but resilient fiber network.

Federal and Municipal Support for Broadband Deployment

SBA does not provide funding for broadband deployment. However, it does provide funding to nonprofit Small Business Development Centers (SBDC). SBDCs provide training and education to encourage greater use of broadband. SBA also supports research by its Office of Advocacy on the use and availability of broadband.

Congress appropriated funds for the BTOP and BIP programs under the American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5, 123 Stat. 115 (2009)). All funds were obligated prior to the end of fiscal year 2010. In the joint Notice of Funds Availability, NTIA and RUS provided that projects should be completed within 3 years of receiving an award. 74 Fed. Reg. 33104, July 9, 2009. As part of BTOP, in support of broadband adoption, NTIA awarded grants to public computing centers and sustainable broadband adoption projects that funded access to broadband, computer equipment, and job training.

The Connect America Fund is part of ongoing Universal Service Fund reform aimed at eventually replacing existing high-cost support mechanisms. The high-cost program within the Universal Service Fund (USF) provides subsidies to telecommunications carriers that serve rural and other remote areas with high costs of providing telephone service. GAO has ongoing work on the USF reforms and their impact on broadband deployment and other issues.

Some municipalities also support broadband deployment by funding, building, and operating networks to provide broadband access to their communities, much as some cities offer utilities such as water and electricity. The municipal entity providing this service may be, for example, a department within the city government, or a cooperative formed among several communities. Communities have used federal funds, issued bonds, and taken out loans to fund the construction of municipal broadband networks. In some instances, voter referendums have been required for the city to take out loans or bonds for this purpose.

Municipal networks have achieved varying degrees of public acceptance and financial success. In some communities, these networks have been welcomed because they are the only broadband service provider. In other communities, the municipality functions as a competitor to cable and DSL providers and lawsuits have been filed by incumbent service providers to prevent municipalities from building networks. Some states have passed legislation to prevent communities from becoming service providers. Nevada, for instance, prohibits cities with a population of 25,000 or more from selling telecommunications services to the general public. Nebraska prohibits any political subdivision that is not a public power supplier from providing broadband or Internet services. Financially, some municipal networks have been successful while others have struggled to pay off bonds or loans used for capital investment.

Federally Funded Efforts to Expand Broadband Encompass but Do Not Specifically Target Small Businesses

Federal broadband programs do not target deployment to small businesses. As previously discussed, federal programs target deployment to areas that are unserved or underserved. Many programs do, however, have requirements that can result in networks maximizing the number of small businesses and residences served. For example, USDA’s Community Connect grants require that the service provider offer broadband services to all residences and businesses in the proposed service area. To be eligible for the Rural Broadband Access Loan and Loan Guarantee Program at least 25 percent of the households in an area must currently be underserved. Thus, the program’s funding supports providers who will serve residences and small businesses in areas of need. Table 3 shows selected federal funding requirements related to eligibility and infrastructure deployment for the six federal programs previously described.

Since these programs do not focus on deployment to small businesses, they do not measure their impact on small businesses, including the broadband speeds and prices available to them. However, each program has broader goals and measures, some of which encompass the impact on businesses. For example, BIP supports USDA’s goal to increase the number of rural Americans with access to broadband service and provide the speeds needed by business, health care, public safety, and others. Consistent with this goal, RUS reported in August 2013 that more than 5,800 businesses had received new or improved service as a result of BIP funding since passage of the Recovery Act in 2009, even though BIP does not have specific performance targets regarding services to businesses. BTOP supports NTIA’s strategic goal of driving innovation through policies that enable broadband growth and support e-commerce. Accordingly, NTIA measures the number of community anchor institutions, such as schools and libraries, that received broadband connections through BTOP and the miles of broadband network deployed. NTIA also collected data on interconnection agreements that allow small internet service providers to provide broadband service.

According to service providers we spoke with, federal funding was instrumental in their network expansion or upgrade. For example, officials from Monroe Telephone Company in Oregon stated that without the federal support they received through BIP, they would not have expanded their network due to the area’s low population density and mountainous terrain. Monroe officials stated that they used the loan of $1.4 million and grant of $4.2 million, both from BIP, to expand broadband access to 1,200 households and small businesses in two counties that previously only had dial-up or satellite service. In another example, officials at Paul Bunyan Telephone Cooperative in Minnesota stated that the RUS loan they received enabled them to expand their broadband service years earlier than otherwise would have been possible.

Selected Federally Funded and Municipal Networks Have Improved Broadband Service for Small Businesses

Service Improvements

Federal programs have supported improvements to broadband networks through grants and loans for expansions, upgrades, and building of new networks, according to the service providers we spoke with. Providers expanded their existing networks by laying new fiber optic lines or using other technologies to make broadband available in areas that were previously unserved or underserved. For example, Intermountain Cable in eastern Kentucky used a Community Connect grant to expand its broadband network to Hurley, Virginia. According to officials at Intermountain Cable, Hurley previously only had satellite broadband service. SandyNet, a municipal broadband provider in Sandy, Oregon, used BIP funding to build fiber optic lines, allowing SandyNet to expand its wireless service further into rural areas. Providers also used federal funds to upgrade and improve the reliability and speed of their existing networks. For example, in northwest Minnesota, Garden Valley Telephone Company used an RUS Telecommunications Infrastructure loan to upgrade the copper lines in the rural areas it serves with fiber optic lines, which provide a faster and more reliable connection. For homes and small businesses in these areas, speeds have gone from approximately 1 Mbps download to a top advertised speed of 30 Mbps. In other areas it serves, Garden Valley used portions of the loan to make smaller scale improvements, loan to make smaller scale improvements, changing some of the hardware attached to existing copper lines to increase speeds. Finally, federal funds or, in the cases of some communities, other sources of funding such as municipal bonds, have been used to build new broadband networks. The North Georgia Network used a $33 million BTOP grant to build a 260-mile fiber optic network that provided broadband to businesses and residences. MiNet, a municipal network operated by the cities of Monmouth and Independence, Oregon, used city funds and a loan from the state of Oregon to build a fiber optic network that provides download speeds of up to 1 Gbps.

According to some providers, these federal and municipal investments have stimulated competition. In some areas that received federal funds or where a municipal network was built, other broadband providers took steps to improve the speed and reliability of their service. For example, following the construction of a fiber-to-the-home municipal network in Monticello, Minnesota, the two other broadband providers in the area made investments in their infrastructure to improve their broadband speeds. One of these providers stated that all of its networks undergo periodic upgrades to improve service, but upgrade schedules can change in order to stay competitive when there is a new service provider in a particular market.

Speeds and Prices

Speed

We found that more service providers in funded communities offered service at higher speed ranges than providers in comparison communities, as shown in figure 1. For example, twice as many funded communities as comparison communities have a provider that offers speeds of 51 Mbps or higher. However, among the 14 funded communities and 14 comparison communities included in our analysis, all have at least one service provider that offers download speeds of at least 4 Mbps, which is FCC’s current benchmark for broadband.

We also compared the highest speed offered by service providers. Our analysis found that federally funded and municipal networks most often had the highest advertised top speed when compared with top speeds offered by nonfederally funded and non-municipal networks in the same community, and networks in nearby comparison communities. In 9 of the 14 sets of communities included in this analysis, federally funded or municipal networks had the highest advertised top speeds, as shown in figure 2. For example, a federally funded network in a community in northeast Georgia advertised a top download speed of 100 Mbps, while the highest speed advertised by other providers in the same community and in the nearby comparison community was 40 Mbps. In the five other cases, networks in nonfederally funded communities offered speeds that were equal to or higher than speeds available in funded communities.

We found that prices offered by federally funded and municipal networks were slightly lower than prices offered by nonfederally funded networks in the same community and networks in comparison communities. For example, for speeds of 4 to 6 Mbps, federally funded and municipally operated networks charged prices that were on average about $11 per month less than nonfederally funded networks in the same community and about $20 less per month than networks in comparison communities. The price differences are greater in the 7 to 10 Mbps download range, where federally funded and municipally operated networks’ prices were on average about $30 less per month than nonfederally funded networks in the same community and about $35 less per month than networks in comparison communities. There were some cases where federally funded or municipal networks offered substantially lower prices than networks in comparison towns, such as the municipal network in Windom, Minnesota, which offered 10 Mbps download service for approximately $38 a month, while two networks in a comparison town offered the same speed for about $100 to $110 per month. Figure 3 illustrates the prices for selected speed ranges offered by all the providers included in our analysis and is broken out by federally funded and municipal networks, nonfederally funded networks in the same community as a federally funded or municipal network, and networks in comparison communities. As this figure shows, prices in all the ranges are generally lower for federally funded or municipal networks, and at the 4 to 6 Mbps and 7 to 10 Mbps download ranges, networks in comparison communities tend to have higher prices than both federally funded and municipal networks and nonfederally funded networks located in the same community.

We also compared broadband speeds and prices in the nonurban funded and comparison communities with the speeds and prices in urban areas. For download speeds below 10 Mbps, average prices in nonurban areas were lower than average prices in urban areas. For example, for speeds of 4 to 6 Mbps, the average price was about $23 less in nonurban areas than in urban areas, and for speeds of 7 to 10 Mbps the average price was about $9 less. The lower prices offered by networks in nonurban communities could be due to providers having lower costs to recoup because some receive federal or municipal support or due to the limits imposed by weak market demand, typical of many nonurban areas. In this analysis it is difficult to identify the exact reason for the lower prices in the nonurban communities. For speeds of 11 to 25 Mbps, urban areas offered prices that were on average $21 less than nonurban areas.

Furthermore, nonurban communities with federally funded or municipal networks tended to have lower prices than nonurban comparison communities and urban communities. For example, in the 4 to 6 Mbps download range, nonurban networks in funded communities offered average prices that were about $16 less than the prices offered by networks in comparison communities and $32 less than networks in urban communities, and $20 and $19 less, respectively, in the 7 to 10 Mbps speed range. In the 11 to 25 Mbps range, nonurban funded communities offered lower average prices than comparison communities, but urban areas offered lower average prices than both the nonurban funded and comparison communities. Figure 4 illustrates the prices that service providers offer for selected speed ranges in urban and nonurban areas.

We found that providers in urban areas generally offer higher speeds than those in nonurban areas. Among the locations included in our analysis, providers in all 8 of the urban areas offered download speeds of 100 Mbps or higher, whereas providers in only 7 of the 28 nonurban areas offered download speeds of 100 Mbps or higher. Six of the 7 nonurban areas were funded communities with speeds of 100 Mbps provided by a federally funded or municipal network. However, in one funded community one competitor also offered speeds of 100 Mbps.

Impact of Network Improvements on Small Businesses

Cities of Monmouth and Independence, Oregon, MINET Fiber Network MINET is a fiber optic network in Monmouth and Independence, Oregon. The two cities decided in 2004 to build their own fiber network for economic development purposes. City officials believed that availability of broadband services would help to keep existing jobs and attract new employers. The fiber network was built with city funds and a state loan. MINET passes 6,400 businesses and homes at the curb. In June 2013, MINET’s customers included about 500 local, mostly small businesses, according to MINET officials, a number that comprises about 90 percent of local businesses. Most businesses subscribe to download speeds of 7 Mbps or 10 Mbps, although MINET can offer download speeds up to 1 Gbps.

Minnesota, a farm equipment sales and service company reported that it switched from its previous broadband provider because the provider’s service could not supply the desired broadband speeds. Now the farm equipment company has broadband speeds nearly twenty times its previous speeds. Similarly, 18 of 27 small businesses we spoke with told us that their new service is more reliable than the service of their previous provider. These small businesses said they experienced less network downtime and no significant slowdowns in speed at points in the day when usage increased. Many service providers told us that they used fiber optics for their expansions or upgrades, contributing to greater reliability and speed.

While reliability and speed were reported as improving, small businesses we spoke to reported that the effect of the new network on price varied. Several reported the price of broadband service went down, particularly a few businesses that previously relied on satellite service for broadband. However, some small businesses we spoke with reported that the price for the new service was similar to or more than their previous service. For example, an information technology company in northeast Georgia told us that it pays approximately $20 more per month but stated it was worth the additional cost because of the increased reliability and additional speed.

Small business owners we met with who use the services of federally funded or municipal networks told us that they made improvements to their business operations, often because the speed of online applications was improved, which allowed them to operate more efficiently. Table 4 describes some of the improvements that small businesses told us they experienced due to the enhancements to their broadband service.

Small business owners we spoke with said that the operational efficiencies they experienced as a result of better broadband service have not yet resulted in increased revenues. Only one small business we met with sought to improve their revenue potential by relocating to an area with better Internet service. Rather than relocate, a different small business owner stated he would pay more to get a dedicated line for faster or more reliable service. Other small businesses stated that broadband service would not alone determine where they set up their business but might be one of many factors considered. Similarly, the communities that built high speed broadband networks did so to attract some new businesses, as well as retain existing businesses.

Agency Comments

We provided a draft of this report to NTIA and EDA within the Department of Commerce, USDA, SBA, and FCC for review and comment. NTIA and FCC provided technical comments, which were incorporated, as appropriate. The other agencies reviewed the draft but had no comments.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of his letter. At that time, we will send copies of this report to the Secretary of Commerce, the Secretary of Agriculture, the Administrator of the U.S. Small Business Administration, and the Chairman of the Federal Communications Commission. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any question, please contact me at (202) 512- 2834 or goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report describes: (1) the federal government’s efforts to ensure the availability of broadband services for small businesses, and (2) the effect of federally funded and municipal networks on broadband service and small businesses.

To address both reporting objectives, we reviewed documents from and interviewed officials at the U.S. Department of Agriculture’s (USDA) Rural Utilities Service (RUS), the Department of Commerce’s (Commerce) National Telecommunications and Information Administration (NTIA) and Economic Development Administration (EDA), and the Federal Communications Commission (FCC) about their efforts to ensure the availability of broadband services for small businesses. We also reviewed documents and interviewed officials at the Office of Advocacy within the Small Business Administration (SBA) about its research on the availability and use of broadband by small businesses. We reviewed program rules regarding funding applicability and eligibility for FCC, RUS, NTIA, and EDA programs that provide funding for broadband infrastructure; status reports for the Broadband Technology Opportunities Program (BTOP) and the Broadband Infrastructure Program (BIP); SBA’s Office of Advocacy’s study on small business access to broadband; and reports from FCC and NTIA on broadband deployment and availability. We also reviewed reports and surveys from academic institutions, think tanks, and trade associations on the topics of broadband deployment, economic development, and small business. We interviewed representatives of a telecommunications trade association, representatives of small business interests, and large and small broadband service providers in an effort to obtain a variety of viewpoints on issues related to small business and broadband services. To identify the strategic objectives, goals, and performance measures of federal broadband infrastructure programs, we reviewed budget summaries and performance plans, performance and accountability reports, and other agency documents for these programs from USDA, NTIA, RUS, and FCC.

To describe the effect of federally funded and municipal networks on broadband service and small businesses, we obtained and analyzed information from a variety of sources. We visited towns in Oregon, Minnesota, Tennessee, and Georgia, where we interviewed a nongeneralizable selection of Internet service providers that received federal funds, municipally operated network providers, and small businesses that use the services of these providers. We selected these states and the specific locations within the states on the basis of the presence of at least one project that received federal funding for broadband infrastructure in the last 5 years; the presence of a municipally operated broadband network, which also may have received federal funding; and geographic diversity, i.e., sites were in different regions of the county. The locations were chosen to collectively include at least one project from each of the major federal broadband infrastructure programs. We selected small businesses to interview that were users of the federally funded or municipal networks and that had fewer than 500 employees, based on FCC’s National Broadband Plan, which addresses support for broadband growth in small and medium enterprises of this size. While the results of our interviews cannot be projected to all service providers and small businesses because they were selected using a nonprobability approach, they illustrate a range of possible views and experiences.

We collected information on broadband speeds and prices offered by all wireline providers in the locations we visited where federally funded or municipal networks were present. We only included wireline broadband service in our analysis because unlike some wireless service (e.g., satellite and mobile broadband), wireline broadband generally offers higher speeds and greater reliability that businesses require. For comparison purposes, we also collected speed and pricing information for all wireline providers in nearby towns that were similar to these locations in terms of population, income levels, and number of wireline service providers, but where federally funded or municipal networks were not present; and in two urban areas in each of the same states. Table 5 lists the locations visited, the nearby towns, and the urban areas visited in each state. In total we collected pricing information on fourteen nonurban towns that received federal funding or have a municipal network, 14 nonurban comparison towns, and 8 urban areas. We used the National Broadband Map, a joint effort of NTIA and FCC to analyze and map broadband speeds, and comparable efforts managed by the states to identify wireline service providers in these locations. For each service provider identified, we collected information on advertised download and upload speeds offered to small businesses and the monthly rate charged. We collected unbundled, month-to-month pricing when available. Some service providers required a customer to have a telephone line and some required a contract ranging from 2 months to 2 years. If the service provider did not provide separate pricing for small businesses, we collected residential speed and pricing information. We obtained this information from service providers’ websites or if not available online by calling the company directly. We requested speed and pricing for each city and town in the sample—either by the town’s name or by a specific address if the service provider required one. We analyzed the information collected to identify difference in speeds and prices between the locations with federally funded or municipal networks and similar towns without such networks, as well as between urban and nonurban locations. Because this information is drawn from a nonprobability sample, it cannot be generalized to all locations with federally funded or municipal networks, all urban locations, or all nonurban locations.

We conducted this performance audit from February 2013 to February 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives.

Appendix II: Speeds and Prices Offered by Federally Funded and Municipal Broadband Service Providers That Were Part of GAO’s Analysis, as of September 30, 2013

Appendix II: Speeds and Prices Offered by Federally Funded and Municipal Broadband Service Providers That Were Part of GAO’s Analysis, as of September 30, 2013 Top available advertised speed (Mbps)

Most common speed subscribed to by businesses (Mbps)

Information for broadband speed and pricing is reported here only for the Georgia Communications Cooperative, a member of the North Georgia Network. Other cooperatives belonging to the North Georgia Network may offer different speeds and prices.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Heather Halliwell, Assistant Director; Namita Bhatia Sabharwal; Sharon Dyer; Laura Erion; Eric Hudson; Dave Hooper; Josh Ormond; Amy Rosewarne; and Andrew Stavisky made key contributions to this report.