Verizon and AT&T: No Interest in Rural Areas

Building out a network of fiber to support New York City is hard enough, but rural and hard-to-reach areas come with additional challenges. So, the government is subsidizing the cost for providers, but Verizon and AT&T refused the money. Now, the government is trying to figure out what to do next.

Mar 25, 2014 at 2:00PM

Verizon Communications, (NYSE: VZ), AT&T (NYSE:T), Comcast (NASDAQ:CMCSK), and several other large providers are working to implement state-specific deals to limit the build-out of broadband services for certain areas deemed "hard to reach." According to a recent article in Newsweek, AT&T has already retained 120 lobbyists in Sacramento, and 36 in Lexington, KY. The goal of the lobby effort is to get rid of all obligations requiring large providers to service customers outside of profitable zones.

The Telecommunications Act of 1996 was a reformation of the Communications Act of 1934. In a nutshell, it deregulated the industry and opened it up to competition. In 2001, the FCC decided to create a National Broadband Plan to ensure every American has "access to broadband capability" by 2020. The plan was released in 2010, and in 2011 a decision was made to funnel funds from the Universal Service Fund, or USF, to the National Broadband Plan.

The annual budget for the fund is $4.5 billion over a six-year period (starting in 2011), and it's called the Connect America Fund, or CAF. The first phase of CAF funding has already been awarded -- use the interactive map below to see how much money your state received:

On March 19, the FCC had a workshop covering this topic that can be viewed on the FCC website. Below is an excerpt from the website describing the event:

The workshop included an examination of the broadband needs of rural populations and the unique challenges of both broadband deployment and adoption in rural areas. In addition, the discussion highlighted the economic, educational, and health care benefits that can be realized through broadband deployment and adoption.

Meanwhile, AT&T and Verizon gave back $47.8 million and $19.7 million, respectively, to the government, on the premise that the cost to service customers in rural and hard-to-reach areas is prohibitive in the long term.

On one hand, large providers aren't interested in unprofitable accounts -- who can blame them? The cost of building out a small town in the Appalachian Mountains is much more than the cost of building out Jersey City, but the medical needs and educational requirements are the same everywhere -- or at least they should be -- which is why the government is stepping in to level the playing field in a niche that is considered unprofitable by private industry. 

Investment Opportunity
Like most industry events, opportunities always arise. The opportunity in this case might be Clearfield (NASDAQ:CLFD).

CLFD Chart

CLFDdata by YCharts

Clearfield is a small fiber optics equipment company (with $0 debt) that specializes in providing equipment and consultation for fiber optic deployment in rural or hard-to-reach places. Shares have gone up over 300% in the last 12 months, and insiders are buying the stock at current prices.

Broadband and wireless have become more than a luxury item, they have become access. In an effort to reduce inequality and increase access for all Americans, the FCC is stepping in to subsidize the cost of the build-out. But, large companies aren't interested in the long-term profitability of the accounts and are lobbying to get out of current state obligations.

If Verizon, AT&T, and Comcast believe rural and hard-to-reach customers will be detrimental to earnings, a good decision has been made for its shareholders. Meanwhile, smaller providers are using this as an opportunity to gain share in an ultra-competitive market, which, in the end, could have a more deleterious effect on the profitability of larger providers than their decision to stay out of this "unprofitable" niche to begin with.

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Jun 12, 2015 at 5:01PM

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