Funding gap of $3.7 billion! The U.S. plan to replace Huawei ZTE equipment is in jeopardy

According to Fierce Wireless, the Federal Communications Commission's (FCC) plan to compensate U.S. service providers for removing and replacing existing huawei and ZTE equipment faces a $3.7 billion funding gap, and the goal of the plan could be precarious if additional support from Congress is not received in the near future, as operators themselves are in trouble.

Based on preliminary data on the cost of replacing Huawei and ZTE equipment from existing networks, Congress has allocated $1.89 billion to the FCC's compensation program in 2020 to implement the Secure and Trusted Communications Networks Act of 2019. The goal is to pull so-called "risky" equipment out of U.S. networks, and the government will reimburse operators for the costs they pay. After a preliminary review of 181 claims filed before the Jan. 28 deadline, the FCC raised its estimated costs to $5.6 billion.

The amounts requested ranged from $14,400 for the North Cambria School District to $1.19 billion for Viaero Wireless. 14 applicants (excluding Viaero) demanded more than $100 million, 21 applicants demanded less than $1 million, and the rest were spread between the two.

Initial compensation will begin on June 15, 2022, when the FCC will need to confirm that the petition has been approved. At the same time, the agency is reviewing and asking operators questions about the estimated amount. But because there isn't enough funding, uncertainty has made it difficult for some operators, most of them smaller rural operators, to complete or even get started.

If, by the middle of the year, the program's funding is not yet in place, the reimbursement amount will be prorated according to the rules that prioritize service providers with less than 2 million customers.

All of the divested and replaced participants had fewer than 10 million users, while most of them had fewer than 2 million users, and many had fewer than 150,000 users.

The FCC wants additional funding next year, while the Association of Competitive Operators (CCA), which represents small and rural operators, is lobbying.

"Grind until you stop"

Armand Musey, president and founder of Summit Ridge Group, a consulting firm, is advising seven operators of all sizes, including Viaero Wireless, through the complex claims process from start to finish. He saw the funding shortfall as a big problem and told Fierce that he wasn't sure the FCC or Congress was fully aware of the situation operators were facing.

"Considering that most rural operators have very weak capital and low profit margins, they can't really commit to starting the project if they only have a third of the money." Musi said he was talking about the whole program rather than specific customers.

Even for those operators who want to get started, vendors are in many cases reluctant to provide a lot of equipment because they know they may not be paid if operators don't get full reimbursement from the government, he said.

"So in a way, at least for a lot of operators, this process is gradually stopping." He said.

Tim Donovan, CCA's senior vice president for legislative affairs, told Fierce that the group and its affected members are reaching out to Congress for full funding for the program, and said the latter is increasingly aware of this, including congressional leaders and other members, especially those representing states with devices in the network that need to be replaced.

"This is a serious gap that could mean that the success of the program is at stake." Speaking about the deficit, he said, especially for smaller suppliers who can't afford to pay for themselves.

Operators are in different positions regarding how many devices need to be replaced, whether it's how many devices or end-to-end replacement, and what network configuration they have. However, according to Donovan, all affected members will be harmed by a substantially reduced compensation in proportion to the scale.

"For some of them, it could mean simply not being able to complete this plan or even shut down their business." He continued.

Steven Berry, CCA's chief executive, noted that if operators get a penny of new money to implement the plan, they agree to dismantle all so-called "unsafe" network equipment and replace them with approved equipment. If they didn't have millions of dollars to take advantage of, they wouldn't have launched the program.

CCA's current lobbying efforts are focused on finding any solution to get the full amount by the June deadline, when a prorated amount for applicants will be announced.

While most CCA members are not affected by the divestiture and replacement, they represent an important part of the overall plan, as some of the largest number of cellular sites (although still less than 2 million users) are among the companies seeking the most compensation.

Donovan said the FCC will use the full time before the June deadline to review the application and ask operators questions about the estimated amount, but "we have no reason to believe that this is sufficient to reduce the overall need to complete the program." ”

Pine Belt Wireless, a small wireless carrier in western Alabama, expressed similar sentiment in a March 28 email to the FCC. If the funds are distributed proportionally rather than in full, this will ultimately lead many operators to have only two options, whether to try to continue operating with their original equipment or to shut down most of the network, the document said.

Pine Belt's letter is a response to Mavenir's cost estimates, which see Open RAN as a potential way to address funding shortfalls.

Why are the initial estimates so far apart?

So how did the money needed to pull Huawei and ZTE out of U.S. networks surge by more than $3 billion? This seems to be the result of several factors working together.

According to Donovan and Musi, one reason driving the difference from the initial $1.9 billion to the current $5.6 billion is the number of companies applying.

The initial data collection involved about 52 companies that responded to the FCC's request to estimate the costs associated with installing and removing equipment. Eventually, more companies qualified, and the number of applicants seeking reimbursement within the filing window that began last October increased to 181.

Musi also argues that some parts of the application may be exaggerated because they are done early in the process, i.e., before the applicant can delve into the network. The estimated amount may be based on a cost catalog provided by the FCC, and the applicant has not yet discussed it in detail with the supplier.

"Everything else becomes apparent when you drill down into the details," such as changes to the cell tower or the need to replace downstream equipment to ensure there are no compatibility issues when removing a Huawei device.

Still, neither Donovan nor Musi believes that the amount required will be significantly reduced after the FCC's comprehensive review of the initial application.

Compounded by broader global supply chain issues, such as shortages of chips affecting telecommunications equipment, shortages of skilled workers, and strict deadlines for completion. Congress gives participants a year from the initial reimbursement to complete the divestiture and replacement process. The FCC has the capacity to give a six-month package extension as well as individual extensions, although groups such as the CCA and the Rural Carriers Wireless Association (RWA) have urged the committee to do so, but it has not yet done so.

Donovan also noted that when it comes to supply chain issues, whether it's chips for telecom equipment, or other elements like HVAC systems and cement, these will become more difficult as more broadband infrastructure projects come online and there is a greater demand for equipment.

Operators can't "come in and out" when it comes to lining up to order and deliver equipment based on whether and when they can make more money, he noted.

They also work in less densely populated areas, where labor shortages are likely to intensify.

Both Musi and Donovan believe that while it may take longer to complete the project and there may be some price relief related to supply chain issues, this will not solve the current funding gap, and $1.9 billion will not be enough to support it.

So with funding uncertain, Musi said, some operators sit back and watch Congress move because they can't launch the program if they can only see halfway through.

Some players have publicly announced vendors, such as Montana carrier Triangle Communications using Mavenir, Colorado Viaero using Ericsson, and Union Wireless having partnered with Nokia to deploy sites in Wyoming, Colorado, Utah and Idaho.

As representatives of CCA's Berry and Viaero, Cellular One, United Wireless and other members described in a unilateral document dated March 3, "some members even voluntarily replaced the equipment (planned) covered, invested a lot of money" and "completed the remaining two-thirds of the program with a financial burden that could prove financially devastating..."

Mr. Musi expressed a similar view, saying that having to order equipment out of their own pocket without reimbursement was "enough to bankrupt some smaller operators, and there weren't many things that the equipment supplier knew they could foreclose." He also said that while some companies may be able to bear such a burden, those with a large number of devices are unlikely.

If operators want to start working on June 15th, they need to place an order today or as soon as possible.

Musi explained that for small operators who don't have a large finance department, some of them need to get bank loans in order to settle the working capital of placing orders. But it will take time to do so, and banks will also want assurances that some government funds will indeed be in place. So in terms of funding, "the sooner the better".

Is Open RAN the solution?

To address the funding shortage, vendor Mavenir wrote a letter to the FCC proposing a deceptively simple solution — choosing Open RAN.

Mavenir is a new entrant who has been at the forefront of leading Open RAN and has publicly announced that Triangle Communications has chosen it to implement a divestiture and replacement process.

In a Letter dated March 21, Mavenir listed a form comparing cost estimates for 15 applicants, including the cost of each site. Based on an estimated amount of $420,000 per site using Mavenir technology, the company claims it could save the program $2 billion. Specifically, "if all wireless carrier applicants use Mavenir's solution (or a similar cost-competitive vendor)," the total filing funding for these 15 companies will fall from $3.258 billion to $1.081 billion.

Mavenir's Open RAN solution can reduce capital expenditures by an average of 40 percent and total cost of ownership by 37 percent compared to other vendors' dedicated solutions, it said.

The proposed costs include the replacement of THE RAN as well as EPC and IMS, although it notes that the latter do not need to be purchased as part of the Mavenir solution because they are open and interoperable with other vendors.

However, at least one stripping and replacement participant, Pine Belt, strongly opposed Mavenir's conclusions.

Pine Belt, one of the companies listed in the Mavenir icon, responded in a March 28 email to the FCC that the software company was just trying to market itself.

In the filing, Pine Belt acknowledged that it "spent a great deal of time and money working with engineers and negotiating with equipment suppliers, including Mavenir, to determine the best and most efficient way to replace ZTE equipment." ”

It believed that the recent Mavenir proposal was "based on oversimplified assumptions" because each project is unique and the equipment involved has higher requirements for variable deployment costs.

Mavenir's Ex Parte is just a trailer for its equipment, failing to address the real challenges affected operators are trying to solve to replace existing equipment, and is also significantly off target in addressing funding shortfalls, Pine Belt wrote.

Pine Belt said it worked directly with Mavenir to submit a preliminary estimate as part of its 2020 data collection. It determined that when looking only at RAN devices, Mavenir submitted the second highest estimate, which was only 17 percent lower than the highest estimate the company received.

Asked if Open RAN (could) be an option to reduce costs, Musi said that while it's an interesting, promising technology, and possibly cheaper, his work shows that operators aren't quite satisfied with Open RAN yet, noting that integration challenges remain because it's "not ready for the golden age."

His overall feeling is that it will become more attractive in two or three years, but for the divestiture and replacement plan, urgency is key.

Widening the digital divide

Another potential unintended consequence of the lack of funding for the program, mentioned by Donovan and Musi, is to further widen the digital divide, or at least hinder efforts to bridge it, which has been a major goal for the United States as the administration aims to get more Americans online.

Many of the participants in the program are smaller rural operators, sometimes the only operators serving specific areas. While forced shutdowns are clearly a problem as the U.S. wants to improve broadband availability, funding shortfalls could also delay upgrades to new technologies.

As part of its efforts to get rid of Huawei and ZTE, Viareo said it is upgrading more than 900 LTE sites to equip 5G network-ready equipment, while Union Wireless is upgrading most of its networks, initially deploying 4G and then moving towards 5G.

In many cases, the devices being replaced are old 3G devices that can be replaced with new ones. If the plan is well funded, some operators will add a little money to the compensation to further upgrade.

For example, Mussi noted that the FCC will not compensate the participants who lay the fiber, but will give them the money to replace the microwave link. Operators can shift the reimbursed microwave connection costs to fiber optic connections while making up the difference with their own money.

Without more funding, these efforts will also be delayed. As the divestiture and replacement process has continued for more than two years, some carriers' networks have been stalled for some time.

"Over the past few years, some carriers' networks have been frozen to some extent." Donovan said.

Huawei and ZTE have largely been driven out of the U.S. market, while operators with the equipment involved are unable to get the network support they need and are on the verge of hell waiting to upgrade to new equipment.

Cast the die

Congress has gone back and re-examined funding allocations to ensure that plans are successful when funding is short, not without precedent.

Both Donovan and Musi cite the 600MHz tv broadcast spectrum restructure a few years ago as a recent example, when Congress allocated $2.75 billion to the FCC program to reimburse television broadcasters for moving to channels when they auctioned off wireless services.

Mr. Musi has been closely involved, helping broadcasters navigate similar complex processes, citing differences such as smaller funding gaps and higher profit margins and lower capital density in the television broadcasting industry than in the wireless industry. But the government still went back and allocated an additional $1 billion to the process on top of the original funds.

Importantly, unlike TV broadcasters, small and regional operators will not be able to complete half of the divestiture and replacement projects, but will simply wait for more funding, he said.

Both Musi and Donovan stressed the urgency of a fully funded plan for smaller operators to successfully remove Huawei and ZTE. Musi noted that some operators need bank loans to settle working capital, and to do so, banks need government assurances.

Donovan hopes the funds will eventually be in place.

"It's a lot of money, and it's important to Congress." "June 15 is coming soon, and we're working with Congress to try to find any possible solution," he said. ”

Mr. Musi said he was very confident the program would get the full amount needed, though it could be less than $5.6 billion, but acknowledged it was a matter of timing — and his consolation wouldn't necessarily ease operators' concerns.

"If you're a smaller operator, it's a 'desperate' situation." He said. It's one thing to convince him that Congress will eventually step in, but "I'm not sure I'm willing to bet my entire company on it, that's where they are now." (C114 Jiang Junmu)